ARCHIVÉ -  Transcription - Hull, QC - 2001/10/03

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

BEFORE / DEVANT:

ALSO PRESENT / AUSSI PRÉSENTS:

ERRATA / ADDENDA

Hull, Quebec / Hull (Québec)

--- Upon resuming on Wednesday, October 3, 2001

at 0900 / L'audience reprend le mercredi

3 octobre 2001 à 0910

3558 THE CHAIRPERSON: Order, please.

3559 Good morning. Welcome back to Day 3 of our proceeding looking at the price cap plan for the next four years for the incumbent telephone companies across the country.

3560 Just the order of business for today.

3561 We will start off with a Commission ruling with respect to the disclosure issue raised by TELUS.

3562 Following that, and a couple of other issues that the Commission just wishes to note, we will then hear from Mr. Greg Thompson, who originally was scheduled to appear on Monday but was unable to, who is the Member for New Brunswick Southwest, speaking as a general representation on the issues.

3563 I will then call for any preliminary or procedural matters anyone wishes to raise.

3564 Then we will turn to The Companies Panel 2 and cross-examination of that panel.

3565 First I will turn to Commission counsel.

3566 Counsel Moore.

RULING / DÉCISION

3567 MS MOORE: Thank you, Mr. Chairman.

3568 I will be delivering a ruling with respect to TELUS' application to review and vary Decision CRTC 2001-582.

3569 I note that this is a ruling of the Commission and not of the Panel.

3570 The following is the ruling the Commission on the application dated 21 September 2001 by TELUS Communications Inc. ("TELUS"), seeking to review and vary a portion of Decision CRTC 2001-582, referred to herein as Decision 2001-582.

3571 The Commission has considered this application, as well as the opposing comments filed by AT&T Canada Corp ("AT&T") and GT Group Telecom Services Corp ("Group Telecom"), dated 27 September 2001, and the reply filed by TELUS dated 28 September 2001.

3572 For the reasons that follow, the Commission hereby denies the review and vary application. The Commission, therefore, finds it unnecessary to make a determination on TELUS' request for an interim stay of that decision.

Background

3573 In Interrogatory Response TELUS(CRTC)26 Jun01-1302, hereinafter Interrogatory 1302, TELUS filed, in confidence, information in support of its position regarding the state of competition in Canada.

3574 Decision 2001-582, among other things, ordered TELUS to make public information which it had filed in confidence in its answer to Interrogatory 1302.

3575 AT&T and Group Telecom requested disclosure of the information in question and TELUS filed a reply opposing the requests.

3576 By letter dated 8 August 2001, Commission staff said that Tables 1, 2 and 3 of Interrogatory 1302 were to be provided on the public record.

3577 By letter dated 13 August 2001, TELUS advised the Commission that it would not be placing the information on the public record because:

"[t]he information in question (analyses developed by BNI/Sone & Associates and by Lemay Yates & Associates) is protected by copyright. TELUS does not have permission of the copyright holders to release this information to the public. Public disclosure of this information, as directed in the Staff letter, will infringe the rights of the copyright holders.

Because the Staff letter does not have the effect of a Commission ruling, TELUS may be liable for infringing the rights of the copyright holders without having recourse even to the potential defense that the disclosure was compelled by the order of a court or tribunal of competent jurisdiction. TELUS is therefore asking for a Commission ruling on this matter."

3578 On 10 September 2001 the Commission issued Decision 2001-582. Regarding Interrogatory 1302, the Commission stated:

"The Commission considers that the information filed in confidence in response to interrogatory TELUS(CRTC)26Jun01-1302 (local competition market analyses developed by NBI/Sone & Associates and by Lemay-Yates Associates) is relevant to this proceeding, and that it would be appropriate for all parties to have an opportunity to review and respond to it. Accordingly, TELUS is directed to file, on the public record, the requested information in the response to Interrogatory TELUS(CRTC)26Jun01-1302."

3579 Subsequently, TELUS revised its answer to Interrogatory 1302 by removing Table 3. TELUS, not having removed Tables 1 and 2, filed a review and vary application with respect to those Tables.

TELUS' Arguments

3580 TELUS submits that there is substantial doubt as to the correctness of the Commission's determination for the following reasons:

3581 (1) the Commission erred in law in not providing adequate reasons for its decision; and

3582 (2) the Commission erred in law by failing to consider all of the factors in exercising its discretion.

3583 TELUS noted the Commission's statement that the information filed in confidence was relevant to the proceeding and that it would be appropriate for all parties to have an opportunity to review and respond to it.

3584 According to TELUS, the Commission did not provide:

"...adequate reasons for its determination that the public interest in revealing the proprietary information of NBI/Michael Sone & Associates outweighs the specific direct harm that would accrue to TELUS and to NBI/Michael Sone & Associates".

3585 As part of its submissions TELUS suggested, among other things, that disclosure would result in harm to itself and NBI/Michael Sone & Associates.

3586 The Commission notes that the onus is on an applicant to demonstrate that there is substantial doubt as to the correctness of the decision that it seeks to review and vary.

3587 The Price Cap Review proceeding is a significant public proceeding in which the Commission will be determining the future regulatory framework for TELUS and the other large telephone companies.

3588 The information the Commission required TELUS to disclose had been filed by the company in that proceeding to buttress its position on the state of competition. The state of competition is an issue in the proceeding because it is relevant to the degree of pricing flexibility that should be accorded to TELUS and the other telephone companies.

3589 The Commission notes that in Decision 2001-582 it found that the information in question was relevant to the proceeding and the Commission also found that it would be appropriate for all parties to have an opportunity to review and respond to that information. These reasons supported the Commission's determination that in the circumstances any specific direct harm was not sufficient to outweigh the public interest in disclosure of the information upon which TELUS was relying.

3590 With regard to TELUS' argument that requiring disclosure of the information in question may foreclose the use of third party information in future proceedings, the Commission notes that in the past the Commission has, where appropriate, required disclosure of third party information. Furthermore, to not require disclosure on the basis of an agreement between TELUS and a third party would create an opportunity for abuse and impair the Commission's ability to conduct open and transparent public proceedings.

3591 The Commission notes, in passing, that the fact that it came to a conclusion which TELUS disagrees does not amount to a failure to consider relevant factors or to provide adequate reasons.

3592 In light of the above, the Commission considers that TELUS has failed to demonstrate that the Commission has committed an error of law. Accordingly, the Commission finds that there is no substantial doubt as to the correctness of Decision 2001-582 and therefore dismisses TELUS' application to review and vary that Decision.

3593 If TELUS no longer wishes to rely on the information in question it can revise its answer to Interrogatory 1302 by withdrawing Tables 1 and 2. Otherwise, pursuant to Decision 2001-582, TELUS must place the information in question on the public record by the close of the hearing.

3594 That is the end of the ruling, Mr. Chairman.

3595 THE CHAIRPERSON: Thank you, Counsel Moore.

3596 We would also like to take this opportunity to clarify once more this issue around the scope of the proceeding and address the issue that was raised by Messrs. Lowe and Henry, I guess on Monday and that we discussed to some extent yesterday.

3597 I will again turn to Counsel Moore.

3598 MS MOORE: Thank you, Mr. Chairman.

3599 On behalf of the Commission I note that, as is clear from the Public Notice and all subsequent rulings, among the issues in this proceeding is the basket structure, including what services should be included, whether those provided to competitors or otherwise, and how all services should be priced.

3600 I note that in paragraph 22 of the Public Notice the Commission stated as follows:

"The Commission invites proposals on any changes to the current treatment of utility segment competitor service rates that parties might consider appropriate." (As read)

3601 In response to questions from parties the Commission, in Decision 2001-618 stated that:

"The Commission confirms that evidence respecting ILEC services used by competitors, including, for example, CallNet's carrier services proposal, are within the scope of this proceeding." (As read)

3602 The Commission also stated, in Decision 2001-618, that:

"The Commission confirms that the definition of `essential service' contained in Decision 97-8 and the current classification of `certain services as essential' is not under consideration in this proceeding." (As read)

3603 Therefore, the Commission is requesting both the companies and TELUS to indicate after today's lunch break whether they wish to take the opportunity, first offered on Monday, reiterated yesterday, to file further evidence with respect to the pricing of services used by competitors.

3604 Further, if The Companies and TELUS wish to take the opportunity to file further evidence, then out of fairness to all parties, and to provide greater certainty, the Commission requests The Companies and TELUS to indicate when it would be feasible for them to file such evidence.

3605 The Commission also reminds parties that this evidence can be filed after the close of this phase of the proceeding and that if this were to occur the Commission would consider what further process as part of this proceeding might be required.

3606 Thank you, Mr. Chairman.

3607 THE CHAIRPERSON: Thank you, counsel.

3608 With that, then, we will go back to the phase of the hearing that we were on Monday, to hear general representations on the pricing issues that are before us.

3609 Mr. Greg Thompson, MP for New Brunswick Southwest, wasn't able to be with us at that time and had requested an opportunity to appear before us today, so we will provide that opportunity now.

3610 Good morning, Mr. Thompson.

PRESENTATION / PRÉSENTATION

3611 MR. THOMPSON: Good morning, Mr. Chairman and Members of the Commission.

3612 I apologize this morning to my francophone members of the Commission. The translation of my remarks was not ready when I left my office this morning. It will be later today. But I have filed a copy with the people at the back of the room and we will have, I believe, simultaneous translation, which should assist you.

3613 Mr. Chairman, thank you for the opportunity to be here and make this presentation. I agree with those who wanted to see the CRTC hearing held in the Atlantic Region to allow for greater participation of those who are affected by this application and your subsequent decision. I trust you have now been put on notice and that future hearings will be held where they belong.

3614 My name is Greg Thompson and I am Member of Parliament for the constituency of New Brunswick Southwest. More than 61,000 people live within the boundaries of the riding, which includes all or parts of seven of the 15 New Brunswick counties and stretches from Woodstock down to Saint John and St. Stephen up to Fredericton. Most of the people live in small towns, villages and rural areas.

3615 My riding of New Brunswick Southwest also includes the Fundy Isles, Grand Manan Island, Deer Island and Campobello Island. There are no cities in my constituency, so this application would impact 100 per cent of the constituents I represent in the House of Commons.

3616 I am in my third term of office and have become well acquainted with the people of New Brunswick Southwest, their lives, their hopes, their needs and their struggles.

3617 Statistics will show you that the percentage of income from employment is less than the national average and the percentage of income from government transfers, old age security and Canada pensions and employment insurance, et cetera, is much higher than the national average. Average household income is $10,000 below the national average. The unemployment rate was 17.2 per cent in the last accurate data census.

3618 These cold figures just show part of the picture, of course, and as an MP I have three constituency offices for the express purpose of helping people, including direct interventions with government agencies such as Canada Pension Plan, Employment Insurance, Student Loans, Revenue Canada and for problems or information related to most of the departments and agencies of the federal and provincial governments.

3619 Much of my constituency work has to do with money, the lack of income or the increasing costs of just about everything associated with living in our modern world.

0925

3620 The last thing our people need is another price hike for an essential service. Ranking right up there with the category of things they don't need is this proposed discriminatory price structure which penalizes people for where they live, not for how much they use the service or because the service is better, but strictly for where they live.

3621 If you list the essentials of life, food, water, shelter, heat, access to health care, the telephone would find itself in the top ten. There is no doubt there are some people who can live without it, and in fact do live without it, but they are rare individuals.

3622 I remind the Commission of the vital needs provided by telephone access such as communication with family and the outside world, access to emergency assistance, not only police but ambulance services as well.

3623 I don't think anyone should have to prove or demonstrate the essential nature of this basic tool. What I do feel that I have to define and establish is the serious impact that price increases have on so many people.

3624 I submit that most of us in this room will never notice $5.00 or $10 a month. It is the cost of a small lunch or a taxi ride. But when you add the ever-increasing cost for telephone service on top of the escalating costs of electricity, fuel oil, gasoline or clothing and then demand payment from someone on social assistance, limited pension or minimum wage, it is a much different story. It is a sad story.

3625 Can anyone here or anyone in Aliant Telecom imagine living on a monthly income of $400? Ask that person what $5.00 or $10 a month more for phone service means to their budget and you begin to see the picture of why so many of the presentations you are hearing are so opposed to this application.

3626 I just mentioned an ever-increasing bill for phone service and I suspect that the phone people would like to object, but it is a fact that just a few years ago the phone bill was in the $20 range, all services included, and now it seems to be in the $50 to $100 range when you add the modern conveniences and technologies that are dependent on that service -- part of that service.

3627 Aliant Telecom produces figures that attempt to show our rural customers are getting a bargain or even getting their phones below cost. I submit that the history of NBTel and all of the other companies that make up Aliant Telecom have a history of huge and continuing profits, all taken under the protection of a monopoly, the effects of which are still continuing even though an element of competition now exists.

3628 I don't want to leave the impression that I oppose the telephone industry. Like most New Brunswickers, we have regarded NBTel with pride, particularly with the knowledge that its planning and innovation have allowed our province, the Province of New Brunswick, to position itself at the leading edge of technology and telecommunications.

3629 We know that the company must show a profit and remain viable to provide a return for its investors. We respect its business history and continuing success. At the same time, we expect the company's officers and board of directors to remember that telephone service is a public utility and that the public trust must be paramount.

3630 When commenting on the rate increase, Wendy Paquette, President of Aliant Telecom Consumer Services, said, and I quote:

"We have shareholders looking for a reasonable return on their investments."

3631 The Commission has heard testimony that Aliant has recently posted double-digit profit gains to its shareholders. The question then becomes: How much is enough? If double-digit profit gains aren't enough, what would be considered sufficient to please the shareholders?

3632 The three islands in New Brunswick Southwest that I mentioned earlier, by definition and because of geographical location under the federal tax law, should be entitled to specific benefits associated with being isolated communities.

3633 If Aliant Telecom is allowed to make a distinction between rural and urban in providing this basic service, what will the status of communities like Grand Manan Island, Deer Island and Campobello Island be in the future?

3634 It is generally accepted that the present cost of delivering that service to the Island communities far exceeds the cost of delivering that service on the mainland, including the rural areas. The question is: How far can you push cost recovery? What is the cut-off point?

3635 What will be the next category of service delivery? What will that category be, for example? Isolated communities. Would that be one?

3636 When considering the public we do not discriminate either in the provision of a service or in the charge for that service. In the context of another national debate, there is no justification for a two-tier health care system, nor is there any for a two-tier telephone system.

3637 The President of Aliant Telecom, Mr. Pond, appears to argue that with the rationalization of local service rates and long distance rates, the effect will be about the same in overall cost.

3638 I suggest to him that he should then avoid the negative message that characterizes his company's application that rural customers are somehow not in the same category or class as urban customers. Discrimination does not fly in the social or political world, nor should it have a place in business, particularly in a public utility.

3639 The price of enjoying the benefits of monopoly or near-monopoly status is the responsibility for assuring that the customer comes first. I would expand that thought to include the principle that discriminatory or differential prices can have no place in the business practices of a company that relies on the public trust and should be serving that public trust.

3640 Mr. Chairman, thank you for the opportunity to appear before the Commission on behalf of the people of New Brunswick Southwest.

3641 If permitted or requested by you, Mr. Chairman, I would respond to any questions that you may have.

3642 Thank you.

3643 THE CHAIRPERSON: I don't think we have any questions, Mr. Thompson. I appreciate your taking the time out of your schedule to come here today and represent the people of your riding.

3644 Thank you very much.

3645 MR. THOMPSON: I thank you, sir.

3646 THE CHAIRPERSON: Now, I believe counsel Moore has one minor clarification to make.

3647 MS MOORE: Thank you, Mr. Chairman.

3648 I apologize. It came to my attention that I misread the last line of the ruling with respect to the timing of the filing of the information should TELUS not wish to withdraw the information.

3649 I should have said that if it is not withdrawing, then it must place the information in question on the public record by the close of hearing on 4 October 2001, in other words, by the end of day on October 4.

3650 Thank you, Mr. Chairman.

3651 THE CHAIRPERSON: Thank you, counsel.

3652 Are there any preliminary matters, then, before we introduce and turn to cross-examination of The Companies Panel 2?

3653 Ms Lawson.

3654 MS LAWSON: Thank you, Mr. Chairman.

3655 Just a minor matter. During my cross-examination of Panel No. 1 on Monday I referred to a document, a Yankee Group Study dated 1999 which was not on the record. I have, therefore, introduced today an exhibit. It is a one page exhibit, double-sided, with the relevant excerpt from that study.

3656 THE CHAIRPERSON: Mr. Secretary.

3657 MR. SPENCER: Yes. This will be entered as Exhibit ARC et al Exhibit No. 6.

EXHIBIT NO. ARC-6: Yankee Group Study dated 1999

3658 THE CHAIRPERSON: Thank you.

3659 Anybody else? No?

3660 Okay. Mr. Henry.

3661 MR. HENRY: Thank you, Mr. Chairman.

3662 I am pleased to introduce The Companies next panel dealing with the subject matter of The Companies proposed price regulation regime, as well as issues related to wholesale quality of service. I would remind you that company-specific interrogatories related to Bell Canada related to these subjects would also be for this panel.

3663 Now, seated closest to you is Ms Joan Highet who is currently Vice-President of Voice Product Management in Bell Canada's Marketing Group. She is assisted by Mr. Ernie Goldberg, Director of Product Management and Market Development.

3664 Mr. Bob Farmer is back for a repeat performance, sitting next to Ms Highet. He is Vice-President, Reg matters. Again, he is assisted by Ms Judy Bodnar, Director of Regulatory Coordination.

3665 Sitting next to Mr. Farmer is Mr. Barry Dixon, who is currently Senior Vice-President, Carrier Services of Bell.

3666 Next to him is Ms Megan Davidson, who is currently Senior Director of Operations, Carrier Services, Bell. Mr. Dixon and Ms Davidson are assisted by Mr. Fritz Schmidt, Associate Director, Wholesale Service.

3667 Again, Mr. Chairman, the witnesses' CVs are set out in our attachment to our 20 September letter.

3668 Perhaps the witnesses could be sworn in.

SWORN: JOAN HIGHET

SWORN: BARRY R. DIXON

SWORN: MEGAN G. DAVIDSON

PREVIOUSLY SWORN: ROBERT F. FARMER

EXAMINATION / INTERROGATOIRE

3669 MR. HENRY: Now, ladies and gentlemen, your qualifications are accurately set out in the attachment to The Companies letter of 20 September. Is that correct?

3670 MS DAVIDSON: That's correct.

3671 MR. DIXON: That's correct.

3672 MS HIGHET: That correct.

3673 MR. FARMER: That's correct.

3674 MR. HENRY: Mr. Farmer and Ms Highet, you are responsible for sections 5, 6, 7, 8, 10, with the exception of section 6.6, as well as Appendices 1 and 2 of The Companies evidence. Is that correct?

3675 MR. FARMER: That's right.

3676 MS HIGHET: Yes.

3677 MR. HENRY: As well as the interrogatory responses set out in Attachment 2 to The Companies letter of 20 September that are related to that evidence, with the exception of those related to wholesale quality of service? Is that correct?

3678 MR. FARMER: That's right.

3679 MR. HENRY: Is that evidence and those responses true, to the best of your knowledge and belief?

3680 MR. FARMER: They are.

3681 MR. HENRY: And Mr. Dixon and Ms Davidson, you are responsible for those interrogatory responses set out in Attachment 2 that are related to wholesale quality of service. Is that correct?

3682 MR. DIXON: That's correct.

3683 MR. HENRY: Are those responses true, to the best of your knowledge and belief?

3684 MR. DIXON: Yes, they are.

3685 MR. HENRY: Mr. Chairman, the witnesses are available for cross-examination.

3686 THE CHAIRPERSON: Thank you, Mr. Henry.

3687 Good morning, ladies and gentlemen. Welcome to our proceeding. Welcome back, Mr. Farmer.

3688 MS HIGHET: Good morning.

3689 THE CHAIRPERSON: We will then turn to the first party to cross-examine this panel, which is ARC et al.

3690 Mr. Janigan I guess it is going to be.

3691 MR. JANIGAN: Thank you, Mr. Chairman.

3692 THE CHAIRPERSON: Your microphone, Mr. Janigan.

3693 MR. JANIGAN: I am going to be asking some questions on the test for --

--- Pause

3694 THE CHAIRPERSON: Is your microphone on?

3695 MR. JANIGAN: When I conclude, Ms Lawson will be completing the cross-examination of this panel on behalf of ARC et al.

EXAMINATION / INTERROGATOIRE

3696 MR. JANIGAN: I would like to turn to your test for removal of upward pricing constraints, in particular your evidence set out at paragraph 6.4 and beyond.

3697 You have proposed for this hearing something which you call a competitiveness test which, in your words, would test for the presence of competitive alternatives. Is that correct?

3698 MR. FARMER: That's right.

3699 MR. JANIGAN: If a capped service met that test the upward pricing constraint would be removed, but the imputation test would remain and the reporting and tariffing requirements would remain. Do I have that right?

3700 MR. FARMER: That's right. Just one variation. It is not the whole service. It would be the service within the market of interest which could be a band or some other area of definition.

3701 MR. JANIGAN: Thank you.

3702 Now, it sounds to us as if what occurs after the upward pricing constraint is removed is that competitors continue to be protected, but not customers. Can you respond to that?

3703 MR. FARMER: Clearly, I don't agree with the characterization.

0940

3704 The idea behind the test is that, when there is competition for a service within an area, then it is the competition itself which is going to provide the protection for customers, together with the other constraints that we talked about, the constraints being the downward pricing movement. That is a test for anti-competitive behaviour as opposed to the test that you are talking about.

3705 Plus, as I mentioned yesterday, there are other conditions possibly beyond price that one might look at in terms of reviewing the tariffs. So I suppose to that extent as well there is additional protection for customers.

3706 But the main protection is actually the market that is in play at the time.

3707 MR. JANIGAN: Now, I take it from your evidence that this competitiveness test is to be distinguished from the test for forbearance from regulation under section 34 of the Telecommunications Act.

3708 MR. FARMER: That is correct.

3709 MR. JANIGAN: Now, presumably the grounds for seeking forbearance from regulation are more stringent from the regulated companies' standpoint. Would I be correct in that?

3710 MR. FARMER: Yes, I would say that is true.

3711 MR. JANIGAN: There would have to be greater evidence of competition?

3712 MR. FARMER: Again, I don't disagree with you.

3713 We are obviously looking at two parameters: market share and availability. Those two parameters would be looked at for forbearance. There would be other considerations as well.

3714 It is also possible that one would look -- certainly our experience has been that a higher market share loss, for instance, was relied upon before forbearance was granted.

3715 But there is no set number, I would say, for forbearance, so it is a little difficult to be too categorical on it.

3716 MR. JANIGAN: Now, from a customer's standpoint, the upward pricing constraint is an important feature of regulation. Would you not agree?

3717 MR. FARMER: I would, where regulation is required, absolutely.

3718 MR. JANIGAN: Then coming back to this point, the distinguishing -- or attempting to make this test different than forbearance, why should the test be a different one for forbearance from regulation as opposed to the removal of the upward pricing constraint, given the consumer interest in upward pricing constraint as an appropriate form of regulation?

3719 MR. FARMER: Well, two things.

3720 One, it isn't forbearance as we discussed. There would continue to be some regulatory oversight, including the requirement for filing approval of tariffs before any price change went into effect, or any other change to the service that would fall within the purview of the tariffs.

3721 So it isn't the same as forbearance in that regard.

3722 What we were looking for was a relatively easy test in the sense that the forbearance applications that we have been involved with have taken quite some period of time. From the time of filing to the time of eventual approval are measured in months, and several months.

3723 So what we were looking for was a test that was somewhat more easily applied in that it relied on exclusively objective data. So then it would permit the removal of upward price constraints where it is believed that upward pricing constraints aren't required any longer because of the conditions of the market, but it could be done in a rather more rapid pace than the forbearance applications have run in the past.

3724 MR. JANIGAN: But from a consumer standpoint, if upward pricing constraints are an important feature of regulation, why shouldn't they be entitled to the same stringent test that forbearance from regulation is subject to for other circumstances, such as the imputation test, tariffing, whatever?

3725 MR. FARMER: I understand the issue. I understand the concern.

3726 Again, when I prefaced my answer about regulation is important -- or rather upward pricing constraints are important it was in the context of where regulation is required. So then it becomes a matter of judgment as to when, just as the forbearance decisions are a matter of judgment.

3727 What are the market conditions which make it appropriate to no longer require that certain previously held regulatory requirements are no longer required? And I admit it is a matter of judgment.

3728 That is why when one brings forbearance applications there is no one set of data that one is expected to bring and then it is a matter of just looking at it and say if that "test" is passed because the test can be somewhat subjective and has to be, you know, specific to the market conditions at the time.

3729 So having said that it is somewhat subjective as to whether the market conditions are yet right for relieving upward price constraints, as I said, we were looking for a somewhat simplified test.

3730 But part of that test is also, within the general framework that we proposed, that there would continue to be constraints, not in the standard form of upward price constraints as we have now, but constraints in the form of know the averaging within the area that gets the upward pricing constraints removed.

3731 That, of course, is also to protect customers who may not have competitive alternatives available to them directly, but to the extent that the benefits competition are at least being realized and the effects of competition are being shown in the prices for customers in that area, and then those same benefits would flow to everybody else in that area.

3732 MR. JANIGAN: I agree with you, Mr. Farmer, that the test for competition is not necessarily a bright line, but I guess the question is: Why would you set the line lower for upward pricing constraints, which primarily benefits customers, than removal from regulation all together, which primarily benefits competitors?

3733 MR. FARMER: Again, the reason it is lower, the test is lower because -- and I will try not to repeat myself -- is because it is not the same as forbearance. Quite frankly, there would continue to be a regulatory tariff approval process as we have it today.

3734 Now, having said that, what we have proposed obviously is our opinion would be that when the test is met, when the conditions of the test are met, it is no longer necessary to have those upward pricing constraints, because we believe that market itself is going to be able to do that, which is not unlike the thinking that one has in forbearance.

3735 I have to tell you that when we were thinking about this particular thing we were saying: Well, listen, when there really isn't a great deal of competition we completely agree why there would be a reason for regulation for those services which one might call essential to customers.

3736 Now, when competition comes along we know that the endpoint would be forbearance. At least, we would expect that to be the case, and that might be some years behind.

3737 So we were looking at a sort of a continuum of pricing constraints. The normal price constraints that one would see in, say, almost-monopoly areas, moving into the sort of the end-stage forbearance.

3738 What we were looking for was kind of a half-way house in there. So we had proposed: Well, we will keep it tariffed, we will go through the tariff approval process so that the Commission can look at it and bring to bear whatever particular judgments which have to be considered.

3739 Now, having said that, we could have said -- and we did to ourselves -- there are other ways of looking at this, there is other halfway houses as well. Perhaps one is just looking at not uncapping but higher constraints, if I can put it that way. Maybe you take it outside the basket that has an overall constraint and look at just the individual price constraint at 10 per cent. That is another possibility.

3740 I cannot be terribly dogmatic to say one is right and one is wrong. There are sort of a range of options available to us. But I think the notion is correct and that is that we really should be looking at the continuum moving from monopoly to a fully competitive area ready for forbearance and pick something that is somewhere in between that.

3741 MR. JANIGAN: But from a consumer standpoint, Mr. Farmer, when you remove the upward pricing constraint, consumers at that point in time have to rely on the state of competition to provide them with consumer protection. It is pretty important for consumers at that point in time that you have the state of competition correct.

3742 MR. FARMER: I completely agree with you. Absolutely. That is, in fact, the essence behind our proposal, the state of competition is going to be enough to do it. Then it becomes a question of judgment as to how one measures it and what the appropriate steps are at that time.

3743 MR. JANIGAN: I wonder if I could turn to The Companies interrogatory from ARC No. 101. In particular I am looking at part (e) of that question.

--- Pause

3744 MR. FARMER: I have it.

3745 MR. JANIGAN: Part (e) is:

"Please comment on how the criteria proposed by The Companies compared to the criteria used by the Competition Bureau to determiner whether a firm has market power or whether a merger may result in the merged firm having market power. Please comment on the appropriateness of adopting a test that is consistent with the approach used by the Competition Bureau." (As read)

3746 And your answer in (e) was that:

"The criteria proposed by The Companies in their 31 May 2001 submission are not intended to replace the criteria used by the Competition Bureau to determine whether a firm has market power." (As read)

3747 I guess the question that arises from that exchange is: Is it your view that an incumbent could still have market power for a service, yet the upward pricing constraint could be removed?

3748 MR. FARMER: Well, again it is a question of definition of market power.

3749 If one uses as the test, if I can put it that way, for market power, that you can only conclude that a company doesn't have market power if it cannot pass the forbearance test, then I guess I would have to say, because I would expect that our competitiveness test is generally less stringent than that, then it is a possibility that there could be some at least residual market power in an area that would pass the competitiveness test but yet is not ready for forbearance.

3750 Now, that becomes somewhat of a tautological response that I am giving you, so I'm not too sure if it is terribly helpful.

3751 It really rests on: Do we believe the forbearance test is the only test for market power?

3752 I haven't really turned my mind to that. I am prepared to accept, however, at this time that the forbearance test is the right test for market power.

3753 MR. JANIGAN: Well, from a practical standpoint, looking at the firm with market power, essentially a firm with market power can raise a price of that service without necessarily having market discipline. Do you understand that to be what market power involves?

3754 MR. FARMER: Oh, I see what you mean.

3755 Absolutely. If you had some kind of market power then you could, yes, absolutely, raise the price for some prolonged period of time and not really suffer the consequences in the market.

3756 MR. JANIGAN: Now, I would like to look at the proposed test which, as I understand, it is five -- the competitiveness test is a loss of 5 per cent of the market share and having a competitive option open to 30 per cent of the market.

3757 I would like to apply that test to the circumstances of Bell Canada's residential local market.

3758 MR. FARMER: Sure.

3759 MR. JANIGAN: Now, as I understand it, there are currently about 8,650,000 residential NES. Does that sound right?

3760 MR. FARMER: I was thinking 7.5 million, but it is a big number.

3761 MR. JANIGAN: Well, since I have done these computations with that number in mind, let's try that. I don't think it does violence to the principle.

3762 MR. FARMER: No, that is perfectly fine.

3763 MR. JANIGAN: We assume that the conditions exist for the removal of the upward pricing constraints so that, first of all, Bell Canada would have to lose about 5 per cent of its customers?

3764 MR. FARMER: That is correct.

3765 MR. JANIGAN: And that is about 450,000 customers.

3766 MR. FARMER: That's right. If one were going to apply the test on the entire base, yes.

3767 MR. JANIGAN: Then if we look at the test, the 30 per cent test for a competitive alternative, there would have to be at least 2,600,000 customers in the entire market with a competitive alternative, which includes the 450,000 that have already opted for an alternative?

3768 MR. FARMER: Correct again. If the test was going to be applied on the entire service, yes.

3769 MR. JANIGAN: Now, Bell Canada decides to increase local rates by -- the upward pricing constraint test is met and the constraints are removed, and Bell Canada decides at that juncture that they are going to increase local rates by $10 per month. Now, you would have in this scenario six million customers -- six million customers that are without an alternative -- pay that extra $10 a month and you get over $725 million in annual revenue from this measure. Am I correct on that?

0955

3770 MR. FARMER: Well, I suppose -- I will accept your arithmetic -- one could do it. It is a question of whether it would be a smart thing to do. I suppose theoretically, just looking at the constraints themselves, technically speaking it could be done.

3771 I think it would be foolish in the market, but it is a possibility.

3772 MR. JANIGAN: That leaves, by my arithmetic, 2,150,000 Bell customers who have a choice to switch but haven't yet switched to an alternative.

3773 That is in the 30 per cent market.

3774 MR. FARMER: Right. Let me come back on the scenario.

3775 MR. JANIGAN: I will give you a chance to comment on whether or not it is a likely scenario, but I wonder if I could review the arithmetic first.

3776 MR. FARMER: That is actually what I intended to do. I wasn't going to launch into a long speech on this one.

3777 Just so it is understood, if one looked at -- again we are using the entire service base from the consumer basic services as the test. Part of the test, of course, is the de-averaging issue. So if we were going to increase prices by $10, as I think is the scenario you picked, I couldn't do that unless I was increasing the prices by $10 everywhere.

3778 I think that was your issue?

3779 MR. JANIGAN: Absolutely. The 2,150,000 Bell customers are subject to the $10 a month increase as well. They have a choice to switch to an alternative but haven't yet switched to an alternative.

3780 The question is: In this scenario how many will switch?

3781 Under your test, if we assume that an average monthly rate is $22, and for some reason this increase enrages all of them and they all go out the door, every single one of them that has a competitive alternative available that formerly was with Bell, about $568 million goes out the door annually in that calculation.

3782 So even in this worst case scenario, under your test Bell will earn over $150 million annually with everyone in that 30 per cent customer market going out the door.

3783 MR. FARMER: Maybe now I have to launch into my speech.

3784 If one were looking at that scenario -- and you are right, we would probably jack up everybody's prices overnight by $10 and you have enraged them and they all move. Maybe they would all move in that case, and I suspect we would worry about that a great deal.

3785 We are not in the business of losing all of our customers. That is clearly not what we want to do. Obviously, when you lose your customer, if you lose it for local maybe you are losing it for everything you have. That is probably the case.

3786 Perhaps more to the point is those -- I think what you are thinking of are captive customers; those customers who don't yet have competitive alternatives available to them. If we have done that in the market, they will very quickly have competitive alternatives available to them, simply because of the conditions that we would have set ourselves in the scenario that you have put forward.

3787 MR. JANIGAN: Let's look, first of all, to the market that does have the competitive alternative and attempt to make a realistic estimate of how many would switch in that circumstance.

3788 I would suggest to you that an appropriate analogy or an appropriate comparison might be the long distance toll market, where after years of offering lower long distance rates in the residential market than Bell Canada, the long distance competitors look to have about 15 to 20 per cent of the minutes across Canada and maybe about 10 per cent of the customers. And that is after years of competition.

3789 MR. FARMER: Let me give you some Bell Canada figures. I know the national figures are in that recent monitoring report that we can turn to. But we are talking the consumer market for long distance, I think about 30 per cent of the market, which is measured, I think, in revenues.

3790 MR. JANIGAN: I am talking about residential here.

3791 MR. FARMER: So am I, the consumer long distance, absolutely. Business is around 50 per cent of the market that has gone.

3792 I was giving you Bell Canada figures, Mr. Janigan. That is perhaps the difference.

3793 MR. JANIGAN: Okay.

3794 MR. FARMER: We can quibble about the numbers, but those happen to be the Bell Canada statistics.

3795 So I set the record straight in terms of the numbers for consumer long distance.

3796 Perhaps you could repeat your question, because I have lost track.

3797 MR. JANIGAN: I am attempting to draw an analogy to the long distance toll market where competitors have for years offered lower rates than Bell Canada and yet their degree of capture of that market still leaves Bell with an overwhelming share of the residential market.

3798 MR. FARMER: It is a good share, and I am glad to have the share that we have. There is no question about it.

3799 It is a share which we have looked at very carefully over the last number of years, and the determination was made there that Bell Canada does not have market power in that market.

3800 So whether that would play out in the scenario that you presented, which is really quite different from the scenario in the long distance market where one is seeing over time price changes in the long distance as opposed to what you were talking about, which were very sudden and large increases, which I think would have a rather different effect on the market.

3801 MR. JANIGAN: Let me take another example, one that intrigued me greatly while it was in place.

3802 For about five years after the onset of long distance competition, Bell was still offering plans which mandated a monthly amount of calls to get a discount. Yet the overwhelming percentage of the low volume long distance customers stuck with Bell and the rest of the ILECs. They were paying the basic toll rate even though the competitors were offering rates that were 35 to 50 per cent below Bell's. Yet something like 90 per cent, after five years, stuck with Bell.

3803 Wouldn't that same kind of inertia apply in circumstances of local competition, where you have an upper pricing constraint removed and you are given the ability to increase rates, let's say, $10 a month?

3804 MR. FARMER: I don't know that anyone has put the customer inertia to the test to that extent. So I would be very surprised if things played out the way you are indicating.

3805 I think the way the long distance market has been characterized is perhaps not quite right either. The reason we have the market share we have is because we have provided quite a number of packages. Now I'm not sure that any of them in the consumer market actually have minimum charges.

3806 MS HIGHET: No, none of them do.

3807 MR. FARMER: I don't know if one can really draw these comparisons. I have, frankly, a lot of difficulty accepting that what has happened in the long distance market can in any way lead us to believe what is going to happen in the local market under the scenario that you have proposed.

3808 MR. JANIGAN: If the take-up is similar to 20 or 30 per cent in the face of price increases for local service that may be put in effect after the removal of upper pricing constraints, this could be an enormously profitable measure to put in place for Bell Canada.

3809 Would you not agree?

3810 MR. FARMER: Possibly in the short term it could be, just simply because of the way the arithmetic works out.

3811 I will tell you that we have perhaps not the guts nor the foolishness to attempt something of the sort that you are talking about right now. As we understand our customer behaviour, we simply wouldn't behave in the way that you are talking about right now.

3812 I recognize that that is kind of a "trust me" response to your question. But I have to tell you that is really behind what we say when we say the market is going to be really conditioning what we are going to be doing in terms of pricing to these customers and these services.

3813 Frankly, it is our understanding of the way customers would actually behave. The sort of scenario that you are painting here is simply not one that we would ever engage in.

3814 So it is perhaps an interesting but academic discussion.

3815 MR. JANIGAN: Even if the market eventually forced a competitive response from Bell Canada, in the interim, between the period of time where you levy the increase and the market forced a competitive response, there would be enormous windfall profits for Bell Canada.

3816 MR. FARMER: Well, again, one has to question what the timing would be. If you are talking about an area that doesn't have local competitors initially in a particular area and we jack up the prices, it could take a little while, but not a great deal of time. If competitors are already in the area, so to speak, it could take a little while for them to roll out.

3817 But at the same time we are facing competitors already for other services that we provide, like long distance, as we have talked about. Internet access is another one in that market that is very important to us. These, too, would be affected by the kind of scenario that you are presenting.

3818 So I think the timing, if it exists at all, would be really quite short.

3819 Frankly, the long term damage that we would be doing to ourselves would certainly keep us from doing it.

3820 MR. JANIGAN: To what extent were you guided, in the fashioning of this competitiveness, test by the CRTC test for deregulating basic cable rates?

3821 MR. FARMER: It was obviously a model that was in front of us that we were aware of. So one could just sort of look at it and latch on to it, so to speak, in the sense that obviously the Commission had turned its mind, at least in the context of some services, to say: When is it no longer necessary to regulate?

3822 In this case -- anyway, that is not our proposal -- this was really forbearance for certain cable company services.

3823 Obviously, we went to that decision because it was there, because it was a model.

3824 Again, one can't get terribly dogmatic about this. I recognize there is a certain amount of subjectivity in it. Whether one picked a five-and-thirty test or a ten-and-forty test, I can't say one is absolutely right and the other one is absolutely wrong.

3825 I think there is a continuum of moving from no market share to a lot of market share, from no availability to a lot of availability. We do find that availability in an area runs out quite quickly. It is frequently all or nothing, but not necessarily the case.

3826 Again, we were guided because it was there and the Commission was familiar with it. We are very much guided by the fact that both availability and market share are also some of the parameters in the forbearance test. We wanted to pick one again that has a fairly easily measured, objectively, parameter that we could look at.

3827 It was kind of guided by a number of considerations.

3828 MR. JANIGAN: Mr. Farmer, you will acknowledge that there are some basic differences between the two services, in particular when we look at the local telephony and basic cable for the purpose of the use of this test.

3829 MR. FARMER: Certainly there are differences between cable and local telephony, absolutely.

3830 MR. JANIGAN: Some of them may be the societal importance of the service.

3831 MR. FARMER: Yes, that is a consideration. I don't know how one measures it.

3832 As you know, there are other areas of our evidence and proposal that talk about certain services being discretionary. We don't think basic telephone service is discretionary. We consider it to be essential. That is why we have absolutely no qualms, in a time when there is very little competition, to have regulation there.

3833 I don't know what determines what is discretionary and what is essential, which I think is really at the heart of this discussion.

3834 One of the things that we do look to, however, is penetration rates. The penetration rates of the services which we think are discretionary are certainly well under 50 per cent. The ones that we would consider to be essential would be considerably higher than that, I would think.

3835 Obviously, telephone service is very high. Cable service is very high actually. It is over 80 per cent, I believe.

3836 Would one call that discretionary or essential in terms of societal interest? I really don't know. It is kind of tough.

3837 I don't view, personally, telephone service the same as cable. But I suppose if I asked my son which he would rather give up, I suspect he would give up the telephone.

3838 MR. JANIGAN: From a regulatory standpoint, though, you would agree with me that it would difficult to characterize cable as an essential service.

3839 MR. FARMER: Actually, I don't think I can proclaim on that, simply because I am not too sure what all of the considerations should be.

3840 The only reason I hesitate here -- and I am not trying to be difficult -- is I do see it as a service which an awful lot of people, in fact most people, take.

3841 It is difficult for me to say that when Canadians generally have said through their purchases that they value cable television, it is difficult for me to say that it shouldn't be considered essential.

3842 But it is a subjective matter.

3843 MR. JANIGAN: Presumably take up of a service is not necessarily equivalent to the essential nature of the service.

3844 MR. FARMER: No, not necessarily, I agree. There may well be other considerations. That is the reason I am very much hedging on this one. I can't be definitive.

3845 MR. JANIGAN: One other difference may be the availability of near substitutes for cable, particularly on-air television reception. I don't think an equivalent exists for telephone service.

3846 MR. FARMER: I mean, that is, of course, what we are talking about right now, the extent to which there is going to be competition and the extent to which there are alternatives. But, yes, it is one of the considerations.

3847 MR. JANIGAN: The nature of basic service in cable and telephony is fundamentally different. Would you agree? One is a collection of channel program offerings, the other is access to a network.

3848 MR. FARMER: Oh, sure. Yes.

3849 MR. JANIGAN: In cable, most customers could probably not separate their regulated basic cable service from their extended programming service. Would you agree?

3850 MR. FARMER: I'm sorry, could you just repeat that?

3851 MR. JANIGAN: Unlike telephony, where you have local service and then you have your services on top of that, for example, pretty much everyone can distinguish basic local service from call answer or call waiting or whatever.

3852 In cable you have basic service and then you have a series of extended programming services, all which resemble basic service, and most customers can't tell the difference between one and the other?

3853 MR. FARMER: I can't comment on how people view different cable tiers differently. People can choose to take just a primary tier, and there are other tiers, as I understand it.

3854 Telephone service, absolutely, you have a basic service; you either have it or you don't. Once you have the service, then you can obviously judge as to which other services you want to take on top of it, and there is lots of choice there.

3855 MR. JANIGAN: In terms of the distinguishing features of the two services in telephony, the additional services are much different than the additional services offered in cable.

3856 In cable, a very small percentage of the cable population take only basic service.

3857 MR. FARMER: Yes, that is my understanding. I am told that quite a number of folks take more than just the basic tier. I suppose that gets us into the question as to whether tiers above the basic are considered essential or not in public too. I don't know.

3858 MR. JANIGAN: Are there any other rate limitations on cable, apart from a constraint on basic cable rates that you are aware of?

3859 MR. FARMER: No, not that I am aware of.

3860 MR. JANIGAN: Apart from the CRTC decision with respect to regulation of basic cable rates, has any commission that you are aware of used this particular test to remove regulatory upper pricing constraints for a regulated service?

3861 MR. FARMER: Not this particular test. We do have an interrogatory where we have outlined a number of examples where other tests have been used for purposes of not regulating the services under their jurisdiction.

3862 The interrogatory is The Companies GT 26 June No. 9. In that we have listed a number of examples, some of which look to market share, some of which look to availability, some look at just availability. The airline industry, for instance, has questioned as to whether there is even a single competitive carrier offering service on a route, and if there is then those prices would not be regulated.

3863 If I could read this quickly enough, I guess I could go through other examples, but they are listed in this interrogatory.

3864 So there are tests similar in nature in that they pick objective tests which have passed and also rely on both considerations of share and availability and, if passed, then regulation is lifted.

3865 MR. JANIGAN: But this five-and-thirty test, is this unique?

3866 MR. FARMER: The combination of the five and the 30, to my knowledge, only applies in Canada in the cable industry.

3867 MR. JANIGAN: I wonder if you could explain to me how geographic average pricing works in your model?

3868 MR. FARMER: Actually, it is not a terribly difficult concept at all. Again, the idea is that one does recognize that if competitive alternatives are not available to all customers in an area that has upward price constraints removed, then there could be a fear that we would do just the sorts of things that you were talking about, i.e., decrease some prices and increase those ones where there would not be competitive alternatives.

3869 So we said let's just average the prices, then, in that case. That way we will be disciplined by the competitive forces in the area in which they are present. That discipline will actually have its effect throughout the area. So, that is the reason we put it in.

3870 How it would work is actually it is fairly simple. We would make an application to the Commission, bring forward the evidence on the parameters which would illustrate the both availability and market share numbers, and at that point commit to not de-averaging new prices within that area.

3871 That goes as far as our evidence goes, and I would like to add something, because we have given this a lot of thought.

3872 What I would like to say, too, given the nature of competition, it might be necessary, we may find at a later date that it is really kind of necessary for us to be able to de-average in the sense that there are particular pockets in these areas that are facing particular competitive pressure.

3873 At that point, it would be incumbent upon us again to come back to the Commission and ask approval for some form of de-averaging and, at the same time, we would make a commitment in terms of the pricing action in the rest of that area, again to fulfil on our promise that we are not going to, by nature of uncapping, if I can say it, abuse our customers who do not have competitive alternatives.

3874 The onus would be on us to make the recommendation to the Commission as to what that form of protection would be.

3875 MR. JANIGAN: Have you read the evidence of CallNet with respect to what they term the tag-along price constraint?

3876 MR. FARMER: Yes, I have.

3877 MR. JANIGAN: Could you explain to me briefly what you understand that to be?

3878 MR. FARMER: My understanding of it is that if a telephone company were wished to change a price of a service, and it is on a service basis, if the price of a service were going to be changed for any group of customers or in any area, then that price change, on a percentage basis, would be applied uniformly across the entire service.

3879 So if we wished to lower our price in Toronto or increase a price in Smiths Falls, and say that price decrease or increase was 5 per cent, then that 5 per cent change would apply everywhere in our territory.

3880 MR. JANIGAN: I take it that the company does not agree with this proposal?

3881 MR. FARMER: That is right. We don't agree. We think it is quite antithetical to the competition, generally speaking.

3882 MR. JANIGAN: Can you explain to me why your commitment to geographic average pricing is better for customers than the CallNet's tag-along price constraint?

3883 MR. FARMER: Yes, I will. It comes back to what it is that we are trying to accomplish with this competitiveness test.

3884 I know it looks like, oh, here's the telephone companies looking for greater pricing flexibility, but that isn't actually the reason we have presented it.

3885 We have actually presented it as a competitive safeguard in the following way. It is not only as a competitive safeguard, but it is one other thing. There is another principle that we think should be adopted, and that principle should be where it isn't necessary to regulate, then regulation shouldn't happen.

3886 So where it isn't necessary, in our view, to impose regulatory upward pricing constraints, then those upward pricing constraints should be relieved. Just as a matter of principle, they should be relieved. Then we get into the debate as to what that right test is.

3887 The competitive safeguard notion of the competitiveness test is really the following.

3888 One of the fears -- and actually it is expressed in the tag-along proposal that CallNet made. The fear is that what the telephone companies can do, those price cap companies can do, is if services were in a basket together, like for instance, business Band A versus Band B, that sort of thing, if they are in a basket together, the way we could meet competitive pressures in Band A is by lowering the prices in A and increasing the prices in B and get what I think your client described as a costless price change or a costless competitive response, that sort of thing; i.e., we could pay for decreases by funding it through increases in that same basket.

3889 When services and price levels are in the same basket, technically you can do that. That is what happens. That is just the way the arithmetic works.

3890 So what we had proposed was this: The essence of the fear is that the prices are linked, i.e., the prices in the less competitive areas could be linked with prices in the more competitive areas in the following way: You could lower the ones in the more competitive areas, increase the ones in the less competitive areas, and you have made your competitive response but the same number of dollars are coming in. That is the theory. The prices are linked because they are in the same basket.

3891 What we had proposed was a way to de-link those prices, to allay that fear by saying: All right, we will isolate the pricing action in the less competitive areas from the pricing action in the more competitive areas. We will remove the incentive we would otherwise have to increase some prices to pay for decreases somewhere else. If you put constraints in the less competitive areas in the form of upward price constraints, then you can do that, independent of what is happening in the more competitive areas.

3892 Therefore, if you take the more competitive areas out of the basket and put it somewhere else, which we are now calling uncapped, then those prices become de-linked and the competitive safeguard kicks in in that way.

3893 The tag-along proposal doesn't do that at all. In fact, it does something quite different, which I would consider to be not conducive to comparative activity. So we presented ours as a competitive safeguard. Theirs, I think, is presented -- whether it is presented this way or not is not the issue. The impact would be not conducive to competition.

3894 It would say, without perhaps incurring some tremendous penalties, you are not allowed to change the prices in Toronto without changing the prices everywhere else, making targeting of price changes, targeting of price decreases to meet competitive pressures, for instance, really very difficult for the reasons that Mr. Talbot and Mr. Nicholson spoke about yesterday.

3895 There are many, many constraints on us. Price constraints in a regulatory forum are one, but there are also many other constraints from the market from the financial perspective and so on.

3896 So it makes it extremely difficult with the tag-along proposal to even react to competitive pressures as any other competitive market would allow a competitor to react.

3897 So it has quite a different effect. Where I would look at our proposal as being a protection for competitors and the tag-along proposal having an entirely opposite effect; in fact, it is removing the flexibility one would normally expect to find in any kind of competitive market.

3898 MR. JANIGAN: As I understand it, the tag-along proposal addresses that into using your competitive test through 70 per cent of the market to which a competitive option hasn't arrived.

3899 Under your model, as I understand, the protection is that because of the fact that there is a competitor in the market and can reach 30 per cent of the market, that shows enough competition to protect that 70 per cent in the long run.

3900 MR. FARMER: There is another very large difference between the competitiveness test application, implementation, as we have talked about it in the tag-along, and that is this:

3901 What we are proposing for the competitiveness test is you look at those areas where there is competition. Again, it is a question of degree here, but it is where there is competition.

3902 It is within that area where there is competition, and in fact I suspect we will find -- well, I don't want to make it as a commitment because this may well not be the case, but it could also be the case that the competitiveness test, if we go forward on it, we would find that the availability is on 100 per cent of most of the areas we would ask for it to be approved anyway. But even if that weren't the case, it really doesn't matter.

3903 The issue is this: We look at an area where competition is present in the area. Now, whether it is 30 per cent or 40 per cent, we can talk about what that parameter should be, but it is there and once it is there in an area -- you can even think of Toronto as an area, if you wish -- once it is beginning in Toronto, it is going to roll out to the entire Toronto area fairly quickly. Why? Because I think the economics in that one area are fairly similar and competitors would already be present so they could roll out, generally speaking.

3904 So it becomes on a much more granular basis, if I can put it that way.

3905 The tag-along test is not that at all. It just covers the entire area. It covers all of our customers in Ontario and Quebec, to use Bell Canada's example. It covers all of the customers, without regard, frankly, to the competitive nature in all those other areas.

3906 It is the fact that it covers the whole area, making it very difficult to have any kind of competitive response, that is really at the heart of what I consider to be -- I shouldn't use the term "anti-competitive," but I suppose that is one way of describing it -- the anti-competitive nature of the tag-along.

1025

3907 MR. JANIGAN: I would like to move on to the issue of the removal of the basic toll constraint.

3908 I note in CallNet's evidence, which is in fact derived from interrogatory response from The Companies in this proceeding, noted that about 5 per cent of Bell toll customers that provide about 5 per cent of the basic toll revenues remain on basic toll service.

3909 I understand that the figures are approximately 7 per cent for MTS and 9 per cent for SaskTel. Subject to check, does that sound correct?

3910 MS HIGHET: No, it is correct.

3911 MR. JANIGAN: Now, these customers are paying toll rates that appear very much in excess of The Companies own long distance plans. Isn't that correct?

3912 MS HIGHET: They do not have a discounted plan, that is correct.

3913 MR. JANIGAN: Who are these customers, do you know? In terms of what is a characteristic --

3914 MS HIGHET: As in the demographics of them?

3915 MR. JANIGAN: The demographics, their characteristics.

3916 MS HIGHET: They actually spread across all demographics.

3917 MR. JANIGAN: Now, do you know why they are still paying basic toll?

3918 MS HIGHET: Not specifically. There certainly is, you know, equal access across virtually the entire territory. There certainly is multiple toll plans available to all the customers, either through ourselves or through our competitor.

3919 MR. JANIGAN: To some extent it runs contrary to all assumptions about behaviour in the marketplace to have 400,000 customers out there paying a toll rate which is higher than even the long distance plans that the company offers.

3920 MR. HENRY: Well, there is an assumption that either their long distance is limited, the time of day that they use long distance is specific, or the either cross-border international plans that we have don't meet their specific requirements.

3921 MR. JANIGAN: Well, could it also be that --

3922 MS HIGHET: It is only 5 per cent of the base.

3923 MR. JANIGAN: It's 5 per cent, but Bell Canada is so big those are a lot of customers.

3924 MS HIGHET: No, I realize that.

3925 MR. JANIGAN: And there are corresponding percentages for the other companies as well, but obviously Bell Canada in size dwarfs them.

3926 Is it possible some of these customers lack the ability to respond effectively to competitive options? In other words, that they are not literate, they lack basic skills to opt for your plan. Is that possible?

3927 MS HIGHET: Well, obviously it would be a possibility. That would be correct. There are probably substantial other possibilities as well as to whether they choose one plan versus another.

3928 MR. JANIGAN: Now, are there any other service plans that are dependent upon the price of basic toll? In other words, are basic toll rates used to calculate any other price that is charged to telephone customers, apart from basic toll?

3929 In other words, is any service based upon a percentage of basic toll, any long distance plan based on a percentage of basic toll?

3930 MS HIGHET: You mean with respect to the minimum?

3931 MR. JANIGAN: Possibly. In other words, if you get the removal of the basic toll constraint, are you going to be able to raise any other prices apart from basic toll?

3932 MS HIGHET: Well, the only other dependency is the credit card surcharge which we have also requested to be removed from the schedule.

3933 MR. JANIGAN: Okay. But that's it.

3934 MS HIGHET: Yes.

3935 MR. JANIGAN: Now, why do you want to? These are customers that are already paying more than your long distance plan. I mean apart from the obvious answer, why do you want to charge the customers more?

3936 MS HIGHET: I don't think we specifically want to charge our customers more.

3937 MR. JANIGAN: Then why do you want the constraint removed?

3938 MS HIGHET: Because, as I indicated to you, equal access is available to almost 100 per cent of the base. It is a fully competitive market. There is absolutely no need to put pricing constraints where we don't need pricing constraints, so we are requesting pricing constraints to be removed on this specific piece of the business.

3939 MR. JANIGAN: But for those customers that may be unable to respond to competitive offerings for a variety of different reasons, the removal of these basic pricing constraints is going to essentially mean that they are going to be paying more for their long distance plans without the ability to -- let me rephrase that.

3940 If there are customers that are unable to participate for a variety of reasons of their own disability, whether or not it's literacy or ignorance or whatever, the removal of the basic toll -- the basic toll constraints is just simply going to put more money in your pocket.

3941 MS HIGHET: No. I don't agree with that. I think it's more from ensuring that we are able to manage the program and ensure there is no pricing constraints where there don't need to be.

3942 We have, as I indicated, this is 5 per cent of the base. The choice is the customer's with respect to what toll plan they take. There are multiple toll plans out there in the marketplace.

3943 MR. JANIGAN: But these customers, with respect, have already been given that option and have been given that option by the company and they are on basic toll for a whole variety of reasons we may or may not be aware of.

3944 MS HIGHET: And some of the reasons may be associated with what you are talking about. There is no question. I would suspect, though, the majority of the reason is really associated with their long distance patterns.

3945 MR. JANIGAN: And the only reason for removal of the basic toll constraint would be presumably to charge higher basic toll rates, because your long distance plans are not dependent upon the size or extent of the basic toll rate.

3946 MR. FARMER: I would just like to -- Ms Highet already touched on it, but I had touched on it earlier, so I just wanted to come back to the principle, one of the principles that I talked about earlier, and that is let us not regulate where regulation isn't required.

3947 I have to say I look at the basic toll restrictions as a hangover from the forbearance days where there was a concern expressed at the time that maybe some customers wouldn't be able to avail themselves of all of the choices.

3948 If there was a concern then, I would have to say there isn't a concern now simply because of the nature of the market right now and how well known long distance competition is.

3949 Our objective here isn't to increase the price of the basic toll schedule. Our objective here is just to remove regulation where regulation isn't required. It's really as kind of simple as that.

3950 This is not going to mean a lot of money in our pockets one way or the other and that is simply not our issue here.

3951 MR. JANIGAN: But the only effect, apart from getting high marks in regulatory principle theory, the only effect of removal of the basic toll constraint is to give you the ability to raise basic toll prices. Isn't that correct?

3952 MS HIGHET: I think we have indicated otherwise.

3953 MR. JANIGAN: No, but Mr. Farmer has just indicated that in fact the reason it is done is to conform to regulatory -- to the principles of regulation. Now, apart from that exercise, which may or may not have a degree of importance, the only practical effect of this is to be able to increase rates.

3954 Is there some other practical effect here that I am missing?

3955 MR. FARMER: Two practical effects. One is the nature of regulation. Fine. We could dismiss that if you would like.

3956 The other one is actually, you know, once you remove a constraint it is possible at some future date maybe prices would change over time. I don't know. I don't know whether they would or they wouldn't. I would say I guess we will let the market determine it because we shouldn't be regulating it at this stage.

3957 I'm not saying we are going to commit one way or the other as to what is going to happen with prices. I think that would be foolish in a competitive market to do that.

3958 All I am saying is, all we both said, is that we don't expect to see any huge changes, but if they should come, they should come.

3959 But the point is, it is a competitive market. We don't have any market power, even in these areas. We are talking about I think extremely small numbers of people. Simply to show how many choices there are available other than the basic schedule. Really, I mean that is about as simple as we can make it.

3960 THE CHAIRPERSON: Mr. Janigan, I would like to take the morning break shortly.

3961 MR. JANIGAN: You are completely coincident with the termination of my cross-examination, Mr. Chair.

3962 THE CHAIRPERSON: Thank you very much.

3963 We will take our morning break now, then, and reconvene in 15 minutes.

--- Upon recessing at 1035 / Suspension à 1035

--- Upon resuming at 1050 / Reprise à 1050

3964 THE CHAIRPERSON: We will return to our proceeding now and continue cross-examination by ARC et al.

3965 Ms Lawson, just to give you a bit of a heads up, I understand with the agreement of the parties there has been a switch in the order of cross-examination. I understand that RCI will follow ARC et al.

3966 Ms Lawson.

3967 MS LAWSON: Thank you, Mr. Chairman.

3968 Good morning, Panel Members and witnesses.

3969 Mr. Chairman, just before I begin, I don't think I have more than an hour and a half. I am expecting to run until the lunch break.

EXAMINATION / INTERROGATOIRE

3970 MS LAWSON: I'm not sure who to address all my questions to, so I will --

3971 MS HIGHET: We will do a tag team.

3972 MS LAWSON: I will let you do that.

3973 Panel Members, I understand that the proposal of The Companies here is, first of all, to increase high-cost service area rates by up to $2.00 per year to a maximum nominal level of approximately $30, which maximum varies by company. Correct?

3974 MR. FARMER: We would have that flexibility. That's right.

3975 MS LAWSON: And I understand that these increases would be entirely offset by reductions to the subsidy.

3976 MR. FARMER: That's correct.

3977 MS LAWSON: Is this a revenue neutral rate change for Bell Canada, Mr. Farmer?

3978 MR. FARMER: No, in the following sense: When a price is increased in a high-cost area, the subsidy amount coming from the national pool is reduced by exactly that amount. In that sense it is completely revenue neutral.

3979 There is a second order effect. That is, as this happens the national pool will shrink and as the national pool shrinks then of course everybody who pays into the national pool would be paying less. That would be true for Bell Canada as well.

3980 Therefore, because Bell Canada puts in about 40 per cent of the national pool, the extent to which we increase prices in high-cost areas, about 40 per cent of that shows up as reduced payments into the national pool.

3981 MS LAWSON: Have you provided a calculation of the net revenue effect that this has for Bell Canada?

3982 MR. FARMER: I don't believe we have. I actually have the number here, I believe, if you would like me to go to it.

3983 MS LAWSON: Please do.

--- Pause

3984 MR. FARMER: Again, this is for Bell. For one year, for 2002, let me give you that number. It's fairly representative. The increases of up to $2.00, if they were taken, would net $21.6 million. That is in increased revenues and that, of course, is a reduction in the pool. Therefore, the net impact of that will be $8.5 million.

3985 MS LAWSON: And could you provide the same number for each of the other companies?

3986 MR. FARMER: Yes. We can do that. I don't have them here though. I would have to --

3987 MS LAWSON: As an undertaking?

3988 MR. FARMER: Sure.

3989 MS LAWSON: Thank you.

3990 I take it there is a net positive revenue impact for Aliant and MTS and SaskTel as well.

3991 MR. FARMER: Well, the same conditions apply. The net effect becomes -- as a result of the impact on the national pool, so yes, I would expect them all to be net positive.

3992 MS LAWSON: Okay. Thanks.

3993 Now, turning to non-high cost area rates, I understand your proposal is to allow them to increase by the rate of inflation. Correct?

3994 MR. FARMER: That's right.

3995 MS LAWSON: And in Aliant's case by significantly more than the rate of inflation.

3996 MR. FARMER: In Manitoba -- or in Nova Scotia there would be no increase in the first year, but it goes up to $25 in the first year and from there the rate of inflation.

3997 MS LAWSON: So these increases are clearly not revenue neutral.

3998 MR. FARMER: No. I would agree with that.

3999 MS LAWSON: Now, would you agree with me, Mr. Farmer, that under rate of return regulation you had to justify any rate increases, even those just keeping up with inflation.

4000 MR. FARMER: Yes, generally. I am only hesitating simply because I know that even in a rate of return regulation there is still an opportunity to change your prices as you go throughout the period, but certainly generally speaking, yes, they are justified on a basis. Yes.

4001 MS LAWSON: But you don't need to justify them now I take it.

4002 MR. FARMER: Well, I think we are getting into a discussion that we had yesterday, I believe. We are proposing the pricing flexibility so that, therefore, the parameters in which we would be able to change prices.

4003 Certainly it is part of the price cap regulation, that is correct. It is a question as to whether one meets the predefined rules or one doesn't. If it meets the predefined rules, then it should go forward.

4004 MS LAWSON: But isn't this proceeding about getting it right going into the next price cap regime?

4005 MR. FARMER: It certainly is.

1100

4006 MS LAWSON: So why should the Commission now be allowing any rate increases that are not cost justified?

4007 MR. FARMER: I am just questioning to what extent -- I'm trying to avoid repetition of the discussion yesterday, so let me give a very brief version of the discussion that Mr. Nicholson had in terms of the various objectives that we are attempting to achieve; and that is affordability, competition and investment.

4008 I really won't take it any further than that, because I think Mr. Nicholson said really all there has to be said about it.

4009 The question then becomes: Is that going to be the way in which one gets it right, to put it in your terms?

4010 It is a question of balancing those various objectives. We think we have it right in terms of the balance being the right balance in terms of meeting those three objectives together.

4011 MS LAWSON: It is pretty obvious to everyone here that what you are asking for here is more money. You want to get more revenue, more net revenue out of these increases.

4012 MR. FARMER: Again, there is no question that the flexibility that we have requested, if we were to completely exercise it, would permit us to increase revenues if the market also allowed us to do it over time.

4013 To what extent that is actually going to happen is not really clear to me. But certainly in the short term, in some customer basis, yes, I would expect to see prices moving up. In consumer basic service, which I suspect is one of the focuses, that is probably the case.

4014 MS LAWSON: Mr. Farmer, you would agree with me that local and long distance rates are now fully rebalanced?

4015 MR. FARMER: Well, fully rebalanced. There continues to be, as you know, a subsidy in high cost areas. We have calculated those numbers and put them on the record.

4016 I don't think I would say prices are fully rebalanced until those subsidies have disappeared, so I don't think I could agree with that.

4017 MS LAWSON: I am referring to long distance specifically here. As you know, the argument used to be that long distance subsidizes local. We need to rebalance; we need to reduce long distance rates through local rate increases.

4018 I am asking: Do you agree with me that that is no longer the case? We do not need to lower long distance rates, offset by local rate increases.

4019 MR. FARMER: No, I don't think I agree. And forgive me, this may be a somewhat long answer on this one.

4020 It is just this. You have certainly characterized the discussions we have had in past years correctly in terms of the rebalancing. I completely agree with that.

4021 But there do continue to remain subsidies in our high cost areas. Those subsidies are currently paid by telecommunication service providers across the broad range of services that they provide.

4022 I suppose if one were to talk about rebalancing these days, we wouldn't talk about local and long distance; we would talk about local and other services.

4023 In fact, that is probably not even accurate either. It is probably local and local and other services, because of course any telecommunication service, or almost any telecommunication service, is subject to the tax and therefore makes a contribution towards the high cost area subsidy.

4024 So I can't say things are completely rebalanced as long as those subsidies remain in place.

4025 MS LAWSON: You are not arguing for long distance rate decreases, though.

4026 MR. FARMER: No, we are not, for the reasons that we have discussed on many occasions, including in this room quite some time ago. It is a very competitive business right now, and I think what happens in the long distance market is driven entirely by that nature of competition that is there right now.

4027 MS LAWSON: Mr. Farmer, you wouldn't argue that your long distance side of your business subsidizes the local side of your business?

4028 MR. FARMER: No, I don't argue that. I don't argue that it does it.

4029 I'm sorry, I am not too sure whether you put the "not" in there or not.

4030 As a service which is subject to the tax, then it clearly subsidizes long distance, just as anything else that is subject to the tax does.

4031 MS LAWSON: Could we turn to interrogatory response, The Companies(CRTC)1800.

--- Pause

4032 MS LAWSON: If you turn to page 2 of this interrogatory response, supplemental, and go down to the last paragraph, The Companies say here -- and it is in the context of local loop pricing -- that:

"Incumbents and CLECs must both recover their embedded and fixed and common costs from the totality of their services. Under the present regulatory regime, a CLEC is free to lower its prices as it wants on certain services. Its only constraint is that it has to recover its fixed and common costs and its embedded costs from the totality of its services, not from any particular service." (As read)

4033 You say this in the context of local loop pricing, but I take it that the principle applies generally.

4034 MR. FARMER: Yes.

4035 MS LAWSON: So it is an appropriate model for the recovery of fixed and common costs in a competitive market.

4036 MR. FARMER: That is true.

4037 MS LAWSON: Would you agree with me, Mr. Farmer, that in competitive markets companies are concerned about covering their costs through the totality of their revenues. They don't try to attribute fixed and common costs to specific services?

4038 They need to be free to respond to competitive pressures.

4039 MR. FARMER: Yes, I think that is quite true in any competitive market. One has to vary mark-ups on underlying costs to the extent that one can in the market.

4040 You are absolutely right again, that the goal at the end is to recover total costs.

4041 MS LAWSON: That could involve loss leaders, for example, such as free cell phones in the wireless market.

4042 MR. FARMER: Let us step away from the example. I am just not familiar enough with it.

4043 Yes, I do know that there are such things as loss leaders in markets. My loss leader, I think, is taking the notion that something would be priced possibly even below cost for a certain period of time, or with very small mark-ups.

4044 MS LAWSON: Ultimately what matters to a company in a competitive market is that overall a customer is providing enough revenue to cover that customer's costs, taking into account all of the services being purchased.

4045 MR. FARMER: That is true. I guess the only argument I would have with your question is I think the discussion of the customer is perhaps problematic.

4046 The company is looking to recover the totality of its costs through all of the services which it charges and certainly wouldn't look to do that on a customer-by-customer basis.

4047 MS LAWSON: Let's put it differently. If we are looking at the recovery of all of its costs, the company has to consider that on the basis of all of its related services.

4048 MR. FARMER: That's right.

4049 MS LAWSON: Thank you.

4050 Moving on, I wonder if you could pull up two interrogatory responses: The Companies(AT&T)202 and The Companies(CallNet)300.

--- Pause

4051 MR. FARMER: That was CallNet 300?

4052 MS LAWSON: Yes, The Companies(CallNet) 300.

4053 MR. FARMER: I have it.

4054 MS LAWSON: If we look at the CallNet interrog first, this is where CallNet asked you for an average change in your Phase 2 costs for residential primary exchange service over the price cap period.

4055 For Bell Canada you said that was minus 3.6 per cent, on average, per year.

4056 I think the exact annual numbers are provided The Companies(CRTC)105.

4057 You would agree with me that if you are looking at the total change in costs of residential local service here, basic local service, over the four-year period, we are looking at about a 15 per cent decline in costs?

4058 MR. FARMER: Well, 3.6 compounded annually four times. I haven't done the arithmetic.

4059 MS LAWSON: Subject to check, you would agree --

4060 MR. FARMER: Subject to check, that sounds about right, yes.

4061 MS LAWSON:  -- that it is a reduction of 15 per cent.

4062 Looking at the AT&T interrogatory response, here you provide the annual rate of change in the average monthly bill for residence individual line service over the price cap period.

4063 If we look at Bell Canada, would you agree with me, subject to check, that we are looking at a 15 per cent increase in rates for the same service over the same period of time?

4064 MR. FARMER: Again, subject to check, that is correct.

4065 Let me just make one caveat on this. Frankly, I just don't know what the answer is.

4066 It is not clear to me, for instance, that in 2001 we would have worked into our numbers in CallNet 300 the effect of the contribution tax of 4.5 per cent.

4067 But that aside, I will certainly take these numbers as they are given here.

4068 MS LAWSON: It is pretty nice symmetry, wouldn't you say, if at the same time your costs are falling by about 15 per cent your rates are increasing by about 15 per cent?

--- Pause

4069 MR. FARMER: First of all, we are talking about the average monthly bill. So we should be clear on that. It is not a question of price change.

4070 That would affect -- let me put it this way. That would be affected by a number of considerations. One is, of course, demand would grow, because this is including any number of services which residential customers are taking.

4071 I wouldn't expect one would have a huge increase in demand on residence individual line service, but it is there and, of course, these customers take other services as well.

4072 I don't think we should draw the parallel between the numbers we see in 202 -- I'm sorry, I shouldn't say "draw the parallel"; rather, draw the inference that this reflects a price change. Clearly price change is an impact there.

4073 I do know, again looking at the Bell Canada number, the basic residential line service increased by, I think, 7 per cent over that period.

4074 MS LAWSON: As we just discussed -- and I thought you agreed, Mr. Farmer -- what is important to companies in competitive markets is that they are covering their costs by the totality of revenues coming from the services.

4075 MR. FARMER: Yes, I would agree with that. I don't think we are inconsistent yet.

4076 MS LAWSON: Do you take the position that the residential rate increases that you are proposing in non-high-cost areas in this proceeding are cost justified?

4077 MR. FARMER: I hesitate to use the term "cost justified" by either agreeing or disagreeing, because it is not really clear to me what the term means.

4078 Let me put it another way. We are not proposing that we have the flexibility to increase prices because we believe costs are going to go up. I think we had a discussion as to what my expectations would be going forward, based on nothing more than looking backwards.

4079 I would say the pricing flexibility we are looking for -- and again, let's remind ourselves that we are talking about freezing prices in real terms. The pricing flexibility we are looking for going forward is really to send a signal to the market to address the competitive agenda, while at the same time not in any way harming the other agenda, which is the affordability issue, which I think we discussed quite a bit yesterday.

4080 MS LAWSON: I understand. Maybe I can help.

4081 When I used the term "cost justified", I am thinking in terms of a rate base rate of return, a revenue requirement application and justification.

4082 If we were doing a revenue requirement proceeding for Bell Canada right now, Mr. Farmer, do you take the position that these increases you are proposing now could be justified in such a proceeding?

4083 MR. FARMER: Well, you are getting into an area where I would really be on very thin ice, simply because I don't know what rate of return we would be talking about there.

4084 I just can't pass a judgment as to what that would be.

4085 If we were talking about rate of return regulation and where would we end up in terms of prices, in totality, it is not clear to me, for the reason I just gave.

4086 Where we would end up in prices for these particular services, I don't know. I don't know that it would be any different. I can't say.

1115

4087 MS LAWSON: You just don't think you should have to go through the process of justifying these rates with reference to your costs at this time. Correct?

4088 MR. FARMER: I don't think the process is the right process to look at, I guess, is the way I would say that. I believe that we quite correctly, back in 1998, left rate of return regulation aside and are suggesting now what considerations we should bring to bear in terms of prices going forward, which gets me into the iron triangle, as Mr. Nicholson talked about yesterday.

4089 MS LAWSON: I don't want to go back there; I don't think we need to.

4090 Let me try clarifying once more. Is it your position that residential rates in non-high-cost areas do not currently cover the forward-looking cost of providing service in those areas?

4091 MR. FARMER: No, not in the non-high-cost areas. The incremental costs of the service are covered by the price.

4092 MS LAWSON: I would like to just look at that for a moment, Mr. Farmer.

4093 With some reluctance, you did provide your Phase 2 costs of residential primary exchange service by band in this proceeding. They were provided first in the proceeding following up on decision CRTC 2001-238, and the numbers I have in front of me are from a letter dated June 26th filed in that proceeding.

4094 These show the Commission estimates of residence primary exchange service costs by NAS, by company and by band. Do you have that in front of you?

4095 MR. FARMER: I have a note here in front of me which has numbers, which I believe are the ones that you are referring to here.

4096 MS LAWSON: The same numbers. Which Bell then provided some adjustments to. So we also have some Bell-adjusted residence PES costs by band. Correct?

4097 MR. FARMER: The answer to that is correct. Maybe you could help me by just giving me the reference.

4098 MS LAWSON: I don't have an interrog response reference. I have a reference from decision CRTC 2001-238. It is a letter dated Jun 26, 2001. I couldn't find this in the interrogatory responses.

4099 MR. FARMER: That is fine. I am quite familiar with the numbers. I'm sure I know which ones you are referring to.

4100 MS LAWSON: At the same time, you have provided in this proceeding average residential individual line rates by band by company, and that is in each company's separate response to CRTC 1201. I wonder if you could pull that out?

4101 I just want to make sure I understand this correctly. I wonder if we could start by just taking an example. Let's take Bell Canada Band A.

4102 MR. FARMER: Yes, I have it.

4103 MS LAWSON: The costs determined by the Commission for Band A in Bell Canada are $10.14.  Correct?

4104 MR. FARMER: That is correct.

4105 MS LAWSON: You have said that according to your calculation they should be $11.21?

4106 MR. FARMER: Yes. That was an attempt we had made to replicate, if I can put it that way, to replicate the results that we find in the Commission Decision 238.

4107 So we hadn't attempted to make any adjustments to it whatsoever other than to just understand what it was that the Commission had done. We came out with some slightly different numbers. Perhaps the largest variation is actually the one that you are pointing to right now.

4108 MS LAWSON: Anyway, it is $10, $11, somewhere in there?

4109 MR. FARMER: That is right.

4110 MS LAWSON: When we look at the rates, the average residential individual line rate that you are getting from your Band A residence customers, we see that is $22.51. Correct?

4111 MR. FARMER: That is right.

4112 MS LAWSON: Leaving aside the validity of the Phase 2 costs, which we all know is going to be dealt with in a separate proceeding now, would you agree, Mr. Farmer, first of all, that we are comparing the costs and rates of the same thing?

4113 MR. FARMER: We are looking at the same item here in terms of absolutely Band A cost for the service and the price for the service.

4114 I have to reluctantly say, Ms Lawson -- and I don't intend to get into this either, and I am happy to carry on the discussion as we are having it -- but you are quite right in noting that there is some disagreement as to what the costs really are as opposed to how they appear in Decision 238.

4115 You know that there are currently three requests for variance in front of the CRTC. Bell Canada has raised its own issue as it relates to the costs in this proceeding, and they will be addressed elsewhere.

4116 So I do want to say that I am happy to carry on this conversation with you, but when it comes to cost numbers, we have a different view as to what actually the costs are.

4117 MS LAWSON: I understand. That is why I prefaced the question with leaving aside that whole argument. Let's just deal with the numbers we have in front of us.

4118 I just want to confirm that we are comparing apples and apples here. When I look at the costs of residence PES service and the rates of residence individual line service, it is the same thing. Is that correct? The 1201 rates correspond to the Phase 2 costs for residence primary exchange service that we are looking at?

4119 MR. FARMER: That is correct. Let me make for the record one other point, and, again, I don't think that this is terribly material to the discussion we are about to have, but just to point out the costs I think you just put in front of me, that are in this interrogatory in fact, are the costs of Decision 238. They were revised slightly in a revision to 238, 238-2.

4120 Other than that, I completely agree; it is an apples and apples comparison.

4121 MS LAWSON: If we were to accept these costs as accurate, which I know you don't, we would see that Bell is making a margin of over 100 per cent on the Band A residential customer. Correct?

4122 MR. FARMER: That is correct, somewhat over 100 per cent.

4123 MS LAWSON: Am I right, Mr. Farmer, that using the new numbers that you want the Commission to adopt, you would still be making a margin of close to 100 per cent on these particular customers?

4124 MR. FARMER: That is true, but let me, before I finish, just add one other point. Again, you can deal with it as you wish.

4125 Just to say that the appearance of the margin is one of the very important things that we think needs clarification in these proceedings which will go on outside of this proceeding to talk about costs.

4126 I do want to say that if one were to use for Band A for Bell the costs that we believe are the right costs, we would be looking at a margin of a little over 50 per cent. Whether that makes a difference to your approach, I will leave you to decide, but just so you understand that is what we are looking at.

4127 MS LAWSON: I understand. Just to finish this up. Band D if your highest cost non-high-cost area band. Correct?

4128 MR. FARMER: That is right.

4129 MS LAWSON: If we use the Commission's determination of costs here of $17.07 and your rate of $22.32, we end up with a margin of approximately 30 per cent?

4130 MR. FARMER: That is correct. If we use the revised numbers, slightly revised, it is 28 per cent, but I agree with that.

4131 MS LAWSON: When we are doing this comparison here, these rates we are talking about, they don't include the income that you are getting from other services, do they, optional services, in many cases extended area service, for example?

4132 MR. FARMER: No. We are talking about the basic residential line.

4133 MS LAWSON: So if we were to include in the income you get from other local optional services or mandatory EAS, we would be seeing significantly greater margins. Correct?

4134 MR. FARMER: Optional local service, correct. EAS is built into the numbers for Bell Canada.

4135 MS LAWSON: For Bell, but for some other companies it is not?

4136 MR. FARMER: Separate EAS charges in NewTel territory, I believe.

4137 MS LAWSON: I am going to come back to that in a second because I do want to clarify it.

4138 Have you provided anywhere on the record of this proceeding the weighted average rate and cost per NAS for residential primary exchange service in non-high-cost areas?

4139 MR. FARMER: No, we haven't.

4140 MS LAWSON: I wonder if you could provide that in the course of this proceeding by way of an undertaking? I am talking about if you take Bands A, B, C and D, give us an average for the rates that show up in 1201 and for the Commission-determined PES costs.

4141 MR. FARMER: We will certainly undertake to look into it. Nothing presents itself to me right now which would tell me that we wouldn't be able to do it.

4142 MS LAWSON: It is just an arithmetic calculation. Correct?

4143 MR. FARMER: Well, it is a question of availability of data. That is really the issue.

4144 If we were going to compare it to this interrogatory you pointed me to a moment ago and looking at the billing, we have to look at all of the services built into there and then see if there is actually incremental cost data available for it. That is all. I will undertake to look into that.

4145 MS LAWSON: Thank you very much, Mr. Farmer.

4146 Just before we leave this issue of Phase 2 costs and the separate proceeding that is coming up, would you agree with me that if your new higher costs are accepted, that would change the calculation of the total subsidiary requirement significantly?

4147 MR. FARMER: Yes, it would.

4148 MS LAWSON: And it would significantly increase the total subsidy requirement?

4149 MR. FARMER: Yes.

4150 MS LAWSON: And if the total subsidy requirement increased, then the subsidy payments to Bell Canada would increase. Correct?

4151 MR. FARMER: Both the payments in and the payments out would increase, yes.

4152 MS LAWSON: But as we discussed at the beginning of my cross-examination, that results in net positive revenue to Bell Canada. Correct?

4153 MR. FARMER: I think that is a different question you are asking me.

4154 What we were talking about earlier was whether a price increase in a high cost area for Bell Canada nets a net positive for Bell, and the answer is yes.

4155 What we are talking about now is -- let me put it in these terms. We are talking about subsidy requirements changing, and they may change for Bell and other companies as well as a result of this proceeding that we are talking about. It all depends on the nature to which they are changing and the extent to which they are changing company by company.

4156 You can imagine, for instance, Ms Lawson, that if Bell is a net contributor today and continued to be a net contributor even under new costs -- by "net contributor" of course I mean we put more into the pool than we take out -- if the pool actually gets bigger and we continue to be a net contributor, then we are actually worse off.

4157 It just depends on how all those numbers shake out among all the other companies before I could answer that question that you asked.

4158 MS LAWSON: So you would say if the subsidy payments increase you can't say right now whether Bell Canada would have a higher or lower revenue requirement, all else being equal?

4159 MR. FARMER: Correct. Simply because I would have to know how -- this is the workings of a national pool, I would have to know how they change for everybody else, too, before I could draw a conclusion.

4160 MS LAWSON: But for any given company, if that significant change in the total subsidy requirement did in fact lead to a significant reduction in their revenue requirement, all else being equal, in such a case, the price cap index for that company should be lowered. Do you agree?

4161 MR. FARMER: Present the standard to me again, if you will.

4162 MS LAWSON: It is a very hypothetical one. It starts off, assuming that your updated costs are accepted by the Commission in a proceeding subsequent to this one, let's say we set a price cap index in this proceeding, then we go and look at your costs, we find that they are actually higher, and we find that that lowers your revenue requirement, so to speak, all else being equal. In such a case you would agree that it would be appropriate to revisit the price cap index and lower it?

4163 THE CHAIRPERSON: It sounds to me, Ms Lawson, like you are trying to argue two cases down the road.

--- Laughter / Rires

4164 THE CHAIRPERSON: No, I'm serious.

4165 As I say, we indicated that this other issue would be dealt with in a separate proceeding and not related to this one. It seems to me like you are getting to a hypothetical that even goes beyond the issue that Bell has raised with its cost filing to perhaps even a subsequent proceeding after that.

4166 MS LAWSON: The issue that --

4167 THE CHAIRPERSON: So I think we are stretching the bounds of the --

1130

4168 MS LAWSON: I take your point, Mr. Chairman.

4169 The point I was trying to make was the link between the two, between the decision that comes out of this proceeding and the investigation that occurs --

4170 THE CHAIRPERSON: I precisely understand that. That is why I'm raising it.

4171 MS LAWSON: Thanks. That's fine.

4172 Now, I would like to move on to make sure I understand your proposals correctly, panel members.

4173 You provide average rates and revenues for basic local service in your response to CRTC 201, and again in 1201, which we have been looking at here.

4174 Am I correct that extended area service is not included in these rates for NewTel and SaskTel only?

4175 MR. FARMER: That's correct, to the best of our knowledge. I believe that is the case. If I'm not correct, I will certainly come back, but I believe that is the case.

4176 MS LAWSON: NewTel's rate for extended area service ranges from $1.05 to $3.10 per month, and then NewTel also has a community calling plan charge of $5.00 per month for some customers. Correct?

4177 MR. FARMER: That's right.

4178 MS LAWSON: And SaskTel says it has extended area service rates of between $2.25 to $4.50 per month for affected customers?

4179 MR. FARMER: Well, I will accept those numbers.

4180 MS LAWSON: Do you have any data on the proportion of customers of these two companies who are subject to these EAS charges or CCP charges?

4181 MR. FARMER: For NewTel and SaskTel, I don't. I don't have that data.

4182 MS LAWSON: Is it possible to get NewTel and SaskTel to provide that data?

4183 MR. FARMER: Yes. Well, on their behalf, let me promise to look into that.

4184 MS LAWSON: Okay. So the undertaking, then, is for the proportion of NewTel's customers who are subject to EAS and CCP charges and, from SaskTel, the proportion of its customers who are subject to EAS charges.

4185 Now, these charges are not included, as we just confirmed, in the rate, the average rate data you have provided in response to the CRTC interrogs. I understand that in your proposal, where the EAS charge is not included in the basic monthly rate it would be put in a separate basket and constrained by inflation overall and then by 10 per cent on an individual rate element on that basis. Correct?

--- Pause

4186 MR. FARMER: Again, I'm sorry, not to be definitive on this one, I believe that that's correct.

4187 MS LAWSON: Well, I think it is set out in you evidence at paragraph 6.35 and 6.50. It looks to me like it is the same rule for high-cost areas as is for non-high-cost areas.

4188 MR. FARMER: I accept that.

4189 MS LAWSON: Okay.

4190 Now, you have proposed a maximum rate for both high-cost areas -- have you proposed a maximum rate for non-high-cost areas?

4191 MR. FARMER: No, we proposed -- well, in some sense I suppose yes, but not in the same sense as high-cost areas.

4192 We have proposed that prices can go up on average by inflation and each individual element couldn't go up by more than 10 per cent. So you do the arithmetic and that would tell you rate element by rate element. But on average, of course, it would be much less than 10 per cent.

4193 MS LAWSON: All right. When we look at those proposed maximum rates, nominal dollar rates for the high-cost areas, am I right that it's not actually the maximum, for NewTel and SaskTel at least, because it doesn't include these EAS charges?

4194 MR. FARMER: Well, EAS would be handled separately as per out earlier discussion. So it's a --

--- Pause

4195 MR. FARMER: Again, yes, I can confirm your understanding.

4196 MS LAWSON: Okay. So we agreed that when we are looking at the current monthly rate in Newfoundland and Saskatchewan that it actually understates the price, and possibly significantly understates the price that subscribers are actually required to pay in those provinces for basic local phone service?

4197 MR. FARMER: Yes, I don't think I would accept the term "significantly". SaskTel in particular has said they wouldn't be taking any increases in their first year and then would gradually move up to $28. I suspect that if one were to look at their EAS charges -- and I do not have the numbers here, but if one were to do that and apply an inflation rate it still wouldn't come to more than $30. So I would be hard-pressed to say that that's the case.

4198 But I just don't have their data here in front of me, so I'm just having a little bit difficulty in confirming it as significant.

4199 MS LAWSON: Mr. Farmer, is it possible for you to say whether there is a problem for NewTel and SaskTel providing average rate figures that include EAS? Is that impossible to do?

4200 MR. FARMER: No, I thought I had undertaken to do that.

4201 MS LAWSON: Okay.

4202 MR. FARMER: I'm not aware that there would be any difficulty.

4203 MS LAWSON: Good. I just want to clarify, then, that the undertaking is not just to provide the proportion of customers subject to EAS, but it is also to provide an average rate figure, as provided in CRTC 1201, that includes EAS.

4204 MR. FARMER: Okay, that's fine.

4205 MS LAWSON: Okay. Great.

4206 Just to clarify, then, in terms of your proposal, these maximum rates do not include EAS charges, but that only relates to SaskTel and NewTel. Are there other companies for whom these maximum rates might not include EAS charges?

4207 MR. FARMER: Well, there is only one other company to consider, and that would be MTS. I don't believe that is the situation there. Bell it clear does include the EAS.

4208 MS LAWSON: Okay. We have been talking about existing EAS here, but I think you have said in your proposal that any rate increase is attributable to future expansion of local calling areas would be above and beyond the maximum rates set out in your evidence. In fact, I think your words are they should be "dealt with outside the scope of the regime."

4209 MR. FARMER: Yes, I agree with your latter way of describing it. They would be "dealt with outside."

4210 Whether they would -- and again, who knows without going through the proceeding -- but whether they would result in rates bigger than $30 is quite a different matter. Whether they would result in rates that would be bigger than, say, the 10 per cent applied on an annual basis for four years is also quite a different matter to be determined.

4211 But, of course, there we are talking about price changes for customers who do not now have EAS, but who would be getting EAS under the separate proceeding.

4212 MS LAWSON: So essentially residential subscribers under your proposal could be seeing mandatory basic monthly rates significantly higher than what it looks like you are proposing here, depending on what happens with EAS?

4213 MR. FARMER: It's that adjective again, Ms Lawson. Whether it's "significant" or not, I don't know.

4214 I know in the past we have looked at EAS, and I hate to put a number forward as though one can rely on it, but I know certainly in the past, when we have looked at providing EAS in some areas that we were talking about, maybe $1.00 change to accommodate that.

4215 MS HIGHET: Even less.

4216 MR. FARMER: And perhaps even less, as Ms Highet tells me. So $1.00 is $1.00. Whether it is significant or not is in the eye of the beholder.

4217 MS LAWSON: Okay. Thank you.

4218 I would like to move on to the issue of capped versus uncapped services.

4219 I notice that you are proposing not to apply price cap constraints to late payment charges and also to the fee for extra listings in the directory. And this reflects the current regime, I take it?

4220 MR. FARMER: I believe that is correct.

4221 MS LAWSON: I'm wondering if you could provide the rationale for not capping these services, besides the fact that they are currently uncapped?

-- Pause

4222 MR. FARMER: I'm not sure -- well, obviously you can tell by the pause that I haven't turned my mind to those particular items a great deal, so I'm not too sure how far I can take it.

4223 In terms of extra listings, I suppose that's an item which I would probably, myself, categorize as something that is really quite discretionary. One could choose to take it or not to take it. It is quite different than taking a different line. So that is one item.

4224 In terms of late payment charges, here I am struggling a bit only because I was under the impression, or under the understanding, that late payment charges were set in relation to the Bank of Canada rate or some such thing. So I thought there was already a formula that applied to late payment charges that was already laid out in our tariff. I may be incorrect, but I would really have to look into that a little bit deeper.

4225 MS LAWSON: Would you agree that there should be a constraint on late payment charges?

4226 MR. FARMER: Oh, yes, like the broad scope of constraints. I think it would be quite unreasonable to, I don't know, charge people 1000 per cent for, I mean -- so, yes, I would have to say, in general that there should be some form of constraint, which I thought was covered in this tariff item.

4227 Oh, I see. Might I also add that in terms of extra listings, we are proposing to freeze the rate for extra listings, just to correct the record on that.

4228 MS LAWSON: Oh, you are proposing -- and this is Bell? Bell is proposing to freeze the rate for extra listings?

4229 MR. FARMER: That is what I have been told, yes. Oh, I'm sorry, that's not extra listings, that was unlisted numbers. Our mistake.

4230 MS LAWSON: Unlisted, right.

4231 MR. FARMER: Yes.

4232 MS LAWSON: Which is currently frozen.

4233 MR. FARMER: That's right.

4234 MS LAWSON: Let's just deal with these two issues that I raise.

4235 Mr. Farmer, you think there may be some other constraint that applies to late payment charges. If in some case there is not such a constraint, would you agree that late payment charges should be part of the capped basket of services?

4236 MR. FARMER: I think I would agree that there should be some form of constraint. Just what it would take, I would have to give some thought, yes.

4237 First of all, let me check to see what the facts are on that.

4238 MS LAWSON: Okay. Thank you.

4239 And on extra listings, you have characterized that as a discretionary service. I'm just wondering, I mean, would you agree that there are many families, couples, out there with different surnames?

4240 MR. FARMER: Yes, that's my understanding.

4241 MS LAWSON: So would you agree that in those cases extra listings are necessary, in fact, in order for the full family to be listed in the directory?

4242 MR. FARMER: Well, not really necessary. I can see that there would be a convenience to that, there is no question about that.

4243 MS LAWSON: Well, one person wouldn't be listed if they are not in there under their own name. Correct?

4244 MR. FARMER: Unless their friends knew that there was another name under which they could look them up in the phone book as. That is the only reason I'm hedging at all on this question of unnecessary.

4245 MS LAWSON: Okay. Thanks.

4246 Now, you are proposing not to cap optional local services on the basis that, while they may not be competitive these services are discretionary. Correct?

4247 MR. FARMER: That's correct.

4248 MS LAWSON: So as long as the service is discretionary, in your view, it need not be capped because even if the monopoly provider increases the rates beyond what anyone would consider reasonable, consumers don't need to buy the service. They can give it up. Correct?

4249 MR. FARMER: I would put it rather differently.

4250 The reason an upper restraint isn't required is that if we were to increase our prices to levels that were, I think you said, beyond reasonable by anybody's standard, we would quickly find, because our customers would consider them to be beyond reasonable, that we would find that they would no longer be taking the services. It is that dynamic which, in our view, allows the regulatory regime not to impose upper pricing constraints on those services, just as it has not for the last four years.

4251 MS LAWSON: Okay. Well, it's important, then, is it not, that consumers be aware of the optional services that they are subscribed to and the price of each on an ongoing basis?

4252 MS HIGHET: I will answer that.

4253 That would be correct.

4254 MS LAWSON: So that they can unsubscribe if they feel the price is no longer reasonable?

4255 MS HIGHET: That's correct.

4256 MS LAWSON: Would you agree that many people are forgetful --

--- Laughter / Rires

4257 MS LAWSON:  -- especially about relatively mundane things like which optional telephone services you have subscribed to?

1145

4258 MS HIGHET: Well, that's possible.

4259 MS LAWSON: Would you agree, then, with me that consumers should be able to see on each monthly bill which optional services they subscribe to, the fact that these are optional and how much they are paying for it?

4260 MS HIGHET: That is an interesting point because we have had major debate about the detail that we provide on our bills to our customers. We have had a lot of research done in the past with respect to the length of the bill, how much data we provide.

4261 We do provide, every time a customer takes a new smart-touch feature, which is the options and features, we do provide detailed billing at that point.

4262 The feedback we have received from our customers is that we provide them far too much paper. So that is why we actually went away from that perspective to actually provide the detail on a monthly basis.

4263 MS LAWSON: But it's not just optional services that are --

4264 MS HIGHET: It was a wide range of services that we looked at. You are specifically referring to them.

4265 MS LAWSON: Then it's not just optional services that are listed on the bill --

4266 MS HIGHET: No, no. That's correct. That's correct.

4267 MS LAWSON:  -- as causing the length of the bill.

4268 But would you agree with me that customers -- if we are taking this position that we don't need to cap optional local services because customers can just give them up when they want to, that it is particularly important that customers see those optional local services on their bill on a regular basis?

4269 MS HIGHET: That may well be from that perspective, but the other perspective I was bringing forward is that we have done customer surveys and research with our customers with respect to the kinds of data that they are looking to see on the bill and the kind of -- amount of paper that we actually drive forward to them.

4270 MS LAWSON: Have you specifically asked about optional local services? Do they want to see --

4271 MS HIGHET: It was included, yes, in the research that was done.

4272 MS LAWSON: Could you undertake to provide these results of that research specifically related to optional local services?

4273 MS HIGHET: I will give you the specific research that we did with respect to bill detail. I will have to confirm that options and features were included in that, Ms Lawson, just to make sure.

4274 MR. FARMER: Can I just add, too, in terms of the forgetfulness, if I can put it that way. Customers do tend to use these services on a daily basis, so whether they would forget that they actually have them, I suppose it is a possibility, as Ms Highet indicated, but I suspect somewhat remote.

4275 MS LAWSON: They might forget, however, Mr. Farmer, that these are optional services that they can give up at any time.

4276 MR. FARMER: Again, I guess one can't ignore the possibility, but I would suspect that it's remote, but one never knows. We do, of course, provide each year a detailed listing to each customer of what they take.

4277 MS LAWSON: Thank you.

4278 In Decision 2745, the CRTC decided to impute $60 a year for optional local services to ILEC revenues for the purpose of calculating the subsidy requirement in high cost areas. Correct?

4279 MR. FARMER: It was a margin as opposed to a revenue. That's the right number.

4280 MS LAWSON: Margin, sorry.

4281 Now, this $60 per year imputed figure was based, I take it, on your actual optional local service revenues that you provided to the Commission in confidence in the proceeding that led to that decision.

4282 MR. FARMER: Well, not to break any confidences, the Commission didn't tell us upon what basis they made their decision so I can't answer the question directly.

4283 But I can tell you the extent to which there are margins and optional features varies quite widely across the country. So if the Commission were looking to strictly what each company is actually generating in margins out of those services, then there would be a different number for each company.

4284 MS LAWSON: I think we have that information now on the record, the public record of this proceeding. Correct?

4285 I guess my point, Mr. Farmer, is the Commission didn't pull this figure out of the sky.

4286 MR. FARMER: I would agree with that.

4287 MS LAWSON: They based it on actual figures that The Companies provided them with.

4288 MR. FARMER: Well, the extent to which that played a role in their picking their numbers only they can answer. I am telling you from a Bell Canada perspective it is not an unreasonable number to use.

4289 MS LAWSON: All right.

4290 Now, can we turn to interrogatory response The Companies(ARC et al)103.

--- Pause

4291 MR. FARMER: Yes, I have it.

4292 MS LAWSON: Now, in this interrog we asked The Companies why the $60 imputed amount for optional local services should not be re-evaluated down the road, say at the time of the next price cap review. You answered by quoting from Decision 2000-745 and then over the page stating:

"It is clear from this that the imputed subsidy amount is not linked to actual local optional service revenues or margins."

(As read)

4293 Do you stand by that statement?

4294 MR. FARMER: Yes, I do. Let me explain why.

4295 First of all, we talked about the extent to which each company actually derived these numbers and they do differ from company to company.

4296 Clearly, though there may be some sort of linkage, they are not actually looking at the actual number for each company, as we discussed earlier.

4297 The idea and the reason we quoted from 2000-745 was to pick up the notion of an implicit subsidy target, that is there is -- let me put it an incentive given to each of the companies to generate revenues that are at least of that scale because it is going to be assumed that those margins are coming into the company when it comes to calculating the subsidy amounts that they will receive for purposes of serving their high-cost areas.

4298 But it is a target just as, for instance, in the current regime the "X" factor is a target. This is also a target. If one can beat the target, then one should get the benefits of it just as if one doesn't make the target, one shouldn't be made -- the difference shouldn't be made up by changing the number.

4299 MS LAWSON: So you wouldn't disagree that the target was based on a review of actual margins.

4300 MR. FARMER: I'm sure that the numbers that the Commission had in front of it certainly played a large role in terms of the number that they picked eventually, but they did pick one number to be applied across all companies.

4301 MS LAWSON: So I think we may just be having a semantic discussion here over the term "linked".

4302 Would you agree, Mr. Farmer, that there is nothing to stop the Commission from re-evaluating the appropriateness of this imputed value at some time in the future.

4303 MR. FARMER: I think that's true about just anything in the regulatory regime. There may be nothing, no exceptions, so certainly the Commission has a wide discretion.

4304 MS LAWSON: But you believe it is inappropriate for the Commission to do that in this case.

4305 MR. FARMER: Well, let me put it this way, and that may well be the position that we would take if we ever got into a reinvestigation of it.

4306 MS LAWSON: I'm just looking at this interrogatory response where we asked the specific question. It seems to me your answer was that the Commission should never -- you know, it set this target, it should stick by it and it should never re-evaluate it, even at the time of the next price cap review.

4307 MR. FARMER: Let me go a little bit beyond the words in the paper, if I can, just to describe a bit of the principle underlying this.

4308 I won't take a lot of time on Decision 745. I think everybody understands where the target is there. I didn't mean to say I would talk about that.

4309 Once the target is put in place, there are these incentives, as I said, to meet the target or to beat the target. Therefore, if those incentives are actually going to have some meaning, then someone should be able to beat the target and not have the benefits of beating that target taken away by readjusting the number. That is kind of a general statement I would make.

4310 Let me make another comment. I think if one faced the following circumstance: If, for instance, we discovered a number of years from now that the margins coming from these services are universally, and I mean by all companies in the market, universally greater than $5.00, then you might actually consider whether it would be appropriate to change the number at that point.

4311 Symmetrically, I would say that if we also discovered universally that the margins coming from these services were less than $5.00, then you might want to consider moving it downwards simply to continue to meet the objectives of putting a target in in the first place.

4312 Now, whether that's going to happen, I don't know. Whether these prices will continue to rise or whether they are going to be forced down by market forces is, I guess, going to play itself out in the market. So whether this is actually going to happen is really something that we are not going to be able to determine or to forecast.

4313 It might also, I have to tell you, be rather difficult for us to even figure out what the margins are if, for instance, we get into a situation where we are bundling these services with other services and one has to in that case tease out what the margins are related to particular elements of the bundle. It may be very difficult to even come up with the number to even have the discussion.

4314 I feel I am having perhaps having just an academic discussion. I don't as a matter of principle rule out the possibility of revisiting it. I would say over a short period of time, and I would look at four years as a short period of time, I don't think one should and whether in the future it would make any sense or even be possible, well, I think in the future we will be able to determine that.

4315 MS LAWSON: Okay. Fair enough. Thanks.

4316 On to the question of the term of the price cap period. You are proposing a four year term.

4317 I couldn't find anywhere in your evidence though, Mr. Farmer, any discussion of the kind of review that you think should occur at the end of that term.

4318 Presumably you would agree we would have some kind of review, as we are having now, to see if the objectives of this new price cap regime had been attained. Is that correct?

4319 MR. FARMER: I think it's likely. I noticed in TELUS' evidence they talked about a somewhat longer term, but also say if everybody agreed, more or less, that there were no complaints about how the price cap mechanism was working, one could just extend it going on. That's also a possibility. I think that's a good thought one might want to consider.

4320 I think, being practical, we would probably have a review of some sort at the end of the term for the same reason we are having a review now.

4321 MS LAWSON: And would you take the same position regarding the scope of that review as you have in this proceeding, that is that there should be no review of your earnings and no review of your costs?

4322 MR. FARMER: I would expect that that would be the case. I don't know why we would be changing our -- we wouldn't be changing our position on that I'm sure.

4323 I think it would be again another instance of looking at the various objectives that we want to achieve in Canada as regards these services.

4324 Everybody would have an opportunity there to argue what they thought the rate objectives were but, more importantly, what means one would pick to actually achieving those objectives. I would expect the objectives we have put forward would still be very much in the forefront.

4325 MS LAWSON: So your position would be that we only need to review the extent to which rates are affordable to customers and promote competition, regardless of how economic that competition is?

4326 MR. FARMER: Well, let me also add in the third leg of the three-legged stool that Mr. Nicholson spoke about. That would still be there as well. That is the investment objective.

4327 Yes, I think that is sitting here now. Looking forward it's a little difficult to say, but I would expect that four years from now we would also recommend that the Commission make sure that services continue to be affordable where there isn't, and look at how competition is rolling out, saying if something should be done, then in that regard as well.

4328 MS LAWSON: Yes. I just wanted to confirm again your view that your earnings would be totally irrelevant at such a time, irrelevant to the regulation of services for which competition has not yet developed.

4329 MR. FARMER: That's correct.

4330 MS LAWSON: Now, at the end of the term, Mr. Farmer, some companies might have what has been referred to as headroom left in their price cap. They may not have taken all the increases that they were allowed to take under the price cap index. Correct?

4331 MR. FARMER: Well, that's a theoretical possibility. I'm sure the numbers are being dug out from behind me as we speak. That's correct.

4332 MS LAWSON: And just theoretically, at the end of the term any such headroom is wiped out and we start afresh with a new set of numbers. Correct?

4333 MR. FARMER: Yes, that's right.

4334 MS LAWSON: Now, would you agree that if a company chooses not to use all of its headroom in a given year, it can't then take the unrecovered amount from the previous year, previous regime in this case, put it in a deferral account so to speak and recover it from ratepayers in the next year, in the next regime?

4335 MR. FARMER: Not moving from regime to regime, that's correct. In other words, I would say whatever the unused headroom, to use the terminology, would be -- well, that's an opportunity missed perhaps or whatever. I mean it just wasn't in the cards.

4336 The perspective we want to take is, look at the prices today, come to a conclusion as we have -- this is obviously our position -- come to a conclusion as we have that those prices are reasonable and let's talk about how those prices should move going forward. So we are talking about where prices are today and how they would move forward.

4337 MS LAWSON: And I'm just asking a few questions about the mechanics of price caps really.

1200

4338 Am I correct that the same principle applies during the current price cap regime year over year, so that if a company chooses not to use all of its headroom in one year, it can then put that in a deferral account, that amount of money that it didn't take, and move it into the next year because, in that case, it would end up violating the price cap?

4339 MR. FARMER: Under the current regime you are asking me?

4340 MS LAWSON: Yes.

4341 MR. FARMER: No. The headroom is transferable, if I can use those terms, from year to year.

4342 The way it works, just to talk mechanics, there is a price index that indicates what level prices are allowed to be at and as long as the actual price is lower than that particular level then it is okay to take the change. So that if, for instance, just to make up numbers -- let's assume prices were allowed to increase by 2 per cent each year for two years, the index after two years would be 1.04, i.e., a 4 per cent increase.

4343 If you chose not to take the increase in the first year, then you would be able to take up the 4 per cent in the second year. That is the way it works today.

4344 MS LAWSON: So it is only when you come to the end of the four-year term in this case that it is wiped out and you can't then move it forward into the next regime?

4345 MR. FARMER: That is right, it is a fresh look.

4346 MS LAWSON: Would you agree with me that Aliant's proposal in this proceeding, as set out in Aliant(CRTC)1400, is to do just that? It is basically to take the unused headroom from its price cap index in this regime, effectively to put it in a deferral account and recover it through rate increases in 2002?

4347 MR. FARMER: Which interrogatory was that?

4348 MS LAWSON: Sorry, Aliant(CRTC)1400, part (b).

--- Pause

4349 MS LAWSON: This is how Aliant is justifying its proposal for increases in New Brunswick, Newfoundland and P.E.I. to bring urban rates up to the $25 level in 2002.

4350 MR. FARMER: Well, the way I read the response is that Aliant is saying that if they were to exercise the headroom in the last day of the current regime then they should be permitted to do it, which is true. It is true of any day of a regime. So I don't --

4351 MS LAWSON: But they are not proposing to do that. In this proceeding, they are proposing to take the increases in 2002. And in this interrogatory response, part (b), Aliant is clearly saying -- is clearly justifying that on the basis of the unused headroom in 2001. Correct?

4352 MR. FARMER: Let me say that it might be a different way of achieving the same effect, if I can put it that way.

4353 I think it would be far better to express it as saying taking the headroom in the period, i.e., actually doing it, as opposed to moving aside the rule that I had just described to you.

4354 The way I understood Aliant's proposal is the flexibility they are looking for is to move the $25. That is the flexibility. One doesn't really have to talk about unused headroom to do that, one really only has to talk about: What should the price level be? It is $25. We don't even have to have this discussion.

4355 Am I being clear?

4356 MS LAWSON: I think so. I think you would agree with me, though, that this a question from the CRTC asking Aliant to justify that flexibility and the justification Aliant is giving is unused headroom in the current regime. Correct?

4357 MR. FARMER: As I read this, that is a fair interpretation.

4358 I guess what I would say is it is one way of describing it, but I don't think it was really necessary to describe it on those terms. I would just simply say: Whatever we don't use, we don't use, but here is how prices should move going forward and one doesn't have to even discuss unused headroom. It is really not relevant.

4359 MS LAWSON: One doesn't even have to justify it?

4360 MR. FARMER: Well, no, it is not a question of justifying.

4361 We are in the process in this proceeding of justifying the flexibility. So I would say Aliant has to justify moving to $25 in the first year, just as Bell has to justify having the flexibility of increasing the basic residential price, for instance, by the rate of inflation. That is the process we are in right now.

4362 I was simply pointing out that one didn't have to get into a discussion of unused headroom.

4363 Perhaps what Aliant was pointing out was: Listen, we had the flexibility to do it, we just didn't do it. It would appear that the Commission had already turned its mind to allowing this sort of thing to happen a number of years ago, it shouldn't be perhaps too difficult a decision for the Commission to make now to let it go forward.

4364 But, as I said, it is a matter of presentation here, I think, more than anything else.

4365 MS LAWSON: Well, Mr. Farmer, then how should Aliant have justified it?

4366 MR. FARMER: Aliant should justify it in the way, as I said, Bell Canada would justify its proposal and Sasktel would justify its, and so on and so forth. Every party to this proceeding has a different proposal.

4367 MS LAWSON: Which is by reference to what?

4368 MR. FARMER: Which is by reference to any number of considerations, three of which we talked about at length yesterday: affordability, competition and investment. Others have different objectives that they are bringing and they will justify on those terms.

4369 MS LAWSON: Thank you very much.

4370 Those are all my questions, Mr. Chairman.

4371 THE CHAIRPERSON: Thank you, Ms Lawson.

4372 So I understand, with the agreement of the parties, the next party to cross-examine will be RCI.

4373 Mr. Engelhart, I think we will turn to you now and go until about 12:30. So if you can work a logical break into your flow of your cross-examination at about 12:30.

--- Pause

4374 MR. ENGELHART: Thank you, Mr. Chairman.

4375 With me today is Andrew Briggs.

EXAMINATION / INTERROGATOIRE

4376 MR. ENGELHART: Good afternoon, Mr. Farmer, panel members.

4377 Mr. Farmer, just sort of jumping back to first principles, the basic model of a price cap regulatory system is to group services, some subset of the company services, into baskets and to regulate the price of those services by allowing them to rise by the rate of inflation typically less productivity measure. Is that correct?

4378 MR. FARMER: I think that I would describe price caps in somewhat more general terms. I agree with the first part. The basic approach is to group services into baskets and then to put some form of constraint on how prices can move it in those baskets.

4379 The form of the constraint we have had in the current regime, an overall constraint does in fact apply a productivity offset target which is related to how costs might change. Of course, there are other baskets that we have, for instance the residential basic basket, which is able to move up by the rate of inflation.

4380 So though you have described price cap regime, elements which we have in the current regime, and there are many other regimes which have elements like that, that is not, say, the definitive or the most general description of price caps, I would say.

4381 MR. ENGELHART: Thank you.

4382 So let's deal with the current regime, then, as you described it.

4383 Under the current regime the overall price constraint is inflation minus a productivity factor. That productivity factor is intended to measure the way in which costs typically have declined in the telecommunications industry. Is that correct?

4384 MR. FARMER: I think that is a fair characterization in that -- there is a slight difference and Mr. Hariton will be here later. He is much more capable of discussing this.

4385 But it is not how costs are declining in the industry but rather, I think, the extent to which they change relative to the economy overall. I think that is the way he would describe it.

4386 And it is true that many jurisdictions, including our own, have looked at how prices have changed in the past to get a handle on how they would change in the future.

4387 MR. ENGELHART: Thank you.

4388 So the key difference in Bell Canada's proposal between the current regime that we are under today and the regime that you are proposing going forward is, you propose to eliminate the productivity offset and allow prices to increase by the rate of inflation with no deduction for productivity. Is that correct?

4389 MR. FARMER: Ninety per cent correct. Really in broad strokes, that is correct. The productivity offset is used in our proposal for purposes of calculating contribution only.

4390 MR. ENGELHART: Right. In the jargon of our industry we tend to talk about the inflation minus productivity model as the "I minus X" formula, "X" being the productivity factor. Is that correct?

4391 MR. FARMER: That is right.

4392 MR. ENGELHART: So you are proposing to apply the productivity factor, or the "X" factor, to the costs in your high-cost serving areas, but not to the rates for any of your other cap services. Is that right?

4393 MR. FARMER: That is correct. Again, let me make one comment as it relates to that, and it just relates to what we call our competitor services basket where we have proposed that prices move as costs move, so it picks up the sort of general theme of the general price cap model, as you described it. It is just done in a somewhat different way.

4394 But with that exception aside, I think you have characterised it correctly.

4395 MR. ENGELHART: So we are no longer going to be deducting productivity in the non-high-cost serving areas, but you would agree with me that you would expect to continue to achieve productivity in the non-high-cost serving areas, wouldn't you?

4396 MR. FARMER: I would imagine. I certainly hope that we would. That is the plan, that is -- on day-to-day basis it is a question of achieving productivity improvements.

4397 MR. ENGELHART: Certainly historically, using any number of methods, we could take your method filed in your evidence, historically, according to Bell's method, since 1988, you have achieved an average annual productivity of 3.5 per cent?

4398 MR. FARMER: On the access services that we have looked at, yes.

4399 MR. ENGELHART: Right, on the access services. In fact when we look at your numbers we see those productivity numbers actually higher during the last few years under the first cap regime. Isn't that right?

4400 MR. FARMER: You know, I don't think I will go down that road. I am just going to have to let Mr. Hariton and Mr. Park speak to that.

4401 MR. ENGELHART: Fair enough. So you would agree with me that, if you continue to earn -- if you continue to achieve cost savings through increased productivity, but you no longer have a productivity offset, all other things being equal, you will make more profits?

4402 MR. FARMER: I think we have had that discussion with Ms Lawson earlier. Generally speaking, I would say that is correct. It depends on what else is happening in the market and other conditions as to whether we will be making more profits. But all else being equal, that is a very important qualifier.

1215

4403 MR. ENGELHART: I would like to walk you through the calculation in the RCI evidence.

4404 I know there is an undertaking to the Commission to look at those numbers, but I think we could get a lot of work done if we have a look at those right now.

4405 I would like you to please refer to paragraph 27 of the RCI evidence. Actually, we will start with paragraph 26.

4406 If you take a look at the first sentence of paragraph 26. It is on page 14 of the RCI evidence. It says:

"As noted in The Companies(RCI)26 Jun01-27, the offset will apply to the estimated 2002 high-cost serving area cost of only $351.5 million under Bell's original HCSA Loop Costing Study, as opposed to the estimated $3,124,000,000 that the offset applies to in 2001." (As read)

4407 I would ask you, Mr. Farmer, if you would agree with that; that under your proposal the offset will apply to only $351 million of revenue, whereas under the current regime it applies to in excess of $3 billion for the current year.

4408 MR. FARMER: That is right.

4409 MR. ENGELHART: So RCI has gone on, in paragraph 26, to calculate what the monetary impact of that would be.

4410 What he has done, if you look down two sentences later, is he has taken the 4.5 per cent and he has applied that to the amount of revenue that no longer has an offset.

4411 The $351 million still has an offset, so he has subtracted that from the $3,124,000,000, multiplied it by the current 4.5 per cent productivity offset imposed by the Commission, and has calculated that Bell is proposing that it be authorized to keep additional revenues of $124.8 million.

4412 Would you agree that that calculation and that methodology is accurate and appropriate?

4413 MR. FARMER: The calculation is correct. The description of it maybe is a bit off.

4414 To refer to it as additional revenues is perhaps not the best way to discuss it. There are other ways to describe it.

4415 It is describing the impact of not reducing by the 4.5 per cent. If we had an overall constraint of inflation -- obviously if the inflation was, say, 2 per cent, then the additional revenues we would be talking about would be 2 per cent times the base, not 4.5 per cent times the base.

4416 MR. ENGELHART: Your proposal is that the rates go up by inflation. The current regime is inflation minus 4.5 per cent. So the difference between those two regimes is the minus 4.5 per cent.

4417 If we are trying to figure out the difference between the current regime and the proposal, would you agree that it is appropriate to multiply by 4.5 per cent?

4418 MR. FARMER: With that caveat, I have no difficulty.

4419 MR. ENGELHART: Okay.

4420 Carrying on in paragraph 27, in the third paragraph the RCI evidence states:

"Even more importantly, it must be noted that the effects of not reducing rates extend beyond the first year in which they are not reduced as the surplus revenues are embedded in the higher rates used as the starting point for next year's rates." (As read)

4421 Would you agree with that statement?

4422 MR. FARMER: I agree with the statement. "Surplus" is one of those terms that I don't think we need get into here.

4423 Certainly as prices would continue to move, if in fact they were to move over the period, they would be increasing year-on-year.

4424 MR. ENGELHART: Right. In other words, if we compared a world where the Commission had extended the current price cap regime for another four years -- so the current regime that we have today carries on for four more years; you wouldn't have had to come to this hearing, we wouldn't have had to do this. We would just carry on for four years.

4425 Or we compare that with another world, which is the Bell proposal, then as paragraph 27 shows, that would result in $124.8 million of revenue in the first year, $249.6 million in the second year, $374 million and $499 million, for a grand total of $1.25 billion.

4426 Would you agree with that calculation?

4427 MR. FARMER: Again, I would agree with the calculation, but perhaps not quite the characterization.

4428 What we are talking about here, of course, is the flexibility that the proposals we put forward would allow. There may well be a difference between the flexibility and how one exercises that flexibility.

4429 There are, as well, other assumptions built into this calculation. Obviously, one has to make assumptions to do these calculations.

4430 One of the assumptions is that the base of capped revenues would stay the same, which of course, as you have noted here, you have assumed -- and it is not an unreasonable assumption -- but, you assume a growth of 4.5 per cent each year on the base. I can understand that.

4431 There are other factors which might affect the base, however, and that relates to the roll-out of competition.

4432 So to the extent that either the growth drops off or there are competitive inroads, additional competitive inroads, which is not unexpected going forward, then one would see the base drop. Therefore, the calculation would have to correspondingly derive a smaller number than the number you have concluded here.

4433 I guess that is the caveat I would put on the characterization of these numbers. There is a certain amount of assumptions built into them which may or may not play out going forward.

4434 MR. ENGELHART: Just let's review those two assumptions.

4435 The first one -- and I think you are quite right -- is that this calculation in paragraph 27 assumes that Bell takes every penny of the inflation rate increase that it is permitted to take.

4436 That is your first point.

4437 MR. FARMER: Right.

4438 MR. ENGELHART: Your second point is, we are assuming that there is a certain amount of growth every year due to household addition and new lines, and whatnot. For simplicity of arithmetic, we have picked the level of growth at 4.5 per cent per year so that the arithmetic is easy.

4439 Looking at the revenue growth in the cap services category, I think you would agree with me over the last four years that is not an unreasonable assumption unless future conditions change dramatically.

4440 MR. FARMER: That is not unreasonable. I do agree with you. The extent to which future conditions are going to change, I suppose, we will all determine.

4441 I will note that we are coming off a period of fairly robust economy moving into one that certainly appears to be far less robust. So that may not be a particularly good assumption.

4442 I think we would both be hard-pressed to say how we would build it into the calculation.

4443 MR. ENGELHART: If the economy is a little slower or the competition is a little stronger, we are going to have a different number than $1.25 billion. But it will be the same order of magnitude.

4444 Would you agree with that?

4445 MR. FARMER: Again, under the assumption that we would actually take all of the price changes that the flexibility would permit.

4446 MR. ENGELHART: We handed out an exhibit which does a similar sort of thing to this calculation.

4447 This calculation asks the question: How much more money would there be under the current regime -- or how much less money for Bell would there be under the current regime than under the Bell proposal?

4448 Our exhibit asks how we would translate that into profit figures for the utility segment.

4449 The document, Mr. Chairman, is called "Bell Canada Utility Segment Estimated Impact of Not Applying Offset to All Cap Services Revenues".

4450 Do you have that, Mr. Farmer?

4451 MR. FARMER: Yes, I do.

4452 MR. ENGELHART: In a similar sort of a way this calculation walks through, as I said, what happens to profits in the utility category without an offset.

4453 Have you had a chance to review this, Mr. Farmer?

4454 MR. FARMER: Yes, I have.

4455 MR. ENGELHART: As you can see, the exhibit calculates a profitability level of 15.9 per cent in 2002, 17.3 per cent in 2003, 18.7 per cent in 2004, and 20.1 per cent in 2005.

4456 Given that this methodology is extremely similar to the methodology that we have just been discussing, with all the caveats that we have discussed in our discussion of paragraphs 26 and 27, do you agree with the calculations of the profit levels set out in this exhibit?

4457 MR. FARMER: Again, the arithmetic is right. I will not repeat all the caveats. I think we have already covered all of them.

4458 I guess the only other caveat I would indicate -- and it may be covered under some of the earlier ones -- is that there is also an implicit assumption that if we were under the current regime we would continue to run at 14.3 per cent rate of return.

4459 What you are showing here is the difference associated with our proposal.

4460 MR. ENGELHART: I'm sorry, could you repeat that last sentence again?

4461 MR. FARMER: I guess the way I am looking at the numbers of what you have labelled "race" here, the way you arrived at the 15.9 was you looked at the difference that a 4.5 per cent would make and then added that to the 14.3.

4462 That in itself is an assumption about what would happen without the "X". That is the only point I'm making.

4463 MR. ENGELHART: Right. We assumed that going forward over the next four years you would achieve productivity of 4.5 per cent, but if you achieved greater productivity, as you have, for example, in the last four years, those profit levels would be higher.

4464 And, conversely, if you in fact achieved lower productivity, those profit levels would be lower.

4465 Is that the point you are making?

4466 MR. FARMER: That is correct.

--- Pause

4467 MR. ENGELHART: For the record, if we could, there is another exhibit that simply takes those results and graphically portrays them in a bar chart.

4468 This is a document entitled "Bell Canada Utility Segment Return on Equity Impact of Not Applying Offset to All Cap Services Revenues", again showing the 20.1 per cent profitability by the year 2005.

4469 If that bar chart looks accurate to you, Mr. Farmer, I would like that to be entered as an exhibit, as well.

4470 MR. FARMER: Again, you have taken the numbers, based on the caveats that we discussed earlier. You have just depicted them in a bar chart as opposed to just listing them horizontally on the page before.

4471 I don't have any difficulty with accepting it, based on all of these assumptions that we talked about.

4472 I would like to note -- because one does look at these numbers and I note a horizontal line at 11 per cent, which is obviously the rate of return that was set in 1998.

4473 Just as a point of comparison, I do have some data that talks about the rates of return achieved in the year 2000 by a number of the regional Bell holding companies and independent companies. I would be happy to put this on the record as well.

4474 There is one number that is quite low, minus 19.7 as a rate of return. I am sure I don't know what was happening there.

4475 All of the other numbers are in the twenties and thirties and up, and some high teens, nothing lower, other than that very negative number, 18.6, as I see it here.

4476 So just as a point of comparison to put some context on these numbers.

--- Pause

4477 MR. ENGELHART: You have repeated a few times "subject to all the caveats". Let me just review those caveats so that we are quite sure we are talking about the same caveats.

4478 The caveats that underlie these calculations in these rate of returns are:

4479 (1) that Bell Canada will take every penny of the rate increases that it is allowed to under its proposal;

4480 (2) that it will experience a growth of lines and other services leading to annual revenue growth of 4.5 per cent; and

4481 (3) that it will achieve a productivity level of 4.5 per cent each year for the next four years.

4482 Those are the three caveats that underlie these calculations?

4483 MR. FARMER: That is correct. Your growth comment covers both the market share loss and any weakening of the economy. So yes, I would agree, that those are the caveats.

4484 MR. ENGELHART: Mr. Chairman, this might be an appropriate time for a break.

4485 THE CHAIRPERSON: All right.

4486 Thank you, Mr. Engelhart.

4487 We will take our lunch break now, then, and reconvene at 2:00 p.m.

--- Upon recessing at 1228 / Suspension à 1228

--- Upon resuming at 1400 / Reprise à 1400

4488 THE CHAIRPERSON: Order, please.

4489 Mr. Secretary, I understand you have a few exhibit numbers to assign.

4490 MR. SPENCER: Yes, Mr. Chairman, I have 10 exhibits.

4491 The first document is Ms Highet's CV, which will be introduced as The Companies Exhibit No. 5.

EXHIBIT NO. THE COMPANIES-5: CV of Ms Joan Highet

4492 MR. SPENCER: Mr. Dixon's CV will be The Companies Exhibit No. 6.

EXHIBIT NO. THE COMPANIES-6: CV of Mr. Barry R. Dixon

4493 MR. SPENCER: Ms Davidson's CV will be The Companies Exhibit No. 7.

EXHIBIT NO. THE COMPANIES-7: CV of Ms Megan G. Davidson

4494 MR. SPENCER: I also have seven CRTC undertakings. I was asked to specify that those undertakings are due for the 12th of October.

4495 The first is undertakings to The Companies regarding the quality of service, which will be CRTC Exhibit No. 6.

EXHIBIT NO. CRTC-6: Undertaking to The Companies regarding quality of service

4496 MR. SPENCER: Undertaking to TELUS regarding quality of service will be Exhibit No. 7.

EXHIBIT NO. CRTC-7: Undertaking to TELUS regarding quality of service

4497 MR. SPENCER: Undertaking to ARC et al regarding quality of service, Exhibit No. 8.

EXHIBIT NO. CRTC-8: Undertaking to ARC et al regarding quality of service

4498 MR. SPENCER: Undertaking to CallNet regarding quality of service will be CRTC Exhibit No. 9.

EXHIBIT NO. CRTC-9: Undertaking to CallNet regarding quality of service

4499 MR. SPENCER: Undertaking to GT Group Telecom regarding quality of service will be CRTC Exhibit No. 10.

EXHIBIT NO. CRTC-10: Undertaking to GT Group Telecom regarding quality of service

4500 MR. SPENCER: Undertaking to RCI regarding quality of service will be CRTC Exhibit No. 11.

EXHIBIT NO. CRTC-11: Undertaking to RCI regarding quality of service

4501 MR. SPENCER: Undertaking to AT&T regarding quality of service will be CRTC Exhibit No. 12.

EXHIBIT NO. CRTC-12: Undertaking to AT&T regarding quality of service

4502 MR. SPENCER: Thank you.

4503 THE CHAIRPERSON: Thank you, Mr. Secretary.

4504 Now, I believe Messrs. Lowe and Henry will report back to us.

4505 Mr. Lowe.

4506 MR. LOWE: Thank you, Mr. Chairman.

4507 We have reviewed your scope letters again and clarifications you made on transcript and we wish to advise that we will not be seeking to file further evidence.

4508 Thank you.

4509 THE CHAIRPERSON: Mr. Henry.

4510 MR. HENRY: Thank you, Mr. Chairman.

4511 I would like to adopt and rely on what I said yesterday at transcript Volume 588 -- page 588 and 589.

4512 We are relying on the Public Notice, your ruling in Decision 2001-618 of September 28th, your comments, Mr. Chairman, on the transcript of Monday, October 1st and Tuesday, October 2nd, at, I believe, page 191, 192, 589 and 590, as well as of Commission counsel this morning. Frankly, I don't think I can add to what I said yesterday.

4513 So, accordingly, we see no need to file further evidence or have further process.

4514 Now, of course, and as I mentioned yesterday, we are not waiving our rights and in fact we reserve our rights to take whatever action we deem appropriate should the ultimate decision in this case not comply, in our view, with those rulings.

4515 Thank you, Mr. Chairman.

4516 THE CHAIRPERSON: Thank you, Mr. Henry.

4517 Any other comments on this issue?

4518 Mr. Ryan.

4519 MR. RYAN: Mr. Chairman, I have managed to remain silent on this issue up to this point, although the temptation has been there on many occasions to say something. I won't say very much now, except that we do want to say that we hope this brings closure to this issue now.

4520 I don't want our silence up to this point to be interpreted in any way as indicating any uncertainty on our part as to the position the Commission has adopted. I think the Commission has been more than fair in the opportunity it has given to The Companies.

4521 They have now declined it and I hope we can move forward without any more uncertainty or any more inconvenience to the various parties that have been affected by the confusion that has arisen by the vacillations of the telephone companies in respect of how they proceed to move forward.

4522 Thank you.

4523 THE CHAIRPERSON: Anybody else? No?

4524 MR. ROSENZVEIG: So just to be clear, Mr. Chairman, it has been made clear that the treatment, including the prices, of all services used by competitors is considered within the scope of this proceeding. There was a scope ruling. There have been several scope rulings.

4525 In the most recent one the Commission specifically referred to the evidence that it considered was within the scope. It has given an opportunity to The Companies and to TELUS to file additional evidence, if it wishes.

4526 In fact Bell, on the 20th of September, filed rebuttal evidence specifically rebutting some of the evidence in question, and, for the reasons given, the telephone companies have declined the opportunity to file additional evidence.

4527 THE CHAIRPERSON: Thank you, counsel.

4528 Any other issues anyone wishes to raise before we return to cross-examination? No?

4529 Okay, back to you, Mr. Engelhart.

4530 MR. ENGELHART: Thank you, Mr. Chairman.

4531 Mr. Farmer, before the lunch break, we were talking about the price cap formula, which under the present price cap regime involves a constraint on prices of the rate of inflation minus a productivity factor. I suppose a more complete statement of the formula is that it is inflation minus the productivity factor, plus or minus exogenous factors. Is that correct?

4532 MR. FARMER: That's right.

4533 MR. ENGELHART: Those exogenous factors under the first price cap regime are intended to compensate you for cost increases or to subtract for cost decreases where those increases or decreases are beyond your control. Is that correct?

4534 MR. FARMER: Both beyond control and specific to the telecommunications industry.

4535 MR. ENGELHART: Thank you.

4536 Could you refer, please, to The Companies(CallNet)201, and in particular part (c) on page 3 of 10?

--- Pause

4537 MR. FARMER: Yes, I have it.

4538 MR. ENGELHART: Would you agree with me that during the first price cap period there were four exogenous increases for Bell and one exogenous decrease and that the exogenous increases were, first, an increase to compensate you for the amount calculated by the going in revenue requirement proceeding;

4539 Secondly, an increase to compensate you for your local competition start-up and local numbered portability costs;

4540 Third, an increase to compensate you for the reduction of the direct connect rates that are used by long distance companies to interconnect with you; and

4541 Fourth, an increase because of the contribution levy, the four and a half per cent contribution levy, which now applies to local service.

4542 So those are the four increases.

4543 The decrease is because of the removal of the Ontario Gross Receipts Tax?

4544 Would you agree that that is an accurate listing of the exogenous factors that were brought to bear during the first price cap period?

4545 MR. FARMER: Yes. We are talking about Bell Canada here, specifically. We could quibble about whether some of these are really exogenous adjustments or not, but I'm certainly prepared to accept that they are, yes.

4546 MR. ENGELHART: As I understand it, all but one of these exogenous factors is ongoing, that is to say they continue to affect you year after year. The exception would be the local competition start-up and local number portability costs, which were really a lump sum that you were allowed to recover over three years. Is that correct?

4547 MR. FARMER: That's right. It was an adjustment to our prices to recover costs that had been incurred over a number of years over a three-year period.

4548 MR. ENGELHART: Thank you.

4549 So I want to focus for a moment now on these local competition start-up and number portability costs. In particular, we are CallNet 201, and I would like you to refer to Tables 4 and 5 on page 4 of 10 -- sorry, page 5 of 10.

4550 What we see on page 5 of 10 is that you were originally given an ability to recover $71.8 million of local number portability and local competition start-up costs, which translated into a 2.1 per cent rate increase -- I'm looking at the line "Bell Canada" on Table 4.

4551 So for Bell Canada, you got a $71.8 million amount, which translated into a 2.1 per cent adjustment factor.

4552 Then when we look at Table 5, the Commission issues a revision the next year. So there was a $13-million lowering of the value of the adjustment and a 0.4 per cent adjustment factor reduction.

4553 So in the final analysis, Bell got to recover -- Bell got a 2.1 per cent increase in the first year and then a 1.7 per cent increase in the second year and a 1.7 per cent increase in the third year. Is that correct?

4554 MR. FARMER: That's right.

4555 MR. ENGELHART: If you could, please, refer to Bell(CRTC)1102.

--- Pause

4556 MR. FARMER: Yes, I have it.

4557 MR. ENGELHART: Your answer to that question posed by the Commission there is:

"As of 1 May 2002 there will be no remaining balance of unrecovered start-up and LNP costs." (As read)

4558 So you would agree that by May 2002 Bell will have completely recovered the $58.8 million of LNP and local competition start-up costs?

4559 MR. FARMER: Well, the start-up costs were a great deal larger, but it is that amount over -- I multiplied by three, if I could put it that way.

4560 But that is right, that's what this says. It's the --

4561 MR. ENGELHART: Yes, you are absolutely right. Those were annual amounts and the true figure is three times that amount. Thank you for making that clarification.

4562 That will be fully recovered by May 2002?

4563 MR. FARMER: That's right.

4564 MR. ENGELHART: Now, I understand that you do not propose to reduce the price cap index in May 2002 when these amounts are recovered. Is that correct?

4565 MR. FARMER: That's right.

4566 MR. ENGELHART: If the expenditure has been completely recovered, what is the rationale for retaining that 1.7 per cent factor in your price cap index?

4567 MR. FARMER: For many of the reasons that we discussed yesterday, and a little bit this morning, as well, if one is trying to balance these various objectives, the three objectives that we have talked about before, what we are saying is: Given that the prices, where they are today, which includes the adjustment that was made for LNP/LNI cost recovery, when you look at those prices and draw the conclusion, as we do, that prices are affordable and are very reasonable on an international basis, then it is not required, from an affordability perspective, to lower the price, that prices, generally speaking, to --

4568 To effect at least some general increasing in margins in the market which might be conducive to allowing more competitive entry, then it would seem, on the basis of that, that it would be better, rather than to reduce prices further -- and then, of course, it is the absence of the reduction in price that we are looking for here -- it would be better not to reduce the prices, just move from the levels at which we sit and move prices going forward in the manner that we have discussed.

4569 MR. ENGELHART: So I think you would agree with me that when we review all of the exogenous factors you would agree that on balance the exogenous factors have resulted in an increase in your price cap index?

4570 MR. FARMER: Yes, they do because they have also, on balance, resulted in an increase in costs over these four years.

4571 MR. ENGELHART: Right. So when you leave them in place, particularly for this number portability and local competition start-up, aren't you continuing to recover for a debt that has already been paid? Aren't you continuing to take 1.7 per cent each year for something that -- an obligation that has been completely paid back?

4572 MR. FARMER: Let me describe it this way: If we were continuing in a regime where prices would move with costs, and if these source of costs came up which were unexpected out of our control and not covered off in the industry generally speaking, if we were in that mode and continued in that mode, then you would put something in place like this adjustment to allow us to recover the costs. Then when the costs were recovered, you would take it out. That would mean a reduction in prices at that level.

4573 It's true, that is exactly the regime that we have had and are still under today. We are proposing a different and the different regime is: Let's talk about how prices should move from where they are today and going forward and suggesting that this reduction in prices that would be caused by removing the LNP adjustment would actually drive prices down and not be conducive to helping competition move along and not be necessary for purposes of maintaining the affordability objective that we have.

4574 MR. ENGELHART: So you would agree that if the current price cap regime extended another 12 months, to December of 2002, there is no doubt that you would roll the rates back by 1.7 per cent next year, and the reason you are saying you should be allowed to keep it is because it is a new price cap regime.

4575 MR. FARMER: Well, it is not just because it is a new price cap regime. It is because we have an opportunity in looking at establishing what the new price cap regime should be, we are saying let's bring certain objectives to the forefront and talk about how we would achieve it.

4576 It's not just because it's new. It is just because it is a different set of objectives that we feel should be the ones that we should be following.

4577 MR. ENGELHART: Right. So the objective is: Out of concern for the competitors you want to keep the rates up and if it has the ancillary benefit that your company gets to keep another $60 million each year, so be it.

4578 MR. FARMER: There is no question that whatever it is we do with prices, whether we are talking about this issue or freezing prices in real terms or anything else we might talk about, it is going to have an effect on everybody in the industry. By that I include not only the telephone companies and competitors, but also customers. There is no question that each party is going to be affected in one way or the other.

4579 What we are attempting to do -- what we are all attempting to do here is to come up with the right balance of looking at these various stakeholder loops and saying: Given that particular balance how do we move forward with prices?

4580 So I don't deny that it would have an effect on us, at least in the short term. We talked a little bit earlier about how things would play out on their future and how one has to make certain assumptions to guess as to what might happen.

4581 Certainly there would be an effect on us, as there would be an effect on the other stakeholders as well.

4582 MR. ENGELHART: Well, let's turn to another one of the exogenous factors and that's the Ontario Gross Receipts Tax.

4583 As I understand it, in Ontario Bell Canada pays a provincial telephone tax based on its gross revenue. Is that correct?

4584 MR. FARMER: That's right.

4585 MR. ENGELHART: My understanding is that in 1998 the level of this tax was 5 per cent, that it was reduced to 4 per cent in 1999, to 3 per cent in 2000, that this year it is 2 per cent, and that the Ontario government has announced plans to reduce it to 1 per cent next year and eliminate it after 2002. Is that your understanding?

4586 MR. FARMER: That's right.

4587 MR. ENGELHART: As I understand it, CallNet applied to have your price cap index reduced in 2000, so because the reduction had already taken place in 1999 and there hadn't been an application, you simply got to keep those savings in 1999 with no adjustment to your price cap index. Is that correct?

4588 MR. FARMER: That's correct.

4589 MR. ENGELHART: Could you refer for me, please, to Bell(CRTC)1101, page 2 of 2.

--- Pause

4590 MR. ENGELHART: On page 2 of 2 in the last paragraph, would you agree with the statement there that each 1 per cent reduction in the gross receipts tax reduces your cost by about $36 million and about 44 per cent of that effect flows through to capped utility services?

4591 MR. FARMER: That's right.

4592 MR. ENGELHART: So each 1 per cent reduction in the tax is worth about $16 million to the utility segment. Is that right?

4593 MR. FARMER: That's right.

4594 MR. ENGELHART: I mean, I can give you the cite, but from your memory do you recall that about 50 per cent of the utility revenue is capped and 50 per cent uncapped?

4595 MR. FARMER: I'm sure I could find the number. I think it is somewhat higher than 50 per cent that's capped, but we can check.

4596 MR. ENGELHART: Take a look at The Companies(CRTC)407, Table 6.

-- Pause

4597 MR. FARMER: All right. I have the interrogatory, Mr. Engelhart. Which page would you like me to turn to?

4598 MR. ENGELHART: 407, Table 6.

4599 So the first three columns are capped -- or the first three rows are capped. So it around half capped, isn't it?

4600 MR. FARMER: About. I mean that's about right. I'm not going to quibble about a half. We could do the arithmetic on it.

4601 MR. ENGELHART: Okay. So we know from 1101 that each 1 per cent reduction in the tax is worth about $16 million to the utility segment. Let's go back, then, if we can, to part (a) of 1101.

4602 I am reading from the response to Bell(CRTC)1101, page 1 of 2, (a):

"Under the terms of Order 2001-100, Bell Canada reduced rates for capped services in 2001 to accommodate the Ontario GRT tax savings realized by the company in 2001, as well as one half of the tax savings realized by the company in 2000. Order 2001-100 indicated that the latter tax savings should be amortized over two years. With no further rate action with respect to cap services, the entire 2000 GRT tax savings would flow through to customers by the end of 2002. Bell Canada does not propose to reverse that impact." (As read)

4603 So the taxes come down 3 per cent and you have an exogenous factor that lowers your rates by that 3 per cent and then lowers it by an extra amount to capture some of the money that you saved in the year 2000. Is that correct?

4604 MR. FARMER: That's right.

4605 MR. ENGELHART: So if the Ontario government left the tax at 2 per cent and we didn't adjust your exogenous factor, you would actually have a price cap index that was lower than it should be to account for the Ontario Gross Receipts Tax because you have an extra lowering in there now to recover the savings you made in the year 2000.

4606 MR. FARMER: That's correct.

4607 MR. ENGELHART: But if the government lowers the rate to 1 per cent next year and lowers the rate to 0 per cent the year after, as they have announced that they are going to do, would you agree with me that if we were still part of the initial price cap period, those reductions would necessitate a further reduction in your price cap index?

4608 MR. FARMER: Yes, in the following way: We have now lowered our prices by 4 per cent, 3 per cent for 2001 and 1 per cent for 2002. So they are down by 4 per cent.

4609 Moving into 2002, the reduction in the tax is now 4 per cent, though our prices are already at that level, so nothing is due that year. The next year there would be another percentage reduction.

4610 MR. ENGELHART: Thank you very much.

4611 Again, your position is that under the new regime, if the Ontario government were to effect those tax reductions, you don't propose any reduction in your price cap index.

4612 MR. FARMER: For the same reasons that we discussed earlier. Yes.

4613 MR. ENGELHART: The final exogenous increase that I want to review is the exogenous increase relating to the 4.5 per cent contribution levy.

4614 As I understand it, the CRTC gave you an exogenous increase on your capped services index to reflect that 4.5 per cent contribution payment. Is that correct?

4615 MR. FARMER: That's correct.

4616 MR. ENGELHART: Now, the Commission has said that it will reduce contribution to 1.5 per cent next year and if they do, I understand, again for the reasons I suppose that we have discussed, you don't propose to reduce the price cap index to reflect that reduction in contribution payments, do you?

4617 MR. FARMER: Same answer, same reasons. That's right.

4618 MR. ENGELHART: Right. So the net effect of all of these exogenous increases is 3 per cent for the contribution proceeding, 1.7 per cent for the local competition and number portability, something for the Ontario Gross Receipts Tax. It's an increase to your price index of close to 5 per cent higher than it would be if the price cap period extended to the end of 2003. Is that correct?

4619 MR. FARMER: I'm sure those numbers add up to something very much close to that. That's correct, yes.

4620 MR. ENGELHART: I would like to turn to another topic now which deals with your capped revenues.

4621 I guess I would like to ask you before we get into it if it is your position that you think Bell Canada should only receive subsidies for capped residential services.

4622 MR. FARMER: Did you say "for capped residential services"?

4623 MR. ENGELHART: Yes.

4624 MR. FARMER: Subsidies for the basic service in high-cost areas for residential customers.

4625 MR. ENGELHART: Thank you.

4626 So you don't think Bell should receive subsidies for capped business services?

4627 MR. FARMER: That's correct.

4628 MR. ENGELHART: And you don't think that Bell should receive subsidies for its uncapped services?

4629 MR. FARMER: That is also right.

4630 MR. ENGELHART: I wonder if you could have a look for me, please, to Companies(CRTC)407, in particular, page 4 of 5, Table 6.

--- Pause

4631 MR. FARMER: Yes, I have it.

4632 MR. ENGELHART: This is a chart that sets out under Table 6 for Bell Canada, for the years 1998, 1999 and 2000, the various revenues associated with your various service categories.

4633 When I look from 1998 to 1999 for the row entitled "Capped residential services", I see a modest increase, though when I look from 1999 to 2000, I see a dramatic reduction in your capped residential services revenue. I also see a healthy reduction in your capped business services revenue.

4634 But when I look down to the last row to "Other uncapped services", I see a very large increase of maybe $500 million in "Other uncapped services".

4635 I take it you would agree with me that these dramatic revenue shifts are related, aren't they?

4636 MR. FARMER: Yes. There are different factors in each line but there is a linkage between them.

4637 MR. ENGELHART: Right. And let's have a look if we can, please, to Bell(CRTC)1403, page 3.

--- Pause

1430

4638 MR. FARMER: Which page was that, Mr. Engelhart?

4639 MR. ENGELHART: Page 3.

4640 MR. FARMER: Okay, I have it.

4641 MR. ENGELHART: Here we see the answer to the mystery.

4642 At the top of the page, under "Capped Residential Service":

"Reduction due primarily to the introduction of bundles, which include a number of features together with the access line and which are classified as uncapped." (As read)

4643 Do you see that?

4644 MR. FARMER: I do.

4645 MR. ENGELHART: Similarly, if we turn the page to page 4 of 5, to "Other Uncapped Services", increase -- I am reading from the first sentence on page 4 of 5, under "Other uncapped Services":

"Increase due primarily to the introduction of bundles which consist of a number of features together with a residence individual line in 2000." (As read)

4646 So would you agree that what happened here is that a bunch of residential lines and business lines were bundled with optional calling services and, therefore, reclassified as uncapped and therefore removed from capped revenues?

4647 MR. FARMER: That's right, that was one of the factors. The other factor was in business lines there was a migration from lines to Centrex and local links as we indicate here. But yes, there are also the introduction of the bundle of line and features.

4648 MR. ENGELHART: Right. So quite a lot of revenue, maybe -- I only see the hatch marks so I can only speculate, but maybe $400 million of revenue has been moved from capped to uncapped as a result of the formation of these bundles and, therefore, that revenue does not have the productivity offset applied to it. Is that correct?

4649 MR. FARMER: It does not have the productivity tied to it, that is correct.

4650 Now, when price changes are made inside the basket, the capped services, and in particular using these bundles as an example, if the price changes for the residential basic line as a result of whatever filing it is we are doing, because these bundles refer back to that tariff, the bundle too would pick up essentially the same impact on price.

4651 MR. ENGELHART: But when you calculate the amount of revenue reduction required, you multiply the amount of revenue times the 4.5 per cent, and when the $500 million or $400 million, or whatever it is, is taken out of the capped revenues, then that is revenue that is not subject to the reduction. Would you agree?

4652 MR. FARMER: Yes, I do. And maybe it requires a word of explanation as to what this new service is that we are talking about, our new services.

4653 Here, we are bundling lines and features together. In some cases we bundle the line and the features together and overall the bundle is provided at a lower price. Sometimes we bundle the line with features which are not available on a stand-alone basis as well, thereby creating a new service.

4654 New services, as you know, are not included inside the general price cap.

4655 But, perhaps more to the point, one looks at: Well, why is it okay to move it out? Aren't you, say, unconstraining the prices for something that looks like residential basic service.

4656 The answer is no. The constraint comes because residential basic service, to use these examples, continues to be constrained by the price cap rules and because it continues to be also available on a stand-alone basis then the pricing discipline and the price protection is afforded that way.

--- Pause

4657 MR. ENGELHART: So let's have a look at one of these bundles that we are talking about here. There is a tariff notice that we have distributed as an exhibit, which is Tariff Notice 6469. It has associated with it Order CRTC 2408 and some tariff pages.

4658 MS HIGHET: Yes, we have it.

4659 MR. ENGELHART: If we have a look at the letter which is at the beginning of the tariff page, or the tariff notice -- let me read to you from the second and third paragraphs:

"The company is proposing General Tariff Item 2170 to create two new calling features bundles which would include the company's residence and business single line exchange service as an element of both the Smart Pack and visual call-waiting packages. The monthly rate associated with each package will vary according to the basic service rate the customer is paying as per General Tariff Item 70.1 or General Tariff Item 70.2. The company notes that the proposed packages constitute new bundle service offerings.

Furthermore, for the purpose of the price cap regime, the proposed bundles are properly classified as uncapped services for the following reasons:

1) The packages contain one cap service, residence exchange service, the remaining service elements in each package are uncapped; and

2) Customers have the option of subscribing to the capped service component on a separate basis." (As read)

4660 Mr. Farmer, it looks to me like you have taken an ordinary telephone line and a package of optional calling services, put the two together without any further rate adjustment, called it a bundle and that is your new service. Am I missing something?

4661 MS HIGHET: Actually, maybe I will address that, if I may?

4662 If you go to your attachment on page 3 of 7, under "Service Subscription" 2.2.2, it actually identifies that the visual call-waiting feature package also includes a service enhancement, which is the ability to actually, while you are on the phone, have name and telephone number display go across your telephone line. So that is the actual service enhancement to this bundle.

4663 You are correct that the price has not been effectively discounted, but we have actually added a product feature to this bundle.

4664 MR. ENGELHART: But wasn't visual call waiting already available before it was bundled with --

4665 MS HIGHET: Not in this specific product enhancement, not while you are on the phone itself physically. This is a nuance as a software enhancement to an existing package.

4666 MR. ENGELHART: And the Smart Pack, though, that you added to the line was the same Smart Pack it was before and now instead of saying: I would like a phone line and I would like Smart Pack, you now say: I would like the bundle?

4667 MS HIGHET: Well, Smart Pack actually had discounting associated with it.

4668 So there was actually two strategies here. One was a product enhancement strategy from a bundle and the other one was an effective price discounting.

4669 MR. ENGELHART: But weren't those things already in place before you created this --

4670 MS HIGHET: That is the whole benefit of bundling strategies, to take popular features that our customers are looking for, bundle them together and effectively price discount them. That is what we were doing.

4671 In this case, we were also trying out software enhancements to provide a further service enhancement to the package.

4672 MR. ENGELHART: But didn't you already have visual call waiting as a package that someone could buy before you did this Tariff Notice 2170?

4673 MS HIGHET: We had call waiting and call display. As I indicated, the enhancement to this bundle is an actual service enhancement.

4674 MR. ENGELHART: Just combining those things into a bundle isn't what removed the revenue from price caps. What removed the revenue from price caps was then adding that bundle to the phone line. Is that correct?

4675 MR. FARMER: It was in creating a new bundle really, as Ms Highet just explained. That is what allowed it to be removed from the capped.

4676 We created a bundle, which in one case consisted of the line plus features that were already available, but this bundle was at a discount in price and therefore a new service sold together.

4677 In the other case it was a line plus some features, plus an enhancement to some existing features which together combined was a new bundle and offered to the customer. So it is a new service that allowed it to be removed from the basket.

4678 MR. ENGELHART: Let us have a look at the very first paragraph of the letter of April 7, 2000 that says:

"Attached for the Commission's approval is a proposed addition to Bell Canada's General Tariff Item 2170, calling feature bundles. Existing Smart Pack and visual call-waiting services previously filed in the company's General Tariff Item 2165 will be migrated to this item." (As read).

4679 Doesn't that state fairly clearly that Smart Pack was already existing, that visual call-waiting services were already existing, that they were already in Tariff Item 2165 and they were then migrated to Tariff Item 2170?

4680 MS HIGHET: Actually, I would have to understand 2170.

4681 MR. FARMER: Again, what tariff notice item number is mentioned here is really a matter of irrelevance, quite frankly. We could have kept it in 2165, I suppose, as well. As a matter of convenience we gave it a different tariff notice number.

4682 That is not really the issue here.

4683 The issue here is that this feature, this new service, this discounted price, became available as a bundle with the line rate and therefore is treated as bundles are normally treated.

4684 MR. ENGELHART: But I can't buy Bell Canada's optional calling services unless I have a phone line. I need a phone line to make it work, don't I?

4685 MR. FARMER: Yes, of course.

4686 MR. ENGELHART: So if I am a customer on April 6, 2000, before this letter was filed, and I got a phone line and I got Smart Pack, how am I any different than I am after this tariff notice is approved and I get the calling feature bundle? Aren't I paying exactly the same rate, getting exactly the same service and the only difference is that unbeknownst to me, Tariff Item 70 and Tariff Item 2165 are now combined into Tariff Item 2170. Isn't that the way it is?

4687 MR. FARMER: No. For these two bundles that we are talking about, in one case you are not paying the same price, you are paying a lower price. In the other case, you are not getting exactly the same service, you are getting an enhanced feature, as Ms Highet described.

4688 MR. ENGELHART: No, but it says in the first paragraph that the enhancements -- visual call waiting already existed in 2165 and that Smart Pack already existed.

4689 MS HIGHET: There is no question they did. I think the nuance is the incremental service enhancement that we brought to the table with respect to the ability to be on the phone and to understand that a name and number is coming through as you are talking on the phone. That is what the service enhancement for that specific bundle is.

4690 I'm not sure I an explain it any differently other than maybe to go and show you how it works.

4691 MR. ENGELHART: So you are saying that when this was filed -- you are agreeing with me that, when this was filed, there was such a thing as visual call waiting?

4692 MS HIGHET: I'm sorry?

4693 MR. ENGELHART: On April 7, 2000, when this application was filed, there already was a service under Tariff Item 2165 called visual call waiting. Is that correct?

4694 MS HIGHET: That is correct.

4695 MR. ENGELHART: And you are saying it was different than the one that was migrated from 2165 to 2170?

4696 MS HIGHET: Yes. And I will refer you back again to page 3 of 7, item number 5, that identifies:

"...the software enhancement which enables Oftel customers to see the name and number..."

4697 Which is what the new service enhancement is:

"....associated with incoming local or long distance call, as well as receiving call waiting tones..."

4698 Which is what the service offered before we introduced the new bundle.

1445

4699 MR. ENGELHART: But it says:

"The Visual Call Waiting feature package is a software enhancement which enables Oftel customers to see the name and number associated with incoming local or long distance call, as well as receiving call waiting tones..." (As read)

4700 MS HIGHET: Yes. And we are describing a service description and the characteristics of it. So the "as well as receiving call waiting tones" is the existing product.

4701 The "software enhancement which enables Oftel customers to see the name and number" is the service enhancement.

4702 Potentially, the words are not written clear enough to make the differentiation between the service enhancement and the existing product, but that is what the enhancement is.

4703 MR. ENGELHART: In paragraph 7 it says "existing Smart Pack and Visual Call Waiting services". It doesn't say "existing Call Waiting services"; it says "existing Visual Call Waiting services".

4704 So there already was a Smart Pack and there already was Visual Call Waiting and they were already in 2165, and they got migrated.

4705 Isn't that what it says in paragraph 7?

4706 MS HIGHET: I think what we have here is part of our strategy has been to move some of our bundles -- and this is probably where we are getting confused. Part of the strategy is to move some of the bundles away from Smart Pack into our umbrella name, which is what we call Simple Connections.

4707 As we are migrating those, we are moving product features from bundles to bundles.

4708 So yes, there was a service called Visual Call Waiting. It did not include the enhancements that we are talking about specifically, which is the ability to see the name and number coming through. That was what this new feature package was about.

4709 MR. ENGELHART: I hate to quibble, but if it was called Visual Call Waiting and there was no visual enhancement, what was visual about it?

--- Laughter / Rires

4710 MR. ENGELHART: Why would you call it Visual Call Waiting?

4711 MS HIGHET: I assume you don't want me to really answer that.

4712 MR. ENGELHART: Yes. Why was it called Visual Call Waiting if there was no visual signal?

4713 MS HIGHET: You actually got a tone, which is different than actually seeing the name and number going across.

4714 MR. ENGELHART: We will go through the tariffs and identify in argument if we see it differently.

4715 Let's deal with Smart Pack, then.

4716 Smart Pack existed before 2170 was created, didn't it?

4717 MS HIGHET: That is correct.

4718 MR. ENGELHART: It says:

"Existing Smart Pack services previously filed under 2165 will be migrated." (As read)

4719 So you took Smart Pack and you added it to a line and you called it a bundle. Is there anything else going on?

4720 MS HIGHET: I'm sorry, would you mind repeating that?

4721 MR. ENGELHART: Let's deal with Smart Pack. I am suggesting that you had a service called Smart Pack; that it was a bundle of optional calling services. You took that existing bundle at its existing price, and you combined it with a telephone line and you created a service called Calling Feature Bundles.

4722 Is that right?

4723 MS HIGHET: But we may have changed -- and I will have to check. We may have changed the name of the bundle itself. I wouldn't want to presume that the only thing we did was add a line to it.

4724 MR. ENGELHART: It does say:

"Existing Smart Pack services previously filed under The Companies General Tariff Item 2165 will be migrated to calling feature bundles." (As read)

4725 It doesn't sound like there was a name change.

4726 But you will check. That is fine.

4727 When you took the Smart Pack optional calling feature bundles and you combined it with the telephone line and called the resulting package a bundle, that then allowed you to remove that revenue out from under the price cap regime so that the productivity offset no longer applied to those revenues.

4728 Is that correct?

4729 MR. FARMER: From the mechanics of how price cap works, that is correct. New service outside; that is correct.

4730 MR. ENGELHART: So if I am a customer -- I can understand putting bundles of optional calling services together in a way that is attractive, simple to order, et cetera, et cetera, but why bother bundling them with the telephone line?

4731 What is the reason for bundling them with the telephone line? You are not giving a discount on the telephone line. You just simply refer in your tariff pages back to Tariff Item 70.

4732 What does bundling it with the telephone line do other than removing the revenue from the price cap system?

4733 MS HIGHET: From a marketing strategy it just provides an overall perspective of the bundle, as a visual to the customer.

4734 There is no question we are not discounting the residential line. We actually specifically refer to the tariff.

4735 But with the bundles themselves, they are effectively price discounted.

--- Pause

4736 MR. ENGELHART: If you take $400 million of revenue from these residential bundles and you take it out of the price cap system, then inflation minus "X" no longer applies to that $400 million.

4737 So if inflation was 2 per cent, and the productivity offset was 4.5 per cent, that would be $10 million of rate reductions that you wouldn't have to make any more.

4738 Would you agree with me, Mr. Farmer, that if you remove $400 million by creating these bundles, that would mean $10 million less of rate reductions?

4739 MR. FARMER: Again, that is the way it works, absolutely. There would be an uncapped service instead of components of it, part of which were capped previously. The arithmetic is right: 2.5 times 400 would be $10 million.

--- Pause

4740 MR. ENGELHART: If I lived in a high-cost serving area, would I be eligible for these calling feature bundles?

4741 MS HIGHET: Yes, you would be. They are available in most of the NAS, with very little exception.

4742 MR. ENGELHART: If I was in a high-cost serving area and I ordered a calling feature bundle, that line would be removed from capped services into uncapped services, wouldn't it?

4743 MR. FARMER: Yes, it would.

4744 MR. ENGELHART: Do you continue to include those lines in your calculation of the total subsidy requirement?

4745 MR. FARMER: That is a good question, to be honest. I'm not too sure. I would have to check.

4746 We haven't had to worry about it, of course, because we are not into the new regime doing the subsidy calculations. That happens next year.

4747 But I would agree that we should not be.

4748 MR. ENGELHART: For the projected subsidy requirements that you have calculated in this proceeding, can you undertake to check whether those lines were included in your calculation of the subsidy requirement; and if they were, to recalculate it with those lines removed?

4749 MR. FARMER: Yes, I will do that.

4750 MR. ENGELHART: Mr. Chairman, that concludes my questions.

4751 Thank you.

4752 THE CHAIRPERSON: Thank you, Mr. Engelhart.

4753 I understand the next party to cross-examine will be BCOAPO.

4754 MR. SPENCER: I think it would be GT Group Telecom.

4755 THE CHAIRPERSON: I'm sorry.

4756 MR. DANIELS: Mr. Chairman, we are going to need a minute to distribute some exhibits.

--- Pause

1500

EXAMINATION / INTERROGATOIRE

4757 MR. DANIELS: Good afternoon, Mr. Chairman.

4758 My name is Jonathan Daniels. I'm counsel for GT Group Telecom. With me this afternoon, I have Norm Pedcey.

4759 I'm wondering if I could just turn to -- forgive me, I missed the introductions this morning but I understand that we have Ms Highet with us. I have your CV, or a quick description, which is The Companies Exhibit No. 5. And as I understand it, you hold the position of Vice-President of Voice with Bell Canada. Is that correct?

4760 MS HIGHET: That is correct.

4761 MR. DANIELS: Right. Mr. Farmer, I understand that you also hold a title with Bell Canada. It is Vice-President, Regulatory Matters, I believe.

4762 MR. FARMER: That's right.

4763 MR. DANIELS: Mr. Dixon, I'm looking at your CV -- or I should say description. This is The Companies Exhibit No. 6. I understand your title is Senior Vice-President, Carrier Services at Bell Nexxia. Is that correct?

4764 MR. DIXON: That's correct.

4765 MR. DANIELS: Ms Davidson, I'm also looking at your CV and I see that it is Senior Director, Operations Carrier Services with Bell Nexxia. Is that correct?

4766 MS DAVIDSON: That's correct.

4767 MR. DANIELS: And as I understand it, Mr. Davidson -- Mr. Dixon, excuse me -- let's try to keep people straight here -- your responsibility is to be in charge of the Carrier Services Group. Is that correct?

4768 MR. DIXON: That is correct, Mr. Daniels, yes.

4769 MR. DANIELS: Okay. So I will be addressing my questions today regarding quality of service to the panel when we come to those questions, and I'm sure we are qualified to answer. Great.

4770 I would like to begin for a moment by turning to generally Bell's response to competition.

4771 Would it be fair to say -- and I can open this question to anyone on the panel who wishes to answer -- that Bell has done a good job of converting its mindset from a monopoly carrier to one that is more competitively focused. Would that be an accurate statement?

4772 MS HIGHET: We could probably all respond to that one. We all have a long way to go. But certainly we are in a competitive market, specifically in the business arena.

4773 MR. DANIELS: Right. And would it be fair to say, then, that Bell has made strides to become more competitive in recent years? Is that a fair statement?

4774 MS HIGHET: Yes.

4775 MR. DANIELS: Would it also be fair to say, then, that Bell has changed some of its behaviours? It has responded more to the competitive marketplace as a result of the introduction of competition? Is that a fair statement?

4776 MS HIGHET: Well, competition has been going on for a long period of time.

4777 MR. DANIELS: Fair enough.

4778 MS HIGHET: It depends what specific market you are referring to.

4779 MR. DANIELS: Right. So let's break that down.

4780 Let's talk about the local market and let me put it to you this way: Would you agree with me that there was no competition in the local market in 1998?

4781 MS HIGHET: No, it was just evolving at that point in time, that's correct.

4782 MR. DANIELS: Evolving? Let's go to January 1st, 1998.

4783 MS HIGHET: That was the start of the decision point, yes.

4784 MR. DANIELS: Right. So prior to -- maybe I misspoke. December 31st, 1997. Would you agree with me that there was no competition in local on December 31st, 1997?

4785 MS HIGHET: You see, I define "competition" a little bit different than just wireline competition. So there is different alternate technologies which I consider to be competition.

4786 So if you are specifically talking about competition in a wireline business, yes. If you are talking about the, you know, introduction of Internet, and what that does to competition from an alternative perspective, that Is a different story.

4787 MR. DANIELS: Okay. In --

4788 MR. DIXON: Maybe I would like to --

4789 MS HIGHET: I understand where you going, so I think I will agree with you.

4790 MR. DIXON: Joan, maybe I would like to add.

4791 Going back, Mr. Daniels, it seems to me that in fact there was some -- and it was pre the huge growth -- but you had companies like Axxent or pre-Axxent, Oftel, that were in the market purely on a resale basis at that point.

4792 MR. DANIELS: Purely on a resale. That would be, if I'm correct, a Centrex resale, would that not?

4793 MR. DIXON: Correct. There were other players as well at the time, yes.

4794 MR. DANIELS: And what type? When they were doing Centrex resale, whose lines were they reselling?

4795 MR. DIXON: Usually the incumbent's, so it was a pure resale.

4796 MR. DANIELS: Would that be usually the incumbents or --

4797 MR. DIXON: Oh, absolutely. I'm not arguing there wasn't facilities-based, I'm just indicating there was some local resale at that point in time, yes.

4798 MR. DANIELS: Actually, what I'm trying to distinguish is between "usually" as opposed to "entirely" prior to -- you know, prior to January 1st, 1998, that the only people who could provide it in Ontario and Quebec, outside of the independent territories, would be Bell, but it would be Bell's Centrex reservice that they were selling.

4799 MR. DIXON: Yes, that's probably true.

4800 MR. DANIELS: Okay. And it is fair to say, therefore, that in 2001 there is more competition than there was in 1998 -- let me qualify that -- in the local market?

4801 MS HIGHET: We will agree with that.

4802 MR. DANIELS: Yes. In fact to the level there seems to be a dispute, but it is clearly Bell's position that the market is more competitive now than it was before.

4803 MS HIGHET: I mean, we are seeing competition in Bands A, B and limited in Band C, through the different folks that are sitting in the room. Much more aggressive than it was before, yes.

4804 MR. DANIELS: And Bell has responded to that competition in the marketplace as well. That is basically really what we are just trying to agree to here so that we can talk a little bit about that response.

4805 MR. DIXON: I think the other aspect is, if you look at the wholesale or the carrier services side, Mr. Daniels, it is the 600 people within my group that service that market is probably a pretty good indicator as well of the advance of competition.

4806 MR. DANIELS: So let me turn for a second, then. Would you agree with me -- and, once again, I can open this up to the panel -- that Bell prescribes to the standard business practice of offering consumers -- or their retail customers lower price products for higher volume commitments?

4807 MS HIGHET: We have a standard business practice, which is trim contracts for volume and term, and it is a practice that we have been employing since the early '80s. We didn't certainly start in 1998.

4808 MR. DANIELS: Right. So I guess my next question you sort of answered, but let's just be clear on that. You also have a practice of giving people -- of offering some of your service offerings, lower prices for the services for a longer term commitment?

4809 MS HIGHET: Certainly longer term contracts are a standard business practice, as I have identified, and it is an ability to have risk and reward sharing for commitments between two parties.

4810 MR. DANIELS: Just to be clear on that, some of these can be for volume commitments, but others can be without volume commitments in terms of as compared to the service?

4811 MS HIGHET: As in term?

4812 MR. DANIELS: As in term.

4813 MS HIGHET: Yes.

4814 MR. DANIELS: That you have a lower price for a longer term without higher volume. So the key differentiating factor is making a longer term commitment for purchasing the service. Is that correct?

4815 MS HIGHET: I did indicate that we did have term and volume, yes, and monthly rates, obviously, depending on what the choice of the customer is.

4816 MR. DANIELS: Right. I'm just trying to just clarify that sometimes when you say "term and volume", it could be actually term or volume, in terms of it doesn't have to be both term and volume together. That's my point.

4817 MS HIGHET: Okay.

4818 MR. DANIELS: Would you agree with that?

4819 MS HIGHET: Yes.

4820 MR. DANIELS: And, as you said, I was going to use the expression of locking a customer into a longer term commitment. I'm sorry --

4821 MS HIGHET: I don't believe I used the word "locking". What I indicated was that it was a customer relationship.

4822 MR. DANIELS: Right, a customer relationship, forgive me.

4823 I didn't catch the exact term, but the notion was basically it's a win-win for --

4824 MS HIGHET: Well, it's sharing reward and sharing risk.

4825 MR. DANIELS: Sharing --

4826 MS HIGHET: It's the ability to pass on cost savings that we would incur to a customer for a term commitment, and it's also, from a customer perspective, it is able to manage from an operating stability perspective, from the ability to understand what the rates are over a longer period of time and there are a number of benefits that are obviously between the two parties that are shared.

4827 MR. DANIELS: Right. So just to break this down in terms of the sharing of the benefit, from the customer's perspective the benefit is a lower price. Is that correct?

4828 MS HIGHET: There is price points associated with term or volume, that is correct, but there are sometimes other things that are associated with it as well.

4829 But that certainly probably would be one of the factors in a customer's decision.

4830 MR. DANIELS: Right. So just to make this easier, why don't we restrict it to just a term commitment situation. Let's leave volume out of it for now, if that's okay.

4831 But I take it you would agree with me that it is a benefit to a customer to have a lower price for a longer term, that that is the benefit to the customer.

4832 MS HIGHET: That is one of the benefits, that's correct. I mean, there is investment that is put on both sides of the parties and that understanding of that commitment to that investment is also very important to the customer. Operating stability is important to the customer.

4833 MR. DANIELS: Okay. From an ILEC perspective it is also, as you said, their sharing of the benefit. There is a benefit for having a long-term commitment as well to the customer, and that is the ability to preserve the customer over the life of the term of the contract. Am I correct in that statement?

4834 MS HIGHET: I missed the adjective you used, actually. Did you say "preserving"?

4835 MR. DANIELS: Yes, preserving the customer for the life of the contract.

4836 MS HIGHET: Well, yes. When you make contractual commitments you obviously honour those contractual commitments until the term is -- or until the customer chooses that -- you know, wants to get out of it. There is termination charges and things that customers can enter into, obviously.

4837 MR. DANIELS: Yes, and I promise you we will be discussing this.

4838 MS HIGHET: Oh, I'm sure you will. I just thought I would mention it.

4839 MR. DANIELS: There is nothing terribly sinister here. All I am trying to suggest to you is that there is a benefit to the customer and there is a benefit, as you said, sharing the benefit from the ILEC. So from the ILEC perspective, they get to preserve that customer.

4840 I would like to just understand this a little bit more, in the sense that would you agree with me that the attraction to the ILEC of preserving the customer is that much more important in a competitive environment than it was in a non-competitive environment?

4841 MS HIGHET: No, I wouldn't necessarily agree to that. I would suggest that maintaining our customer relationship in any kind of environment is extremely important to us, because not only do they have the products and services that we are talking about specifically here, but it is the overall products and services that they bring to the table.

4842 So I would suggest in any environment that customer relationship is important to us.

4843 MR. DANIELS: I'm not disputing that the relationship isn't important to you in any environment. I guess my question was: Is it more important to you in a competitive environment than it was in a non-competitive environment?

4844 MS HIGHET: I would say it's of equal value.

4845 MR. DANIELS: Okay.

4846 From the ILEC perspective the benefit is that you get assured that there is a revenue stream from this customer for the length of that contract. Would you agree with me, at least it is one of the benefits?

4847 MS HIGHET: I will agree with you it is one of the benefits.

4848 MR. DANIELS: Let's take two customers. One customer signs up for a service with a one-year contractual commitment and gets a 10 per cent discount for that service, and a second customer takes that service on a month-to-month basis, stays with it for the full year, but doesn't get the 10 per cent discount every month.

4849 Are you okay with my description?

4850 MS HIGHET: Yes, monthly rate versus the one-year. Yes.

4851 MR. DANIELS: Right. Would you agree with me that at the end of the year Bell is not going to refund the customer, assuming that both customers stayed with Bell for the full year, that it wouldn't make sense for Bell to refund the customer that was month-to-month the equivalent as if they had been there, signed a one-year contract in the first place, despite the fact that the two customers had both the one-year contract -- in the end, though, stayed with Bell for one year for the same service?

4852 MS HIGHET: Yes. The only difference there is that the cost of acquisition associated with a month-to-month customer is different. You have signed a customer for a year and you have a contractual relationship with that customer, your sales support is still ongoing over the year, but a month-to-month customer is not any guarantee. So there is cost of acquisition, and that 10 per cent you are passing on takes that kind of thing into account.

4853 MR. DANIELS: That cost of acquisition is because you risk losing that customer to another provider, if I understand you correctly?

4854 MS HIGHET: Well, that could be. That could be. That wouldn't be unreasonable to make that assumption. But, again, as I said, it is a customer's choice as to what term or commitment they make with us.

4855 MR. DIXON: I will maybe just add, Mr. Daniels, in the wholesale contracts that we negotiate with Group Telecom, term and length of term also come up.

1515

4856 MR. DANIELS: I hope so.

4857 At this point in time, then, I would like to turn to an exhibit that has been passed around. It is Bell Canada's General Tariff Item 70. Do you have that with you?

4858 MS HIGHET: That is our rate schedules for primary exchange services.

4859 MR. DANIELS: Yes.

4860 MS HIGHET: Yes, I have that.

--- Pause

4861 MS HIGHET: I'm sorry, I have it.

4862 MR. DANIELS: I'm wondering if you could just turn to what I believe is your fourth page there which has 2(h), which is the monthly rates.

4863 Correct me if I'm wrong, but is this not the business services -- for individual line business service these are the rates in Bell territory for single line business primary exchange service. Is that correct?

4864 MS HIGHET: That is correct.

4865 MR. DANIELS: There on the left-hand column you have rate bands and there are bands A, B and the rates for C and it is listed in the next column over. Would I be correct in stating that rate bands A, B and C is the vast majority of Bell Canada's territories?

4866 MS HIGHET: That is correct.

4867 MR. DANIELS: The rate for business primary exchange in rate bands A, B and C is $39.95 a month.

4868 MS HIGHET: That is correct.

4869 MR. DANIELS: I would now like to point out -- but there are some exceptions to those, right, along the lines which we have been talking about which is the ability to have some term commitments.

4870 To address those I'm wondering if we could all turn a couple of pages over. I think it's the back page 3. At the bottom there is a schedule.

4871 MS HIGHET: Page?

4872 MR. DANIELS: It is actually listed as 51(1)(b)-1.

4873 MS HIGHET: Okay.

4874 MR. DANIELS: Are you with me?

4875 MS HIGHET: I'm with you.

4876 MR. DANIELS: Okay, great.

4877 So as I read this, this at the bottom here is where we lay out our exceptions in terms of making a term commitment, the discounts that you can get for a term commitment. Am I correct?

4878 MS HIGHET: That's correct. That's the one year and three year contract rates.

4879 MR. DANIELS: Just to be clear, if you sign a one year contract rate for a business primary exchange service, it is $37.95, so it is a $2.00 saving. Am I correct?

4880 MS HIGHET: That's right, yes. It is $37.95, you are correct.

4881 MR. DANIELS: If I am picked to Bell, which I understand to mean that I choose Bell as not only my local but my long distance carrier for that year --

4882 MS HIGHET: That is correct.

4883 MR. DANIELS: I am going to save $4.50 off of my monthly rate.

4884 MS HIGHET: That's correct. Just a loyalty discount.

4885 MR. DANIELS: If I can turn your attention, then, to the three year contract that is set up in a similar way. As I understand it, I save $5.50 a month if I sign a three year contract. That is a difference of $35.45.

4886 MS HIGHET: That's correct.

4887 MR. DANIELS: Sorry, $34.45 and $39.95. Good thing I did this math before. It doesn't work quickly on the stand.

4888 For the three year contract as well, if you are picked to Bell you only pay $31.95. Is that correct?

4889 MS HIGHET: That is correct.

4890 MR. DANIELS: And that's an $8.00 savings a month. Right?

4891 MS HIGHET: Yes.

4892 MR. DANIELS: I know I decided to do math kind of quickly on the stand and it is a little unfair, but you would agree with me that that is roughly a 20 per cent saving, $8.00 of $40 a month.

4893 MS HIGHET: Right. That's correct.

4894 MR. DANIELS: So a 20 per cent saving.

4895 These exceptions to the regular rate of $39.95, they are new exceptions, are they not?

4896 MS HIGHET: That is correct. They were actually filed effective May 2000, I believe.

4897 MR. DANIELS: Actually I have some exhibits to help us out there. I believe it was filed -- there is an exhibit that is entitled "Associated with Tariff Notice No. 6448". It is a letter to the Commission from Theresa Muir, then Director of Regulatory at Bell, dated February 9, 2000.

4898 MS HIGHET: Yes. Sorry, I have it.

4899 MR. DANIELS: So you would agree with me that this is the tariff notice that actually introduced the one year and the three year long term contract commitments for business primary exchange service. Am I correct?

4900 MS HIGHET: I believe this is what we had sent forward to the Commission dated February 9.

4901 MR. DANIELS: Right.

4902 MS HIGHET: Correct.

4903 MR. DANIELS: This is your proposal to introduce this.

4904 MS HIGHET: This is our proposal.

4905 MR. DANIELS: Right.

4906 MS HIGHET: That is correct.

4907 MR. DANIELS: And I guess just to finish matters here then, if you look at another exhibit which I have handed out which is order CRTC 2000-346.

4908 MS HIGHET: Yes.

4909 MR. DANIELS: This is the Commission approving that document that we --

4910 MS HIGHET: That was the date I was referring to which was May 2000. That is correct.

4911 MR. DANIELS: Right. So April 27, approved it. Okay.

4912 MS HIGHET: That was --

4913 MR. DANIELS: So basically we have introduced -- just to be clear, we have introduced as of, as you say, May, practically speaking, in May 2000 a one year and a three year contract commitment for business primary exchange service which didn't exist before. Am I correct in that?

4914 MS HIGHET: That is the date that they were put into effect. That's correct.

4915 MR. DANIELS: So prior to that date I did not have the option of getting a lower rate by making a longer term commitment.

4916 MS HIGHET: No. We did not have contracts until May 2000. That is correct. There was obviously the monthly rates.

4917 MR. DANIELS: Right. Okay.

4918 So if I can take you back to that first exhibit, which was the Bell General Tariff Item 70, I would like to turn to the last page of that document. I'm happy to read it out or I can have you read it out, but I think it would be to our benefit to read out that first paragraph there, 2(h)(ii).

4919 MS HIGHET: 2(h)(ii)?

4920 MR. DANIELS: Yes, top paragraph.

4921 MS HIGHET: I'm sorry, 2(H)(ii). It says:

"At the end of the commitment period the MCP..."

4922 which is minimum contract period:

"...will automatically be renewed with a new minimum contract period of the same duration unless customers notify the company of their intention to terminate this option during the last 30 days of the minimum contract period." (As read)

4923 MR. DANIELS: So this is an automatic renewal provision. Is that a fair characterization?

4924 MS HIGHET: That was, yes, at that time. That is correct.

4925 MR. DANIELS: I'm sorry, at that time?

4926 MS HIGHET: Since that period of time we have put in something called business line contract management which provides electronic confirmation not only of the terms and conditions of the contract itself as well as when the renewal completes as well as we notify the customer 60 days in advance.

4927 So since that point in time we have put substantial I will call it infrastructure, both the 1-800 IVR as well as Web enablement for electronic Internet capabilities for all the terms and conditions of our contract, both for local link and for 1FL.

4928 MR. DANIELS: I guess there is one thing I am a little confused on. As I understand it, this tariff page, is this tariff page in effect?

4929 MS HIGHET: Well, it should be. Yes, it's quite recent, August 28. It may be that -- if you go to over on the other side where it talks about how we actually do our terms and conditions, if you go to item 72(d) -- 2(h)(i).

4930 MR. DANIELS: Yes.

4931 MS HIGHET: This is what we have actually put in effect. So for the minimum contract period where we identify for individual lines, we also have it for local link as well.

4932 We actually picked (c) and (d) as capabilities for not only having our customers understand the terms and conditions of the contract, but also provide confirmation back.

4933 Then 60 days prior to that we actually send out on their bill a notice for them identifying that their contract will come up for renewal.

4934 MR. DANIELS: Right. Okay. If I understand it, those items that you are referring to were actually not in your original tariff notice application, but mandated by the Commission in order 2000-346, the Order I pointed out to you before.

4935 MS HIGHET: That's right. That's why I indicated at that time.

4936 MR. DANIELS: Right. But those, the way it reads in the page that you just point to me there is about signing that customer up to the one year or three year contract. Am I correct in that?

4937 MS HIGHET: Yes. I would suggest that we probably need to update that page.

4938 MR. DANIELS: So that as I look at this right now as it stands, the next page over as it stands and as approved by the Commission right now there is an automatic renewal if you don't notify the customer within the last 30 days.

4939 MS HIGHET: Well, that would be incorrect because in accordance with the order from the Commission, which was 2000-250, effective May 22nd we put what I described in place for all of our services. We actually also sent letters out to our customers saying that if they did not comply with that that they would revert to a monthly rate in November of 2000.

4940 There is no question what is stipulated here. It probably needs to be revised, but as of the date that I indicated we are in compliance with the Commission's order which was May 2000 -- May 22, 2000.

4941 MR. DANIELS: But a customer can be renewed by this period. They can be renewed through your -- what you are suggesting is you are not adhering to the tariff pages here, you have a different process, but customers can be renewed.

4942 MS HIGHET: It is part of the tariff -- sorry, I have been pointing it out to you -- it is actually part of 2(h) so it actually is there. Unfortunately, there is probably another cross-reference. It probably needs to be removed from the tariff, but it actually is in the tariff pages.

4943 As I indicated, all the terms and conditions, including automatic renewal, are up-front with the customer. They have a choice to provide electronic confirmation either through their IVR or through Internet themselves, so they can either hear it or read it and as a result of that, they understand the terms and conditions.

4944 Sixty days prior to the termination of their contract we actually put a notice on their bill telling them that it is being renewed. That is for the smaller customer base. For the larger we obviously have the client rep talk to the customer.

4945 MR. DANIELS: Right. But I guess what I'm trying to get at, if the customer takes no action, what happens at the end of their period? They are renewed, are they not?

4946 MS HIGHET: That is correct.

4947 MR. DANIELS: That is an automatic renewal, is it not? I understand that you are suggesting that you are informing the customer. The question is: If the customer takes no action are they not renewed?

4948 MS HIGHET: That is correct.

4949 MR. DANIELS: Okay.

4950 MS HIGHET: Yes.

4951 MR. DANIELS: Right.

4952 MS HIGHET: I mean I could quote you the Commission's response to that if you would like with respect to the fact that it is not considered to be negatively impacting.

4953 MR. DANIELS: To understand this, if a customer has a three year contract and at the end of the third -- you know, the last month or the last two months when they get the notice, because as I understand we are not adhering quite to the tariff pages, but at the end of the --

4954 MS HIGHET: Sorry, I would like to correct that because we actually are adhering.

4955 What I am suggesting is there might be extra information in the tariff page, but if you look at 72(h), we actually are adhering to the tariff page. That is precisely what we are doing.

4956 MR. DANIELS: I don't mean to suggest that. I took it to say that you are doing slightly more than the way I might have interpreted it.

4957 I guess my point here is if the customer has a three year contract, at the end of that three years if they don't contact you they are going to be renewed for another three years. Is that right? Is that correct?

4958 MS HIGHET: Yes. Well, we will, as I said, contact the customer 60 days prior to the termination of the contract.

4959 MR. DANIELS: You include it in a notice in their bill.

4960 MS HIGHET: Yes.

4961 MR. DANIELS: Okay. But if they don't contact you they will be renewed.

4962 MS HIGHET: Well, you see, in the message to the customer we ask that they either phone the toll free number or we ask that they advise via Internet. What you are really asking me at the end of the day: If they ignore that and don't do either one of those things, will I renew the contract? The answer to that is yes.

4963 MR. DANIELS: Thank you.

4964 I would like to then turn to that second paragraph on that last page there which begins with No. 3:

"Customers may terminate this option at any point in part or in whole at any time before the expiration of the commitment period. In such cases termination charges apply and are equal to one half of the charges remaining for the unexpired portion of the MCP consistent with..." (As read)

4965 Some earlier articles.

4966 MS HIGHET: Yes.

4967 MR. DANIELS: Let's take a customer who is on a three year contract. To make matters easier here, I am not going to even discuss renewal. This is the first of a three year contract.

4968 The way I read this is that there is nothing legally stopping a customer from signing with a CLEC and cancelling the service. Am I correct in that statement? Let's take that customer that is in the three year contract. It is the end of the first year of their three year contract.

4969 If they want to cancel their service and go with a CLEC that is offering an alternative primary exchange business service line, they can do that.

4970 MS HIGHET: Absolutely.

4971 MR. DANIELS: But they are going to have to pay some penalties. Am I correct?

1530

4972 MS HIGHET: That is right. It is standard.

4973 MR. DANIELS: Yes, it is standard business practice. The penalty here, as outlined here, is that they are going to have to pay one half of the charges for their unexpired term. Am I correct in that?

4974 MS HIGHET: That is correct.

4975 MR. DANIELS: So just to be clear, if this customer got a three-year contract, one year has gone by, another two years to go, if I want to get out, I am going to have to pay the equivalent of a full year. Is that correct?

4976 MS HIGHET: That is correct.

4977 MR. DANIELS: So would it be fair to say in order for this customer to be enticed to go to another service provider, if we are just going to assume -- let us talk about customers that switch on price, and you would agree with me that there is a section of the market that is making decisions based on price, would you not?

4978 MS HIGHET: Yes, I would agree with you.

4979 MR. DANIELS: So let's take one of those customers. In order to be enticed to switch to a CLEC in that situation, that CLEC is going to have to offer over a 50-per cent discount in order to make it worth that customer's while. Am I correct in that assertion?

4980 MS HIGHET: Well, I will assume your math is correct and you have done the calculation between the remaining amount of the three-year contract and your own price differentials.

4981 MR. DANIELS: Let's all be comfortable. You have to pay half, so I'm going to assume it is on the -- if I have to pay half every month the CLEC is going to offer me more than half off. It is that simple math. Would you agree with that?

4982 MS HIGHET: Yes. If the customer is purely focused on price point and no other factors as to why the customer would want to switch. The assumption here is that the only thing that matters to this customer is the price point.

4983 MR. DANIELS: Right. And just to be clear, that price that they would have to give -- the CLEC would have to offer over a 50 per cent discount would have to be off the -- for the three-year contract, assuming that they were picked to Bell, would be the $31.95 a month roughly.

4984 MS HIGHET: Yes. If the customer is with Bell, it would be $31.95. That is correct.

4985 MR. DANIELS: A 50 per cent discount roughly. Over $16, you would agree with me?

4986 MS HIGHET: Yes.

4987 MR. DANIELS: As the rate that the CLEC would have to charge the customer in order to make it worth the customer's while?

4988 MS HIGHET: Right. But there is an understanding here that the customer understands that when he goes into this contract, that he understands what his termination charges are, no different than any other contract that he would sign today.

4989 So the suggestion is that this would come as a surprise. It doesn't come as a surprise to business customers. If they decide to terminate, they understand what those terms and conditions are. They can always choose the monthly rate and forego the benefits of having a longer term commitment. That is a choice that our customers have and it is their decision to make the term commitment that they make with whoever they choose to do their business with.

4990 MR. DANIELS: Thank you.

4991 Mr. Chairman, I have a whole new series of questions but if this was an appropriate time to take the afternoon break --

4992 THE CHAIRPERSON: It is and we will do so.

4993 So we will take our afternoon break then for 15 minutes.

--- Upon recessing at 1537 / Suspension à 1537

--- Upon resuming at 1555 / Reprise à 1555

4994 THE CHAIRPERSON: We will return to our proceeding now and cross-examination by GT Group Telecom.

4995 Mr. Daniels -- sorry, Mr. Henry?

4996 MR. HENRY: Mr. Chairman, I do have one preliminary matter of scheduling, if I might take a moment.

4997 THE CHAIRPERSON: Sure.

4998 MR. HENRY: Given where we are in the schedule, and given that Mr. Taylor's commitments to be here this week, what I am now proposing is that after the current panel we would put up the company-specific panels of Aliant and MTS, followed by Dr. Taylor, and then followed by our Panel 3.

4999 So the hope would be to get the company-specific panel, Aliant and MTS and Dr. Taylor finished by Friday. I think that should work, having discussed that with Commission staff.

5000 THE CHAIRPERSON: Okay. Thank you for that.

5001 Anybody else? Okay.

5002 Mr. Daniels.

5003 MR. DANIELS: Thank you, Mr. Chairman.

5004 At this point in time I would like to turn to some quality of service issues.

5005 Let me begin by asking whether the panel is aware of Group Telecom's proposal for quality of service penalties. Are you familiar with that proposal?

5006 MR. DIXON: I saw your submission, yes.

5007 MR. DANIELS: And in that proposal, Group Telecom --

5008 MR. DIXON: GT-25 you are talking about?

5009 MR. DANIELS: No, I think I'm referring to our proposal in our submission. Are you familiar with our proposal in our submission?

5010 MR. DIXON: I am generally familiar with the proposals, yes.

5011 MR. DANIELS: Just to be clear, would you agree with me that Group Telecom's proposal is to provide that there be quality service measures and penalties for violating those for services provided to CLECs. Is that correct?

5012 MR. DIXON: I think it proposes a scheme using the final and interim indicators that have been developed. It proposes a scheme using those, yes.

5013 MR. DANIELS: And this scheme, as you refer to it, these penalties would be specific to individual CLECs, would it not?

5014 MR. DIXON: That is my understanding, yes.

5015 MR. DANIELS: This proposal relates to penalties that would apply to indicators that were approved by the Commission. Isn't it correct?

5016 MR. DIXON: My understanding is -- I think there are about 19 indicators. You can correct me if I am wrong. There is a portion of them that are final, I think it is six, and then there is a portion that is interim. I think that is approximately accurate.

5017 MR. DANIELS: I would agree with you that there are six that are final.

5018 Would you agree with me that Group Telecom's proposal at this point in time, they actually -- Group Telecom lays out in its evidence actual proposed remedies or damage awards. Is that correct?

5019 MR. DIXON: That you have laid out some remedies, not that I agree with the remedies.

5020 MR. DANIELS: Yes.

5021 MR. DIXON: Yes, I agree with that.

5022 MR. DANIELS: And that these relate strictly to the finalized indicators?

5023 MR. DIXON: I don't recall that detail, but I will assume you are correct, that you just focused on the final ones.

5024 MR. DANIELS: That Group Telecom only proposed the final ones, yes, that is the proposition I am putting forward to you.

5025 I would like to look at an example of one of these indicators. Are you familiar with indicator 2.7?

5026 MR. DIXON: If you would just let me catch the description because there are 19 of them.

5027 MR. DANIELS: I will move as slow for you as for me.

--- Pause

5028 MR. DIXON: That is "Competitor out of service", "Troubled cleared within 24 hours"?

5029 MR. DANIELS: That is the one I am referring to you.

5030 MR. DIXON: Yes.

5031 MR. DANIELS: Could you describe to me what that indicator measures?

5032 MR. DIXON: It focuses on loops, as I understand it, and it is those cleared within 24 hours that are creating all the service troubles.

5033 I believe that is on an average basis, like over a month, week.

5034 MR. DANIELS: So if I understand this indicator correctly -- maybe you can let me know right or wrong, how -- this is if CLEC leases an unbundled local loop. Correct?

5035 MR. DIXON: That is correct, yes.

5036 MR. DANIELS: And this is if there is a problem with the unbundled local loop, the CLEC places a call to the ILEC which creates the -- asking the ILEC to repair that local loop. Am I correct?

5037 MR. DIXON: That is correct, yes.

5038 MR. DANIELS: When they make that call the ILEC opens a trouble ticket. Is that correct?

5039 MR. DIXON: That is right, yes. I think the only shortcut I believe that is in place, in an attempt to move things forward, are procedures that we put in place in the initial day of conversion where we have asked my group to take the call directly to facilitate closure on what appears to be 3 per cent or 4 per cent the orders that don't make it the first day, of which there is troubles on both sides. So I don't think those are counted at this point in that indicator.

5040 MR. DANIELS: I'm just trying to keep it at a high level for now, just so we will make sure we all understand, because you and I are probably a little bit more familiar than the rest of the people in this room.

5041 Indicator 2.7 does not necessarily mean -- so just sum up a high level, would you agree with me that what this is measuring is whether the ILEC repairs the loops that the ILEC receives a trouble ticket from CLEC within the 24-hour period of time. Am I correct in that?

5042 MR. DIXON: That is my understanding, yes.

5043 MR. DANIELS: And the measure here is for all the loops that fall -- for all the trouble tickets that are open. I know you mentioned before an average and I thought maybe we should just clear that up.

5044 Am I correct in stating that this would measure all the loops, whether they were in fact cleared within 24 hours or not?

5045 MR. DIXON: That is correct, but I believe it is measured over a month.

5046 MR. DANIELS: Right.

5047 MR. DIXON: Is that correct? Yes.

5048 MR. DANIELS: And in that month there is standard. Are you familiar with the standard?

5049 MR. DIXON: You are referring to the 80 per cent?

5050 MR. DANIELS: Yes.

5051 MR. DIXON: Yes.

5052 MR. DANIELS: So can you explain to me what the 80 per cent measures?

5053 MR. DIXON: Yes, if there was a 100 out of service, I believe -- and I stand to be corrected -- that 80 of those would be cleared within 24 hours, so 20 wouldn't be.

5054 MR. DANIELS: So just to be clear, take your example of 100 loops, the standard here that the ILEC is required to adhere to is that if there is 100 trouble tickets open within the period of one month, that 80 per cent of those have to be cleared, solved in other words. That is what we mean by "cleared".

5055 Am I correct in that when we say "cleared"? I just want to make sure everyone is familiar with --

5056 MR. DIXON: Yes, I think so. I know that at this point on the troubles that come in -- and I stand to be corrected -- that at times there is a number that get turned back because they are associated with the CLEC. I think those are absolutely removed from these calculations.

5057 I think on the initial troubles that we receive associated with the sort of 4 per cent failures -- on the install, sort of the first day, about 60 per cent appear to be Bell-related troubles which I think would sort of flow into this and 40 per cent tend to be CLEC-related. That is something we can jointly work on, but that is my understanding. I think it is the Bell-related piece we are focused on here.

5058 MR. DANIELS: Right. Mr. Dixon, I am at this point just trying to describe for everyone how this work.

5059 So we have the 100 trouble tickets that are being measure here which are all related to the ILEC. The issue is: How many of those were cleared within 24 hours? That is what this indicator is measuring. Correct?

5060 MR. DIXON: Yes.

5061 MR. DANIELS: The standard that it must adhere to is that 80 per cent in that given month must meet that. Am I correct?

5062 MR. DIXON: Yes.

5063 MR. DANIELS: So just to be clear, the ILEC, if the ILEC, for whatever reason, isn't able to repair 20 of those, or 19, 19 of those trouble tickets within the 24-hour period, the ILEC is still deemed to have met its requirements. Am I correct in that?

5064 MR. DIXON: That is correct, yes. I think we would be -- we know we would be striving for a 100, but that is the standard.

5065 MR. DANIELS: If the ILEC was surpassed, did 21, it would be deemed not to have met that standard?

5066 MR. DIXON: That would be my understanding, yes.

5067 I don't know if there are volume limits, whether we discussed those yet, because we are at the early stages on some of these indicators and on provision indicators, I think there are confidence intervals and on repair indicators perhaps confidence intervals we need talk about given that we have segregated the market by CLEC. Because some of the CLECs are small enough that you could be talking 10 troubles in a month. So there could be statistical validity that we have to worry about.

5068 MR. DANIELS: But that is not into the indicator. Right now, there is no volume commitments or whatever, as you refer to?

5069 MR. DIXON: No. But I think that was one of the reasons -- as I understood 2002-366 -- that the Commission came forward with on June 20th, that we would work as a group for the first year looking at the indicators and understanding what tweaking might have to be done. That is not to say we are not focused on meeting them, I'm just saying that they are new indicators for us all.

1615

5070 MR. DANIELS: Right. Just to be clear, 2.7 was a finalized indicator. Am I correct?

5071 MR. DIXON: That is correct, but I believe the whole bundle we were looking at over that period.

5072 MR. DANIELS: We will address that in a minute.

5073 For now, keeping it at the high level, I want to make sure it is clear in terms that everyone understands and that we agree that from Group Telecom's proposal -- Group Telecom has proposed penalties be applied for violations of these quality of service indicators.

5074 In the scenario you gave where in one month a CLEC sends in 100 trouble tickets for loops, and assuming that 19 or 20 of those are not cleared within 24 hours, you would agree with me that under Group Telecom's proposal no penalties would be applied.

5075 MR. DIXON: I will take your word for it, yes.

5076 MR. DANIELS: You made reference to this being a new indicator. Are you familiar with another indicator, which is 2.1(a).

5077 I will give you a second to find the reference to 2.1(a), and then we can describe to everyone what it is.

5078 MR. DIXON: Were you giving me a reference?

5079 MR. DANIELS: If you want a quick summary for it -- bear with me for a second.

5080 MR. DIXON: As I understand it, it is a retail indicator. So you are going to have to carry me along here for a minute.

5081 MR. DANIELS: Fair enough. Let me find a good reference in the documents for it. I have one.

5082 We are going to be looking at this in a moment anyway, so maybe I could ask someone to pull out for you The Companies(ARC et al)501.

--- Pause

5083 MR. DANIELS: Do you see a reference there to 2.1(a) in the attachment?

5084 MR. DIXON: I have a summary of 2.1 in short. Maybe you can confirm this.

5085 My understanding was that prior to the new indicators, the loop indicator was inside of 2.1, and now it will be separate and moving forward. That is the indicator that you are pointing at, moving forward to 7.

5086 MR. DANIELS: Actually, I couldn't confirm that. I would ask you that.

5087 I am more interested in understanding from this perspective: that 2.1 measures --

5088 MR. DIXON: It is out of service troubles.

5089 MR. DANIELS: Cleared within 24 hours.

5090 MR. DIXON: Including retail and competitive voice access type services, is my understanding.

5091 That was, I think, pre the development of a loop only measure that you were talking about earlier.

5092 MR. DANIELS: For all intents and purposes, I am happy to leave this as a retail one for now. I take your point that it might actually include competitor loops in there.

5093 I believe this is measuring out of service for primary exchange service, not for loops.

5094 MR. DIXON: Well, it had competitive voice access type services. So perhaps Centrex was in there.

5095 MR. DANIELS: Perhaps.

5096 MR. DIXON: Yes.

5097 MR. DANIELS: This would be a retail offering.

5098 MR. DIXON: I think it is a retail measure, yes.

5099 MR. DANIELS: Right, a retail measure. Fair enough.

5100 MR. DIXON: Yes.

5101 MR. DANIELS: As a retail measure, this measured -- and correct me if I am wrong -- from a customer's perspective, if the phone service went out, whether it would be prepared within a 24-hour turnaround.

5102 Is that correct?

5103 MR. DIXON: I am not the retail expert, but that is what I read here. It seems to be similar.

5104 MR. DANIELS: The standard there, as indicated, is also 80 per cent?

5105 MR. DIXON: Yes, that's right.

5106 MR. DANIELS: So it worked roughly the same way every month.

5107 MR. DIXON: I think that is probably what we are modelling it after, yes.

5108 MR. DANIELS: I would just like to figure out a little bit of the history here.

5109 Perhaps we can turn to a document that we handed out as a Group Telecom proposed exhibit. That is a CISC document entitled "Installation, Testing and Maintenance Guidelines for Unbundled Loops".

5110 MR. DIXON: I have that, yes.

5111 MR. DANIELS: At page 18 of that document, at least in my version -- which is section 7.2. That is what I am going to refer to for a moment.

5112 The first sentence there says:

"The ILECs will endeavour to provide the CLECs unbundled loop trouble reports with a repair service level comparable to what the ILECs provide their end retail customers." (As read)

5113 This is a CISC document, is it not?

5114 MR. DIXON: Yes. I think it was jointly developed between the incumbents and the CLECs.

5115 MR. DANIELS: So within this document, this is where we lay out what the repair commitment is going to be for unbundled local loops for CLECs.

5116 Is that correct?

5117 MR. DIXON: I think it lays out the procedures. I think the standards were in the document you referenced earlier.

5118 MR. DANIELS: Sorry, what was the document that I referenced earlier?

5119 MR. DIXON: Unless I am mistaken, this lays out the process and focuses on the process. I think the intervals and such that you were referencing earlier are separate to this.

5120 MR. DANIELS: Rather than argue about whether it is this document or that document, let me put it to you this way: Would you agree with me that there was a commitment made at the time that this document was adopted, or around that time, that CLEC trouble tickets would be repaired within 24 hours for unbundled local loops?

5121 Is that correct?

5122 MR. DIXON: I think we have the indicator we are working towards that we talked about earlier.

5123 MR. DANIELS: Right. This is a timing question here. The indicator that you are referring to was adopted recently -- and we will talk about that decision -- this year. But this document here predates the adoption.

5124 It is dated October 18, 1999.

5125 MR. DIXON: Correct.

5126 MR. DANIELS: Do you agree with me there?

5127 Do you see where I am?

5128 MR. DIXON: Sure.

5129 MR. DANIELS: Or am I moving a little too quickly? It is on the cover page. It says approval date, 1999-10-18, October 18th.

5130 MR. DIXON: I am just looking for your reference to 24 hours, that's all.

5131 MR. DANIELS: No. I think my reference is to 7.2:

"The ILECs will endeavour to provide the CLECs unbundled loop trouble reports with a repair service level comparable to what the ILECs provide their end retail customers." (As read)

5132 MR. DIXON: As I think we went through, the indicator for retail is 80 per cent within 24 hours, and the newly developed indicator for wholesale we are working on is 80 per cent within 24 hours.

5133 MR. DANIELS: Right. I guess what I am trying to point out here is that CISC adopted this document, and it was approved by the Commission -- if you go back to the cover page, you would agree with me that it was approved by the Commission. The date there is January 18, 2000.

5134 MR. DIXON: Are you asking me if I am endeavouring to provide unbundled loop troubles with a repair service level?

5135 Is that your question?

5136 MR. DANIELS: I think what I am really asking you, to put it bluntly, is: Would you agree with me that the 24-hour commitment to provide CLECs unbundled repair for an unbundled local loop existed, prior to the release of the decision that we talked about, and that the ILEC was required to repair loops within 24 hours 80 per cent of the time.

5137 Would you agree with me?

5138 MR. DIXON: No, I can't agree with you. I don't know.

5139 MR. DANIELS: Then let's go through a couple of documents.

5140 I would like you to turn to another exhibit that I handed out. It is Telecom Decision 97-16.

--- Pause

5141 MR. DANIELS: Do you have that document there?

5142 MR. DIXON: Yes. I'm sorry, 97-16?

5143 MR. DANIELS: Yes.

5144 MR. DIXON: Yes, I do.

5145 MR. DANIELS: This is a decision of the CRTC dated July 24, 1997. Would you agree with me that this is a decision where the CRTC set out some quality of service indicators for the ILEC, including Bell Canada?

5146 Is that correct?

5147 MR. DIXON: That is right.

5148 MR. DANIELS: I would ask you to turn to page 21 in my version, that I believe I have handed out.

5149 I hope we are all looking at the same version here.

5150 MR. DIXON: The one that has Indicator 1.7 on page 21 of 23?

5151 MR. DANIELS: That's right.

5152 MR. DIXON: Yes.

5153 MR. DANIELS: If you look further down the page, there is Indicator 2.1.

5154 That indicator is out of service trouble reports cleared within 24 hours.

5155 Would you agree with me that that sets out the repair standard for providing service that the ILEC is required to provide primary exchange service within 24 hours for 80 per cent of the time with in a month?

5156 MR. DIXON: Yes, that is the retail indicator.

5157 MR. DANIELS: Yes, it is the retail indicator. You would agree with me.

5158 MR. DIXON: Yes.

5159 MR. DANIELS: And that was adopted by the Commission on an interim basis in that decision.

5160 Is that correct?

5161 MR. DIXON: Correct.

5162 MR. DANIELS: I am going to spare us here. Will you take my word that the Commission adopted it and finally approved it in a decision a couple of years later?

5163 MR. DIXON: Sure. That is the same document where they approved competitor repair appointment --

5164 MR. DANIELS: No. Sorry, I haven't given this document. It is Decision 2000-24. On January 20, 2000, "Final Standards for Quality of Service Indicators For Use in Telephone Company Regulation and Other Matters".

5165 If you want, we can take a moment, or we can just take it that the Commission approved it on a final basis.

5166 MR. DIXON: What we are saying is the retail indicator 2.1 was approved in that document?

5167 MR. DANIELS: On a final basis. But we have agreed that it was approved on an interim basis and existed as far back as July 24, 1997, if not earlier.

5168 Is that right?

5169 MR. DIXON: Sure.

5170 MR. DANIELS: So when we go back to that CISC document that we were looking at before, the one that is entitled "Installation Testing and Maintenance Guidelines For Unbundled Loops", and we go back to section 7.2, it says:

"The ILECs will endeavour to provide the CLECs unbundled loop trouble reports with a repair service level comparable to what the ILECs provide their end retail customers." (As read)

5171 Have we not agreed that the service that they provide to their end retail customers is 24 hours 80 per cent of the time?

5172 MR. DIXON: Correct.

5173 MR. DANIELS: And that this was adopted by the Commission as the standard for CLECs?

5174 MR. DIXON: Yes.

5175 MR. DANIELS: Therefore, we can conclude that the 24 hours for unbundled local loops was adopted with the adoption of this document.

5176 Are we agreed to that?

5177 MR. DIXON: Sure. I think we have been working to it for a long time.

5178 MR. DANIELS: No problem. And that was back in January of 2000.

5179 MR. DIXON: Yes.

5180 MR. DANIELS: Having said that -- because we have been making some distinctions about new indicators. The adoption recently of the Commission's decision -- let's be clear: 2.7, which we talked about earlier has been the creation of an indicator to measure. The standard existed beforehand. You would agree with me.

5181 MR. DIXON: We had some experience with that indicator previously, yes.

1630

5182 MR. DANIELS: I'm just suggesting that the standard itself existed. What was new is the creation of an actual indicator to measure it. Is that correct?

5183 MR. DIXON: That's correct. I think it became more formalized with the creation of the indicator.

5184 MR. DANIELS: So what is new is that the ILEC is going to be required to report on this, report on every month on their adherence to the standard. Is that correct?

5185 MR. DIXON: That's correct. And I think we have been working in the past months to be prepared for our filing in November. But I think there is some subtle differences in that I think it became clear as it -- I think as the year unfolded the need for specific CLEC-by-CLEC indicators.

5186 MR. DANIELS: Right. And once again --

5187 MR. DIXON: Do you agree? I know I turned it around, but it did change, I think, throughout the year, Mr. Daniels.

5188 MR. DANIELS: Okay. As I said, I think -- that's fine. I think the important point here to measure is that we both agree that the standard existed prior to the release of the CRTC's decision recently and what's new is the measure. Right?

5189 And in that decision -- and I believe we are referring to Decision 2001-217 -- and I don't think we need to turn to it at this point, but that's an exhibit that's been handed out by Group Telecom -- you would agree with me that the ILEC was required to start reporting on these indicators effective the third quarter of this year?

5190 MR. DIXON: Yes.

5191 MR. DANIELS: And the third quarter of this year, as I understand it, just ended last -- I guess it was last Sunday. I just want to make sure we are talking the same calender year.

5192 MR. DIXON: Yes. No, I think our planned filing, which I think is consistent with normal filings, was mid-November --

5193 MR. DANIELS: Of 45?

5194 MR. DIXON: Yes, submission to the Commission.

5195 MR. DANIELS: And, more importantly, to the CLECs themselves.

5196 MR. DIXON: Absolutely. I mean, I think there's communication issues that we have to work through. But there has been ongoing forums that existed for the past two years at the operating level between all the groups, sharing performance indicators and providing a forum for the clearance of problems, should they arise.

5197 MR. DANIELS: But these indicators haven't been on the public record?

5198 MR. DIXON: That's correct. I'm just indicating that there has been plenty of opportunity for communication and exchange. In fact, you know, there's been scorecards between ourselves and the CLECs before the formalization of indicators dealing with provisioning and failures the first day and those types of things, which, you know, many of the CLECs participated in.

5199 MR. DANIELS: Right. Okay. But you would agree with me that there have been other indicators that have been reported on the public record, those retail ones that we were talking about before. Right?

5200 MR. DIXON: And wholesale ones, I might add -- the 1.6, 1.7 and 2.6.

5201 MR. DANIELS: Okay. Well, we will discuss those in a minute.

5202 And those indicators are on the record of this proceeding. I think we have the interrogatory I turned you to before, The Companies(ARC)501. Perhaps we could go back to that interrogatory.

5203 MR. DIXON: Just give me a minute.

--- Pause

5204 MR. DIXON: I have it.

5205 MR. DANIELS: If you look at the page where the answer is, before the attachment, I note on page 1 -- first of all, just let's be clear -- I should step back -- this is the page that's going to outline the -- it's a summary of below standard CRTC quality of service indicators. So, basically, what this does is this lays out all of the indicators for The Companies from 1998 to the year 2000 -- or actually to March 2001, where they had failed to live up to their standard. Is that correct, your understanding of this document?

5206 MR. DIXON: I -- yes, yes.

5207 MR. DANIELS: If you want to take a minute to familiarize yourself with the document, that's fine.

--- Pause

5208 MR. DIXON: Thanks for bearing with me because this is all Mike Parks' area, in terms of retail. I'm looking at the chart. Is that where you were taking me?

5209 MR. DANIELS: Not yet.

5210 MR. DIXON: Not yet.

5211 MR. DANIELS: We will be going there in a minute.

5212 MR. DIXON: Okay.

5213 MR. DANIELS: All I'm trying to suggest is that the document here, what it does is it lays out -- it's going to lay out, in terms of any failed indicator. And you are familiar with that.

5214 MR. DIXON: I'm familiar with that and I have looked at other results, as well, with the same kind of display in other formats. Thanks.

5215 MR. DANIELS: Great. So just before we go to the chart, if we look at the second paragraph on the page, which is the answer to the interrog itself, not the attachment -- it begins, "It should be noted..." -- I read this as noting that the communications -- that, you know, there was a strike against Bell Canada during the months of April and May, 1999, and against MTS during the months of June to September, 1999. And it should also be noted, as well, that the quality of service indicators for Bell Canada and the former Aliant Telecom companies were affected by the ice storm that occurred in early 1998.

5216 So as I understand it, the key point here is 1998 there is an ice storm. In 1999, there was a strike at MTS and Bell. So would you agree with me that in the year 2000 there was no ice storm of a significance of the type that we referred to generically as "The Ice Storm"?

5217 MR. DIXON: Sure.

5218 MR. DANIELS: And, as well, there was no significant strike at Bell in 2000, as well?

5219 MR. DIXON: I agree, yes.

5220 MR. DANIELS: Okay. With that in mind, maybe we could actually look at the results for 2000. That's going to be on page 4 of the attachment.

5221 MR. DIXON: That's 4 of 6, Bell Canada? Yes.

5222 MR. DANIELS: Yes, the second box there. That lays out 2000 Bell Canada. Are you with me?

5223 MR. DIXON: Correct.

5224 MR. DANIELS: Okay. So as I understand this chart, on the left here, it lists -- for every indicator the actual number and then a quick description of what the indicator is, as well as the standard, it would list all the indicators that were breached by Bell -- and I grant you these are mostly retail, but not exclusively retail -- in the year 2000. Are we reading this the same way? I just want to make sure before I go on.

5225 MR. DIXON: Yes, my read on it, given my focus on wholesale, was the two wholesale indicators did not have a miss, the on-time activation of picks for long distance carriers did have a miss. And I understand why that happened, it was a fail-safe activation in our network.

5226 MR. DANIELS: So in these results, though, you would agree with me that there are nine indicators that were breached at least once during the course of 2000?

5227 MR. DIXON: I'm not sure where you are getting the nine from because it's not my -- oh, nine indicators in total, not the months times nine indicators? Yes.

5228 MR. DANIELS: And would it be fair to say that six of those nine were breached at least one out of every two months, on average?

5229 MR. DIXON: That appears correct.

5230 MR. DANIELS: And I know you have made reference to that there were three quality of service indicators for competitors. Perhaps we could turn the page to page 5. Let's look at NBTel, for example. We can agree that one of the ones that you referred to as a competitor indicator, 1.6, competitor installation appointments met --

5231 MR. DIXON: Yes.

5232 MR. DANIELS:  -- it looks like 7 out of 12 months NBTel failed to meet that. Is that correct?

5233 MR. DIXON: I'm not representing NBTel here, but that appears to be correct.

5234 MR. DANIELS: And would you agree with me that for 2.6 competitor repair appointments met, they in fact failed 12 out 12 months?

5235 MR. DIXON: That's what this data says.

5236 MR. DANIELS: And The Companies aren't disputing this data. They produced this data. Is that correct?

5237 MR. DIXON: I think so. As it was indicated earlier, I think, the panel following this one might be from -- include or cover New Brunswick.

5238 MR. DANIELS: So if I turn back, then, to the Bell Canada material, you would agree with me that these indicators are service levels that Bell is required to adhere to?

5239 MR. DIXON: Yes, as I understand process. We submit them regularly to the CRTC, and they are monitored and actions are taken, if need be.

5240 MR. DANIELS: But I guess my point is that the standards established in this, that Bell is required to maintain these standards. Would you agree with that statement?

5241 MR. DIXON: That's my understanding.

5242 MR. DANIELS: Mine, too. But this is the same approach that's going to be applied to CLECs, that we have created standards and indicators to measure these standards to see whether they are actually living -- that the ILECs are living up to their standards to the CLECs. Is that correct?

5243 MR. DIXON: That's true.

5244 MR. DANIELS: And to the best of your knowledge, or anyone on the panel -- we looked at these nine indicators that were breached in the year 2000, when there wasn't a strike and when there wasn't an ice storm. To the best of your knowledge, did Bell compensate customers for these breaches?

5245 MR. DIXON: No.

5246 MR. DANIELS: I would like to now turn to some interrogatories that might be best if we pull out, CallNet interrogatories, specifically we are going to start with 906, The Companies(CallNet)906.

--- Pause

5247 MR. DIXON: Yes, I have that in front of me.

5248 MR. DANIELS: Okay. Before we go there, I think it's just -- it's worthwhile because I might make some reference to this. We have agreed before, we looked at indicator 2.1, that measures retail repairs within 24 hours and that 2.7 measures CLECs repairs within 24 hours for unbundled loops. So with that in mind, I was wondering if we could -- if I look at the second paragraph, I read, it says here that,

"The methodology for the tracking of mean time to repair for customers with whom Bell Canada has a contractual obligation is not different than the tracking of repair times for other Bell Canada customers with no such contract. Furthermore, the procedure for the repair of loops is as follows for all customers." (As read)

5249 You agree with that statement, do you not?

5250 MR. DIXON: Yes.

5251 MR. DANIELS: And then it goes on to outline. So the procedure for repairing is the same for all customers?

5252 MR. DIXON: The procedure for repair is, yes.

5253 MR. DANIELS: And there is a reference here to mean time to repair, or generically referred to as MTTR. That's how we generally, in the industry, measure repair. Is that correct?

5254 MR. DIXON: I'm familiar with that, yes.

5255 MR. DANIELS: And so this is just -- it's basically another way of saying the average repair time. Is that correct?

5256 MR. DIXON: That's correct. It focused on the carrier that has the trouble in that period, right.

5257 MR. DANIELS: So if could get you to turn over to another two interrogatories, which is this time The Companies(CallNet)908.

--- Pause

5258 MR. DANIELS: Are you with me?

5259 MR. DIXON: Yes, I have it.

5260 MR. DANIELS: This is the interrogatory where a company set out for Bell Canada the repair times for various services -- well, for various different customers of pretty similar service. If I read this correctly, residential primary exchange service customer, the average repair time is 24.5 hours. Is that correct? Am I reading that correctly?

5261 MR. DIXON: Were you on a particular line?

5262 MR. DANIELS: I'm looking at The Companies(CallNet)908. Are we looking at the same document?

5263 MR. DIXON: Oh, yes, sorry. I was looking at a back-up across from it. Yes.

5264 MR. DANIELS: Yes.

5265 MR. DIXON: Yes.

5266 MR. DANIELS: If you want to show that, I would be very interested.

5267 Here we have -- would you agree with me that the average service repair time for residential primary exchange service customers is 24.5 hours. Is that correct?

5268 MR. DIXON: That's what this seems to indicate, so it must be correct.

5269 MR. DANIELS: And for a business primary exchange service customer, it is 18.8 hours. Is that correct?

5270 MR. DIXON: I assume so, yes.

5271 MR. DANIELS: That's what it says here.

5272 MR. DIXON: Right. Correct.

5273 MR. DANIELS: So that's Bell Canada's position. You have no reason to dispute that.

5274 MR. DIXON: Correct.

5275 MR. DANIELS: At the bottom it says:

"The average service repair time for customers within Bell Canada contractual mean time to repair obligations is three hours."

(As read)

5276 Is that correct?

5277 MR. DIXON: It must be, yes.

5278 MR. HENRY: Mr. Chairman, I wonder if we are straying into the wrong panel for this. This interrogatory is, unless I am wrong, has been assigned to Mr. Park and it deals primarily with retail indicators.

5279 I think Mr. Dixon is having to look at it for the first time and trying to decipher what it means himself, but not having been personally responsible for the contents.

5280 THE CHAIRPERSON: Mr. Daniels.

5281 MR. DANIELS: Mr. Chairman, I understand the concern. I think these are pretty self-evident explanatory. I think it relates to the different levels of service regarding -- in terms of the repair procedure and we are trying to relate this back to quality service indicators that should be applied to CLECs.

5282 In my submission, this is the proper panel to ask these questions. If there is any concern about the non-validity of the information, I think it is all pretty straightforward on the documents themselves.

5283 THE CHAIRPERSON: Well, except as Mr. Henry noted and Mr. Dixon has indicated himself earlier, he is not familiar with or responsible for the retail as I understood it.

5284 I don't know how far you want to pursue this questioning with respect to the retail issue here. I mean the answer says what it says and Mr. Dixon has agreed that the answer says what it says. I went to the interrogatory.

5285 MR. DANIELS: Right. I wasn't going to pursue it much further other than to look at another interrogatory which relates to a Nexxia answer. As Mr. Dixon has indicated, he is responsible for repairs, so let's go there.

5286 In that case, can I get you to turn to The Companies(CallNet)920.

5287 MR. DIXON: Is that CallNet 920? Is that what your reference is?

5288 MR. DANIELS: Yes. In this document Bell Canada says that it has no service level agreement specific to loops whether with our five largest customers, Bell Nexxia or any other customer. From Bell Nexxia's perspective, you are comfortable with that answer?

5289 MR. DIXON: Again, you are wandering into an area that -- I am going to agree because we put it on the record, but I am not day to day familiar with this.

5290 MR. DANIELS: Fair enough. Perhaps I could get you to turn to the interrogatory before, The Companies(CallNet)919.

5291 MR. DIXON: I have got that.

5292 MR. DANIELS: If you could look at answer (m).

5293 MR. DIXON: Did you say paragraph (m), last page?

5294 MR. DIXON: Yes. Here it says:

"Bell Nexxia offers a four hour MTTR on a business case basis."

(As read)

5295 You would agree with me that Bell Nexxia does offer a four hour MTTR then to certain customers.

5296 MR. DIXON: I'm not familiar with the details relative to that. I understood Mr. Gillette was involved in that question.

5297 MR. HENRY: Mr. Chairman, this is another case of part of this interrogatory, the one that deals with wholesale, has been assigned to Mr. Dixon, but he is quite right, not that part of this question.

5298 MR. DANIELS: Mr. Chairman, I am prepared to move on to another subject. I take it that I was trying to bring a comparison between -- unfortunately because I can't have both panels at the same time it's very difficult for me to represent retail, what they are offering on the retail basis as compared to offering on the wholesale basis.

5299 I was trying to do it in a manner that wouldn't be unfair. I apologize to Mr. Dixon in that regard, but I think the point was made and we can move on.

5300 Therefore, can I turn to Companies CRTC-1503(c).

--- Pause

5301 MR. DIXON: I have it, Mr. Daniels. Thanks.

5302 MR. DANIELS: And we are comfortable, hopefully, discussing this one together then.

5303 MR. DIXON: Quite honestly, it is one -- I am happy to take a shot at it, but it's actually one again that Mr. Park who has all the retail indicators is prime on, but I am happy to try to help here.

5304 MR. DANIELS: The reason why I raise this one is I am interested in (c), answer (c), if you look at the third paragraph there where The Companies state their position regarding competitor service quality guarantee.

5305 I take it that you are comfortable to discuss that and that this would be the appropriate panel to --

5306 MR. DIXON: I should be happy to discuss wholesale issues. Yes.

5307 MR. DANIELS: So as I understand that third paragraph, that's page 4 of 1503, it says:

"The Companies are not opposed to providing a competitor service quality guarantee applicable to those competitor service quality indicators listed in Appendix 1 of Decision 2001 366 for which the measure relates solely to the actions of The Companies. Specifically these indicators are --"

(As read)

and then it lists three indicators.

5308 MR. DIXON: That's correct.

5309 MR. DANIELS: So as I understand it, basically The Companies aren't opposed to having quality of service penalties be applied to --

5310 MR. DIXON: Quite honestly, I think the notion of having measures in place makes absolute sense. I think -- I guess my experience with the hoarder volumes that we have done historically, Mr. Daniels, over the past years and the need to improve processes and the understanding is to get on a common set of measures and work out where there is disconnects. This I think moves us in that direction.

5311 I think there is, as you indicated, past experience with formal indicators, but we also have had quite a history of informal indicators that we have had on all our voice services and data services, so the notion of moving this forward and being increasingly measured with the CRTC isn't foreign to me.

5312 At times, given the efforts that we have made, you know, if you look at the orders we did as a group last year, it was 400,000 orders processed through my group of all types, data and voice. It's not foreign to us relative to us to creating a measure in the system or moving forward.

5313 We do have some experience with it. Some of these are a little different. The process that we are talking about is a little different. Exercising and measuring data processes and voice processes that have been around for 20 years is a little easier than some of these and has a little less complexity, but I am absolutely on the page of moving forward on something like this.

5314 MR. DANIELS: Right. Let's just be clear about what something like this means. The way I read this, this isn't measuring. Measuring has been adopted by the Commission. It's the competitive service quality guarantee. Am I correct?

5315 This is talking about monetary compensation for violating it. Is that not your understanding of this?

5316 MR. DIXON: What we are saying is that we would with experience on the indicators that we have got be more than happy to develop a, you know, financial penalty plan that either compensated the CLECs directly or in some other means.

5317 We haven't seen the first set of formal indicators on these. We are just in the process and have been for the last three months trying to gear up to provide the 19 indicators, including these three and the additional three that were final.

5318 We have little experience with them, but I mean I think there was a proposition put forward to study these with a CISC on a joint basis with a focus on -- I think the Commission suggested it -- with a focus on mid-year 2002 and then move forward from there.

5319 Quite honestly, I am more than happy if we could work with the industry to condense that, Mr. Daniels. You know, if we could take three months off there and three months off the end process and get going earlier, that's fine with me.

5320 Honestly, I would like to understand and see the indicators a little bit before I put a penalty regime in and understand it fully.

5321 MR. DANIELS: I just want to understand first of all --

5322 MR. DIXON: I would also offer that I think in the filing of the results which I think we are going to begin filing and then filing on a monthly basis, if there are issues with the results or concerns with the results, I suspect the CRTC has its ongoing remedies that they could apply anyways.

5323 Our focus has been and continues to be customer service. We want to deliver. I didn't do 400,000 orders last year and get 95 per cent of them in on time by not focusing on customer service. There is just some practical things I think we got to get out of the way.

5324 MR. DANIELS: Okay. Before we go there, let's just for now -- we just read this. I think the important thing is we both agree here that this is talking about financial penalties, that The Companies are not opposed to having financial penalties.

5325 MR. DIXON: That's true. That's what we wrote and that seems fair.

5326 MR. DANIELS: And The Companies state here:

"-- for which measures relate solely to the action of The Companies" (As read)

Is that correct? We both agreed to that, so I am --

5327 MR. DIXON: I agree. The fact is what is solely and how we work through that, judge I suspect, will work through a few issues. You know, if you look at initial failures, for example, on provisioning, you know, it's almost 50-50 split as it comes in the door between the clock and Bell.

5328 I just -- I mean if we are the judge of that, I think we need a little experience to understand how we flushed out and feel comfortable with those numbers.

1700

5329 I quite honestly also have seen a very cooperative approach and I would like to see that on a move-forward basis and make sure that we create the right indicators and the right financial regime that doesn't create behaviour on either side of the table here that, in the end, doesn't benefit the end customer.

5330 MR. DANIELS: Right. Keeping with this cooperative approach, let us try one here. At this point in time, all we have established is that there is a position not opposed to having financial penalties and then, specifically, we say it relates -- there is a caveat -- it relates solely to the actions of a company and there is three indicators that are listed there specifically. So, these are the ones that relate solely to the actions of The Companies as I read this interrogatory.

5331 Now, those three indicators there are all finalised, correct?

5332 MR. DIXON: What was your last --

5333 MR. DANIELS: The three indicators listed here -- 1.8, 1.9 and 2.7 -- are three of the six that were finalised?

5334 MR. DIXON: Correct. I didn't know what you said, that was all.

5335 MR. DANIELS: And these three were chosen because they -- as I understand, it relates solely to the actions of the ILECs?

5336 MR. DIXON: I think that, of the 19, the ILECs involved in many of them and I think the CLECs are as well.

5337 MR. DANIELS: Because the way I read this interrogatory -- I stand to be corrected -- it seems to say: we are not opposed to having them relate solely to the actions of The Companies. And there is three indicators that are listed. Now, I am assuming here that that is three of the six and that the others -- as you say, there is 19 in total ---

5338 MR. DIXON: I think we have greater comfort with those three at this point than others.

5339 MR. DANIELS: So, this list, I take it, you didn't look at the other 13 to determine, you know, the ones that were interim, they are not included on this list. That is because they were interim, not necessarily because they are not solely within the ILECs' control.

5340 MR. DIXON: I think that is part of it and I think the sense of having some experience with these before we set too much in concrete makes sense to us.

5341 MR. DANIELS: I just want to make sure that I understand. So, you focused on three of the six and the other 13 weren't included because they are interim. So, we can look at them later to see whether they relate solely to the action of the ILECs, that is The Companies' position?

5342 MR. DIXON: I think we could consider other indicators as we move forward, if applicable and appropriate and not redundant, because in my read of these, there was a team working on this for a substantial amount of time but in even reading some of the interrogatories, there appeared to be acceptance that there was actual redundancy and within the 19.

5343 MR. DANIELS: But we have three of the six. Now, presumably, my understanding that -- well, let me put it this way: Group Telecom proposed penalties for all six indicators that were finalized and there are only three listed here.

5344 So I want to explore with you for a moment, I am presuming that the reason the other three were not included in The Companies' view is because we know that they are finalized, it must be the other caveat that it did not relate solely to the action of The Companies, is that correct?

5345 MS DAVIDSON: Can we just interject for a minute, Mr. Daniels?

5346 Specifically, maybe we can talk about a final indicator 2.8, migrated loop completion notices to competitors. There is a process in place that we are working through and we need the cooperation of the CLEC at the other end to accept the completion notice and we are working on what that process will look like. So, I think the distinction may be in terms of the ones we have offered up are the ones we feel are solely in our control and perhaps we are a little bit more confident with respect to the data and I think maybe that is a good example of why we wouldn't have included that.

5347 MR. DANIELS: So, let's take a look at another example. Indicator 1.10 measures LNP stand-alone, maybe I can turn you to a document where you maybe you, if you are comfortable with it, you could give a quick description of what this measures.

5348 Actually, we are going to go to a document anyway, so let us make this a little easier.

5349 MR. DIXON: Are we talking local number portability indicator?

5350 MR. DANIELS: Yes, it is for a stand-alone port. Perhaps we could all turn to a CISC document that we have handed out as an exhibit called Business Process Consensus Report on Quality of Service Indicators.

5351 THE CHAIRPERSON: Mr. Daniels, while we are doing that, I just note that we are coming up on five o'clock now, so I want to adjourn for the end of the day some time soon.

5352 MR. DANIELS: Mr. Chairman, I estimate another 15 to 20 minutes. So, I am in your hands here, I am happy to -- it could be a lot less but --

5353 THE CHAIRPERSON: You mean on this issue or to finish?

5354 MR. DANIELS: To finish my cross-examination for this panel.

5355 THE CHAIRPERSON: If it is 15 minutes or so, then we will finish.

5356 MR. DIXON: I have the package, Mr. Daniels, where was it in your -- which subsection was it you were -- is this the Industry Working Group?

5357 MR. DANIELS: Yes, the Industry Working Group, Business Process Consensus Report. It is dated May 11, 2001. Are we all looking at the same document?

5358 MR. DIXON: Yes.

5359 MR. DANIELS: So, just to be clear, the Commission came out with a decision -- let's make sure that we are all in agreement on how this document comes into existence.

5360 The Commission came out with a decision, 2001-217, which established for the first time quality service indicators for CLECs to be measured on a CLEC specific basis. And we have agreed that in that decision, the Commission makes six of those indicators finalized and suggested a whole slue more be created. You agree with me with that?

5361 MS DAVIDSON: Yes.

5362 MR. DANIELS: And so, two industry working groups were assigned, CISC working groups were assigned to work on those indicators, one of them was the Business Process Group and that is the -- their consensus report is the document that we have before us?

5363 MS DAVIDSON: Yes.

5364 MR. DANIELS: And that the Commission then ruled in 2001-366, I believe, in terms of on adopting these consensus reports and any issues where there wasn't consensus, made rulings on that and adopted the other 13 indicators on an interim basis in that decision, is that correct?

5365 MS DAVIDSON: That is my understanding.

5366 MR. DANIELS: Right. So this is the document that is going to set out the details of the indicators that were adopted on an interim basis, you would agree with me with that?

5367 MS DAVIDSON: Yes.

5368 MR. DANIELS: So perhaps I could get you to turn to page 4 of that document. Item number 4 there is local number portability, order, stand-alone service, interval, met, and the actual indicator is in the shaded section there, indicator 1.10. So, I can give you a minute and maybe you could describe for the panel what this indicator measures.

5369 MS DAVIDSON: My understanding is the definition of indicator 1.10 is the percentage of time that the duty it is relating to orders for the stand-alone porting of numbers are met within the applicable standard service interval.

5370 MR. DANIELS: Let me put it in the way that I understand it, not being a technical person. This is an indicator for when a CLEC is going is going to provision a local service to a customer but it is using its own facilities, is that correct?

5371 MS DAVIDSON: That is correct.

5372 MR. DANIELS: But they are not leasing an unbundled loop. What is happening here is the CLEC installs its own facility but there is an existing phone number, probably associated with the ILEC, that the ILEC is no longer needing to be -- sorry, that the customer wishes to switch from the ILEC to the CLEC, is that correct?

5373 MS DAVIDSON: That is correct. And I may be presumptuous here but if you are headed to have me distinguish this particular indicator like I did 2.8, there is a piece of the process that is within the CLEC's responsibility and they are responsible for activating the number and so the distinguishing factor here was that, again, Bell Canada cannot be responsible for the process, end to end, which is why we put on the record that we would move forward with three out of the other six indicators.

5374 MR. DANIELS: Can I get you, Ms Davidson, to read -- if you turn the page, page 4 to page 5, can I get you to read the top three lines of this CISC approved document?

5375 MS DAVIDSON: "The BMWG recommends", is that what you would like want me to read?

5376 MR. DANIELS: Yes, please.

5377 MS DAVIDSON: "...that LNP orders be

excluded from the measurement when the due dates were missed for reasons attributable to an end customer or a CLEC." (As read)

5378 MR. DANIELS: So, as I understand it, this measure here is designed to measure local number portability and, as you rightly point out, there could be some concern that the CLEC could be responsible for the reason why the ILEC missed the LNP stand-alone, but that is not going to be included, is it, in this measure here?

5379 MS DAVIDSON: They will have responsibility for the process but you are right, there will be excluded orders and I believe that that has been agreed to at the working level. There is no question with respect to that is how the indicator will be calculated on a go-forward basis.

5380 MR. DANIELS: And this document was adopted by the CRTC, was it not?

5381 MS DAVIDSON: I have no problem with what is contained in this document whatsoever.

5382 MR. DANIELS: Right. And so, this measure now -- so, we have agreed that this measure was for 1.10 doesn't include CLECs, so you would agree with me, therefore, that this measure, as constituted, relates solely to the actions of the ILECs, does it not?

5383 MS DAVIDSON: I agree with you that if there is a CLEC error, we will exclude that from the performance indicator which I believe will be the situation with all the indicators, which seems reasonable.

5384 But my comment to start with was that they have an integral part of the process that we don't control from end to end. That was my point.

5385 MR. DANIELS: Right. And this relates, once again -- we have established that this is a finalized indicator 1.10, we have agreed to that, right?

5386 MS DAVIDSON: Yes.

5387 MR. DANIELS: So, we have a finalized indicator that is only measuring actions solely related to the ILEC, we have agreed to that, have we not? It is only measuring actions related to the ILEC. If it is a CLEC problem, you are not going to count it.

5388 MS DAVIDSON: No. I agree. If it is a CLEC problem, that is right, we will remove it from the calculation of whether we have met the indicator or not, that is right.

5389 MR. DANIELS: So, going back to our earlier discussion which we had, which is: We chose three of the six that were the finalized because those ones relate solely to the actions of the ILEC, you would agree with me then that this is an example of one of the other three indicators that the way it is being measured relates solely to the actions of the ILECs?

5390 MS DAVIDSON: My point that I was trying to distinguish the three indicators from the final three of the final indicators, I think I have already put on the record, Mr. Daniels.

5391 MR. DANIELS: Okay. Let's move on. As I understand it. We have talked about that The Companies are not opposed to instituting finalized -- sorry, financial penalties for quality services, I understand that there is a couple of caveats: 1) they have to be finalized, Group Telecom's proposals for those that are strictly finalized, The Companies' caveat is that it is only if the ILEC is responsible. We have talked about how the indicators themselves are designed in a way so they only measure those that the ILEC is responsible.

5392 The last thing I want to address then is that The Companies referenced that we need time to implement this decision before financial penalties would be appropriate. And that reference, I am going to take you back to company CRTC 1503.

5393 MR. DIXON: We have that document, yes.

5394 MR. DANIELS: Can we turn to page 5 of that document, please? I am looking at the -- I guess you can argue it is the second-full paragraph or depending if you want to include the quote, maybe it is the third-full paragraph, I am not really sure. But the paragraph that begins "Depending on the nature of any changes...", are you with me there?

5395 MR. DIXON: Yes, I have that.

5396 MR. DANIELS:

"Depending on the nature of any changes to the current competitor indicators in the penalty mechanism implemented, The Companies may require up to six months following the Commission's review and final ruling regarding the above reference CISC report before financial penalties can be implemented for failure to meet specific indicators."

5397 So, as I understand this, The Companies are saying that they are going to need six months, up to -- not necessarily, but to be fair -- but up to six months after the CRTC final ruling before they can implement the financial penalties because they need to establish tracking mechanisms and update their billing systems, is that correct? Is my understanding correct?

5398 MR. DIXON: I think what we are saying is, if we don't know what the process is or the design of it, we are not sure how long it is going to take us to put it in, so we have put a window of six months. But as I indicated earlier if, I think, there is an opportunity to do it more quickly, we would and if there is an opportunity to work through what was 2001-366 quicker and look at all the indicators and finalize them, we would be there, we are happy to be there.

5399 MR. DANIELS: You make reference to 2001-366, that is the decision where, as I understand it, CISC is assigned to monitor these indicators for a year, the interim indicators for a year, and then report back to the Commission by December 1, 2002, is that correct?

5400 MR. DIXON: That, and it is referenced above in that same 1503.

5401 MR. DANIELS: Yes. That quote I was trying to describe before, right. So, would you agree with me that this -- first of all, we are talking that a year's worth of data has to be collected and so the --

5402 MR. DIXON: I guess, when we looked at this, we had some direction from the Commission and, as I indicated, if we could do this in less time, you know, I am happy to go there, which I said earlier. If we could jointly, because it is an industry form, agree that we would try to get that done first quarter, then that accelerates this process and I am happy to move on that.

5403 MR. DANIELS: That is great. I mean that honestly. I am sure my client will take that up and so do I. But the ILECs are supposed to start reporting -- or will be reporting, as you indicated, in November, we will see the first report for the three months of the third quarter, that is correct?

5404 MR. DIXON: That is correct.

5405 MR. DANIELS: And in that report, we are going to have the indicators for all six of the finalized are going to be reported for the ones that have been finalized, that is correct.

5406 MR. DIXON: That is what we are trying to do, yes.

5407 MR. DANIELS: No, they will be done.

5408 MR. DIXON: Yes.

5409 MR. DANIELS: And I take that -- and we do not necessarily turn to this -- that the reports are going to be something similar to the ones that we set out in The Companies(ARC)501. That is where we looked at that chart?

5410 MR. DIXON: That chart. I think so. I think in the design of that, there was considerations for confidentiality and other issues, because much like pick reports and other things, people didn't want to share market share information with each other.

5411 MR. DANIELS: Right, but it is going to go to the CLEC and, from the specific CLEC they are going to see each indicator each month. It is going to be broken down by each indicator each month.

5412 MR. DIXON: It is the only way it is going to work.

5413 MR. DANIELS: And as we have agreed that is actually in the process of being compiled right now.

5414 MR. DIXON: Absolutely.

5415 MR. DANIELS: And in fact, would you agree with me that, probably, we are going to have two reports, but for sure one of those reports will actually be issued by the time the Commission reaches its decision in this proceeding.

5416 MR. DIXON: Our target, as I think I indicated earlier, was November 15. I think that is correct.

5417 MR. DANIELS: So we will at least have one report now.

1715

5418 I would like you to assume with me for a moment that in this decision the Commission adopts Group Telecom's proposal for financial penalties for the finalized indicators, and assume with me for a moment that the ILEC breaches one of those indicators.

5419 I think we are both agreed that the CLEC is going to receive a report, and in that report it is going to detail that the ILEC breached that indicator.

5420 Am I correct in making that assumption?

5421 MR. DIXON: That is correct. My experience tells me, though, that even though we have been working on some indicators jointly for some time with a number of CLECs, in some cases I would expect some time to make sure that we have a common understanding of the data we are dealing with.

5422 I have people that are on electronic interface with us. I have other people that send faxes to me. I have CLECs that create statistics by checks. I am not sure that there are any checks and balances.

5423 I have a mechanized system for a lot of what we are doing. I am anticipating that there will be some differences that we are going to have to work through.

5424 Hopefully, we can get through those quickly.

5425 MR. DANIELS: Right. Let's take an example, indicator 2.7, which measures out of service trouble repairs cleared within 24 hours, a standard of 80 per cent. We have agreed that this standard has existed for quite some time.

5426 I guess my question is: The ILEC is going to produce a document as to their adherence to the quality of service indicator.

5427 Is that correct?

5428 You are going to tell me, for Group Telecom for all the loops or for CallNet for all its loops that it had and all the trouble tickets it had in a specific month, whether you cleared 80 per cent of them with in 24 hours.

5429 MR. DIXON: I agree. I am just saying that in my experience at this for ten years, making sure that we are talking about the same data and focusing on solutions to address that -- in my view, the focus on financial penalties is interesting, but at the end of the day what I am really interested in, as an operations guy and a guy running a business, is that we get to the core of the problems. You have to have the same data points.

5430 I am just saying my experience on MTTR measurements with major carriers that I have worked with for the past eight years is that you have misunderstandings relative to numbers, and they don't get solved overnight. They get solved quickly, but there are perceptions that are around. I am just anticipating that it is going to take a little bit of time to sort this out.

5431 MR. DANIELS: Mr. Dixon, what I am talking about here is -- I haven't even come to a dispute between the CLEC disputing the ILEC's numbers.

5432 We are both agreeing -- at least I hope we are both agreeing -- that these are going to be ILEC-produced numbers that the ILEC is going to send to the CLEC.

5433 MR. DIXON: That is correct. My experience tells me that at the end of the day we should be coming up with the same set of numbers, and we should be talking the same set of numbers each week, each day and each month. That is the way it has worked on other informal arrangements that I have had with carriers, and it works quite well.

5434 We have been working hard to get these in place, and I am just anticipating that there will be some differences as we move forward.

5435 People are at different stages. Some people are electronic interfaces and some people are not. Some people are more ordered than others and some people are not.

5436 MR. DANIELS: Right. I understand.

5437 MR. DIXON: I am happy to --

5438 MR. DANIELS: I understand your concern. But what I am talking about here -- and I think we can both agree; it is pretty simple -- is that the ILEC is going to send a report.

5439 I am not even bringing in and I haven't mentioned -- you are talking about anticipating. I haven't mentioned anything --

5440 THE CHAIRPERSON: Mr. Daniels, I have heard Mr. Dixon agree twice that you are going to get what you have said you are going to get.

5441 MR. DANIELS: All right.

5442 THE CHAIRPERSON: Maybe we can go on to the next question.

5443 MR. DANIELS: From that perspective, then, would you agree that a CLEC would be able to create a bill from the data that the ILEC produces, assuming that the Group Telecom proposal was adopted?

5444 MR. DIXON: You are free to do whatever you wish. It is the payment of the bill that becomes the issue, I think.

5445 MR. DANIELS: I am coming there.

5446 The CLEC is able to create a bill and send this to the ILEC. The ILEC, I take it, would be able to check this bill against the report that the ILEC created and sent to the CLEC.

5447 Is that correct?

5448 MR. DIXON: I think that is possible. I would hope, in the way we have operated generally within the industry, that we would probably sit down and talk about these issues and not be firing bills back and forth; that we would sit down and agree on the core data associated with what we have.

5449 If there is a financial mechanism that we agree on or that the Commission directs us to put in place in certain timeframes, then that is the bill I would be expecting. I am not expecting another bill that is a Group Telecom version. I would expect we would have an industry-wide approach on this issue.

5450 The notion of penalty charges and meeting of commitments is broad. We buy from you out west. I have contracts with you for hundreds of PRIs in TELUS territory. You have obligations to me, as well.

5451 We come to agreement on what those arrangements in terms of penalties are going to be.

5452 MR. DANIELS: Mr. Dixon, the ILEC can check that bill from the CLEC against the ILEC's own data and could confirm it. We are agreed there.

5453 MS DAVIDSON: I think we are jumping the gun a little bit. I just want to put on the record, before we conclude, that there isn't a history of non-performance with respect to service indicators to the wholesale customers in Bell Canada's territory.

5454 So I think we are getting further down the pipe than we have to. I think what we need to do is see the data, understand where the deficiencies are, work through, understand forecasts, understand events that we are going to exclude, and at some point develop and debate and agree to a mechanism when the timeframe comes and we deem, as an industry, it is appropriate.

5455 I don't think we are going to be in a position on November 15th to be evaluating bills from Group Telecom with respect to misses on the indicator. I think that is premature.

5456 MR. DANIELS: I understand that is your position, but I guess I am just trying to understand. You would be in a position to evaluate whether the bill was accurate based on the data, because it came from Bell data.

5457 You would agree with me there.

5458 I understand your position that you don't think it is a good idea. I am just asking you whether you would be able to do it.

5459 Is there any problem with doing it?

5460 MS DAVIDSON: The data that does get filed, will it be accurate and will we be able to identify when we haven't met the performance standards? Absolutely. I would agree with that. That's right.

5461 MR. DANIELS: Mr. Chairman, that concludes my cross of this panel.

5462 THE CHAIRPERSON: Thank you, Mr. Daniels.

5463 I believe Commission counsel has a point to raise.

5464 MS MOORE: Thank you, Mr. Chairman.

5465 It is just a minor procedural matter relating to disclosure requests.

5466 Today the companies have submitted requests for disclosure and further responses to interrogatory responses filed by AT&T Canada and Group Telecom on October 1st.

5467 If any other party wishes to make a request for disclosure to interrogatory responses that were filed with the Commission on October 1st, they are requested to file their requests in writing by the end of the day Thursday -- that is tomorrow.

5468 Replies to any such requests, including The Companies October 1st request, are to be filed in writing by the end of the day, Friday, October 5th, copying the party who made the original request.

5469 I also note that there are some interrogatory responses outstanding. Once those are filed, we would ask parties to file any requests for disclosures two days after the filing of those interrogatory responses, with replies one day after that request.

5470 Thank you, Mr. Chairman.

5471 THE CHAIRPERSON: Thank you, counsel.

5472 Is there anything else before we close for the day?

5473 That completes our work for the day, then. We will see you tomorrow at 9:00 a.m.

--- Whereupon the hearing adjourned at 1720, to resume

on Thursday, October 4, 2001 at 0900 / L'audience

est ajournée a 1720, pour reprendre le jeudi

4 octobre 2001 à 0900

Date de modification :

2001-10-03