ARCHIVED -  Transcript - Yellowknife, NWT - 2000/06/19

TRANSCRIPT OF PROCEEDINGS

FOR THE CANADIAN RADIO-TELEVISION AND

TELECOMMUNICATIONS COMMISSION

TRANSCRIPTION DES AUDIENCES DU

CONSEIL DE LA RADIODIFFUSION

ET DES TÉLÉCOMMUNICATIONS CANADIENNES

SUBJECT / SUJET:

NORTHWESTEL INC. - IMPLEMENTATION OF

TOLL COMPETITION AND REVIEW OF

REGULATORY FRAMEWORK, QUALITY OF SERVICE

AND RELATED MATTERS / NOROUESTEL INC.

- MISE EN OEUVRE DE LA CONCURRENCE

DANS L'INTERURBAIN ET EXAMEN

DU CADRE DE RÉGLEMENTATION,

DE LA QUALITÉ DU SERVICE

ET D'AUTRES QUESTIONS

HELD AT: TENUE À:

Town Hall Room Salle Town Hall

Best Western Gold Rush Inn Best Western Gold Rush Inn

411 Main Street 411, rue Main

Whitehorse, Yukon Whitehorse (Yukon)

June 19, 2000 le 19 juin 2000

Volume 5

Transcripts

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

bilingual as to their covers, the listing of the CRTC members

and staff attending the public hearings, and the Table of

Contents.

However, the aforementioned publication is the recorded

verbatim transcript and, as such, is taped and transcribed in

either of the official languages, depending on the language

spoken by the participant at the public hearing.

Transcription

Afin de rencontrer les exigences de la Loi sur les langues

officielles, les procès-verbaux pour le Conseil seront

bilingues en ce qui a trait à la page couverture, la liste des

membres et du personnel du CRTC participant à l'audience

publique ainsi que la table des matières.

Toutefois, la publication susmentionnée est un compte rendu

textuel des délibérations et, en tant que tel, est enregistrée

et transcrite dans l'une ou l'autre des deux langues

officielles, compte tenu de la langue utilisée par le

participant à l'audience publique.

Canadian Radio-television and

Telecommunications Commission

Conseil de la radiodiffusion et des

télécommunications canadiennes

Transcript / Transcription

Public Hearing / L'audience publique

Northwestel Inc. - Implementation of toll competition and review of regulatory framework, quality of service and related matters / Norouestel Inc. - Mise en oeuvre de la concurrence dans l'interurbain et examen du cadre de réglementation, de la qualité du service et d'autres questions

BEFORE / DEVANT:

David Colville Chairperson / Président

Jean-Marc Demers Commissioner / Conseiller

Andrée Wylie Commissioner / Conseillère

Cindy Grauer Commissioner / Conseillère

Ron Williams Commissioner / Conseiller

ALSO PRESENT / AUSSI PRÉSENTS:

Geoff Batstone Legal Counsel /

Annie Paré Conseillers juridiques

Gérant de l'audience

Marguerite Vogel Secretary / Secrétaire

HELD AT: TENUE À:

Town Hall Room Salle Town Hall

Best Western Gold Rush Inn Best Western Gold Rush Inn

411 Main Street 411, rue Main

Whitehorse, Yukon Whitehorse (Yukon)

June 19, 2000 le 19 juin 2000

Volume 5

APPEARANCES / COMPARUTIONS

Phillipa Lawson CAC/NAPO

Roger Rondeau Utilities Consumers' Group

Pat O'Connor (UCG)

George Henry Council of Yukon First

Jan Staples Nations

Angus Oliver Government of Northwest

Territories

Peter Macdonald Government of Yukon

Tom Zubko New North Networks

Phil Rogers Northwestel

John Lowe Telus Corporation

TABLE OF CONTENTS / TABLE DES MATIÈRES

PAGE

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: M. CHALIFOUX 984

AFFIRMED / DÉCLARATION SOLENNELLE: PETER W. DENNETT 984

AFFIRMED / DÉCLARATION SOLENNELLE: RAY G. HAMELIN 984

AFFIRMED / DÉCLARATION SOLENNELLE: FRANK W. DUCK 984

EXAMINATION BY / INTERROGATOIRE PAR:

Mr. Rogers 985

Ms Lawson 988

Mr. Rondeau 1069

Mr. Henry 1120

Ms Staples 1150

Mr. Pratt 1151

Mr. Zubko 1186

Mr. Lowe 1211

Mr. Batstone 1230

by the Commission 1234

Mr. Batstone 1255

AFFIRMED / DÉCLARATION SOLENNELLE: PAUL FLAHERTY 1256

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: RAY HAMELIN 1256

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: RAY WELLS 1256

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: CLAUDE VACHON 1256

EXAMINATION BY / INTERROGATOIRE PAR:

Mr. Rogers 1256

Ms Lawson 1258

Mr. Rondeau 1274

Whitehorse, Yukon / Whitehorse (Yukon)

--- Upon resuming on Monday, June 19, 2000,

at 0833 / L'audience reprise le lundi 19 juin

2000, à 0833

6259 THE CHAIRPERSON: Good morning, ladies and gentlemen.

6260 Before we bring forward the next panel, are there any preliminary matters we should address? No.

6261 Okay. With that, then, Madam Secretary, would you call the next panel.

6262 MS. VOGEL: Yes, Mr. Chairman.

6263 We have called Panel No. 3, which has to do with finance, revenue requirement, regulatory framework, rate of return.

6264 I would ask CRTC counsel to swear the witnesses, please.

6265 MR. BATSTONE: Thank you.

6266 Do you wish to be sworn or affirmed? Affirmed?

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: M. CHALIFOUX

AFFIRMED / DÉCLARATION SOLENNELLE: PETER W. DENNETT

AFFIRMED / DÉCLARATION SOLENNELLE: RAY G. HAMELIN

AFFIRMED / DÉCLARATION SOLENNELLE: FRANK W. DUCK

6267 THE CHAIRPERSON: Mr. Rogers...?

EXAMINATION / INTERROGATOIRE

6268 MR. ROGERS: Thank you, Mr. Chairman.

6269 Mr. Hamelin is chair of this panel.

6270 Mr. Hamelin, could you indicate your position with Northwestel.

6271 MR. HAMELIN: I'm the Comptroller, Treasurer and Chief Financial Officer of Northwestel.

6272 MR. ROGERS: And do you have with you Sections 4 and 5 of the evidence of the company and the list of interrogatory assignments?

6273 MR. HAMELIN: I do.

6274 MR. ROGERS: And were those sections of the evidence and the interrogatories assigned to this panel prepared by you or under your direction?

6275 MR. HAMELIN: They were.

6276 MR. ROGERS: And is that evidence and those responses true and accurate, to the best of your information and belief?

6277 MR. HAMELIN: They are.

6278 MR. ROGERS: Do you have any additions or corrections to this evidence, at this time?

6279 MR. HAMELIN: Not at this time.

6280 MR. ROGERS: Ms Chalifoux -- sorry. Did I cut you off, Mr. Hamelin?

6281 MR. HAMELIN: No; that's all right. Thank you.

6282 MR. ROGERS: Ms Chalifoux, could you indicate your position with the company?

6283 MS CHALIFOUX: Assistant Comptroller, Financial Analysis and Costing.

6284 MR. ROGERS: And Mr. Duck, could you indicate your role on this panel.

6285 MR. DUCK: I'm President of Ford Finance, a private financial consulting firm. I'm a consultant to Northwestel primarily on financial matters, including ROE, and I have over 30 years' experience in regulatory and financial affairs in the Canadian telecommunications industry.

6286 MR. ROGERS: And Mr. Dennett, could you indicate your role on this panel.

6287 MR. DENNETT: I have been retained as a consultant by Northwestel for this proceeding, working primarily in the area of regulation. Prior to my becoming a consultant, I worked for Bell Canada for 30 years, in a variety of positions; most recently, in regulatory affairs.

6288 MR. ROGERS: Did each of you assist in the preparation of the evidence and the responses assigned to this panel?

6289 MR. DENNETT: I did.

6290 MS CHALIFOUX: I did.

6291 MR. HAMELIN: Yes.

6292 Mr. DUCK: I did.

6293 MR. ROGERS: And to the best of your knowledge, is the evidence and the responses accurate and true?

6294 MS CHALIFOUX: Yes.

6295 MR. DENNETT: Yes.

6296 MR. HAMELIN: Yes.

6297 MR. DUCK: Yes.

6298 MR. ROGERS: Mr. Chairman, that is the panel.

6299 I will mention the people assisting and supporting the panel, in the second row.

6300 Supporting this panel are Christina Frisch, Eric Hoenich, Norm Eady Dr. Aly Elfar and Leon Schufelt.

6301 The panel is available.

6302 THE CHAIRPERSON: Thank you, Mr. Rogers.

6303 Good morning to the panel and the backup team.

6304 Madam Secretary, the first party to cross-examine?

6305 MS VOGEL: Yes. Our first party to cross-examine this panel is CAC/NAPO, Ms Lawson.

6306 THE CHAIRPERSON: Good morning, Ms Lawson.

EXAMINATION / INTERROGATOIRE

6307 MS LAWSON: Good morning, Mr. Chairman, Members of the Commission. Good morning panel members.

6308 There a number of topics I want to touch on this morning. I'm going to start with the financial issues and, in particular, you debt-equity ratio.

6309 Would you agree that a company can be compensated for higher risk in one of two ways: a higher return on equity or a higher equity ratio?

6310 MR. DUCK: I would agree that the determination of the return on equity is governed in some measure by the debt-equity ratio, yes.

6311 MS LAWSON: Okay. So, in other words, the higher a company's equity ratio, the lower its financial risk and, therefore, the lower its required return for shareholders of the company, all else equal?

6312 MR. DUCK: Yes. Your last phrase "everything else being equal" would have to govern that remark, yes.

6313 MS LAWSON: So, to the extent that higher risk has already been compensated by a higher equity ratio, allowing higher returns, would amount to double recovery; a company would be having its cake and eating it, too?

6314 MR. DUCK: Well, that I have a bit of difficulty with.

6315 I'm not aware that the Commission is in the practice of double compensating, as you are suggesting. I would rather suggest that the Commission looks at the ROE, with reference to the risks that are prevailing at that time, and makes a determination; and then times goes on and perhaps it needs to make another reassessment in the future.

6316 I wouldn't say that second review, whenever it might occur, is a second compensation, if you will.

6317 MS LAWSON: Okay. Well, let's just look at Northwestel, right now.

6318 In Decision 93-20, the Commission approved a common equity ratio for Northwestel of 55 per cent. Correct? And this was, in the Commission's words, in order to mitigate any potential increase in business risk over the long term. Is that correct?

6319 MR. DUCK: I think the exact language in 93-20 suggests that the Commission accepts Northwestel's proposal to move towards a more conservative capital structure.

6320 MS LAWSON: And that was in order to mitigate any potential increase in business risk over the long term?

6321 MR. DUCK: That's correct.

6322 MS LAWSON: Yet, my understanding is that Northwestel allowed its equity ratio to remain well below the approved level of 55 per cent.

6323 MR. DUCK: Yes, I think that's fair to say.

6324 MS LAWSON: And that was because Northwestel's shareholder wanted to take advantage of relatively cheap debt, I understand, and because its shareholder wanted to see more cash generation from the company. Is that correct?

6325 MR. DUCK: Yes, I think those were a number of the reasons. I don't think we were, again, slavish to the 55; we saw it as a ceiling that, arguably, could be reached, given the level of business risk. But, certainly, the matter of earning consistently less than our mid-point, our emphasis on cash and the falling interest rates scenario gave rise to -- which gave rise to making debt more attractive tended to pull that equity ratio down a touch.

6326 MS LAWSON: Okay. Now, I understand, from the evidence, that your 1999 year-end equity ratio, in fact, rose to 48 per cent and that you are now forecasting a 52 per cent equity ratio by year end 2000 and a 55 per cent equity ratio by year end 2001 -- assuming your proposal is accepted.

6327 MR. DUCK: Those certainly are the numbers that were filed with the original filing that went in way back when, I can't recall the exact date, I guess in January, with the initial interrogs.

6328 Since then, as I recall, we filed revised financial evidence -- and perhaps I should give you the numbers, but the equity ratios are, perhaps, not as high as you are suggesting but they still are trending upwards.

6329 Let me...

--- Pause / Pause

6330 MR. DUCK: I believe, at the minute, for 2001, the equity ratio is expected to be 54.8 and, for 2002, 55.5. So, just a smidgen less than the numbers you remarked on a moment or two ago.

6331 MS LAWSON: Same general ball park.

6332 MR. DUCK: Yes.

6333 MS LAWSON: So, despite the fact that your equity ratio is already well above its 1998 low of 45 per cent and is, in fact, forecast to rise to the approved level of 55 per cent, in the test year, your rate of return proposal is based on the outdated 1998 equity ratio?

6334 MR. DUCK: Well, I can only -- well, first of all, I guess I have to frame that question: I'm far from the expert on ROE and I think you heard Ms McShane discuss that point, on Friday; let me just revisit that, for a second.

--- Pause / Pause

6335 MR. DUCK: I certainly don't want to read all this back to you but I think the gist of it was -- on page 441 of the transcript, when she was talking about the equity ratio, she said that, and I quote here:

6336 I think for discussion, she went on to suggest that the 1998 number was used by and large because of the timing of the writing of the evidence, but more importantly perhaps, the fact that she had reference group numbers for the rest of the industry only up to the end of 1998.

6337 I believe these are considerations that lead to the use of the 45.

6338 MS LAWSON: Okay, thanks. Now, turning to a slightly different issue, can you turn to page 61 of your evidence, please. Now, there near the bottom of the page you have a little table showing 1998 toll revenues as a per cent of total revenues.

6339 I take it your point here is that Northwestel's business risk is higher the greater the reliance on total revenues.

6340 MR. DUCK: Yes. That's our point. Obviously the table suggests what it does, that these were 1998 numbers.

6341 MS LAWSON: So these don't include the effect of the rate rebalancing subsequent to 1998.

6342 MR. DUCK: That's correct.

6343 MS LAWSON: Could you provide me with the current figure for toll revenues as a proportion of total company revenues?

6344 MR. HAMELIN: That's about 52 per cent.

6345 MS LAWSON: And that's current as of when, Mr. Hamelin?

6346 MR. HAMELIN: Just hold on, please. That's the forecast for the year 2000.

6347 MS LAWSON: Okay, thanks. Now, am I right that your evidence in your proposal is that Northwestel's return on equity should be established with a view to facilitating an "A" grade credit rating for Northwestel?

6348 MR. DUCK: I think the operative word that you used perhaps is "facilitate", if that's what I heard correctly. I think that at page 66 of our evidence we suggest it would be appropriate to strive to meet the standards reflected in the lowest investment grade credit. We point out some advantages of doing so, but I don't think we are categorical in saying we must meet a single "A" rating.

6349 I think our comments are more directional in nature, that directionally our financial position should be moving upwards rather than staying flat or trending downwards.

6350 MS LAWSON: And what you really want to see is an "A" grade credit rating, is that correct?

6351 MR. DUCK: No. I don't think that's a plan we have in any discrete way. I think we see those standards for single "A" companies as a desirable objective to move towards, but we don't have a particular timetable.

6352 We simply observed that over the three year period that our financial stats give some evidence of moving into that kind of territory, but that's as far as it goes. I don't think we are any more discrete or accurate on that question.

6353 MS LAWSON: Okay. Has Northwestel's "B" plus plus rating affected its ability to raise capital?

6354 MR. DUCK: It's -- "B" plus plus rating has definitely affected the cost of raising the capital. For example -- I'm afraid there will be a bit of a pregnant pause before I find it.

--- Pause / Pause

6355 MS LAWSON: Perhaps while you are doing that I could come back to Mr. Hamelin on the earlier point of the toll revenue reliance. I'm wondering if you can give me a figure for forecast 2001 on the basis of your proposal.

6356 MR. HAMELIN: Yes. It's slightly below 33 per cent. I think it hovers around 32 -- 31, 32 per cent.

6357 MS LAWSON: Thanks.

6358 MR. DUCK: If I can come back to your question. The matter of raising the capital at the higher prices is actually dealt with in Ms McShane's evidence at page 23. There she sets out the matter of the spreads that were actually realized in a historical financing back, I believe, in 1998.

6359 By that I'm trying to say that the spread for triple "Bs" at the time was 70 basis points, but the company raised capital at something like 95 basis points. While I don't think we can quantitatively point to a concern with the amounts of capital in the past, we certainly see the price of capital in the past being affected by our "B" plus plus implicit rating.

6360 MS LAWSON: So you are still able to raise the debt, just as a higher cost.

6361 MR. DUCK: If we look back in the past, I think that may be true. That prospectively is a different story. There's greater uncertainty, capital requirements have grown. It's perhaps looking forward a different scenario.

6362 MS LAWSON: You are suggesting Northwestel would not be able to raise capital.

6363 MR. DUCK: No, I'm not. No, I'm not. I'm suggesting that simply capital requirements are higher. It's prudent if one is going into a scenario in the future where those requirements are higher to raise those funds with perhaps a stronger financial position, leaving aside the ratings per se.

6364 MS LAWSON: And Northwestel has some control over this. For example, by increasing its equity ratio, it can improve the situation. Correct?

6365 MR. DUCK: That's correct, and there is no doubt in the outward years of the forecast that we are examining the equity ratio tends towards that ceiling of 55.

6366 MS LAWSON: Thanks. I would like to move on to a different topic now. That is Northwestel's arrangement with Bell Actimedia. You might want to pull up interrogatory CRTC 426.

--- Pause / Pause

6367 MS LAWSON: Now, I take it that your contract with Bell Actimedia is based on the revenue sharing arrangements under which each party gets an agreed to percentage of total revenues and each company covers certain costs which are listed in that interrogatory response. Is that correct?

6368 MR. HAMELIN: Just a moment, please.

Pardon me. Yes.

6369 MS LAWSON: I understand that the current contract applies to the years 1999 to 2001. Correct?

6370 MR. HAMELIN: I'm not sure about that.

6371 MS LAWSON: Okay. The first page of that interrogatory response, about five lines down in the answer, you state that the current contract applies to the directory published in 1999, 2000 and 2001.

6372 My question is just over this period, has there been any change in the respective responsibilities of the parties?

6373 MR. HAMELIN: It's negotiated at every contract time. I'm not cognizant or knowledgeable of all the details of this specific contract.

6374 MS LAWSON: Okay. I guess we need to get straight then whether you are negotiating three year contracts or one year contracts. Does the current contract cover three years, one year or some other period?

6375 MR. HAMELIN: I think it's three years.

6376 But again, this line of questioning is -- the negotiations that go on are mostly dealt with under the Marketing Department. I'm sorry if I can't be too much help here as to the details.

6377 MS LAWSON: I just want to confirm that what we see here is reflected in the current contract which has been in place for a couple of years.

6378 MR. HAMELIN: We believe it has only been in place since 1999, last year.

6379 MS LAWSON: Okay. Has there been any significant change in total directory revenues; that is, the total amount that you then split between the two parties?

6380 Again I am talking about this period, since 1999.

6381 MR. HAMELIN: Just a moment, please.

--- Pause / Pause

6382 MR. HAMELIN: I have results in front of me here for five months, suggesting that there is no material change. Our take this year is slightly less than the previous year.

6383 However, I am not sure about the details of this contract. In addition, I am not sure how far I can go with numbers, how confidential --

6384 MS LAWSON: You have actually provided some numbers on the record. Maybe we should just go to them and I will ask you some questions about them.

6385 If you look at the attachment to this Interrogatory CRTC-426, you provide Northwestel's commissions there for the year 1998 to 2001. Everything else is confidential, but that particular number I believe you provided after disclosure was requested.

6386 What we see there is relatively flat revenues.

6387 First of all, Mr. Hamelin, am I right that this figure is Northwestel's share of the total directory revenues under the arrangement with Bell Actimedia?

6388 MR. HAMELIN: Just a moment, please.

--- Pause / Pause

6389 MR. HAMELIN: Yes, that would be our share, net.

6390 MS LAWSON: Net of your costs? Net of what?

6391 MR. HAMELIN: Ms Chalifoux will answer that.

6392 MS CHALIFOUX: Yes, it's net after Bell Actimedia takes their costs and their commission.

6393 MS LAWSON: I would ask you to turn back to Interrog 425, Attachment 1. Here you have provided us with a table entitled "Transactions With Affiliated Companies: Significant Payments Made".

6394 I take it this is the other side of the coin. This is Bell Actimedia's and some other affiliated companies' shares. In the case of Bell Actimedia, it is Bell Actimedia's share of the total revenues under your arrangement with them.

6395 Is that correct?

6396 I should perhaps specify that I am talking about the sixth line down where it says "Tele-Direct Services (Bell Actimedia)", and we are provided with numbers for the years 1997 to 2001.

--- Pause / Pause

6397 MR. HAMELIN: This suggests that it would be the total net that we would have paid Tele-Direct.

6398 Again, Ms Lawson, it is just that I am not conversant on the exact details of this contract. Perhaps Marketing can answer a lot better on that.

6399 MS LAWSON: Well, I am interested in this as an intercorporate transaction. I understood that your panel was responsible for that. That is why I am following it up here.

6400 Does this appear as an expense in your revenue requirements?

0900

6401 MR. HAMELIN: It would be, yes.

6402 MS LAWSON: You said that this was a net figure. Net of what?

6403 MR. HAMELIN: Hold on, please.

--- Pause / Pause

6404 MR. HAMELIN: These are the moneys we pay to Tele-Direct. We have a revenue that comes with it.

6405 MS LAWSON: Thanks. That is what I thought.

6406 If you follow that line across, there is an almost doubling of the payment from 1999 to 2000. I am wondering why Bell Actimedia's share would double while Northwestel's share remains relatively flat.

--- Pause / Pause

6407 MR. HAMELIN: Again, this is the terms of a new contract that Marketing has arranged. I understand the rates are very similar to down south. The exact deviation that you see there -- maybe after the break I can try and get some more detailed information, if need be.

6408 MS LAWSON: My understanding is that the contract ran from 1999. So I am just wondering why, during that contract period, we have seen such a jump.

6409 MR. HAMELIN: I do not know the exact nature of that answer.

6410 MS LAWSON: And you don't know why we would see such a change in the proportion that's sharing?

6411 MR. HAMELIN: I can certainly find out. I mean, at this detailed level, I am sorry --

6412 MS LAWSON: Perhaps then you could make an undertaking to me then to explain that big jump in Bell Actimedia's share of the directory revenues?

6911 MR. HAMELIN: I'm sure we can find that out.

6912 MS LAWSON: Thanks.

6913 Now, turning to another issue which is that of the pension expense. Can you pull up CRTC 1601 please.

6914 MR. HAMELIN: Just a moment, please.

--- Pause / Pause

6915 MR. HAMELIN: I have it.

6916 MS LAWSON: All right. Thanks.

6917 You might want to have 401 around too, your balance sheet.

6918 The Commission here is asking you about a deferred pension cost asset which appears in your balance sheet under other assets. Is that correct?

6919 MR. HAMELIN: That's correct.

6920 MS LAWSON: And this has increased from $14.5 over the 1999 level? I should say it has increased by approximately $14.5 million over the 1999 level?

6921 MR. HAMELIN: Approximately, yes.

6922 MS LAWSON: And am I correct that this increase is the result of an accounting change, in particular new standards introduced by the Canadian Institute of Chartered Accountants?

6923 MR. HAMELIN: That's correct.

6924 MS LAWSON: And as a result of these accounting changes $6.3 million was transferred to retained earnings?

6925 MR. HAMELIN: Those are the latest figures, yes.

6926 MS LAWSON: Does this accounting change result in an increase in the rate base on which you are earning a return?

6927 MR. HAMELIN: It would, yes.

6928 MS LAWSON: So thanks to this CICA accounting change Northwestel is going to be getting higher profits at the expense of ratepayers?

6929 MR. HAMELIN: Well, I mean that's one way of putting it, but I think you are painting a picture here that may not be exactly -- I am not sure exactly where you are going, but suffice to say that the CICA rulings permit two approaches and under death you can go retroactively or prospectively. We have chosen retroactively.

6930 MS LAWSON: All right.

6931 You are just making that change this year?

6932 MR. HAMELIN: We have already booked it.

6933 MS LAWSON: Can you turn over to 1603 and here we are talking about a productivity factor for your operating expenses. In the answer to this interrogatory I am just going to quote the first sentence of your response:

6934 This is a new proposal that you are making? I mean it is not in your prefiled evidence. It's just in this interrogatory response. Is that correct?

6935 MR. DENNETT: That's correct.

6936 MS LAWSON: I would like to understand how this proposal will work. If we look at interrogatory CRTC 602 that shows your budget for the year 2000.

6937 MR. HAMELIN: Just a moment, please.

6938 MS LAWSON: There is an attachment there that sets out the budget, Attachment 1.

--- Pause / Pause

6939 MR. HAMELIN: I have Attachment 1.

6940 MS LAWSON: Thanks.

6941 So, if we look at those columns, the first column is the year 1999 and then we get for the year 2000 the operating expenses broken down by category.

6942 I take it that the "Productivity (Gains)/Losses" and other factor is a residual figure? It's the resulting figure once you have accounted for growth, inflation and accounting adjustments?

6943 MR. DENNETT: That's correct.

6944 MS LAWSON: And you are proposing now in CRTC 1603 to change this and instead to establish up front an objective productivity gain factor here, so that your budget would fall out from that, rather than the opposite. Is that correct?

6945 MR. DENNETT: We would set the budget and then back out NAS growth and inflation and accounting changes and arrive at a productivity implicit in that budget figure. What we undertake to do is to make every effort to make sure that that backed out productivity number is 2 per cent or more.

6946 There will be occasions when we won't be able to achieve that and we propose in those circumstances we give an explanation in our budget filing.

6947 MS LAWSON: All right.

6948 But the idea is that you would be -- well, I guess you wouldn't be held to the target productivity factor, but there would be a commitment by you to at least target this 2 per cent productivity gain for your operating expenses?

6949 MR. DENNETT: The commitment is that we are make our very best effort to get there. We fully expect in some years to exceed it. Occasionally we are not going to be able to make it. The nature of the costs of Northwestel are that occasionally you get some very heavy costs that come in in a big bump. The provisioning of the network can be quite bumpy. Transponder leasing, for example, would do that.

6950 In those years it may not be possible to achieve that 2 per cent goal and there will be a specific reason for it.

6951 Generally, as the years go by, we would hope to average that or hopefully even a little bit more.

6952 MS LAWSON: Thank you.

6953 You are proposing the 2 per cent productivity factor, yet you have told us somewhere in the evidence that you are actually expecting to generate operating productivity gains of 4.3 per cent and 5 per cent in 1999 and 2000. Is that correct?

6954 MR. DENNETT: We do have an update to our financial projection. It was provided in CRTC 2601.

--- Pause / Pause

6955 MR. DENNETT: I'm sorry, it was 601 and Mr. Hamelin will give the answer.

6956 MS LAWSON: Thank you.

6957 MR. HAMELIN: What was the question again?

6958 MS LAWSON: The question is: You are expecting to generate productivity gains in these areas, operating expense areas of 4.3 per cent in 1999, 5 per cent in 2000, but you are proposing to have a target productivity gain factor for 2001 and the following two years of only 2 per cent per year. I am just wondering why you don't think you can continue to generate the 4 to 5 per cent productivity gains that you appear to have done in the past year or so?

6959 MR. HAMELIN: I will start talking on this question and then I will ask Peter Dennett to add to this. The 5.4 productivity gains that you have seen there averaged over seven years are rather extraordinary gains and they include depreciation, by the way.

6960 They are a straight result of our downsizing the company commencing in January 1995. We have downsized the company subsequent to a rate case in 1993 that was not successful. So what transpired from that are extraordinary productivity gains, if you will.

6961 The NAS has grown from 1994 to 2000 by some 39 per cent, while inflation went up some 17 per cent.

6962 Our expenses during that time have remained flat totally for seven years, subsequent to downsizing by some 100 employees on an average annual basis. In 1994 we had something like 639 fulltime equivalent employees. Today we are about 100 less than that.

6963 Again, that was corrective action taken by management simply because we were not able to foresee being able to achieve the rate of return. Significant downsizing has occurred.

6964 Having said that, on a forward looking basis, if you will, the way we have presented the budget originally -- and here we are talking October 1999 when these hearings started. That is 15 months ahead of year 2001.

6965 We took a high level view. We knew that for the year 2000 we were embarking on a year where we would not achieve our allowed rate of return. The attitude that we have taken is a status quo, if you will, hoping that we would be able to absorb, as we have previously, the expense increase due to inflation and due to NAS growth.

6966 That is the original budget that we submitted in our evidence that you are talking about.

6967 MR. DENNETT: I would like to add one point, Ms Lawson.

6968 If you would like to turn to CRTC-1407 -- or at least I can tell you about it -- the specific plans for our proposal are laid out. This 2 per cent objective approach cuts in in the year 2002.

6969 We would expect that whatever happens in 2001 will be an outcome of this proceeding.

6970 MS LAWSON: Thanks. Maybe you can also explain why you think the 2 per cent target productivity gain factor is appropriate in light of the Commission's use of a 4.5 per cent productivity factor in the price cap régime.

6971 MR. HAMELIN: Yes. Mr. Dennett will answer this question.

6972 MR. DENNETT: The 2 per cent productivity gain is a simplified approach to productivity measurement which is being used extensively by the telcos. It is often called total implied productivity.

6973 It is known to be, if you like, defective in some ways insofar as you are measuring output by NAS growth, and it is known that that is imperfect. But nonetheless it proves to be a useful measure.

6974 The 2 per cent is typical of the kinds of gains that can be expected, on average, for telephone companies.

6975 However, specifically with respect to your point about the 4.5 per cent productivity offset in the price cap formula, we did consider that.

6976 What you have to realize is that the 4.5 per cent is a total fact of productivity measure. In fact, the basic offset in the price cap formula is 3.5 per cent. The extra 1 per cent, so-called consumer dividend, arises for the benefit of having price cap regulation.

6977 So we didn't think that would apply. Indeed, when the Commission looked into the question of the productivity offset in the proceeding which led to Decision 97-9, it came up with a basic productivity offset of 3.5 per cent.

6978 As I say, that is a total factor productivity. Total factor productivity is a broad measure, is actually defined as total output growth less total input growth.

6979 In our case we don't have total output growth. NAS is not total output growth. We feel in fact that if the 2 per cent, or the total implied productivity is to be viewed as a proxy for total factor productivity, some adjustments are required for some of the differences in measurement.

6980 For example, on the output growth side, NAS being an imperfect measure of total output, we feel that that creates a bias, a downward bias, as well.

6981 Typically, in most stable companies, telephone companies, toll, for example, is growing faster than NAS. So if you just measure output growth by NAS growth, you will tend to get an understatement of output growth.

6982 By our judgmental estimates, we estimate that is worth probably half of a cent, if not more; but let's say half of a cent.

6983 If I could just illustrate this, in a company which is 50:50 local and toll when it comes to revenue, if local is growing at 4 per cent and toll is growing at 6 per cent, then average output growth, for PFP purposes, we would measure 4 per cent.

6984 In that particular example there will be a 1 per cent downward bias in total implied productivity relative to total factor productivity.

6985 We have estimated, because we don't have the exact studies, let's say half a cent bias there.

6986 I should add at this point that total factor productivities are extremely laborious, very difficult to do. They are only done occasionally nowadays. The southern telcos, Bell, Telus, AT&T, as it used to be called, and BCTel used to do some total factor productivity studies on a regular basis, but I think now they are only occasional, as required by the price cap offset work.

6987 Other areas of bias relate to the problem you have in any output measurement scheme of measuring quality. SIP, for example, is going to upgrade the quality of the toll network quite dramatically. That won't show up at all in output growth, but it shows up in input growth because the resources are being used to do this.

6988 Again very conservatively we estimate that that will lead to a further half of a cent bias. No studies, I have to say, but you can see that the vast amount of resources -- in fact SIP, when completed, will be a quarter of our balance sheet.

6989 That is in large part being devoted not to increase output as measured by NAS. You will have a negligible impact on that. But the resources are doing something. What they are doing is increasing quality of output, broadly defined.

6990 Another area where we feel there is a bias is on the input growth. We feel that the expenses for Northwestel will grow rather faster than the norm because we have to rapidly adjust to a competitive environment.

6991 This is something which happened to the southern companies, of course, but their adjustment to competition occurred over a good many years. They had back in the early 1980s terminal competition, and then you got into enhanced service competition, resale and sharing, and eventually facilities based long distance competition.

6992 So we feel we have more of a shock on our expenses that typically happened in the south.

6993 Furthermore, just to expand upon that a bit, we feel we will be facing some major national competitors who are experienced and are not the kinds of people or not the companies that the telcos faced back in 1993.

6994 Again, we feel that, conservatively speaking, this will be another half a per cent of bias.

6995 So I have my 2 per cent; I have three reasons, each of which contribute half a per cent; another one and a half added to the two. So there is 3.5.

6996 So we feel quite comfortable with this.

6997 I can say there is some sort of broad empirical support for this, because companies over the years have had total implied productivity in the 2 per cent range with TFPs coming out in the 4 per cent range.

6998 It is a consistent sort of bias, one method versus the other.

6999 MS LAWSON: Thank you very much.

7000 MR. DENNETT: Ms Lawson, we have prepared a memo on this. It is a three-page memo. It pretty much writes down what I have just said.

7001 If that would be helpful, I would be prepared to provide it.

7002 No?

7003 MR. ROGERS: Mr. Chairman, it may be of some use to Commission Staff if not to Ms Lawson.

7004 THE CHAIRPERSON: Well, it might be helpful. So we will accept that undertaking.

7005 MS LAWSON: Just to wrap this up, then. You have gone through the calculations. You figure 2 per cent is the reasonable target, but you don't think it is reasonable to hold the company to that target. It should just be a target.

7006 MR. DENNETT: We don't think we can be held to it every single year, simply because circumstances arise in individual years which make it impossible.

7007 I guess as a corporate intent, we would certainly feel that we should be able to accomplish that over the longer run.

7008 MS LAWSON: Thanks.

7009 MR. HAMELIN: Certainly the first year, embarking on 2001, we are talking a whole discontinuity in the way we are fulfilling, if you will, our engagement today whereby we are regulated today on a rate of return. What we don't need as supplementary funding today. We are in need of rate relief today, I should say, under the old terms, but on January 1, 2001, we are on the verge of trying to accomplish a totally different mission here.

7010 We are asked to build a SIP program of some $75, $76 million that is totally uneconomic. That's a quarter of our balance sheet today when you think about. We are asked to provide similar rates to the south. Well, that means collapsing our toll rates significantly, effectively wiping out the bloodstream of this company from a revenue perspective.

7011 Then on top of that we are asked to provide choice, that is to subsidize competitive entries such that they will be enticed to come in. You know, it's a kind of a total different way, a total different objective perhaps today we are embarked on.

7012 You know, while the Commission may have some difficulties trying to adjust by what rules should we be implementing here for the company, I have butterflies in my stomach, to be frank. When I'm asked to approach the Board of Directors and tell them in the next three, four years, when you look at the magnitude we are asked to do and the time frame we are asked to do it, we are asked to sign cheques now that will build this network that's totally uneconomic, if you will.

7013 It has great value socially. There is no doubt about it, it's a wonderful mission that's coming about here for northerners, but when I look at the company, I mean it's a great leap of faith to start building this network, collapsing our rates that wipes out effectively all the profits of this company as I know them to day, it's a total discontinuity in the way we are going to operate.

7014 You know, when we talk about risk and I hear about Dr. Berkowitz and Booth and so on, I'm not a Ph.D. in finance, but all I know is once I build this network, or the company will, that money's gone. I mean it is gone and it needs some sort of, you know, warm and fuzzy feeling somehow that we will be able to carry on, if you will with this mission, you know.

7015 When you think about it, you can view the north like in two areas, area one, area two. What I call area one is the main centres. Whitehorse, which is the Toronto of the north, Yellowknife. After that maybe part of Fort Nelson, but after that, you have got this whole big territory.

7016 You know, you go in those communities, you don't see Canadian Tire, you don't see McDonald's, you don't see Radio Shack. That's what we are talking about here.

7017 The economy of the north, to put this in perspective, is about a half of a per cent of the GDP of Canada, one half of one per cent. That's a half a penny on a dollar.

7018 When you consider that, that half a per cent is 80 per cent funded from Ottawa. They are public funds. The other 20 per cent you are talking about, 15 per cent perhaps of the economy is mines. The other 5 per cent is tourism and other businesses. What we are saying here is you have got an economy that is funded by the south.

7019 As it turns a $100 million business such as ours buried in this sea of $20 billion down south for the whole industry, it is one part in 200 which is half a penny. That means, you know, all of the southern telcos have 99-1/2 cents of the market and we have half a penny.

7020 When you use a postage stamp, 46 cents, you know, it's good everywhere in Canada. When you think of banks, well, the big, bad banks, they are not everywhere in our territory.

7021 Last week I was asking some of our people to say "How many communities have banks or at least access to banks?" Well, as it turned out, they gave me a list where there's ATM machines and where there's banks. More than three quarters of our communities don't have access to ATM machines or any banking facility, you know.

7022 The output in perspective here, we are asked to change the nature of our business, what we are trying to do. Historically, and I guess regulation on voice has been there for almost a century, now we are asked to make a quantum leap of faith here. At least from my vantage point, I have got butterflies when it comes to signing cheques in a network and collapsing our rates.

7023 What can I tell you? When you talk to me about pension, you know, you say we are going to be asking ratepayers to pay because of an accounting entry, well, you know when I think of that particular change from the CICA, they are offering two approaches. One is prospective and one is retroactive.

7024 I'm sure all the companies across Canada are using the methodology that they think is in their best interests. In our case, it's in the best interests of our customers. Like I can't pay bills with fictitious credits to expenses and so on. I have got a huge network to build here.

7025 We are the ones raising the funds for this up front. When that money is gone, it's gone. To suggest that, you know, we can't use this method or not or use the other one, I don't think it has much value. We are interested in having real cash to build a real network and not a make-believe network.

7026 MS LAWSON: Mr. Hamelin, are you saying that the CRTC is engaging in folly when it's asking Northwestel to upgrade its network?

7027 MR. HAMELIN: Absolutely not. I think it's the most wonderful, wonderful thing that could ever happen to northerners. Again, you know, anything -- I don't see Canadian Tires in 96 communities, you know. I don't see the McDonald's, the Radio Shacks. There must be a reason.

7028 You have an instant monopoly when you walk into these areas, instantly. You have been up -- anything in Old Crow of that sort, you know. This is what effectively Northwestel is asked to do. It's the equivalent of that, to be there for all Canadians in all of those communities. Think about that.

7029 Now, I think that's a very honourable thing to do. The thing is, as a businessman I need a sense of comfort that, you know -- I guess what could be construed as a kind of a moral contract between the Commission and Northwestel and the consumers for the last century. All it is is it's the same kind of a thing we are talking about here.

7030 It's just that it's trying to accomplish something different, something that the Government of Canada wants, the CRTC is asking us to do and so on. I think all the variables are there.

7031 We heard the other day that perhaps we are a bit concerned about competition not showing up here. Well, I think that's a moot point initially because I think it can be fixed. A good example of that.

7032 If you take a one hour drive from here, you will hit Alaska, our friends in Alaska, but in perspective, Alaska has perhaps a population that is six times ours. I think it is about 600,000. Anchorage itself is a city of 300,000 people. Well, 300,000 people is three times our market.

7033 Fairbanks has a population of 100,000. You know. A hundred thousand. That's our market. Yet they cover a turf that is possibly a third or a quarter of Northwestel's turf, when you think about it.

7034 Now, Alaska has been subsidized since the breakup of AT&T. I was asking Ms McShane, before she left, I said, "You are financing Alaska, are you not?" "Well", she said, "yes". I said, "And how does that appear on your bill?" "Well, they contribute towards this USF, this universal surplus fund, and have been for a long time".

7035 Now, in Alaska, you have got competition there, a lot of presence, you have got subsidies or supplementary funding -- it depends what you want to call it -- and it works.

7036 I think the Commission has got all the variables in hand to make this vision work.

7037 To suggest there may not be a great deal of penetration initially, the first variable of magnitude that I have in mind is the cap rate. You can adjust that, you know, bring it down slowly or at whatever pace you deem is appropriate. And you will see competition. You know. I think as Dr. Berkowitz yesterday was talking about branding for Northwestel being a great advantage. Well, let me tell you Northwestel's been here, and I hope that there is some sort of loyalty out there.

7038 But the folks in the north have been waiting a long time. We have been through three proceedings here, three major proceedings.

7039 One was the IX, interconnection proceeding, should competition come up here as a result Call Net -- whom I don't see around this room, by the way -- who started this. Then we had high-cost serving area proceedings. And now we have what we are doing today, you know. The people have been waiting a long time.

7040 There's been a lot of advertising, a lot of talking, big concepts, et cetera, competition coming to the north and so on. We promoted our blueprint for Year 2000. You know. People are just waiting. And when they heard that it wasn't July 1st, 2000, well, you can imagine there was some reaction, people just drooling and waiting, "Well, wait 'til they come, you know, 'til I hear the pin drop and..."

7041 So, you have got some people that just want wait.

7042 And we have got proof -- proof! -- evidence a lot of bypasses occurred. So, people have walked out on us simply arbitraging between what's happening with flat rates down south, "I don't call you, you call me" kind of thing, and, you know, to say that -- I think I will stop there.

0930

7043 MS LAWSON: Thanks.

7044 I would like to just follow up on a couple of points you just made, Mr. Hamelin.

7045 You pointed out that, in large part, the northern economy is subsidized by the federal government.

7046 MR. HAMELIN: That's correct.

7047 MS LAWSON: So, who do you think should be paying for all of these upgrades?

7048 MR. HAMELIN: Well, in all honesty, I guess Northwestel is open to both, whether it's the industry or Revenue Canada.

7049 However, you know, the practical matter -- the practical way to do this, if you want to do it quickly and as reasonable fashion for the company, industry is the practical way to do it.

7050 MS LAWSON: To what extent have you attempted to get funding directly from government?

7051 MR. HAMELIN: Oh, we bend over backwards any time the governments or any entity tries to -- is interested in providing a donation and grant to build economic facilities. The proof of the pudding is -- historically, it's always been that way.

7052 It was much more on a smaller scale up to this huge project, this YTG project -- it's huge in our terms.

7053 Of course, we are always open to this kind of thing. I mean the history of Northwestel is subsidies, I mean, you know. We have been around for quite a while; we started under CN; you had World War II, where the U.S. built the Alaska Highway and the network started evolving from there. All that was financed, a lot of it, by the United States, for their own reasons. Carrying with the Defence Department, in Canada, setting up DEW line during the Cold War. So, you know, there's all sorts of mechanisms that have built this network -- at least what we are ending up with today, so. Now it's been privatized, if you will, under CN and sold, and so, B.C. took it over and, of course, we are profit-oriented company, in the sense that we have to yield returns that are commensurate with the risk that comes with it. If those returns aren't there, all it does is delay progress for the north, when you think about it.

7054 MS LAWSON: Excuse me, Mr. Hamelin, I wonder if we can just stay on the point here.

7055 MR. HAMELIN: Which was...?

--- Laughter / Rires

7056 MS LAWSON: Which was to what extent the company has taken proactive steps to obtain direct government funding to implement the kind of upgrades that we are talking about in this proceeding.

7057 I realize you are obviously there, you welcome any government interest and you will work with governments to work out an arrangement like with the Yukon Government, the recent agreement. But I'm wondering what the company has been doing, in terms of a proactive attempt to seek out this kind of funding, from other governments.

7058 MR. HAMELIN: Well, we have been working very closely with the Yukon Government and the result is a successful venture here that goes way beyond the basic service objectives that we are talking about here, you know. We are talking high-speed Internet, et cetera, that will do wonderful things for the north, tele-medicine, tele-health, tele-court, you name it.

7059 With GNWT, we have responded successfully to a bid where we are in partnership -- and you have heard of this yesterday -- with two aboriginal entities.

7060 With Nunavut, we are working closely with them today. Nunavut has just been formed the 1st of April, 1999. There's a lot of demand for connectivity, frame relaying. Part of -- I should mention, part of the demands for bandwidth and data and so on, part of it is initiated this year, we are seeing it with the Nunavut Government and GNWT, which caused us to tweak our budget, as of June the 8th.

7061 We are always working with these governments. I mean we are in their backyard. I mean it's the thing to do. We all have the customer at heart as an interest. But, at the same time, for us, it's a balance for the company. I mean we have to stay reasonable within this and ensure we make our return.

7062 MS LAWSON: Right, Mr. Hamelin, but I'm -- what I'm getting at is --

7063 MR. HAMELIN: We are always working with them.

7064 MS LAWSON: Right, you are always working with them. But, in all these cases, it's the governments that have taken the initiative. Correct?

7065 MR. HAMELIN: Well, wait a sec. Again, policy can answer -- can provide, perhaps, more insight on this, and marketing, in particular, but, no, we have always worked hand in hand. To say it's always the government having the first initiative, I'm not sure I buy that.

7066 MS LAWSON: Okay. One more follow-up question.

7067 You talked about Alaska as a model where you have seen a certain degree of success, in terms of rolling out network to outlying communities --

7068 MR. HAMELIN: Don't go too far in this area, I'm not very knowledge about the FCC, the regulations and so on, but it appears to me that it's working well, yes.

7069 MS LAWSON: I just wanted to ask to what extent have you studied that model. Has Northwestel looked at Alaska to try to learn lessons from --

7070 MR. HAMELIN: No, not to a great extent and, you know, I believe the CRTC is very capable of bringing a Canadian solution to our dilemma here. It's just I'm just portraying that the mechanism of having a subsidy and doing things that are -- because things are uneconomic, either building the hardware or reducing the rates, which is our lifeline, and then providing the element of -- it is doable. That's all I'm suggesting. It's doable.

7071 Now, under exactly what terms and conditions that's for us to -- we think we have portrayed here an approach that achieves that in a balanced fashion.

7072 I mean, the puzzle was given to us in a sense, if you will, and we think we have a solution to the puzzle and it can be done. I think it will be done.

7073 MS LAWSON: I am just wondering to what extent that solution that you are proposing has been informed by the experience of your neighbour, Alaska, who faces very similar challenges and is tackling very similar problems?

7074 MR. HAMELIN: The reason we are not -- at least I am fully cognizant on this is the U.S. is structured totally differently. Local has been split up from toll and so on. We are both a local provider, an LD provider and terminals and so on.

7075 So the rules of the game are a bit different. The point is, the point that I am trying to make is that it is feasible to find the solution that achieves these goals.

7076 MS LAWSON: Thank you.

7077 I would like to move on then to another issue and that is your relationship with Northwestel Cable and Northwestel Mobility, your subsidiaries. These are competitive operations. Correct?

7078 MR. HAMELIN: Yes, they are.

7079 MS LAWSON: And that's the reason why you need to establish mechanisms, to safeguard your basic service subscribers from having to subsidize inadequate returns to these competitive companies?

7080 MR. HAMELIN: I am not sure I understand the question exactly. From an accounting point of view we have extracted everything that safeguards the subscribers from any impact of these two subsidiaries, yes.

7081 MS LAWSON: Exactly. The reason is because you are treating them as separate competitive enterprises?

7082 MR. HAMELIN: That's right.

7083 MS LAWSON: All right.

7084 Now, I understand that the current message that you use to insulate subscribers from the effects of any inadequate returns to these two companies is through a deemed revenue approach under which each of the subsidiaries is deemed to produce a return of 14.25 per cent?

7085 MR. HAMELIN: No, that's not at all.

7086 MS LAWSON: Is that the past method that you --

7087 MR. HAMELIN: Pardon me?

7088 MS LAWSON: Is that the method that you used in the past?

7089 MR. HAMELIN: Absolutely not. I will just a few words and I will ask Mr. Duck to add to this.

7090 Deeming is -- all it says to me in simple terms is let's make believe we have made 14.25 per cent on these investments. These investments are in the embryonic stage of their lives. We purchased cable TV on the 1st of May 1996 and we spun off NMI Mobility on the 1st of May 1997. So to say that we are using the deeming approach is not correct.

7091 In fact, we are doing exactly the reversal. All we have done is extracted the investments from the telco operations to try and isolate -- that insulates, pardon me, the impact on the subscriber. Frank.

7092 MR. DUCK: I guess, Ms Lawson, the objective that we attempt to reach is the same as the Commission's. that is, we agree with the proposition in 94-1 and elsewhere that it's important to safeguard subscribers from having to subsidize these inadequate returns or simply insulate the subscriber from these investments. It is really back to the technique one uses.

7093 We have a long shopping list of our concerns about deeming, but maybe we should just explain why we prefer and some of the considerations involved in using this accounting separation.

7094 We believe it goes some distance to relieve the customer of the cost of capital associated with those investments. So, compared to doing nothing, we take the investments out through an accounting separation and we relieve the customer from paying the cost of debt, the cost of equity and the cost of preferred.

7095 We don't find this a particularly revolutionary method. It is used as the basis for Phase 3 and a number of other split rate base calculations. We believe that once it's done it is reasonably clear and understandable and we don't find the approaches particularly offensive. It is, essentially, looking at dollars and if we can relate transactions to those dollars we do. Otherwise, we use, colloquially, a pool of funds approach.

7096 Finally, I would just add that we did have our accountants take a look at this and while I don't pretend they blessed every last detail of it, I think they saw it as reasonable. But again, we can talk about that I suppose.

7097 But the basic principle is that we seek to safeguard subscribers from these investments and I see them, them meaning deeming and accounting separation as essentially two ways of getting to the same spot.

7098 MS LAWSON: All right. So let me just understand, you consider it appropriate to separate the cost and revenues of your competitive subsidiary operations from those of your telephone operations, but you don't consider it appropriate to separate the cost and revenues of your competitive toll operations from those of your non-competitive utility operations?

7099 MR. HAMELIN: The way we view toll, we are talking the approach -- the methodology the company is using is the total company being regulated.

7100 Toll, as a competitive service -- we are going to be price followers in all of this. All the pricing is going to be really dictated by the big nationals that are going to be coming up here. They have got the economies of scale and advertising on TV and so on.

7101 We can't do much with that. We will just be following.

7102 If it is not sustainable for argument's sake in the south and the price war ends and if rates go up, we will just be following the rates. We won't be dictating, if you will, what is happening rate-wise. So there still will be a link between toll and local simply because we are asking a whole company rate of return, at least for the next three-year period. Before we were saying that the regulatory framework can be reviewed again, if you will.

7103 Towards the tail end of the SIP when things have stabilized we will be headed in the tail end of the SIP and market share losses would have likely stabilized by then.

7104 In our evidence we show market share losses starting around 13 per cent in the first year and going to 20, 23 per cent in the next two years. Hopefully there would be stability there, and then we can review the situation again.

7105 But I remind you, in the meantime we would have sunk those dollars into uneconomic projects. It's what we are asked to do to fulfil the vision.

7106 MS LAWSON: I understand, but whether you are a market leader or a market follower, doesn't the same principle apply here that once you decide to go with a competitive environment you let the market forces rule as much as possible and --

7107 MR. HAMELIN: Ms Lawson, if you let the market forces go free up here, you end up with no dial tone in area 2 is what I am trying to guess to you.

7108 MS LAWSON: I think we all recognize that, Mr. Hamelin.

7109 MR. HAMELIN: Right. Then, when you get into Phase 3 category we could talk about CTO, that is in the negative position. We can talk about all the other categories.

7110 What is happening here is all due mostly to the area 2. Everything that's outside these two main centres that could be indeed attractive, right now they are supporting all of the north. LD is uneconomic in 90-plus communities that we are serving and now we are trying to compete on an uneconomic service.

7111 Well, the reason it's economic is because of huge, high rates that are ubiquitously -- it's average for the whole territory.

7112 When you think about it in those terms you see what's happening. Unless you separate those two areas, you always will have this dilemma. It is the link between local rates and toll rates, all of this will still remain if we are regulated under an ROR kind of model.

7113 MR. DUCK: I guess another distinction and I should have pointed this out when you first started discussing about accounting separations were investments in what are called non-integral subsidiaries. That matter of integrality is reasonably important. We are talking about an accounting separation for investments that are non-integral. Non-integral to what you might ask? It has got to do with the provision of telecommunications services.

7114 I don't see the case for the toll segment, for instance, being a non-integral part of providing telecommunications services. I think there is a long history of the Commission seeing that provision of telecommunications service as one area; and investments that go to other areas of the business that are in effect non-integral, they are given either an accounting separating or a deeming kind of treatment.

7115 MS LAWSON: I want to explore this a bit.

7116 The rationale for the split rate base is to break the link between the utility and competitive segments of the company; correct?

7117 MR. HAMELIN: That is correct.

7118 MS LAWSON: And your position is that because of this Commission's decision to permit supplementary funding for the purposes of upgrades to both local and long distance service, because both your local and long distance sides are uneconomic and require external funding, it makes no sense to split the rate base.

7119 Is that correct?

7120 MR. HAMELIN: It makes no sense to...?

7121 MS LAWSON: Split Northwestel's rate base.

7122 MR. HAMELIN: That is correct.

7123 MS CHALIFOUX: Just to add to what Ray is saying, that is one component.

7124 Another key component underlying split rate base is that it presumes that you can price to cost.

7125 Again, as Ray alluded to, much of our toll area is uneconomic. You could never price to cost. Prices would be totally unreasonable. The uneconomic nature of the toll business will remain. In fact, as you move to a competitive market, the fact that you have to bring rates down to price to competitive nature just makes it even more so.

7126 MS LAWSON: So toll competition is going to cost Northwestel money. It is going to cost you lost revenues, even net of your CAT revenues; correct?

7127 MS CHALIFOUX: Again, as you price to competitive levels, yes, there will be significant revenue erosion. It is those specific revenues that this company has relied on to subsidize the rest of the business, to subsidize all of our high cost communities for all the services we provide in those communities.

7128 MS LAWSON: I understand. I just want to confirm that with competition, everything else equal, you are going to require more supplementary funding than without competition; correct?

7129 MR. HAMELIN: Yes, that would be correct. However, the impact of market share loss is less once the rates are comparable, and so on, obviously.

7130 MS LAWSON: We actually asked you an interrog on this. I think it is CAC/NAPO-306.

7131 I just want to make sure I have the numbers correct.

7132 MR. HAMELIN: Just a second, please.

--- Pause / Pause

7133 MS LAWSON: So here we asked you for the revenue requirement impact of two different CAT scenarios, without competition.

7134 I want to confirm, first of all, that these numbers take into account all sources of revenue, including settlement and CAT revenues.

7135 MR. HAMELIN: Can you repeat the question, please. I am not --

7136 MS LAWSON: Okay. There is a table in the attachment.

7137 MR. HAMELIN: Yes, I have it.

7138 MS LAWSON: You are providing us with the total revenue requirement recovered from supplementary funding under the two scenarios, both of which assume no competition.

7139 I want to compare them to your with competition scenarios.

7140 But before I do that, I want to confirm that these numbers take into account all sources of revenue, including settlement and CAT revenues.

7141 MR. HAMELIN: Yes, that is correct. I am not sure when you say no competition.

7142 MS LAWSON: Our interrogatory asked you to assume that toll competition is not permitted.

7143 I have been seeing different numbers and I just want to confirm the total amount of supplementary funding that you are now requesting per year.

7144 MR. HAMELIN: That was filed on June 8th as a final update. The exact numbers, if you permit me to omit the decimal points, would be 30, 35 and 40, give or take a few hundred thousand on the decimal point each year.

7145 MS LAWSON: So it has not really changed from your original application.

7146 MR. HAMELIN: Not significantly. And that is after us modifying our expenses, our expense budget, we had correspondingly with those revenue adjustments that were put in there, because of what we are experiencing on the demand for bandwidth and data from GNWT and Nunavut.

7147 MS LAWSON: So what this table shows us, then, is that if the CRTC decided to change its mind and not allow toll competition in that period, you could save, with a five-cent CAT -- which I guess doesn't make too much sense in that scenario. You would save only $1.6 million of supplementary funding in the first year. But if you went with a 10-cent CAT, you would save $10.5 million of supplementary funding.

7148 MR. HAMELIN: You said $1.5 million in the first year?

7149 MS LAWSON: Yes, with a 5-cent CAT.

7150 MR. HAMELIN: A 5-cent CAT.

7151 MS LAWSON: $30 million minus $28.4 million.

--- Pause / Pause

7152 MR. HAMELIN: Yes. We are now starting to compare different scenarios exactly. We should compare it to the scenario at the time before adjustments, the latest filing that we have done.

7153 At that time I believe the funding was $29 million for the first year. So it is not as much of a difference.

7154 MS LAWSON: So it is only a $.6 million difference in this first scenario.

7155 MR. HAMELIN: Subject to check for a second.

--- Pause / Pause

7156 MR. HAMELIN: That seems about right.

7157 MS LAWSON: Can you remind me what the difference between the $29 million and the $30 million is? This is where I am confused about what exactly you are requesting in the way of supplementary funding.

7158 MR. HAMELIN: The $30 million that I am talking about is the latest and greatest, if I can put it that way, to the best of our knowledge, of all the information that we were -- it is more updated information, if you will. We are now in June.

7159 This is not, by the way, a budget that is very detailed. We are still at a high level. We haven't started our normal detailed budget process for the year 2001.

7160 A lot of these numbers, by the way, are, to the best of our ability, given what we know --

7161 For example, when you think about the SIP program, all these are preliminary planning estimates. They are not detailed engineering estimates where you go through quotes from suppliers, and so on, which we feel, once we do that on a year by year basis, when we approach each year, we will be able to zoom in pretty clearly on these estimates. They are proven technologies. They are things that we are accustomed to.

7162 It is not as if we are trying to estimate a new technology, if you will, something unproven.

7163 I am thinking here, for example, our Hughes program when we tried to eliminate the double hop signalling back in 1993, 1994 and 1995, in that area, when we purchased the eastern Arctic.

7164 When you are embarking on new things sometimes you are off the mark a little bit, when you are testing new grounds.

7165 But these are proven things, proven technologies, and we think once we do the detailed estimates, on a yearly basis when we put forward our applications we will have estimates that will be very tight at that point in time.

7166 MS LAWSON: All I am trying to do here, Mr. Hamelin, is get a sense of how much money toll competition is going to cost the rest of Canadians.

--- Pause / Pause

7167 MR. HAMELIN: Perhaps you can clarify your question again for me, please.

7168 MS LAWSON: Okay. What we see here is that Canadians are going to have to pay to have toll competition in the north, either through higher local rates or through supplementary funding. Correct? I mean higher local rates in the north or supplementary funding from the south.

7169 MR. HAMELIN: Generally speaking, that is correct, but it's more than just for competition. It's also to have comparable rates. It's actually doing it to ourselves, if you will, before and including competition and building the network.

7170 MS LAWSON: Right. But just looking at competition, am I right that the more successful the toll competition is in the north, the more revenue you are going to lose and the more you are going to need from supplementary funding in the south?

7171 MR. HAMELIN: Assuming prices are what we proposed, generally speaking, yes.

7172 MS LAWSON: There is basically -- when we look at the whole picture, Canada as a whole, supplementary funding, local rate increases in the north, there is a net cost to society as a result of allowing competition in the north. Correct?

7173 MR. DENNETT: I think we have just said that there would be a cost in dollar terms. The point, of course, is that it brings other benefits. That's what the Commission sees and, indeed, what we see.

7174 MS LAWSON: Primary among those other benefits is to discipline Northwestel, to make it more responsive and accountable to its customers. Correct?

7175 MR. HAMELIN: Well, accountability can be achieved in -- I mean it's one thing with market forces. That's one thing. But there's many other ways of proving or satisfying that we are accountable to make sure that any supplementary funding is used exactly for the purpose that it's intended to.

7176 You know, we have --

7177 MS LAWSON: I'm sorry. I'm just talking about competition. Just following up on Mr. Dennett's remark that the purpose of competition is at least partly to discipline Northwestel.

7178 MR. HAMELIN: It's only one of several other means of ensuring that we are efficient and effective in deploying here our mission.

7179 MS LAWSON: Okay. Thanks. Now, just going back to this issue of the link between toll rates and local rates, you say in your evidence that because any shortfall in toll revenues will be made up either by local rate increases and/or supplementary funding -- page 49 of your evidence you say that there will be a continuing link between toll revenues, including CAT revenues, local rates and supplementary funding.

7180 MR. HAMELIN: Mr. Dennett will answer that.

7181 MR. DENNETT: That's correct.

7182 MS LAWSON: Okay. So you are saying that there will be a continuing link between toll revenues and supplementary funding. Right?

7183 MR. DENNETT: Correct.

7184 MS LAWSON: Where I'm having trouble is where is the necessary link between toll revenues and local rates? I mean couldn't you view the supplementary funding as having two components, one related to the long distance side of the business and the other related to the local side?

7185 MR. DENNETT: Well, I will get to that in a minute. Split rate base, I remember when that was introduced in 1993 in the south. I was part of the group that was working on that case.

7186 A consultant we retained said "You know, it's bit of a misnomer. It's not splitting the rate base. It's taking a little bit off the rate base and letting it go". That thing you take off, the competitive segment doesn't have a rate base any more. The intent is that it be separated in an accounting sense and not be in an official or VAT separation. It ensures that there is no link-back to local rates or that there is any subsidy of the telephone company in its activities in the competitive market.

7187 It's a two way sort of protection. The point of the split base regime is to prevent cross-subsidy from any source.

7188 Now, as far as a link -- what was your question again? Sorry.

7189 MS LAWSON: I'm just having trouble with where there is a necessary link between toll revenues and local rates. I don't see why you have to go that way. I don't see why you couldn't set up two supplementary funding regimes, one for the uneconomic toll and one for the uneconomic local.

7190 MR. DENNETT: Well, supposing you did that, you would be choosing the supplementary funding that flowed to the competitive segment on some basis, perhaps rate of return. You would have to do that.

7191 Then you have a situation where you have a regulated subsidized competitive situation. By no stretch of the imagination would it be possible to deregulate that and let it go, so to speak, as was the intent in the south.

7192 MS LAWSON: Well, let me suggest something. Would it not be possible for the Commission to deem a certain amount of supplementary funding for the expected toll shortfall? I mean this could be positive, negative or whatever, while continuing to use rate base rate of return methodology to determine supplementary funding on the local side.

7193 MR. DENNETT: The Commission has indicated in this proceeding or in the high cost proceeding actually that they wanted us to upgrade our toll network, so they have evidence already that they feel that they have a continuing role in the management, as it were, of the toll network.

7194 Now, I don't doubt that there's some way of constructing something along the lines that you are talking about, but I would ask why would you ever bother given that the whole thing is rate of return regulated?

7195 MS LAWSON: Well, the reason you might bother, Mr. Dennett, I think is the same reason that you separate out the competitive subsidiaries. That is to insulate subscribers from any possible cross-subsidization.

7196 MR. DENNETT: Well, those subsidiaries, of course, are not recipients or won't be recipients of supplementary funding.

7197 MS LAWSON: I understand.

7198 MR. DENNETT: That is the key difference.

7199 MS LAWSON: I guess my question is did Northwestel consider this type of approach to its regulatory framework?

7200 MR. DENNETT: The approach of separating supplementary funding into two pieces?

7201 MS LAWSON: Yes. That's right. And then allowing the company to set long distance rates as it wished, giving the company some flexibility with toll rate setting.

7202 MR. DENNETT: Well, if that were done and supplementary funding were flowing into the competitive business, how would you establish that, the amount of supplementary funding? You would need some sort of -- excuse me a minute.

7203 You would need some sort of basis for determining how much supplementary funding should go there. You probably end up determining that it will be based on the rate of return that that segment was earning. So I say to you that is rate of return regulation and why go to all that trouble?

7204 MS CHALIFOUX: Just to add to what Peter is saying, a couple of other complexities of uniqueness in the north, our service improvement plan. We have been directed to improve the quality of our long distance network, so we are making necessary investments on the toll side to improve call-in service.

7205 Secondly, in decision 99-16, the Commission deemed the switching aggregation facilities to be an extension of the local network thereby moving them on to the access side. Again, we have a lot of linkages between the toll and the access side that you wouldn't see down south.

7206 MS LAWSON: Okay. So assuming that long distance competition does in fact develop in Northwestel's serving area, you are proposing that Northwestel would need CRTC approval before responding to competitive rate offerings of other companies. Correct? You wouldn't have any pricing flexibility.

7207 MR. DENNETT: That's correct. We would hope to get or we have proposed that we get an ex-party kind of a process, but yes, they would be regulated.

7208 MS LAWSON: And in the event of further erosion of long distance revenues, Northwestel, under your proposal, should be able to raise local rates and/or obtain additional supplementary funding in order to offset the long distance revenue loss. Correct?

7209 MR. DENNETT: Well, you are talking about budget process, the process by which we calculate supplementary funding every year.

7210 Of course, if our toll business were deteriorating in some sense I think the emphasis will be on doing something about that. It was the very last resort to raise local rates, particularly when we are aware of the high level of rates already.

7211 It's just that if there were -- I think what we said in our interrogatory was that if there were some sort of a financial emergency, so to speak, the interim rate locate rate increase option was always available.

7212 Of course, that's a very difficult thing to implement.

7213 In practice, what would probably happen is that, as a year went by, if we saw our toll business deteriorating, we would be working very hard to fix it, and that may involve rates changes of some kind.

7214 In connection with that, if I might just use this opportunity to amplify something that Mr. Wells said the other day, in speaking with Mr. Batstone about economic studies. Mr. Batstone asked Mr. Wells, "When a toll rate reduction were proposed, in response to a competitive move, what sort of economic study could be provided?", and I think Mr. Wells said, "Well, it's a bit difficult because it's in a loss situation, so what could we do?".

7215 On reconsideration, of course, what we could, of course, do would give you an A minus B type of economic study which would demonstrate that the scenario we were proposing was economically preferable to the "do nothing" scenario, and that would be a conventional MPV type of analysis.

7216 So, excuse me, Ms Lawson, but I just gave you the opportunity to clarify that point.

1015

7217 MS LAWSON: Sure. I'm just having trouble because it seems to me that the approach that you are proposing would enable Northwestel to price in such a way as to maintain market dominance, regardless of its profitability, since the long distance revenue it loses to competitors can be made up through increases in other revenue sources.

7218 MR. DENNETT: I think what would happen if we saw that, in a sense, competitors have permanently taken some of the toll business away from us and, now, our toll business was that much lower, we would calculate the supplementary funding as we proposed and maybe it would go up a little. It just depends on what happens to the cost at the same as we lose some of this market share. But I'll accept that it could possibly go up.

7219 I guess what we are really into here is something that I think -- an expression you used with, again, speaking to Mr. Wells, I believe, or his panel, you talked about subsidized competition. This is, indeed, what it will be and we don't have a whole lot of experience with that. It is a new sort of thing that we are doing here, in the north.

7220 I guess our judgment is that it can be made to work and it will bring the benefits of competition to northerners. It will need, frankly, regulation, and that's what we are proposing.

7221 MS LAWSON: Okay. And --

7222 MR. HAMELIN: I think I would like to add to that.

7223 The proposal that we are putting forward is an annual review on a perspective basis. All that would do and all that means is, you know, here are the latest numbers that we feel are required from a supplementary funding in order to achieve an ROE at the mid-point, 12.25 per cent, as per Ms McShane's evidence. That's on a perspective basis; it does not mean one iota that we will be able to achieve it during the year and we are not suggesting retroactive top-up to make ensure that the ROE is achieved, if you will, on a backward basis, so there is still some risk and incentives buried in the formula that we presented.

7224 MS LAWSON: And that's the lag of something less than one year?

7225 MR. DENNETT: That's correct. That's, of course -- so thank you, Ray, for bringing that up -- but, of course, the incentives for efficiency is still very strong and I believe it's, what, CRTC-1413 goes into those in some debt. They, of course, will remain in place.

7226 MS LAWSON: Okay. Just back, Mr. Dennett, to the point where you left off about the need for regulating this competitive environment.

7227 You are proposing that, basically, the CRTC will manage, in a very hands-on way, this competitive environment, will approve all of your rate changes, will effectively set all of your rates to make sure that they are competitive and not anti-competitive?

7228 MR. DENNETT: Yes, in general terms.

7229 Let me say that we are proposing to put rates where we think the competitive level will be and we expect that any competitors coming in to the north will offer their national plans and the national rates, and one might wonder, "Well, why would they do that if they are losing on it?", well, I think the answer is that it fits in with their overall strategy for offering long distance service in the north, as well, Canada.

7230 So I don't anticipate that if our proposal is accepted that there will be a large amount of or a large number of price changes over the next year or two.

7231 It's true that rates will probably track southern but, in a relative sense, there may be a degree of stability emerging in long distance pricing in this country.

7232 I know it's hard to talk about competition and stability in the same breath but, relatively speaking, I think that may be happening -- I think Mr. Wells and his panel talked about that and -- as a result, we feel that we won't be calling upon the CRTC to make heroic efforts here. I think if you approve our proposal with the rates as we plan, we would expect to see a reasonable degree of entry and, if you like, normal market share losses by Northwestel.

7233 MR. HAMELIN: To add to Peter's comments, in the financial evidence, we talk about the uncertainty of being able to forecast, particularly when it comes to demand, initially. I mean, you know, we are repatriating minutes, there's stimulation elasticity, a little market share loss here and a little of this, a little of that, you know, like we had Dr. Taylor look at this. Frankly, what we are doing is so extraordinary, like you are dropping the rates, it's like jumping off a cliff, and nothing of this nature has ever been analyzed.

7234 So there's a lot of uncertainty, and it's mostly in the initial years, frankly. This is why we are asking for a breather here as we are embarking all this, a total discontinuity in what we are delivering today versus what we are about to deliver Jan. 1 and, you know, we are saying, well, once things have stabilized, the dust has settled, both on the hardware side, when you think of the SIP, and on the rates choice for customers and its impact on the north and market share loss, we are suggesting that after three years all this could be reviewed, but we have got tracking mechanisms in between, our capital program, quarterly reports and variances to the Commission in the usual fashion under a monopoly situation adding to the tracking of the SIP where we would be spending, so.

7235 I just I would mention the uncertainty really lies in the initial years and, you know, prior to things stabilizing.

7236 MS LAWSON: And you are saying, whenever you do come into the CRTC with a tariff proposal -- well, you would agree, the CRTC would have to subject that proposal to a full review in order to determine its competitive impact. I'm talking about on the toll side.

7237 MR. HAMELIN: What we are suggesting is an approach. In some of the interrogatories we talk about an ex parte process. If you are suggesting a full review and so on by the Commission -- you know, in the end we are mostly going to be a price follower. I mean, it's -- do you want to add?

7238 MS CHALIFOUX: Just to add to that. Exactly that. I mean our customers are very aware of what the prices are down south, the national prices. We are very aware. All that we are proposing is the ability to meet those prices, so I think, you know --

7239 MS LAWSON: You don't think the CRTC should be reviewing your price proposals to ensure that there is no anti-competitive impact?

7240 MS CHALIFOUX: Oh, exactly. There will be, but I'm saying that there will be sufficient evidence, it will be quite obvious what the prices are. You know, today we have tv ads to point to and newspaper media, et cetera.

7241 MS LAWSON: So that's all the CRTC needs. You are suggesting that they should be doing this without any kind of imputation test. Correct?

7242 MR. HAMELIN: You know, you talk about imputation tests on something that is already artificial, the CAT is a sustainable CAT. It's based on what the market is bearing down south.

7243 One of the objectives of the mission and the vision is to provide comparable rates. You know, Dr. Berkowitz, says one of the five degrees of freedom yesterday is local rates, toll rates. Well, that's obvious. I mean what we have suggested is something we feel is reasonable. The $5.00 increase on the local side is to show the northerners' contribution towards this, but please don't end up with a $25 toll plan, for example, as perhaps was suggested. The folks are fed up in the north. They have been waiting. They have been patient. They see all the ads. They say why not us?

7244 Now, if you are going to bring in something that is in between, it's like a half-baked good. You know, it's not what the people want and it's not the objective I would argue. It's comparable rates today, not tomorrow or five years or inching towards it. Let's do it properly. Let's give -- we think we have proposed something that is reasonably comparable today.

7245 MS CHALIFOUX: I think it should also be recognized that the Commission themselves have established a framework an imputation is not required for companies like ONTel, Quebectel and Telebec were very much similar to us they are not a dominant player. They are not setting prices, but rather they are just following and taking prices.

7246 MS LAWSON: I understand. But your primary rationale for doing without the imputation test is what you said earlier, that you are going to be a price taker in this industry. Correct?

7247 MR. HAMELIN: And the CAT is a sustainable CAT. It's based on market -- it's based on what the market will bear down south. It has no relationship whatsoever with pure economics, cost base cap economics. You have on your quick facts sheet, it shows what our CAT is today. It's around 8 cents, 8.5 cents, and by the time we do SIP it will be over a dime. So let's not kid ourselves. You know, we are saying: What is a sustainable CAT? We are suggesting 5 cents. That's artificial in a sense. We feel this is something that will work initially and if it doesn't we can always tweak it.

7248 There is no problem there. The Commission can review that. But in the end you are trying to make a formula work by using something that is already subsidized. I mean what does it matter? What does it mean?

7249 MS LAWSON: When you say you don't have the financial resources to discipline large national carriers or drive them out of your territory by anti-competitive pricing, which companies are you talking about?

7250 MR. HAMELIN: We think it would be the multinationals -- not multinationals, the big ones. I'm talking about it's possibly Sprint, AT&T and so on. We feel that they may have customers that are in our area that they would possibly want to serve on it.

7251 MS LAWSON: So Sprint, AT&T.

7252 MR. HAMELIN: Possibly.

7253 MS LAWSON: Any other companies you are thinking of?

7254 MR. HAMELIN: The big ones. You know, Telus.

7255 MS LAWSON: What about smaller resellers or facilities-based carriers?

7256 MR. HAMELIN: Facilities-based would be permitted but we don't feel that it's likely to happen.

7257 MS LAWSON: What about smaller resellers.

7258 MR. HAMELIN: Smaller resellers.

7259 MR. DENNETT: I expect we will see a lot of niche marketing and indeed it is already happening. This proceeding is being commenced on evidence by that -- by the marketing panel.

7260 We are already seeing it indirectly and indeed occasionally it happens directly, even though perhaps it shouldn't. So it's remarkable how, every region is -- you can think of it as homogenous over different subsections, but there are always little spots where something special exists by way of circumstances which creates an opening for a niche player.

7261 MS LAWSON: Couldn't you underprice those niche players in an anti-competitive manner if there is no imputation test applied to your tariff proposals?

7262 MR. DENNETT: Could you say that again, please.

7263 MS LAWSON: Could you not underprice these smaller niche players you are talking about in an anti-competitive manner if there is no imputation test applied to your tariff proposals.

7264 MR. DENNETT: The burden, if I can put it that way, with all respect to northern northerners, is the fact that we plan to offer uniform rates throughout the territory. That means that there will be a lot of places where we are offering service well below the cost that it causes to the company.

7265 Now, yes, that is anti-competitive in the traditional sense of the word, clearly so, but that's clearly why we can't be deregulated and let's go split rate-base style. This will just illustrate that point well I think.

7266 So I would say a niche player, he would find perhaps that, one of the medium-sized centres, there was just an opportunity available, there was a particular customer with a particular traffic pattern. It just suited what he could do and he could price at or below our average costs. That is typically what would happen.

7267 If we are being anti-competitive in Old Crow where we will be pricing our long distance well below the cost, as I say, I'm not sure quite what that means in the environment and with the proposal that we are making here. Yes, technically, we are pricing below cost and that is, by traditional definitions, anti-competitive, and yet it is exactly what we feel we have to do to bring the benefits of low rates to people in the north.

7268 MS CHALIFOUX: It should also be pointed out that I mean competitors will be pricing below cost as well up here just by virtue of offering sustainable CAT. You know, they will be pricing below costs. They will, in a sense, be subsidized to enter the north.

1030

7269 MS LAWSON: So would you agree that under a split-rate base regime in general, shareholders bear the costs of the company engaging in anti-competitive pricing?

7270 MR. DENNETT: Under a split rate-base regime, as it was implemented in the south, the shareholders -- profits and losses on the competitive segment accrued to shareholders. Anti-competitive pricing in that world -- well, I guess you would say it was illegal. It certainly violated the Commission's objectives.

7271 I suppose we have the regulatory exemptions, so let's not talk about the Competition Act. Let's talk about regulation. But it would have violated their objectives and there were provisions for complaint by competitors who felt they were being treated unfairly. Those provisions remained. They were always there. That's just the regulations.

7272 Does that answer your question?

7273 MS LAWSON: Well, to the extent that companies can underprice their competitors in a potentially anti-competitive way. It's shareholders would bear that cost. That's all I was establishing.

7274 MR. DENNETT: Well, presumably, it's a benefit.

7275 MS LAWSON: They are gaining market share.

7276 MR. DENNETT: Presumably you are being anti-competitive for a reason.

7277 MS LAWSON: That's right.

7278 But any initial loss of revenue as a result is borne by shareholders.

7279 MR. DENNETT: Yes, UNDER --

7280 MS LAWSON: And if it turns out to have been a bad decision it's the shareholders that pay the price?

7281 MR. DENNETT: That's correct.

7282 MS LAWSON: So without a split rate base it's the customers and in your case Canadians across the country who will bear the cost of any anti-competitive toll pricing by Northwestel through this provision for supplementary funding?

7283 MR. DENNETT: Under a regulated company, in the sense that it makes a mistake, it could be that the shareholders -- not the shareholders, the customers bear the burden of that but, of course, regulation could intervene and in principle does intervene to insulate customers from those mistakes.

7284 Now, that's where we have a slightly different scenario where there is another source of funding that's coming from the south in this case, rather than from another group of subscribers.

7285 The regulator is there to ensure that any mistakes of that type that we make don't get passed on. So, for example, if we overspend in a way which is viewed as producing an unallowable expense that will be disallowed. That's the normal regulatory process for a rate of return regulated company.

7286 MS CHALIFOUX: If I could just add to what Peter said. Nowhere in our proposal do you see any evidence of anti-competitive pricing. In fact, there are some inherent safeguards against that in our proposal.

7287 We are proposing to price to the market at large and also we are proposing to price the same rates across our territory. So there will be ample evidence that, one, we are not undercutting competition and, number two, is there are these niche players going for the segment or a particular segment, so be it. I mean that's the piece of the market that we are going to lose. Unfortunately, it will probably be in our low cost, high margin areas. That's the nature of the game.

7288 We are inherently proposing to price on average to national levels.

7289 MS LAWSON: But what you are doing is you are proposing to get supplementary funding positioned to provide you with the same deep pockets are your competitors?

7290 MS CHALIFOUX: No, not at all. What we are proposing is supplementary funding to ensure that, one, our customers get the benefits of comparable rates to down south. Number two, so that we can roll out our service improvement plan. Thirdly, so that there is some choice in the north, choice of competition.

7291 MS LAWSON: Thank you.

7292 Mr. Chairman, those are all my questions. Thank you.

7293 Thank you, panel.

7294 THE CHAIRPERSON: Thank you, Ms Lawson.

7295 We will take our morning break now and reconvene at a quarter to eleven.

--- Recess at 1035 / Suspension à 1035

--- Upon resuming at 1055 / Reprise à 1055

7296 THE CHAIRPERSON: Madam Secretary, the next party to cross-examine the finance panel?

7297 MS VOGEL: Yes, Mr. Chairman. The next party for cross-examination is Utilities Consumers' Group, Mr. Rondeau.

7298 MR. RONDEAU: Good morning, Mr. Chairman, members of the CRTC, Mr. Hamelin and panel.

EXAMINATION / INTERROGATOIRE

7299 MR. RONDEAU: For this area of financial scrutiny and accountability our organization is going to have to rely on the expertise of the Commission staff to look into the matters a lot more closely. We have no accountants or financial officers. We can only rely on our logic and common sense. I do have some questions, however.

7300 THE CHAIRPERSON: Is that supposed to be different from --

7301 MR. RONDEAU: A good point.

7302 Mr. Hamelin, in the previous cross-examination by Ms Lawson you stated that the $5 increase was the northerner's portion of this program. You further stated "please don't change the toll package to $25 to make up for this $5 increase". You gave your rationale.

7303 If I look at evidence or if we look at the evidence of Northwestel on page 51, it quotes about a quarter of the way down the page:

7304 My question to the panel is: Where is Northwestel's contribution in all of this?

7305 MR. HAMELIN: You make a couple of points there, but Northwestel's contribution is to engage immediately in investing in a network that would otherwise take several decades to happen, at least to bring it up to the basic service objectives.

7306 You have heard I think it was Mr. Walker on the SIP panel that was answering or someone else. You know, each year we may upgrade a switch or two perhaps that are manufacturer discontinued in order for us to have some spare parts, if you will, to go and fix these switches. I am talking the switches that are in the remote communities. These switches are not capable today of providing the basic service objectives.

7307 Now that would continue on, I would suggest for the very long time, the foreseeable future. However, now we are asked to address these areas in order to bring basic service up. This is just one example.

7308 So we are going to refocus, if you will, the capital dollars in an area that we would otherwise not do as intensely.

7309 There is something like 90 switches or so, 88 switches that are in this condition and somebody said, well, just do the math. If you do one or two a year there you get it.

7310 MR. RONDEAU: All right.

7311 I will come back to this a little later when I deal with revenue requirement and rate of return.

7312 I will turn to costs. In UCG Interrogatory 1-1 we asked, basically, how Northwestel were contemplating doing their part in controlling costs to limit non-essential expenditures in order to limit the impacts on ratepayers. Now, Northwestel referred their answer to incentives, CRTC 1413 I believe it is -- yes, 1413.

7313 This response --

7314 MR. DUCK: Mr. Dennett has 1413.

7315 MR. RONDEAU: This response, basically, goes on to say that by using an ROE range Northwestel will have incentives to be more efficient.

7316 My first question: Is this the only type of incentive ratemaking, regulatory ratemaking that you are aware of?

7317 MR. DENNETT: Mr. Rondeau, I think the other major regulatory regime, which is an incentive regime, is price cap.

7318 MR. RONDEAU: Is this the only one you are aware of?

7319 MR. DENNETT: Yes. It's the only one that I am familiar with. Back in the eighties when the U.S. started to experiment with different forms of regulation, up to that time the telephone companies in the U.S. had rate of return regulations, usually with just a point ROE. There was always some adjustment required at the end of the year if the company had even slightly over earned.

7320 They introduced what for them was a novelty, which was a range on the ROE and they called that incentive ROE regulation.

7321 At about the same time there are other experiments with what they called social contract regulation and also price cap came in sometime afterwards.

7322 Those are the régimes I am aware of.

7323 MR. RONDEAU: Are there not régimes that basically look at the revenue requirement and then the regulator of the utility applies for a certain amount of revenue requirement. The regulator looks at this and lowers the requirement in order to provide what I consider a true incentive to operate more efficiently.

7324 Could you comment on that?

7325 MR. DENNETT: Are you referring to a range of ROE where the revenue requirement is set to establish something other than the top of the range?

7326 MR. RONDEAU: Yes, that is correct.

7327 MR. DENNETT: Well, that is what we have. That is what Northwestel has. It has a régime, an ROR régime, or ROE, return on equity, régime whereby in a rate case or a regulatory proceeding the rates or all of the other conditions that are being established are set to aim the company, on a perspective basis, towards the mid-point of the allowed range.

7328 So in the proceeding you get the allowed range determined and the all the factors, such as rates, or particularly rates, I suppose, are set to head the company off towards the mid-point of the allowed ROE range on a perspective basis.

7329 The incentive for efficiency, as I point out, or as we point out in CRTC-1413, remains strong. All the time there is room above where your rate is set to earn more. That is the nature of the incentive. The company has an incentive to reduce costs because it can keep the profits.

7330 It is actually not much different, or not any different really from price cap. Under price cap regulation the incentive for efficiency gains is in fact the ability of the company to keep the fruits of its endeavours.

7331 MR. RONDEAU: But are there not other means that you can bring your ROE up besides creating efficiencies or cutting costs?

7332 MR. DENNETT: Well, I suppose mathematically you can increase your ROE by increasing rates.

7333 MR. RONDEAU: How about deferrals?

7334 MR. DENNETT: Deferrals. What did you have in mind there?

7335 MR. RONDEAU: Deferral of costs.

--- Pause / Pause

7336 MR. HAMELIN: When you are talking, Mr. Rondeau, about deferring costs, costs are of two kinds, I guess. One is capital costs and the other is operating costs or expenses, if you will.

7337 From an accounting perspective, we are guided by GAAP -- Generally Accepted Accounting Principles -- where we have to record the costs as incurred.

7338 For example, a service that has been delivered, whether we paid for it or not, is not the issue. It is accounted for, accrued for in our books, as per GAAP.

7339 The same thing on equipment. When equipment is delivered -- and it could be freight on board, FOB anywhere, depending on the agreement with the supplier -- once that commitment has been rendered, if you will, we have to book in our financials those costs regardless of whether we have paid for them or not.

7340 I hope this helps address your issue.

7341 MR. RONDEAU: I understand that. But you haven't answered me whether there are other ways that you can bring your ROE up to expected returns without cutting costs or being more efficient.

7342 MR. HAMELIN: Perhaps we need to define exactly what you mean by a deferral account in this instance. If you are referring to a mechanism, if you will, that would be established in the sense that if there is a shortfall on the ROE that we would be topped up retroactively and perhaps account for moneys to come in, either from the supplementary fund or some other vehicle; or vice versa, if we earn too much and we put in the deferral account kind of the reverse -- I just need to understand exactly what you are trying --

7343 MR. RONDEAU: I guess what I am getting at is that I feel that there is a better way to regulate.

7344 MR. HAMELIN: Then why don't you just say it.

7345 MR. RONDEAU: Okay. If the regulator sets the revenue requirement lower than what is asked for by the utility, then there is a true incentive for the utility to operate efficiently.

7346 If they find midway through the year that they are going to have problems reaching their ROE, they are going to start operating more efficiently.

7347 Could you comment on that.

7348 MR. HAMELIN: Again, I am not sure if I understand fully.

7349 I can assure you that in any fiscal year, as we monitor the progress during the year, we have monthly meetings internally at the company and we meet with the board of directors quarterly, and we report to the Commission on a quarterly basis all the variances and so on, the deviations on both revenues, expenses and capital.

7350 Depending on what we filed as to our objectives for the current year, it is our job, myself and my colleagues, to ensure that we achieve the goals that we submitted during the year. And we take corrective action accordingly, if need be.

7351 Does that help answer?

7352 MR. RONDEAU: I will leave that one right now.

7353 I would like to go on to revenue requirement, response to Interrogatory CRTC-408.

7354 MR. HAMELIN: I have it.

7355 MR. RONDEAU: The beginning of the last paragraph states:

7356 It is our understanding that the company will invest approximately $25 million a year into the SIP or other capital projects.

7357 MR. HAMELIN: The capital program of the company, of $25 million that is portrayed in our proposal, per year, is in addition to the SIP program, which totals almost $76 million.

7358 So in the first four years, in total, you are talking $176 million, which is more than 50 per cent of our balance sheet today.

7359 MR. RONDEAU: But around $25 million is the correct figure. I would like to deal with this one thing at a time, if I could.

--- Pause / Pause

7360 MR. HAMELIN: I'm sorry, I got diverted there. Can you just ask that again, please.

7361 MR. RONDEAU: The amount that the company will invest is somewhere in the area of $25 million per year.

7362 MR. HAMELIN: Other than SIP?

7363 MR. RONDEAU: Yes. Okay. That's the intent currently.

7364 MR. RONDEAU: And does this come from the retained earnings of the company or does it come from borrowing?

7365 MR. HAMELIN: It comes in two ways. Capital is funded by both a combination of debt, i.e. going to the bank and asking for the banker to help you out, plus the moneys that are left in by the owners of the company, the shareholder. The shareholder out of the earnings that occurred during the year takes a dividend payment, if you will, of -- in our case it has been fixed since 1994 at $8.80 per year.

7366 What that translates to is an amount of $7.6 million per year. The differential on an income of, say, $12 to $13 million a year is ploughed back voluntarily by the owner in the business. What that means is in the next four years, the owners of the company, at least according to our proposal, all things being equal, would be ploughing back well over $25 million plus.

7367 So you have a combination. In general, the finance of any capital program is generally financed by both debt and equity in the ratio of debt and equity. In our case, all these debt ratios you have been hearing about in the last few days.

7368 Say if there was a 50 per cent debt ratio, for example, and you would have 50 per cent debt and 50 per cent equity.

7369 MR. RONDEAU: Thank you. I will come back to that ratio a little later on as well.

7370 Now, you said earlier that the amount of supplementary funding for the SIP was $30 million, $35 million and $40 million.

1115

7371 MR. HAMELIN: That's not exactly correct, Mr. Rondeau. That's the amount of supplementary funding which would keep the company whole, if you want to describe it that way, from an ROE perspective.

7372 What that is, it is a combination of two things. One, that supplemental funding addresses both capital and operating expenses. You can't really pinpoint exactly what it is. Cash is cash. You are trying to earmark exactly or colour code the dollars. That wouldn't exactly work out.

7373 What we are saying is the supplementary funding that's required ongoing goes from 30 to 35 to 40 over the three years, partly due to the SIP cumulating through time, but also for collapsing during this and all of the operations of the company.

7374 MR. RONDEAU: Okay. Can you tell me the updated amounts for the SIP alone?

7375 MR. HAMELIN: $75.8 million over four years.

7376 MR. RONDEAU: Can you break that into the three years?

7377 MR. HAMELIN: Yes, I can.

7378 MR. RONDEAU: A little more of an idea.

7379 MR. HAMELIN: Yes, I can, if you just hold on a moment, please.

---  Pause / Pause

7380 MR. HAMELIN: You are asking how much capital related to SIP will be spent in the next three years.

7381 MR. RONDEAU: Yes, just in --

7382 MR. HAMELIN: By year.

7383 MR. RONDEAU: Or the next four.

7384 MR. HAMELIN: In fact, that's on the quick fact sheet. I think it has that.

7385 MR. RONDEAU: Okay. The latest I have is 17.6, 19.3, 17.1 and 21.2. Is that correct now?

7386 MR. HAMELIN: That's correct. And there's the 75.8 that's for the four years.

7387 MR. RONDEAU: Okay. Now, please bear with me again. I'm trying to understand. This $13.6 million increase in revenue requirement that I mentioned at the start per year after 2005, is that to pay for the return on these investments?

7388 MR. HAMELIN: I'm sorry, I will have to get back to that interrogatory. I thought I had answered your question. Can you hold on a second?

7389 MR. RONDEAU: Yes.

7390 MR. HAMELIN: What was the number?

7391 MR. RONDEAU: It's 408, CRTC 408.

7392 MR. HAMELIN: Just a moment, please. Okay, let's try this again.

7393 MR. RONDEAU: The $13.6 million that you speak about in interrog 408, in the revenue requirement per year after 2005, is this to pay for the return on these investments?

7394 MR. HAMELIN: What that is, and Muriel, maybe you want to add to this -- if this comes from interrog 406, what it is is the SIP program being deployed over four years. What does it command as far as a revenue requirement on an ongoing basis once it's deployed.

7395 The $13.6 million that you see there is the revenue requirement that can be seen as an annuity, if you will, long term just to cover the impact of that capital program. It includes recovery of -- well, once you have assumed the incremental revenues and incremental expenses that come with this SIP, you have underlined that the depreciation related to the SIP for that equipment and embedded in there also is an implicit return which is at the mid point of the allowed range.

7396 Muriel.

7397 MS CHALIFOUX: Yes, Ray, I think you said it there. I mean it's revenues, expenses, depreciation and then, as Ray alluded, you know, it assumes that a portion of the capital is funded through debt, so there is some debt financing costs incurred.

7398 A portion of the investment is financed through equity. That portion is just based on the total company's existing capital structure.

7399 MR. RONDEAU: Okay. I guess I will come right out and ask what I really want to know here again.

7400 MR. HAMELIN: Go for it.

7401 MR. RONDEAU: Is it your proposal that supplementary funding goes into rate base?

7402 MR. HAMELIN: As proposed? Yes, it is. That is what we have put forward.

7403 MR. RONDEAU: Can you give me the rational how that will work? I don't understand when you get supplementary funding, how it -- your rate base?

7404 MR. HAMELIN: Well, I'll try and help here. The reason we would want a return on the equity piece is simply because we are -- we, the company, in its proposal is raising the funds. We are the ones that are committing the funds very early in the game.

7405 As we go and raise debt and equity and implement this network, we feel just by having done that, it would be normal to expect a return on the equity piece that we have put in and a return for the banks for paying them back interest during that period of time.

7406 Now, if you are suggesting that that shouldn't be the case because there's supplementary funding, I think we are talking two things here. Supplementary funding in our proposal is to keep the company whole.

7407 The funding isn't financing directly up front of the capital that's required. It is simply financing, at least from the SIP portion, the carrying charges of the SIP, which is the cost of capital.

7408 If you are talking -- this differs very much from a donation and grant. If someone gave us a donation, if you will, to finance the capital up front, the whole $75.8 million, then the company doesn't have to fork out that $75.8 million in those four years. The company would not be seeking a return on that.

7409 However, the problem with that mechanism is that this equipment, once it's implemented after four years it has to be maintained, upgraded and possibly replaced. Any fixed asset of this nature has a life span, if you will, an expected life.

7410 Well, in order to replace it, it means that you normally replace equipment once you have recovered depreciation. Depreciation is there for a purpose and, essentially, it's a cashless expense, if you will, that once it's covered by revenue it leaves you with a net income that's depleted because of the depreciation entry but the cash flow is the net income plus depreciation and I still have the cash, if you will.

7411 All it means, Roger, is that we would have the means to replace the equipment over time and we would be incented to do so. We would be incented to do so because there is an attached return attached to it. Otherwise, one could argue, "Well, you know, we could redirect the capital just where there is, indeed, a return".

7412 If you are going under a DNG approach, you another DNG after the equipment has been set up, otherwise there's no incentive for us to go and maintain, upgrade and replace that equipment because there's no return attached to that equipment.

7413 MS CHALIFOUX: Just to add to what Ray is saying, we have -- our capital, today, is in the rate base. We have, you know, in excess of 300 million -- I don't know what the number is. What the SIP is is we are just adding to that. We are investing 75 million over four years that gets added to the rate.

7414 Now, the costs that are incurred as relative SIP are the exact same costs that are incurred as part of our normal rate base; you have depreciation and you have financing costs. It's no different.

7415 MR. RONDEAU: I still have problems understanding.

7416 I can understand if you are investing the money up front, fine, for that year. But this will go on year after year after year. Even though you are refunded this money, you will still have this on your rate base for the next 20 years, 'til it's fully depreciated.

7417 MR. HAMELIN: That is correct, Mr. Rondeau. That's the nature of the beast. And when you put capital up front, you need to recover it over time, and if it's -- our composite depreciation rate for the company is almost 7 per cent, which means a composite life, if you will, of the various different classes of plant of about 15 years. So every 15 years, one could argue you would have had to replace the plant, yet, you know, we spend the money all up front and the revenues associated with it only trickle in over time, and if the plant is always replaced over time, that's the nature of the business itself. It's...

7418 MR. RONDEAU: Okay. I will leave that, again, and I will go on to rate of return.

7419 Now, on Tuesday, the first day of the consultations, Tuesday, the 13th of June, UCG submitted -- put in an oral submission and we stated that Northwestel, and by "Northwestel" meaning the corporate shareholders, must share the burden of this undertaking to provide comparable service to comparable costs for the north.

7420 Stating this, I would assume that the only way that this could actually happen is to lower the return on equity.

7421 Would you agree with that assumption?

7422 MR. HAMELIN: Sharing the burden lowering the ROE, certainly the ROE would -- we would like to earn a return for the company that's commensurate with the risks undertaken by the company and, in that vein, and Ms McShane was our expert that testified, and the suggestion is that 12.25 per cent would be a fair return.

7423 The formulation of all this, it has -- the allowed range for the rate of return would then be 11.25 to 13.25 per cent. We are suggesting to keep the sharing mechanism when we -- if ever we were lucky enough to earn more than 13.25, between 13.25 and 14.25, we would share half and half with the fund, if you will, and anything above that 14.25 and up it would all go back to the fund.

7424 What this says, it's an asymmetrical kind of formula where Northwestel would never be able to, you know, do exaggerated returns -- and that's the whole principle of having regulation -- but, at the same time, what happens when you start hitting the low end of the range and perhaps getting under, there's got to be mechanism, in our mind, for us to be able -- if we are able to prove our case that, yes, we are deserving of getting a helping hand, if you will -- to come back towards the mid-point.

7425 MR. RONDEAU: We also heard expert evidence that 9.25 would be reasonable.

7426 MR. HAMELIN: I will leave the battle of the giants...

--- Laughter / Rires

7427 MR. RONDEAU: Would you please refer to CRTC-1404, page 3.

7428 MR. HAMELIN: Yes, I have it.

7429 MR. RONDEAU: Okay. If you look at the chart, would it be fair to conclude from this chart that a reduction of 1 per cent in ROE would result in approximately $2.5 million? Is that correct?

7430 MR. HAMELIN: That's correct.

7431 MR. RONDEAU: From this, can I further conclude, then, or can we conclude that a reduction of 2 per cent would result in approximately five million?

7432 MR. HAMELIN: It's not exactly linear, we have to do the numbers, but, essentially, you would be very close in the ball park, yes.

7433 MR. RONDEAU: Okay. You have heard from many of your northerners, and we will be providing further evidence that affordability is a problem, this $5.00 increase in local fees.

7434 You stated, further, that this $5.00 -- earlier, that this $5.00 would bring in approximately $4 million in revenues. Is this correct?

7435 MR. HAMELIN: It's around 4.3, I believe.

7436 MR. RONDEAU: As I stated, there -- we have provided some information, and hope to provide more, to show affordability is a problem. You have not provided any evidence to the contrary.

7437 So what I'm asking is: Why would Northwestel not entertain the prospect of sharing the burden with their customers by lowering their ROE?

7438 MR. HAMELIN: Well, Mr. Rondeau, again, the allowed range of return -- and this is part of this proceeding -- will be established by the Commission and our best testimony was Ms McShane suggesting 12.25, and if it ends up there, that's what it will be.

1130

7439 MR. DENNETT: Mr. Rondeau, a few seconds ago, Ray was speaking to this matter of the shareholder contributed and he talked to you, I think, about the moneys that were being reinvested in the next three years and we talked to a number that, I think, is approximately $25 million.

7440 I am afraid to use the word "stakeholder", but it seems to me that there are a number of parties, the debtholders and the equityholders, that are contributing to this process. It is not as if they are absent. They are here and they are making a contribution, which I think you should take into account.

7441 MR. RONDEAU: Thank you. I will do that.

7442 You also propose to receive external funding from southern ratepayers, or southern telcos, to the tune of approximately $35 million per year.

7443 Again I will ask the same question: Why would Northwestel not entertain the prospect of sharing this burden with our southern neighbours?

7444 MR. HAMELIN: Northwestel would have expended all the dollars up front.

7445 MS CHALIFOUX: I think it is important to point out -- you just raised the point there, Mr. Rondeau -- that we are looking at doing a number of things to achieve a number of objectives. That is bringing our long distance rates down to comparable levels down south, implementing a service improvement plan of a significant nature. These types of things are going to benefit all customers in the north to a great deal.

7446 What we have proposed of this $40 million requirement is that $4.3 million comes from the northern customers and the remainder, the balance, comes from down south.

7447 We thought it really is a matter of balance, and it is a reasonable contribution for northern customers.

7448 MR. HAMELIN: Mr. Rondeau, I want to add, perhaps conceptually, we are just the middle entity in all this. When the subsidy comes in, we are going to take these funds like a trustee kind of arrangement and immediately turn and try to achieve the mission, which is comparable rates, comparable services, and providing choice to customers. We are just there in between.

7449 There are all sorts of mechanisms that the Commission has in hand to monitor our progress, if you will, how we are doing, and so on. We suggested a tracking system. Hopefully, all this gives a sense of reasonableness.

7450 What we are asked to do -- at least that is the way we interpreted it -- is almost the impossible. Go and build this fantastic network. It costs a lot of money with no returns. At the same time cut your own lifeline, your own blood stream, if you will. Our revenues are going to be collapsed.

7451 We are immediately hovering around the zero mark, if not negative, if you look at CRTC-401, Attachments 2 and 3. This is the nature of the equation, if you want.

7452 MR. RONDEAU: I understand what you are saying, but I also see that you are attempting, it seems -- at least it looks to me -- to raise your net income on the backs of your ratepayers and southern --

7453 MR. HAMELIN: Not really. It is on the backs of the underlying assets that are deployed in the field. We have to pay banks. They need their returns. A shareholder has been taking out a dividend payout that has been sick since 1994, ploughing back all of the income in the north and committing that remainder, if you will, which we call retained earnings, to the north.

7454 MR. RONDEAU: Please refer to UCG-114. Maybe I can get at this a little more.

7455 MR. HAMELIN: I have it.

7456 MR. RONDEAU: If you look at the chart -- let's look at the income side.

7457 From 1993 to 1998, as you said, it's very flat. There is very little change. From 1988 to 1989 you will experience a $1.5 million increase. In 1999 to 2000 there is a drop, approximately $1 million. Then in 2000 and 2001 there is a whopping $3.5 million increase.

7458 MR. HAMELIN: Yes, sir. Let me explain.

7459 These incomes that you see there, in absolute terms, relate also to the underlying equity and debt. There are assets underneath that.

7460 At Northwestel the investment per line -- and we filed this in the high cost and I believe in the IX hearings previous to that -- is well over $5,000 per line, well over. That excludes the concept of transponders.

7461 Transponders currently come into our expenses, operating expenses, whenever we lease capacity from Telesat. Imagine for every $1 million of transponder you would conceivably argue that it comes from capital of a 15-year composite that I just mentioned, as if you have $15 million of capital for $1 million of expenses.

7462 We are way over $5,000 per line, which is way over double the investment per line of any telco down south, at least the big ones.

7463 And guess what? Once you invest that kind of money per line, it commands high rates. And that was the deal in the past.

7464 Mr. Rondeau, you yourself have asked us, in the previous interrog: What is the total bill per NAS?

7465 Northwestel has the highest total bill for NAS in Canada. And likely so, because it has invested more than double --

7466 MR. RONDEAU: You also have the highest profit per NAS.

7467 MR. HAMELIN: If you unitize it per NAS, sure, obviously. If you are going to invest $5,000 to $6,000 in NAS, you are going to command a rate that is commensurate with that investment.

7468 That was the moral agreement, if you will, or understanding or regulation system that we have had in the past. That is not going to change going forward.

7469 If we are asked to put more money in the asset base -- and that is what we are doing at an extraordinary pace. We are going to have a capital program now that will be more than 50 per cent of what we are accustomed to, or thereabouts.

7470 Obviously we are going to be pumping in almost $175 million over four years, which is more than half our balance sheet. There will be more funds and assets exposed there.

7471 So when we are asking to receive a return of, let's say, 12 per cent, nothing has changed. It is relative to investment.

7472 It is like saying Bell Canada made a billion dollars last year. Big bad Bell! Well, it is relative to the investment that Bell has made in the past, or any telco or any business.

7473 MR. RONDEAU: Are you not investing similar amounts than what you have been in the past number of years? From what I understand, $25 million of capital expenditures have been pretty --

7474 MR. HAMELIN: $25 million is on the low side, I should add. It is on the low side, and we have done this in both 1998 and 1999. In both instances we were facing difficulties in achieving our ROE.

7475 What happens when you are not achieving your allowed ROE, all it does is cause grief for everybody. We end up delaying investment because we are trying to make things balance. This is not good for the north. All it does is delay progress.

7476 If you are a healthy company making your mid point regularly, then you can achieve a higher capital deployment, if you will. So $25 million this year is a curtailment of our capital.

7477 If you look at CRTC-401, Attachment 1, page 2, you will find the cash flow statements. There you will see that in 1996-97 we are spending more like $32 million per year.

7478 We have had to bring it down -- and we have had this ratified by the board of directors -- on our own initiative. It is management that says: We are not going to make our return possibly this year. Cash flow, cash requirements will look like this. So we do less than we could have otherwise for the north. That is what happens when you don't make your rate of return.

7479 MR. RONDEAU: All right. I will accept that, but if you are investing close to the same amount is what I am getting at and you look at that chart and you will see the big bump when the supplemental funding comes in, it looks to me that you are taking advantage of --

7480 MR. HAMELIN: No, no, Mr. Rondeau. What we are doing is expending capital that is a lot more than 25. You have to add the SIP to it. It's more like $42 million, $43 million for the next four years. So we are expending more capital than we ever did in the past. So that's what's causing, at least in absolute terms, this blip that you see.

7481 I would like to point out also that year 2000, as you see, is 10.3 per cent is the expected return this year. Effectively, we are in need of rate relief today. What that means, rate relief, we would be essentially asking for a rate case. A rate case means possibly increasing the rates and if we were treading in the normal course of things it would be on the shoulders of northerners.

7482 We have decided to -- well, implicitly, there is a rate case buried in these proceedings one could argue and because we are going to have a total discontinuity on January 1, 2001 and because these proceedings really monopolize the resources that we have at the corporate side, we are where we are. So this year we do not anticipate reaching our allowed rate of return and it caused a capital program to be brought down to the $25 million level, roughly speaking.

7483 MR. DENNETT: Could I add something to that, Mr. Rondeau?

7484 MR. RONDEAU: Could I say something first before I forget?

7485 MR. DENNETT: Yes.

7486 MR. RONDEAU: But in that test year 1999, with what you just stated you are assuming that the reasonable rate of return is 12.25. Perhaps that's not the case.

7487 MR. HAMELIN: The test year is 1999 you say, or did you mean something else?

7488 MR. RONDEAU: Was that the year you were saying where the rate of return would go down to 10.3?

7489 MR. HAMELIN: No, it's this year, the year 2000. We are currently showing a projected -- that same sheet, that interrogatory, do you see 10.3 per cent?

7490 MR. RONDEAU: Yes.

7491 MR. HAMELIN: And the income 13.5. This is partially due -- one could argue it's due to a lot of things, but two things that come to mind, at least one big one that comes to mind to me is the expiry of the eastern Arctic draw down.

7492 If you will recall, Bell Canada provided kind of like a subsidy, if you will, in 1992 of up to the tune of $18 million, which is in your other interrogatories?

7493 MR. RONDEAU: Yes.

7494 MR. HAMELIN: Well, that subsidy, if you will, has been depleted now and now we are stuck with it. The last time we brought into income part of that subsidy of significance was 1998, that was $2 million and that's cashless dollars. It's after-tax dollars. It represents pre-tax something like $3.5 million. That's equivalent to $4 per NAS per month essentially that we have to replace and that's subsidy is gone now. This is exactly the kind of problem that we are facing in this case.

7495 MR. RONDEAU: Yes, that's a reasonable response, but you never answered the question about the rate of return assumption.

7496 MR. HAMELIN: The current rate of return is between 11.25 to 13.25, that's the range we are allowed today. The mid-point is 12.25. As you can see, 10.3 does not achieve that.

7497 Therefore, what happens then is management takes action, in the sense of it looks at all it's operating expenses, it looks at the capital program and I would argue everybody suffers in the end in the sense of if you are talking progress for the north all it does is it delays progress that we would dearly love to do. But right now we are not achieving all-out return.

7498 MR. DENNETT: Mr. Rondeau, could I add my view?

7499 MR. RONDEAU: Yes.

7500 MR. DENNETT: It was in connection with what I will paraphrase as the bump up in net income that occurs over the next few years. Of course, the company's network will be expanding quite considerably over the next four years, that's the whole raison d'être for the SIP. It will become a much more capable and rich and indeed valuable in dollar terms network. It's from that that the revenue requirement associated with carrying that capital base derives a rate as explained.

7501 I should also add though that this brings tremendous benefits to the north, this very activity of building this network and maintaining it. I believe we have referred to the fact of how outside contractors will be used extensively to help us build this network and the Yukon government in its evidence has emphasized the importance of modern communications to economic development in the Yukon. I am sure that applies in the other territories as well.

7502 MR. RONDEAU: Yes. I have no argument with that at all.

7503 Maybe I will go on to the debt to equity ratio, seeing that you mentioned that in your last response. If you look at Northwestel evidence on page 67, the top of the page.

7504 MR. HAMELIN: We have it.

7505 MR. RONDEAU: It's a chart showing the debt-to-equity ratio from 1993 to proposed 2001, 2002 and 2003.

7506 MR. HAMELIN: Yes.

7507 MR. RONDEAU: Your projected equity ratio with the supplementary funding will increase from 47.6 per cent in 1999 to 59.3 in 2003.

7508 MR. HAMELIN: That's correct at the time of filing, but I believe Mr. Duck explained that there was the latest numbers after adjustments for both revenues and expenses that we filed on June 8.

7509 MR. DUCK: I think, as I may have explained to Ms Lawson, that 2001 with these newest numbers and I don't want to get tied right down to the decimal here, but 54.8, 55.5 and 58.2 were the regulated equity numbers that would replace the ones you see in that table for the three outward years.

7510 So our only point there in raising those numbers is to say that with the newest set of financial statements the equity ratio is -- it's rate of increase or amount of growth is somewhat dampened.

7511 MR. RONDEAU: At least some of this investment money is going to come from the supplemental funding. Is that a correct assumption?

7512 MR. HAMELIN: Well, the equity is resultant of the exercises, the periods of operations and all this reflects is what is left invested by the shareholder. It's like the equity you have in your house. You buy a $100,000 home. If you have got a mortgage of $45,000, you have got equity of $55,000 or vice versa. It's no different.

7513 MR. RONDEAU: So you increase your equity rate base, your debt to equity will also -- I guess your debt to equity will decrease, your equity will become greater. Would you not say that such a healthy equity ratio would decrease your risk for investment? In other words, wouldn't this lower the risk premium?

7514 MR. DUCK: I think, as we discussed this morning, we don't disagree in principle on looking at just the equity or financial risk. We certainly agree that the higher the equity ratio, all other things being equal, the lower the financial risk, but there are a number of moving parts to this whole thing called risk.

7515 We have our operating risk and we have some regulatory risk, as well as financial, but on a pure stand alone basis I can't disagree with you, as long as we are talking exclusively financial risk here.

7516 MR. RONDEAU: Thank you.

7517 Restructuring, UCG-136, Attachment 1.

7518 MR. HAMELIN: I have it.

7519 MR. RONDEAU: Number four of the response.

--- Pause / Pause

7520 MR. RONDEAU: If you look at attachment 1, the chart for structuring costs, it shows that there is approximately $8 million of costs incurred from restructuring. Is that correct?

7521 MR. HAMELIN: That's correct.

7522 MR. RONDEAU: Okay. In question 4 we asked how this cost -- if these costs would affect ratepayers. Your response was:

7523 That's a tongue twister. I don't really understand that one. Perhaps you can explain.

7524 MR. HAMELIN: What that means is the following. I will try and explain the best I can.

7525 When the company decided subsequent to an unsuccessful rate case in 1993 to downsize the company, it looked at various things, part of which was labour, reducing the head count.

7526 As occurred in several companies down south, the company approached the Commission and asked "How would you like us to treat this massive downsizing which incurs costs on both severance -- what we call TIPs, termination incentive plan, ERIPs, early retirement incentive plan.

7527 The Commission decided that, as was common at the time I guess down south, to have these costs smoothed out over five years, if you will, as opposed to incurring them all in lumpiness in terms of right up front or not.

7528 What this means then, if you look at your chart, out of the $8 million that was spent to date -- how much has been amortized here? Total amortization, I think we are just showing yearly here. Cumulatively. There's a net on the balance sheet somewhere.

7529 There has been a great portion of that $8 million, if you will, that has been expensed in income. It shifts the income statement through the years, but it still has a few years to go, as that chart shows.

7530 MR. RONDEAU: Yes.

7531 MR. HAMELIN: It has a million three in 2000, as expected. Then it declines to $634,000 in

the year 2001. It shows that we are getting toward the tail end, if you will, of the amortization period.

7532 It smooths out the impact on the earnings. That's effectively what it does.

7533 MR. RONDEAU: Okay. I can understand that. But nonetheless, it is costs picked up by the ratepayer. I always thought restructuring was done to cut costs and save ratepayers money.

7534 MR. HAMELIN: And it does. You are seeing the benefits of it today. We are spending -- our budget this year is at the same level as year 1994. This is seven years later. Think about this for a moment.

7535 We have absorbed an almost 40 per cent increase in terms of lines during that period of time. We have absorbed all the inflationary impacts on all kinds of expenses, including labour. You put that together, it shows extraordinary productivity gains that were alluded to this morning by Ms Lawson.

7536 MR. RONDEAU: Okay. I will accept that as well. Now, you stated that the two programs are basically an incentive plan for termination and early retirement. Please refer to UCG-18.

7537 MR. HAMELIN: I'm there, Mr. Rondeau.

7538 MR. RONDEAU: Okay. This shows that at the same time you were doing your restructuring and your pensions restructuring for these programs, you have a pension surplus over obligation for benefits. They spiral from somewhere in the $43,000 range to $17.5 million in seven years.

7539 My question is why would you need to incur restructuring costs when you have a pension surplus which more than covers this cost?

7540 MR. HAMELIN: The pension surplus, and it's explained in several places, has come about, a lot of it doing with the performance of the stock market in the last decade or so.

7541 You have to understand that pension is a fund that's earmarked towards employees, if you will. The company has no access to these funds to operate, normal operations of the company. That's one thing.

7542 The second thing is the company is a last resort, if you will, that has to fulfil the obligations of the pension. If the pension was underfunded and so on, the company would have to cough up the dollars accordingly. This is outside -- how can I say this?

7543 Pension is governed by the Pension Benefits Standards Act. I wrote it down just in case I wouldn't make a mistake. I'm not an actuary here. 1985 regulations.

7544 There's an actuarial valuation report that's produced every three years. It's filed with the Superintendent of Financial Institutions and Revenue Canada. It's an actuarial opinion. That opinion includes information on the financial position of the plan, it's solvency, the solvency of the plan. It recommends the basis on which the company will do its contributions towards the plan in order to ensure that the fund will be sufficient.

7545 All this is regulated under a certain act that we have to follow. It's a cost of doing business. Pension expenses last year, including the amortization of the restructuring or the ERIP piece of it was somewhere around $890,000. It's less -- when you include depreciation, it's less than a penny on the dollar. It's less than 1 per cent.

7546 The fact that the fund has increased is a wonderful thing, but I can't do anything with it.

1200

7547 MR. RONDEAU: Okay. You state that the fund has increased. I wish my pension would increase like that. There has to be money invested into this pension to make it. Okay? What I don't understand is where this money comes from. It must come from the ratepayer.

7548 MR. HAMELIN: It comes from several sources. Let me explain to you the changes in the valuation of the plan, how it works.

7549 You have your assets at the start of the year. It's like a portfolio, your RRSP fuel. Right? Then there's contributions made to it from both the employee and the employer.

7550 Well, the employer's contribution, as I just explained, it follows the pension benefit fact. It follows rules of actuarial -- actuarial rules and so on that are filed with Revenue Canada and so on, the Office of Superintendent.

7551 Then you have market gains and losses of that portfolio, whatever you may have on hand, however your RRSP is doing or what have you. Then you add to that the income of the plan because there are dividend payments or interest earned if there are bonds in there.

7552 Then you subtract from that any benefits that are paid to those that are lucky and retired. They get these benefits. Then you charge some expenses to the plan like managing it, you know. You need an expert financial guru that will manage the fund and so on. That's how the evaluation is done constantly.

7553 I get regular monthly reports as to how the plan is doing. At the end of the year you get what you get. Every three years there is a formal filing by law, by actuaries. We don't have the depth here in our company to deal with this sort of thing. What we do is we ask the expertise of BCE or Bell Canada that do have actuaries.

7554 Mind you, we are charged for that. And I do monitor it to make sure that -- and they ask me, "Is this appropriate?", and so on -- there are proper cross charges for these kinds of services.

7555 So a lot of it, though, I would like to add, is this performance, this record performance, has a lot to do with the stock market, and everybody's aware of that, and the fund has done exceptionally well and was very well managed. That's outsider control.

7556 MR. RONDEAU: This is beside the perks that you get -- the Bell stocks -- on top?

7557 MR. HAMELIN: There is a stock plan offered, at Northwestel, which all our employees of the company -- and I do mean "all" employees -- can contribute up to 6 per cent of their salary. That would be a perk, to your point, if you want to call it that. For every $3.00 that are put in towards the purchase of BCE share $1.00 kicks in from the company. And that's offered to everybody. So, you know, you call it "perks", it's part of the benefit program of the company. Anything above the 6 per cent -- you can deduct up to 10 per cent of your salary, if you wish, but there would be no compensation for that extra 4 per cent.

7558 MR. RONDEAU: Okay. Thank you.

7559 I just have a couple more issues. Operation and maintenance is the next one.

7560 Again, here, we have to really rely on the expertise on the CRTC staff to scrutinize the utility in this area. We feel that this is the area that must be screened the most diligently, as counting techniques can become quite creative. I do have a couple of questions to ask on this.

7561 Please refer to UCG-120 and Disclosure 120, Attachment 1.

7562 MR. HAMELIN: Mr. Rondeau, I will asking Muriel Chalifoux to address this once she has it.

7563 MR. RONDEAU: Okay. It shows charts, six pages, broken down from 1993 to 1998. And then the disclosure we asked for -- I don't have the date. I will go on with the charts, first, before; hopefully you have the disclosure chart included.

7564 If you look at pages 3, 4 and 5 of the first attachment, 1994, 1995 and 1996, the operating expenses.

7565 In 1995, you implemented downsizing. Is this correct?

7566 MR. HAMELIN: Yes, the downsizing commenced in 1995, that's correct.

7567 MR. RONDEAU: And if you look at your operating expenses in that year, they went down. Is that correct? That's what one would assume should happen.

7568 MR. HAMELIN: Yes, they did.

7569 MR. RONDEAU: 1995 and 1996, between those two years, yes.

7570 Now, if you look at 1996, was restructuring still not in process?

7571 MR. HAMELIN: Yes, the -- yes.

7572 MR. RONDEAU: Well, maybe you can explain to me why operating expenses went up, from 1995 to 1996.

7573 MR. HAMELIN: I might, but I guess if -- if I were to ask you to look at Interrog 601 CRTC, what you would see from 1994 to Year 2000 is the same level of expenses, give or take, plus or minus, you know, a number that is rather -- that is not a big number; suffice to say that this year we are the same as at that time.

7574 I mean if you want us to explain every little change from one year to the next, from 1995 onwards, that's where you --

7575 MR. RONDEAU: Well, I'm just wondering why the restructuring didn't result in some savings here.

7576 MR. HAMELIN: Well, we didn't try and explain what happened prior to 1997. You are talking from 1995 to 1996. All interrogatories addressed to us, from most parties, commenced 1997 onwards, if you will, including the Commission.

7577 MS CHALIFOUX: If I could just add to that, Mr. Rondeau.

7578 I mean, as Ray explained a while ago, or perhaps Peter did, I mean in our expenses you are having to, you know, maintain a certain level of service, there's significant growth in demand that you have to achieve, as well, et cetera, and so, certainly, restructuring is -- or implicit in these numbers are savings due to restructuring, no doubt. You know. However, you do have to incur expenses to keep up with the growth in the business.

7579 So, certainly, you know, expenses went up by, you know, 1 per cent but, given everything that's happened over the last few years, keeping our expenses relatively flat has been quite a significant achievement.

7580 MR. RONDEAU: Okay. Will you please look at the disclosure of Northwestel, 120, showing the variance between 1997 and 1998.

7581 MR. HAMELIN: We have it.

7582 MR. RONDEAU: Okay. My first question, is: Why are the marketing and sales increases of almost 19 per cent -- it seems to be due to your subsidiaries of Internet and NMI. I don't understand your reasoning.

7583 MS CHALIFOUX: Well, as explained in the response, I said there's several factors; one being due to the increase in demand for enhanced services, including Internet services. It's reasonable to expect, as you introduce a new service, you are going to incur some additional marketing and sales expenses to get that service off the ground.

7584 Secondly, due to the spin off of NMI, we did -- you know, we are using their facilities to provide a certain level of service, or a certain service. So, historically, I mean that service was just provided integral, as part of our company, and then, as you spun it off, I mean there were some explicit expenses, but the expense overall did not go up, really; it's just a shift. I mean, you know, initially, it would have been provided on our facilities. Then, as we spun that off, it went -- those facilities went to NMI.

7585 MR. RONDEAU: Well, I guess I just don't understand why these costs are incurred by Northwestel when you have subsidiaries that should have been incurring the costs the way I see it.

7586 MS CHALIFOUX: Well, we are using a piece of their facilities to provide the service to our customers, and we have to pay for that.

7587 MR. RONDEAU: Yes, but the markets and sales of these --

7588 MS CHALIFOUX: I should point out, if we have to pay for that facility cost, it probably, you know -- it's just a decision on where it goes, from an accounting perspective. So I mean it's a facility cost paid for by the Marketing Department.

7589 MR. RONDEAU: I still don't get that one, but I will go on. Number 2 question on general administration and stores. You state that they were reorganized. General administration went down 6.7 per cent and stores increased 196.5 per cent. There's a big gap in the outcome of these two. Maybe you can explain that.

7590 MS CHALIFOUX: Certainly. Reorganized is an incorrect use. What I say there is reclassified. The source of this information was phase three reporting. Typically, in our general accounting system, we don't break up our accounts by activity. We do it by department.

7591 So your interrog requested, you know, operations and maintenance, more activity related expenses, so we thought using phase three would perhaps be a better representation.

7592 Within phase three I had a reclassification of expenses. The level of the expenses remained the same year over year. They just got moved from one category to another. That's all.

7593 MR. RONDEAU: In a prior UCG IR you stated restructuring and pension surplus did not cost ratepayers anything. If I look at the response on administration, it shows that there is a 26.6 per cent increase or $1 million for reclassification of employee benefit costs such as extended benefits and insurance premiums. Can you explain that variance?

7594 MS CHALIFOUX: Sure. Again the operative word here is "reclassification". The year prior we were able to charge back these costs to an employee level. The next year we lost that level of detail, so the costs were charged to a corporate account.

7595 Again, the absolute level of the expenses did not change. It's just a reclassification, you know, throughout every department to every cost centre.

1215

7596 MR. RONDEAU: Okay. My last question. On long term debt, CRTC 412,.

7597 MR. HAMELIN: I have it.

7598 MR. RONDEAU: Okay. My question is why would a company doing business in Canadian dollars borrow money in U.S. dollars? To me that seems to me like you are paying 40 per cent plus right off the top.

7599 MR. HAMELIN: You are quite correct. This shows the amazing rates here we have in the U.S. denominated bonds. What Mr. Rondeau is referring to is it hovers anywhere from 8.4 per cent to 15.6 per cent.

7600 Now, these bonds were issued under CN, then a Crown corporation. When B.C. purchased the company on December 1, 1988, these bonds were there in existence. In a sense, we, Northwestel -- we have these bonds on our books. When B.C. purchases, they are there. I mean they were issued by CN under those --

7601 Now, how that came about under the CN days, I'm not too sure, but I do know that CN as a Crown corporation was in great dire straits. It's possible that they had to go to the U.S. market to raise these funds.

7602 We still have an average life left of about seven years or so composite in these bonds. While we are carrying these extraordinarily high rates, including the effects of foreign exchange, these bonds were probably issued when the Canadian dollar was well over 90 cents kind of thing. This is why you see a face value here of these bonds of $23.1 million are worth effectively $33 million today, if you convert -- at least at the end of 1999 $33.3 million. That's just converting to today's rates.

7603 Not only do you pay interest charges that have very high coupon rates, you are also -- the day will come when you will have to pay the face value in Canadian dollars translated. You have to add an extra ten million.

7604 They are very expensive bonds. Unfortunately, we get bills every quarter and have to pay interest charges on these bonds to the tune of $23 million face value.

7605 MR. RONDEAU: So you will guarantee us that when our dollar is worth the same as the American dollar, you will borrow money from a Canadian institution to pay this debt.

7606 MR. HAMELIN: In fact, there's one that has expired. Our first U.S. bond expired in 1988. You see there $3.896 million. The one that was at nine and a quarter. That alleviates the pain when you can renew at a lesser rate that's Canadian based. Yes.

7607 MR. RONDEAU: Thank you, panel.

7608 MR. HAMELIN: You're welcome, Mr. Rondeau.

7609 THE CHAIRPERSON: Thank you, Mr. Rondeau.

7610 We will take our lunch break now then and reconvene at 1:30.

--- Recess at 1220 / Suspension à 1220

--- Upon resuming at 1335 / Reprise à 1335

7611 THE CHAIRPERSON: Would you call the next party? I'm hesitating a bit because I think Mr. Rogers might have -- any preliminary matters, Mr. Rogers?

7612 MR. ROGERS: I was actually expecting the Secretary to -- there is something that may be before you, Mr. Chairman. It's by way of a clarification.

7613 We thought, in reviewing the transcript and the exchange that you had with Mr. Vachon on what is remote and how does a community get to be a remote, and then there was an exchange as well with Ms Paré -- we thought in reviewing that that it may not be totally clear to everyone. We felt that by putting this on, it would be clear. We hope it does help to clarify.

7614 THE CHAIRPERSON: Okay. Madam Secretary.

7615 MS VOGEL: Thank you, Mr. Chairman.

7616 The document entitled "Clarification by Northwestel" will be marked as Northwestel Exhibit No. 18.

7617 THE CHAIRPERSON: Thank you.

7618 And then the next party to cross-examine.

7619 MS VOGEL: Our next party for cross-examination of this panel is the Council of Yukon First Nations.

EXAMINATION / INTERROGATOIRE

7620 MR. HENRY: Thank you, Madam Secretary, Mr. Chair, Commissioners.

7621 Good afternoon, Mr. Hamelin.

7622 MR. HAMELIN: Good afternoon, Mr. Henry.

7623 MR. HENRY: Who is your money on, the Lakers or the Pacers?

7624 MR. HAMELIN: Lakers or Pacers. I thought we would be talking baseball. It seems to me the whole market, two baseball games in one day, we can have the whole market go to the Big O or something.

7625 MR. HENRY: This is the Toronto of the north, I understand.

7626 I just wanted a point of clarification before we start. This morning you mentioned a trustee-like relationship.

7627 Are you suggesting that the phone company is beginning to be a fiduciary?

7628 MR. HAMELIN: I don't know or understand the legal terminology here.

7629 MR. HENRY: A fiduciary has a responsibility to the beneficiaries of a trust.

7630 MR. HAMELIN: It was an analogy to be a trustee entrusted with funds, to have proper accounting, proper controls, ensuring that the goals of the trusteeship, if you will, are met.

7631 It was kind of an analogy I was talking about. It is certainly not in legal exact terms.

7632 MR. HENRY: Okay. A fiduciary for First Nations is an entirely different matter, completely.

7633 MR. HAMELIN: We are certainly not on the same wavelength here.

7634 MR. HENRY: Thank you. Just to get started, I want to ask if you would refer to the evidence of the Yukon Government -- it is dated April 10, 2000 -- and specifically page 15.

7635 MR. HAMELIN: We are there.

7636 MR. HENRY: It is the second sentence of the first paragraph, and I will just read it.

7637 It says:

7638 Do you agree with that?

7639 MR. HAMELIN: In general terms, I think I would.

7640 MR. HENRY: So the market forces is competition. Is that correct?

7641 MR. HAMELIN: I guess the common way of understanding that in common language, I would interpret it that way.

7642 MR. HENRY: And regulatory action is what the Commission will or will not do or direct you to do.

7643 MR. HAMELIN: That is correct.

7644 MR. HENRY: And "would not satisfy Northwestel's business case criteria for projects".

7645 Do you agree with that?

7646 MR. HAMELIN: Certainly for the small communities, yes.

7647 MR. HENRY: What would be a small community?

7648 MR. HAMELIN: Actually, each business case is not necessarily geared toward communities. It is geared toward more of service or a product, or what have you.

7649 When we are talking the economic business case, it is in the vein of providing a proper return; that is, that generates more than what it costs you to build it, which is the cost of capital.

7650 MR. HENRY: I am just trying to figure out where we fit in, if at all, in terms of the remote definition unserved, underserved. North of north is one reference that was made earlier today.

7651 When you refer to a small community, what would that be?

7652 MR. HAMELIN: There are about 93 or 94 of them in the terms that I am talking about. If you are talking economics, generally speaking area 2 -- I described it this morning -- is really anything out of Whitehorse, Yellowknife and Fort Nelson.

7653 In some pockets of -- take Iqaluit, for example. I am sure there may be a customer or two or three there that could be profitable. But taken as a whole, it is possibly not. Certainly outside of Iqaluit it isn't.

7654 I guess I am talking in general terms. There are two main centres that have been carrying the north at large for 90-some other communities between Area 1 and Area 2. It is in that vein that I am talking.

7655 MR. HENRY: So when you are talking about the small communities, would it be fair to say that the majority of them are First Nation -- First Nation including our Inuit brothers?

7656 MR. HAMELIN: I would say outside the main centres it is predominantly First Nation that have the majority in proportion. I would suggest that that might be right. I don't have the exact numbers, but that makes sense to me.

7657 MR. HENRY: For those communities that are not economically viable.

7658 MR. HAMELIN: It would translate that way, yes, I guess.

7659 MR. HENRY: And that is where you are looking at supplemental funding, or funding from somewhere to help deal with those communities.

7660 MR. HAMELIN: To help achieve the vision from the federal government, the CRTC, providing comparable services, which means elevating the hardware, the network. Comparable rates means collapsing our rates in our case and also trying to provide choice, which has been part of Decision 98-1.

7661 MR. HENRY: And which involves quite a few First Nation communities.

7662 MR. HAMELIN: It involves all Canadians, if I understand 99-16.

7663 MR. HENRY: So when you are looking at these communities there is really no business case. You know that it is going to be too much money, and you are not going to make any money back.

7664 So it is really --

7665 MR. HAMELIN: That is generally correct.

7666 MR. HENRY: If I refer you to page 14 of the Yukon evidence, just the previous page, and look at the objectives of Connect Yukon, do you agree with the first bullet:

7667 MR. HAMELIN: Yes. I believe that is the objective of Connect Yukon program.

7668 MR. HENRY: Do you believe in the second bullet?

7669 MR. HAMELIN: Sure.

7670 MR. HENRY: And then the final, the third bullet.

7671 MR. HAMELIN: Sure.

7672 MR. HENRY: With Connect Yukon then, is that a positive program for Northwestel?

7673 MR. HAMELIN: I think it is a wonderful program. Connect Yukon, they are working with us to make this happen, and we are glad to be the catalysts and bring our skillset to make that happen.

7674 MR. HENRY: And it benefits Northwestel's infrastructure as well; correct?

7675 MR. HAMELIN: I would just like to make sure on one item here. Are we talking the million dollar program that we had --

7676 MR. HENRY: No.

7677 MR. HAMELIN: You are talking --

7678 MR. HENRY: The overall program.

7679 MR. HAMELIN: The big one.

7680 MR. HENRY: Yes, please.

7681 MR. HAMELIN: Yes, it does, in the proportion that Northwestel is submitting its portion, which I believe is somewhere around $3 million, three or $4 million, somewhere around that.

7682 MR. HENRY: And what portion is YTG?

7683 MR. HAMELIN: It's the difference, the whole project.

7684 MR. HENRY: Is it $14 million?

7685 MR. HAMELIN: Something of that nature. If you want to be precise, that is one thing.

7686 MR. HENRY: I would like to be precise, if you want to check.

7687 MR. HAMELIN: The original program was 16 communities and I think it was $16 million. But I would like to check if you want to be very precise as to what the final contract was.

7688 MR. HENRY: Yes, please.

7689 MR. HAMELIN: I believe it included 11 communities, as opposed to 16, for example, that kind of thing.

7690 Let me check.

7691 MR. HENRY: Thank you.

--- Pause / Pause

7692 MR. HAMELIN: Unfortunately, my group does not have it. But certainly it is available easily. The Policy Panel will certainly have the precise numbers in hand.

7693 MR. HENRY: I can --

7694 MR. HAMELIN: But if we talk in general terms, I am sure you are talking around $10 million to $12 million of the government's contribution towards this. It is three to four times bigger than what the contribution of Northwestel is, if we want to keep the line of thought in perspective.

7695 MR. HENRY: In terms of Connect Yukon, and given that you say that it is a positive program, I want to direct your attention to the first bullet on page 14 and ask you a follow-up question.

7696 It says:

7697 How does Northwestel balance the directive from the Commission in response to -- I mean just looking at it it looks like the government is doing your job. I'm wondering how you balance those two. Do you know?

7698 MR. HAMELIN: Well, the way we look at it is the Yukon infrastructure program was an opportunity for Northwestel to work in concert with the government to make -- it had certain objectives, those of which you are reading, and it is talking about also high-speed connection to Internet and so on, that kind of thing.

7699 What that means in relationship to what we are here for today is that it alleviates something, it alleviates pressure, I would argue, on the southern supplemental funding that we are trying to get. What would have happened if this project would not materialize? This project, then, would have likely been put into the SIP program and certainly not achieve everything that is already in this project.

7700 This project is like a turbo SIP, if I can call it that, in a sense. It is providing more than basic service objectives that we are dealing with here today.

7701 MR. HENRY: You are referring to the high speed.

7702 MR. HAMELIN: That's correct, the high-speed Internet and frame relay I believe that's going to come with this project.

7703 MR. HENRY: I still don't have a clear understanding of how you separate the two. What was YTG's job and then what was Northwestel's job based on trying to provide access to a basic level of service. Was there a policy directive? Was there a definition? Was there a cut-off point? How did you measure those two. I know YTG's panel is coming later. I will ask -- I'm just --

7704 MR. HAMELIN: I wasn't the one negotiating the hardware aspect of it, the services, exactly where do you draw the line and so on, but rather I was involved in helping out design, if you will, the business opportunity itself and when it comes to how the funds flow, how the funds would flow and how the mechanism would work, but I was not involved in the detail as to which community would be selected, part of this project. That's more the marketing panel.

7705 But, again, you will have Mr. Wells on the panel, on the policy panel, I'm sure you can address those kinds of details with him.

7706 MR. HENRY: Yes, so it's a marketing issue. Which First Nation communities were affected or not affected? That's what you are -- I can redirect that.

7707 MR. HAMELIN: Thank you.

7708 MR. HENRY: Okay.

7709 Earlier on one of your colleagues referred to no man's land. Do you believe there is a place like no person's land? What is your definition of that?

7710 MR. HAMELIN: I don't have a definition of no man's land. In what context now? You say someone said it. Was it myself or somebody -- I mean to me "no man's land" means it would be very remote and possibly isolated somewhere relative to other communities.

7711 MR. HENRY: With nothing there.

7712 MR. HAMELIN: What do you mean nothing there? Oh, I see. I see.

7713 Mr. Dennett says he thinks it was in the context of the boundary issues, perhaps, that we were discussing.

7714 MR. HENRY: No, it was with regard to the tracking plan, actually, and it was looking at tracking SIP, so that -- I forget the reference you used -- to nine years this place kept falling off the map and no man's land.

7715 MR. HAMELIN: Oh, I think what you are talking about is capital program plans that Northwestel has.

7716 What we are referring to here is we look at a plan for three to four years in general terms. We know there are things, there are so many things that can be done in the north from an infrastructure telecom-wise. What would be nice -- I will give you an example, in fact, that this project addresses.

7717 For a long time the leg between Whitehorse and Dawson is an analog transport system. We would really love to digitize that and bring the most modern features that could be provided if that were to happen. However, we are looking at $9 million here. I think, as Mr. Vachon was saying, there are less than 2,000 NAS behind it, "NAS" being lines, if you will.

7718 Every time we look at it we just can't seem to be able to justify it from an economic point of view and it's always deferred and it has been deferred for nine years, and maybe if that is what you are referring to as no man's land, it never seems to crystallize or materialize and we just can't make it happen.

7719 MR. HENRY: I think he was referring that to me. I definitely believe there is no place like no man's land, that somebody was there before.

7720 MR. HAMELIN: Well, there is no man's land when it comes to economics.

7721 MR. HENRY: That's what I'm trying to figure out, where that is.

7722 In a previous panel I asked Mr. Vachon about financial planning and he mentioned that because of the demand or scarcity of some technologies or new technologies that that might change. Because of the small market and the buying power, how do you anticipate the scarcities or fluctuating prices or budgeted materials that affect the rollout of the SIP?

7723 MR. HAMELIN: I'm not sure I fully understand the nature of your question.

7724 MR. HENRY: It's a redirect from a previous panel and it's just about financial planning. Between now and the end of the four years, how is Northwestel going to deal with changes to the plan, if any, or contingencies, if you will?

--- Pause / Pause

7725 MR. HAMELIN: Again, I'm not sure I'm 100 per cent clear what you are saying. If you are referring to the SIP program not being exactly on target, if you will -- like, for so many projects that we have deployed here we have estimates and these are planning estimates. They could be off 20 per cent easy.

7726 What happens, however, is we intend to -- when we get closer to the year, a specific year, and we do the detailed engineering, the estimates then will be much more tight and precise, and I suspect the variation from those would not be significant.

7727 MR. HENRY: But could be off by 20 per cent roughly.

7728 MR. HAMELIN: I would argue that the whole SIP program that has been presented over four years currently, while it is known technology and so on, by the time we do our surveys and we do the detailed engineering behind it, getting quotes from suppliers as time goes on, you know, we do a spec that gets to be an estimate that is very tight, if you will, and then it is approved by the Board of Directors and would carry on.

7729 MR. HENRY: What happens, then, between year three and year four to make sure that it doesn't -- a place or a plan that you have today doesn't fall off into no man's land?

7730 MR. HAMELIN: Well, we would be submitting, as we go along, the tracking mechanism. The Commission would be able to see how well we are progressing, how many customers we have connected that we said we would connect.

7731 When it comes towards the end -- I mean, if you are suggesting we are going to be off in our current estimates, it's possible that we would be submitting on a yearly basis with the proviso that three years from now there would be a review, in our proposal anyways, a review of both. Perhaps the regulatory framework, where the SIP program is at, have we achieved our goals? How is the rate situation? Do all Canadians have comparable rates and is there a choice available to Canadians up north.

7732 All this would be reviewed in that context. That's what we are proposing.

7733 Mr. Henry, I doubt that the SIP program, if you are three-quarters down the road or 90 per cent done that you would drop a community or two, if that's the line of suggestion. Certainly, it is not our intent. There would be no benefit. That would be missing the vision. That would be a failure.

7734 We don't want that to happen. We are here. We are the catalyst to make this happen. We think we have a balanced proposal. It's doable if we all work together.

7735 MR. HENRY: Let's assume a community did fall off or that you did get to year four, can you see that perhaps happening?

7736 I just want to know what would happen if that was to happen. Do you ask for more supplemental funding? Do you ask for another grant from government. We have already agreed that the high cost areas are predominantly First Nation.

7737 MR. HAMELIN: You know, when we are talking the vision, Manley's vision, the CRTC and everyone, there is no sunset clause in there, there is no drop off. That would go totally against the whole intent of this proposal.

7738 I would like to see common sense prevail and that if there is a community that hasn't been included and we have reached the limit of our four-year budget that that's it and that community drops off the map, if that's what you call it, that doesn't make much -- I cannot believe that that would happen.

7739 MR. HENRY: Okay. If it did happen, I still don't understand what you would do if it did.

7740 The reason I'm asking is because they are predominantly First Nation communities. Correct? It's kind of like a warning to First Nation government is they may have to pay a price down the road if they want service, if it couldn't be made under the SIP or something like Connect Yukon. That's what I'm trying to get at.

7741 MS CHALIFOUX: If I could just add to what Ray is saying and what Mr. Vachon's panel has said, the very purpose of our SIP-tracking plan is to ensure that the very scenario you are laying out doesn't happen. We will be tracking the programs as we implement them and we will be looking at what's left and making sure that we have got the resources required to achieve SIP each year.

7742 Again, I think what Ray is saying is we have set up the mechanism to ensure that what you are portraying doesn't happen.

7743 MR. HENRY: Maybe because you raised this now maybe I will ask a couple of questions about Arcticom. That's the most recent deployment that we are aware of on a major level.

7744 What was the experience there? Were there cost overruns or contingencies that had to be dealt with?

7745 MR. HAMELIN: Yes, there were cost overruns of I would say about 40 to 50 per cent. However, here we were dealing with a project that was a rather complex project. It was the first of its kind in frame relay over satellite and so on. Am I correct?

7746 We were looking at 58 communities all in one fell swoop. There are some implementation issues that have occurred. It is difficult technology for us, relatively speaking, here to offer basic service. SIP is something that we are more accustomed to. It is proven technology. It is smaller projects when you take them one by one.

7747 MS CHALIFOUX: If I could just add to what Ray is saying. He acknowledged cost overruns on the Arcticom project, but it should also be noted that we had significant revenues as well. We underestimated our revenues as well and have achieved much more than we initially expected.

7748 MR. HENRY: So the rates will be coming down?

7749 By the 40 to 50 per cent cost overrun do you mean $1 became $1.40 or $1.50?

7750 MR. HAMELIN: It did, but again there were more demands put on us and this project as it went along. It is paying off perhaps a little slower perhaps than we had anticipated, but the revenue right now is moving along quite nicely.

7751 MR. HENRY: Did you have to renegotiate the contract?

7752 MR. HAMELIN: Again, --

7753 MR. HENRY: That's a big overrun.

7754 MR. HAMELIN: I'm not the one that did that particular contract. Maybe we can talk to the policy panel on this one also. I just know at a high level the capital estimate for this new technology has been overrun, yes, with corresponding demand on it.

7755 MR. HENRY: Do you think you can draw a parallel and say that might be possible with the SIP program?

7756 MR. HAMELIN: I'm not sure if I can draw an exact parallel here. We are talking about a bidding process here that went with this tender when the GNWT put an RSQ out.

7757 MS CHALIFOUX: I think also Ray mentioned that earlier. The two are very different. Arcticom was into a new business, a new technology that we didn't have a lot of experience in or building. SIP is quite different. It's providing basic service and that is the business we are in historically and we have all the experience and, therefore, I think a lot of faith in the estimates that the SIP panel put forward, their planning, but they are based on years of experience.

7758 MR. HENRY: Presumably, the corollary is so was the Arcticom estimate to start with, that it was based on knowledge of the people that put it together.

7759 MR. HAMELIN: Again, we were talking -- to us it was new technology. It was complex and so on and we hadn't done that before. No, it wasn't. I don't think I would compare both.

7760 MR. HENRY: It's new technologies we are talking about now in some instances though, isn't it?

7761 MR. HAMELIN: We are talking about switches that exist out there. We have about 80 switches or so that just don't fit the bill. To replace the switches, replacing a switch, upgrade a manufactured discontinued software, when yet here in Whitehorse you have all the bells and whistles that we can offer.

7762 There are two very different things here. Frame relay on satellite is very different than just upgrading a switch.

7763 MR. HENRY: I guess the question then is in terms of the roll out of SIP as you are tracking and coming back to the Commission on an annual basis, would you be considering cheaper or different technologies if those were to arise, other than what you are saying you are familiar with now?

7764 MR. HAMELIN: Always. Any time you can reduce costs that's music to my ears.

7765 MR. HENRY: So if there was a cost overrun for some of these First Nation communities what assurances or how do the First Nations know they are not going to hit a wall and then it's like if you want basic service it's going to cost you more money, so come up with a Connect Yukon type program.

7766 MR. HAMELIN: I think that's in the hands of the Commission, the rules of how to operate in the north and how far can we go.

7767 It is our intent with the tracking program if we go astray quickly, we will not wait until the year is over before we notify that something has gone wrong, but we do not anticipate this at all. This is just run of the mill, bringing plain old telephone services elevated to the definition of the Commission's basic service that they are talking about.

7768 We think we can do this --

7769 MR. HENRY: Eyes closed?

7770 MR. HAMELIN: Well, eyes closed, with a lot of sweat and at 40 below zero.

7771 MR. HENRY: All right. I will follow this up too with the other panel.

7772 Earlier on there was talk of targeted subsidies. Do you have an example of that and what that might require?

7773 MR. HAMELIN: Are you asking target subsidies like social assistance to specific individuals?

7774 MR. HENRY: You mean to help pay the phone bill?

7775 MR. HAMELIN: No.

7776 MR. HENRY: I'm trying to get a handle on it and Mr. Wells raised it. I know he is coming on a later panel, but I am just thinking in terms of this panel what, if any, thought is on targeted subsidies that don't fall between your capital plan or SIP or Connect Yukon? Then what?

7777 MR. HAMELIN: I think I would prefer that you bring this line of questioning to the policy panel because I am not sure I can answer you.

7778 MR. HENRY: All right.

7779 Let me direct you to an interrogatory please. Just a second.

--- Pause / Pause

7780 MR. HENRY: CRTC 110.

--- Pause / Pause

7781 MR. HAMELIN: Yes, I have it.

7782 MR. HENRY: Thank you, Mr. Hamelin.

7783 It is at the bottom of the page. You estimate Connect Yukon would cost $17 million, of which you would pay $3 million -- sorry, you would pay $4 million, at the bottom, just a point of clarification.

7784 MR. HAMELIN: Yes, and that's on the January 17th round of interrogatories and that was the status of the project as it was at that time. It did change. It was mentioned elsewhere, perhaps in this interrogatory, that we are still negotiating then, trying to finalize the terms and so on.

7785 In the end, instead of, for example, I don't know if they mentioned the number of communities here. They are talking 16 Yukon communities. I believe it ended up at 11 or something as part of the final project.

7786 MR. HENRY: I want to direct you to the second half, Attachment 1, of 110 where you were asked to identify other sources of funding or cost sharing that may be available. Do you have that?

7787 MR. HAMELIN: I have Attachment 1, which is an attachment that comes from the high-cost serving area hearings; it's got six pages.

7788 MR. HENRY: Yes.

7789 MR. HAMELIN: Do you have that page number?

7790 MR. HENRY: Well, it's just a general question.

7791 You identify the other sources of funding to include Community Access Program, Schoolnet, First Nations DirecPC, Advance Satcom, and Canada Province Federal Infrastructures Programs, and the Rule Electrification Program. Do you see that?

7792 MR. HAMELIN: Yes.

7793 MR. HENRY: Okay. So is the only other source of funding that Northwestel looked at, involving First Nations, First Nations PC?

7794 MR. HAMELIN: I wouldn't be 100 per cent sure. Again, marketing could help me on this.

7795 It's suffice to say, in general, we always tried to benefit from any program that can better the systems that we have up north, the network, for the benefit of our customers and we are always open to any subsidy of any kind, if I can put it that way, or a donation and grant or -- you know, when you are talking lines, like, we will give you an example. We have a small community, Kakisa, in Northwest Territories. I think we -- I forget the number of lines, if it was 50 or less. I do recall, however, the number. It was $28,000 for a phone line. I mean that's a nice car in your kitchen before you start, you know. In those days, I think it was $6.70, or whatever it was, in that rate group, that we were charging per month.

7796 How can you make that happen without any help of sorts? Like this is where us being close to our customers and close to the governments, et cetera. I mean this is what effective diffusion of technology means. It's being able to work in concert with those that can help to make this happen.

7797 MR. HENRY: So, just based on this conversation, Northwestel wouldn't say no if a federal department was to invest in, say, Connect Red Yukon, connect the Indian communities that are very high-cost or may be identified in the future.

7798 MR. HAMELIN: Well, I think this -- I'm not sure if I'm mentioning exactly what you mean by "Red Yukon" or --

7799 MR. HENRY: First Nations.

7800 MR. HAMELIN: We are talking Canadians, here, across Canada. We are talking a SIP program that does just that. And there's a mechanism here that we are discussing, our proposal, and we feel that we can make it happen.

7801 MR. HENRY: Okay. So, in terms of other sources of funding, then, no First Nation program has been identified, or anything like that?

7802 MR. HAMELIN: I do not -- not of late. I do not know if there's donation and grants available from the First Nations. If there were donations available, sure, we would entertain the idea.

7803 MR. HENRY: Okay. So, in terms -- this is just going back, a minute. In terms of SIP, that SIP is a Northwestel timeline of four years, not --

7804 MR. HAMELIN: Four years is our proposal. It's a balance approach, we thought, after doing a lot of canvassing, if you will, and I think Mr. Walker, the other day, was -- didn't know exactly where the reference was with all our consultations. Actually, it's Attachment 1 to our evidence. If you go and see that, you will see that CYFN is, indeed -- I think it's the last one on the page. But all the different surveys that we have done and consultations, they are all laid out there and what the issues were for those discussions. It's Attachment 1 of the evidence.

7805 MR. HENRY: I read that.

7806 But it still doesn't deal with the negotiation of land claims and the agreements that may be entered into in the future leading up to new communities in what's now perhaps termed as "no person's land".

7807 MR. HAMELIN: No; today the SIP, after a great deal of effort as best we could in the time frame, we had is what we know. We have driven all over the place. The SIP panel has dealt with that. It addresses just about everybody that we know of, with a few very minor exceptions, if someone is -- you know, there was an example --

7808 MR. HENRY: Yes, we have done --

7809 MR. HAMELIN: -- on the lake and you don't have the shock to reach the antenna. I mean, you know, it's that kind of thing. So it's what we know today.

7810 MR. HENRY: And you don't want to buy them boats. I remember that.

7811 Okay. I'm going to move, now, to another area.

7812 How do you balance the Commission's objective for basic service to unserved and underserved communities with your obligation to serve, given the high cost, or extremely high cost, in some areas where it may be prohibitive? Or it doesn't meet your market.

7813 MR. HAMELIN: Well, obligation to serve, we do just that today, under -- but it's not at the level of basic service objectives that they find in the high-cost, but all the indicators, quality of service, et cetera, was discussed with the SIP panel.

7814 MR. HENRY: Now, earlier on, CAC and NAPO asked about proactive attempts to attract subsidies or supplementary funding from governments and you stated that some of the budgets were tweaked as a result of Nunavut demands -- that's the example that you used.

7815 Who took the lead in that? In the tweaking. Like in changing the budget.

7816 MR. HAMELIN: In Nunavut, we have an Assistant Vice-President, Mr. Mark Hickey, he lives there, he's on site, in Iqaluit, he's in contact with the new government, finding out their needs and so on and -- you know. This is very, very recent. The government, currently, is going to be a decentralized government. Iqaluit was declared the capital. And he's just responding to one business need that they have.

7817 MR. HENRY: Do you know how many First Nation business there are operating in your territory?

7818 MR. HAMELIN: Not offhand, no.

7819 MR. HENRY: Do you know how many First Nation Indian bands there are in your territory.

7820 MR. HAMELIN: No. I just know the split of -- NAS is about 50-50 between res. and bus. and it's an extraordinarily high number relative to the south, which has a split of about 80-20.

7821 MR. HENRY: Okay. It's the position of the First Nations -- and I'm going to talk about the Immigrant Investor Fund that I'm sure nobody envisaged BCE would have access, but that's a different story. It's the position of the First Nations not to access federal funds without their consent.

7822 Do you agree with that?

1420

7823 MR. HAMELIN: No, I can't comment but I can tell you that the funds is Northwestel that's accessing the funds.

7824 MR. HENRY: The Immigrant Investor Fund?

7825 MR. HAMELIN: That's correct.

7826 MR. HENRY: Okay. So you are not aware that the First Nations don't agree with that approach?

7827 MR. HAMELIN: No, I don't.

7828 MR. HENRY: Okay. So, in terms of approaching federal funds -- well, maybe that's a better -- I will redirect it to your colleague.

7829 Okay. Those are my questions and my partner has a few questions dealing with the pilot project.

EXAMINATION / INTERROGATOIRE

7830 MS STAPLES: There was mention earlier, on a network panel, about the possible use of pilot projects for specific areas.

7831 When did you know when pilot projects would be considered?

7832 MR. HAMELIN: I don't know. I can't answer. The pilot --

7833 MS STAPLES: Okay. Would it be for financial reasons? Or technical renovations? A request?

7834 MR. HAMELIN: What's the context of your question I guess would be --

7835 MS STAPLES: There was a network panel, they spoke about the possibility of a use of a pilot project for deployment of certain technology to reach a prescribed area and I just wanted to know, if there were criteria, what those criteria might be.

7836 Would it be, as I say, financial consideration or technical innovation, that sort of thing?

7837 MR. HAMELIN: I am afraid I can't answer that question -- not because I don't want to. I just don't know. Perhaps you could give it another shot with the Policy Panel to see if they understand the context.

7838 MS STAPLES: Thank you.

7839 MR. HENRY: Okay, panel; thank you. Thank you, Commissioners.

7840 MR. HAMELIN: Thank you, Mr. Henry, Ms Staples.

7841 THE CHAIRPERSON: Thank you, Mr. Henry.

7842 Madam Secretary, please.

7843 MS VOGEL: Thank you, Mr. Chairman.

7844 The next party for cross-examination of this panel is the Government of Yukon.

7845 Mr. Pratt, please.

EXAMINATION / INTERROGATOIRE

7846 MR. PRATT: Good afternoon, Mr. Chairman, Commissioners. Good afternoon, panel.

7847 I would like to start, Mr. Hamelin, asking you to look at the response to YG-505.

--- Pause / Pause

7848 MR. HAMELIN: I have it.

7849 MR. PRATT: The question that I have is in relation to page 3, the first full paragraph that says:

7850 This was an issue that I had taken up with the network panel and wanted to get your views on it.

7851 Specifically, how should we interpret this in the light of the SIP expenditures that we know to be coming? What assurances can you provide that potential cash constraint issues will not have an impact on the execution of the SIP?

7852 MR. HAMELIN: That's a good question. This answer was given in the context, I believe, of the scenarios -- there were three financial scenarios that were asked of us. I call them the good, the bad and the ugly -- the good being the proposal that we present; the bad was the rate proposals we are presenting but without any subsidy; and the latter, the last one was don't change your rates and there is no subsidy.

7853 Then we are back to where we are, except perhaps there would be some funding for competitors to come in and take the whole market away from us.

7854 This is a bit in that context. This is a situation where you have scenarios where we are making negative returns. Essentially we are headed towards bankruptcy in a sense, in a very large sense.

7855 This does not achieve the mission at all. It is just adding up, doing the bean counting, if you want, of this scenario.

7856 What would one do? We are addressing what do you do when you are not making your returns or if the cash is being constrained or is not available? You look at the capital program and you look at your operating expenses and curtail them as much as you can. It delays the progress of the deployment of the network for northerners. It is not a good thing in the end.

7857 MR. DENNETT: Could I add something to that, please, Mr. Pratt.

7858 I just wondered whether perhaps you were getting into the area defined by CRTC-2101.

7859 If I may, I will just read you the question. It is from the Commission.

7860 It says:

7861 We took that to mean that the Commission was looking for some kind of safeguard to ensure that we did actually implement the SIP more or less along the lines that we budgeted each year; in other words, that we didn't react to constraints that were appearing in the company in the course of a year and reduce the SIP.

7862 The response to that said, in effect, we adjust the supplementary funding after the fact and thus if any extra ROE were earned by us slowing down the SIP, we would have to give it back.

7863 If you don't mind: this is something that came up in discussions between Mr. Batstone and Dr. Booth.

7864 Our view of this interrogatory was that the Commission was asking for the safeguard. We said fine, that is perhaps a good idea.

7865 But the way the conversation between Mr. Batstone and Dr. Booth proceeded, it was portrayed as a true-up for the company, which in and of itself reduced risk.

7866 I just want to clarify that if that is the way the Commission thought of it, that this is a true-up for our benefit rather than for theirs, and as a result of it being for our benefit it reduced risk, we didn't want to do it.

7867 We proposed it because we thought it was what the Commission wished to have.

7868 I don't know whether that answers or completes the answer to your question, but it certainly seems to be in a related area.

7869 MR. PRATT: Thanks for that. If I can maybe interpret what you are telling me, it is that with respect to the SIP we should not be concerned that other cash constraint issues or inability to achieve the ROE will have an impact on those projects, because if that did happen your supplementary funding would be at risk.

7870 Is that what you are saying?

7871 MR. HAMELIN: Well, generally speaking, the SIP that would be proposed for the year, we would achieve it. It would not be constrained. That is correct.

7872 The capital constraints that we are talking about would be underlying this SIP program. It is the regular program of the company, if I can call it that, coin it that way, that could be delayed further if there are cash constraints that arise.

7873 So no, the SIP for the given year is the SIP. We realize that is a deliverable that we would have to meet.

7874 MR. PRATT: That is where I was going to go next.

7875 Am I correct in interpreting your position that if the eventuality comes that you need to make some changes as a result of cash constraint or challenge in earning the ROE, the first thing you would look at would be the underlying capital program?

7876 MR. HAMELIN: That is correct.

7877 MR. PRATT: Those expenditures are also incurred in order to provide service.

7878 MR. HAMELIN: That is correct.

7879 MR. PRATT: Those kinds of adjustments could also have the effect of delaying service, or they could be service affected.

7880 MR. HAMELIN: Unfortunately, yes.

7881 MR. PRATT: Can I ask you to flip over to CRTC-2506, page 7.

7882 MR. HAMELIN: I'm there.

7883 MR. PRATT: I realize that this again may be a question that was asked in a different context.

7884 I looked at those list of factors on pages 7 and 8, and it seemed to me some follow on logically from the discussion we were just having.

7885 If you could look at that list, Mr. Hamelin, and then tell me with respect to the levers or controls that the company might have to deal with challenges that might be created by a forecast that didn't pan out or other circumstances, whether these are some other avenues beyond the reduction of capital expenditures that might be utilized.

7886 MR. HAMELIN: Any one specific you want to address here?

7887 MR. PRATT: Well, let's start at the top, level of local rates. Maybe we should just take them in a comparative fashion. Presumably you would look for the opportunity to control your capital expenditure before you go back and ask for local rates. Correct?

7888 MR. HAMELIN: Well, capital expenditures relate to several things. I mean we look at the rate of return that we are entitled or allowed to earn. We also look at cash flow and our capability of making things happen.

7889 When you relate it directly to capital, this relates more I suspect to the return of the company that we are talking about. Level of local rates, what we are saying is it is possible -- we don't want to say never -- as to proposing further increases as time elapses if need be, in order for us to reach our allowed rate of return.

7890 MR. PRATT: Okay. The next one, curtailed month of plans for extension of service, would that encompass both the underlying capital plan and the SIP?

7891 MR. HAMELIN: I would like to view this as more the underlying regular program of the company.

7892 MR. PRATT: Fine. The level of the sustainable CAT rate. That's obviously something that will be determined by the Commission in this proceeding.

1435

7893 MR. HAMELIN: Totally. The key is to find out exactly through experience as we open the doors in the north the CAT level that's appropriate. Right now our best suggestion is five cents as a starting point. Currently, you know, we have a lot of bypass that's going on .

7894 People effectively are not enjoying the utility of using their phones. The phone in physical terms, once you pick up the phone, it can transmit and receive. That works from an engineering point of view, but not being able to lift the phone to originate a call because of the rates associated with it and waiting for someone else from the south to call you, that's the most incredible disservice that I can imagine.

7895 A lot of people are doing it. It's the normal thing to do if they are cost conscious. Regrettably, that's what's happening today.

7896 MR. PRATT: Okay. I was going to try and stick closer to the financial impacts. With respect to the level of the sustainable CAT, would that be an issue or a factor you might look at further out in time, going back to the Commission with a proposal for financial matters. Would that be something you might want to adjust for financial purposes?

7897 MR. HAMELIN: We don't think so. I believe once the CAT's established and can be reviewed and so on, I think that it would be for the Commission to decide upon.

7898 MR. PRATT: Thank you. Can you look at the next one then, please, higher settlement payments? There's a point that I would appreciate your clarification on.

7899 In your proposal, once the sustainable CAT is set by the Commission, is it your view that it would supersede the settlement agreements or would there be some other process?

7900 MR. HAMELIN: My understanding is that the CAT that would be set, that the settlement process would ultimately be headed towards that, that it would be settled based on this sustainable CAT.

7901 In fact, it's all shown in our numbers in our proposals. You see settlements dropping significantly in the year 2001 because they are assumed to be based on the sustainable CAT.

7902 MR. PRATT: So the CAT would just simply replace the settlement arrangements that you have now. Correct?

7903 MS CHALIFOUX: Maybe replace isn't the correct word, but rather the settlement would be based on CAT, but interconnection agreements would still have to be negotiated and the payments finalized, or the rates finalized, but they would be based on sustainable CAT.

7904 MR. PRATT: Right, but the element of negotiation of the amounts would no longer be on the table. Correct?

7905 MS CHALIFOUX: Well, I mean the CAT is only one component. There are other components to be negotiated.

7906 MR. PRATT: Okay. Fair enough.

7907 Mr. Hamelin, then, is this a very likely option? If there were financial issues or a scenario -- I'm imagining the cash crunch. It probably isn't very likely to take the -- go back to your settlement partners and negotiate higher payments. Correct?

7908 MR. HAMELIN: It wouldn't appear on the short run. I'm not an expert, however, in settlement negotiations. Mr. Walker is.

7909 MR. PRATT: I thank you. Now, the cost of satellite channels is the next variable that's identified here. Is that something that you have some flexibility in being able to manage that cost?

7910 MR. HAMELIN: To some degree and we have taken steps towards that, at least to secure rates for the longer term. We have entered in a long run contract with Telesat. However, I don't know again all the terms and details of it as to whether we can bow out of it or not, you know, what all the conditions are.

7911 Suffice to say, we entered into a long term arrangement whereby we have a handle on the rates for the long term to come.

7912 MR. PRATT: Was that just a recent agreement, Mr. Hamelin?

7913 MR. HAMELIN: Yes. Well, recent. Fairly recent. It kicks in in the year 2001, I believe, with the new satellite that they will have.

7914 MR. PRATT: Are there any alternatives to Telesat that you could utilize other --

7915 MR. HAMELIN: There might be. Again, I'm not a hundred per cent sure. Some could argue maybe you could negotiate with U.S. satellites or other satellites, though the thing is to make sure that the footprint addresses our market.

7916 MR. PRATT: I mean --

7917 MR. HAMELIN: We are well served currently. You know, we will negotiate with whoever will give us the best rates.

7918 MR. PRATT: And presumably because of a long term contract, that's not an option that is open to you now anyway.

7919 MR. HAMELIN: All that does is mitigate the vagaries of rate increases for transponders.

7920 MR. PRATT: Okay. Over the page, lower supplier and equipment prices. It appears that that's not something that is particularly under your control. It will either happen or it won't. Right?

7921 MR. HAMELIN: That's true to an extent. However, we have entered on a trial basis anyway for a year into negotiation with BUYCO. I don't know if it was discussed with the previous panel. BUYCO is an arrangement with Bell Canada. With Bell Canada, Bell Canada BUYCO buys -- let's say benefits from the purchasing power, if you will.

7922 However, you have to understand that Northwestel is one odd subsidiary in all of this in the sense that we are kind of rural experts as far as -- compared to urban, large urban centres.

7923 Where the benefits of purchase discounts may occur, it only depends if you are buying something that we need. In the end, we are analysing constantly if there are true benefits associated with this arrangement. If not, we will be the first ones to bow out.

7924 MR. PRATT: The next one, company productivity, you have spoken of productivity this morning with this panel. This would be obviously an item that is under your control, but perhaps one that might not give you immediate relief in a financial crunch. Correct?

7925 MR. HAMELIN: I'll ask Mr. Dennett to address this.

7926 MR. DENNETT: Yes. We have considered this one, Mr. Pratt. The conclusion we come to is that the problem with short term productivity gains is they tend to be damaging in the long run. It cultivates this kind of short term thinking mentality in the company and projects which have long term benefits are cancelled simply because they cost short term costs.

7927 Staff training, staff overtime, all these type of things. Typical example, modernization programs or modernization projects which can be cut back. It's all done because it saves cash in the short run, but it tends to be damaging because you leave your work force and your network in a more frail, fragile condition.

7928 MR. PRATT: Nearly done on this list.

7929 The average toll and local rates, can you tell me whether this is something that is a realistic option for the company in the near term to alleviate a hypothetical financial crisis?

7930 MR. HAMELIN: It would a very unfortunate thing and it is not something we are contemplating. We believe that this would not fulfil the vision and the mission that is before us, which you end up when you start deaveraging rates. You end up really with kind of two classes of citizens, if I can call it that, and particularly when you look at the pattern. There is even the calling pattern differs very much in the north. Smaller communities tend to do a lot of intra calls, while the larger communities tend to more inter, southern calls.

7931 If you start playing around, picking away at various schemes to try and reduce the subsidy with these kinds of tools or mechanisms, I don't think it would be to the benefit of our customers. I don't think it would fulfil the mission. I think it would be a failure.

7932 So this is not our proposal. What we are proposing is similar rates for all Canadians right now, not over time, not stretched and bringing them down gradually and so on. We are making a quantum leap here. We are buying a network that is uneconomic. We are saying there are all these benefits, toll rates collapsing. We are asking for $5 as a contribution of northerners towards that. That's the message and that's the mission. That's what we are trying to do, not half way, not here nor there. We are just trying to make exactly what was laid out in many of the speeches of this room and so on.

7933 MR. PRATT: And the last bullet on that page talks about discontinuance of service or abandonment of operations. I will let you tell me, but I would expect that this would be a last resort. Do you ever foresee a situation where you would be in such difficulty that you might come back to the Commission and ask for relief of your obligation to serve?

7934 MR. HAMELIN: Well, obligation to serve, let's be clear here. On competitive segments, if that's what you are talking about, I mean that would happen. Today under Phase 3, for example, we have CTO, terminals and equipment. They are in a negative situation. They have been improving over time, but they are still negative.

7935 Well, in the CTO category you have things like inside wire. Imagine yourself taking a plane to go to Grise Fjord near the magnetic North Pole to go and install a few lines in a house. That's what we are talking about. How would you make this happen? You can't make things add up that way.

7936 Alternatively, if you are telling me this is a competitive segment forever and ever, well, simple business sense tells me if you do an economic value analysis type of approach that you simply walk away from that business and give it to whomever you can.

7937 We have tried to do that. We have tried to encourage, not abandon, but tried to encourage contractors to do just that. We have 50 communities or so that there is no presence of Northwestel, there is no technician. We use community techs. We use Power Corporation techs, but even after you have added all those up, you still have some 45 communities or so that have no one.

7938 To try and find the skillset or those that might be interested in what may be called a business opportunity to do inside wire, for argument's sake, nobody is knocking on the door right now.

7939 So we end up, if you will, fulfilling our obligation to serve and it's a high cost and when you average it all out it is still non-compensatory.

7940 MR. PRATT: Mr. Hamelin, you may suggest that I ask the policy panel about this, but let me ask you now while it's fresh. Would it be your view that the company would consider opportunities if a community or a group or maybe even something along the lines of the old mutual telephone companies were to make a proposal to you to serve some of these areas that you are speaking of?

7941 MR. HAMELIN: When you say "serve" perhaps if you want to clarify. Are you talking local service, for example?

7942 MR. PRATT: I am just picking up from what we have got here on the page, discontinuance of services or abandonment of certain operations, without necessarily specifying whether it is economic or -- obviously, it is uneconomic, but I think you correctly pointed out that if it were an obligation to serve situation it would be basic service. I guess that's probably what we are talking about.

7943 MR. HAMELIN: Well, we are always open to subcontracting if the skillset is there to provide the quality of service that we want to render.

7944 As far as the service itself and so on, we normally -- we are generally in the business of owning, if you will, providing the provision of the service, but as long as when it comes to doing outsourcing maintenance of site power, we do that, for example, with Frontec.

7945 They save us dollars when it comes to chartering helicopters and getting some fuel for our tanks. That's all because they have several clients.

7946 So where it's feasible we do outsource some of the services, if you will, that are commensurate out of our core business.

7947 MR. PRATT: Fine. Thank you.

7948 Could I ask you to turn quickly to YG-804.

7949 MR. HAMELIN: Yes. I have it.

7950 MR. PRATT: And I think it will be safe to say this is my one depreciation question.

7951 MR. HAMELIN: We have an expert with us just in case.

7952 MR. PRATT: Great. I might need the help.

7953 The question related to whether or not, given what we know about technology and the speed of obsolescence whether that might be a conservative treatment. I think the response was, well, not right now.

7954 What I wanted to ask you, Mr. Hamelin, is if at some point, and let's just say in the next four years, it got to be the time to revise the life estimate for this asset code, what would be the impact on the company and particularly on the SIP?

1450

7955 MR. HAMELIN: Your first question was whether we are intending to modify this asset life?

7956 MR. PRATT: I took it from the question that there is a possibility that the asset life might be modified. I assumed, maybe incorrectly, that that would be to reduce the asset life if obsolescence is increasing. Correct?

7957 MS CHALIFOUX: Yes. I mean, we study a portion of our asset codes each year. So at the time this asset code was studied, 22 years was deemed to be the most reflective estimate.

7958 Certainly the next time we study it there may have been some impacts that would shorten the life of that asset code and that does have an impact on increasing your depreciation perhaps in isolation. However, there is always going to be many factors. You have got to look at it in the context of -- because we depreciate on an equal life group basis. So you have got to look at where we are in terms of the average service life of that asset pool and the remaining life of that assets pool, the additions that you are putting into that asset pool, the retirements that you are taking out.

7959 So all things coming into play, it's hard to say what -- you know, will depreciation expense go up or will it go down? But if you just isolate that one variable average service life, if it goes down depreciation does tend to go up.

7960 MR. PRATT: So the depreciation expense would increase and that would affect both the plant that is already in service and the plant that would be being installed, if that works, through the course of the SIP. Correct?

7961 MS CHALIFOUX: Yes. It impacts your plant in service. When asset codes are studied, you look at it in the context of the plan in service at the date it is being studied.

7962 MR. PRATT: Would this be an example of a type of adjustment that might have to be picked up in the annual review process that you have described for the conduct of the SIP?

7963 MS CHALIFOUX: No, I wouldn't foresee it there.

7964 Every year we do a depreciation study. We file it with the CRTC. I expect that mechanism to continue and that would be the proper place for any sort of review to occur.

7965 MR. PRATT: I understand. But if the result of that were to have the expenses go up, then the total bill for the SIP goes up. Correct?

7966 MS CHALIFOUX: No, I wouldn't say that. It may impact the total financial outlook. It may impact the total financial outlook of the company overall, but it shouldn't impact SIP per se, like, the capital expenditures that you are putting into place.

7967 MR. PRATT: Okay. Good.

7968 Mr. Hamelin, I had asked a question, I think, of the previous panel in relation to YG-207. This was in relation, I think, to the office system's category and the annual -- there was an indication there was an annual expense of about $375,000 for office systems, so computer gear and software and the question that I had was if you could tell me how much of that might be sourced locally.

7969 MR. HAMELIN: My understanding is that a lot of this is purchased locally. Should I say who? I will leave it at that.

7970 MR. PRATT: Let me ask you, then, the related question. Is there a policy or is there any directive regarding purchasing, let's say, of this type of equipment generally?

7971 MR. HAMELIN: A policy. If you are talking who exactly we buy from, I can't say that we have a --

7972 MR. PRATT: I'm not interested in that, necessarily.

7973 MR. HAMELIN: Policy-wise, from a finance and accounting point of view, I believe we lease some computers, and that's a matter of whether we believe, you know, in the obsolescence and so on, the useful life of it. Certainly, software we do.

7974 When it comes to computers exactly -- just hold on a second here.

--- Pause / Pause

7975 MR. HAMELIN: We buy locally where it makes sense, because we don't have a specific policy.

7976 MR. PRATT: That's fine. Thanks.

7977 In the same general vein, your response to CRTC 423 described the corporate structure and indicated that there are some services that the company attains from other related companies, and my question here is what alternatives you might have to acquire services of these types, of these various types, from sources in the north?

7978 MR. HAMELIN: You are saying CRTC 423; the org chart that's there?

7979 MR. PRATT: Yes, page 2 of 3, the top paragraph indicates that there are some services there that the company obtains from other companies within the BCE group.

7980 MR. HAMELIN: Yes.

7981 MR. PRATT: For services of the types described there: pension administration, group insurance, human resources administration, treasury service, internal audits. Are there alternate sources in the north that you might get some or all of those things from?

7982 MR. HAMELIN: Well, some that are listed there, for example, pension administration, we talked quite a bit about pension today. These are high skill set actuaries that are available to us via Bell Canada and BCE. Certainly, as I say, we use them if it makes sense.

7983 For us, there is no way we are going to, you know, create such a talent pool for such a small company. We would outsource that. But we do look constantly at the cross-charges and compare, if need be, to elsewhere. I mean we will go the route that saves us every dollar we can save.

7984 MR. PRATT: On CRTC 1402, I think you had some discussion today already about integrality, and I don't intend to go very far into this, Mr. Chairman.

7985 If you could just confirm for me, Mr. Hamelin, that if the deemed approach were to be applied to the subsidiary investments, that the difference in the subsidy requirement is only about half a million dollars. Is that correct?

7986 MR. HAMELIN: I will have Mr. Duck answer that.

7987 MR. DUCK: Yes. I think the way we are looking at this, Mr. Pratt, is on the margin. We are seeing that with respect to the deemed earnings -- just let me get my bearings here -- the deemed earnings being brought in are approximately $3.3 million. The cost of capital is also to be paid by the customer now that the investments are brought back in under the deeming apparatus we estimate to be $1.4 million for a net of $1.9 million after tax, which when grossed up, I will call it in round figures, $3.5 million pre-tax.

7988 MR. PRATT: Okay. Thank you.

7989 MR. HAMELIN: I just want to make sure we understand. When you talk deeming, you know, you are talking earnings that are supposedly there and I can't pay those with that, you know. It's very important considering the SIP program and us collapsing our rates that the cash would be there to help us out and make this dream come true.

7990 MR. PRATT: I know, Mr. Hamelin. I get the same kind of shakes when you talk about integrality.

7991 Could I ask you to look at CRTC 1407.

--- Pause / Pause

7992 MR. HENRY: That will be Peter Dennett's line.

7993 MR. PRATT: Mr. Dennett, you have described how this review process would work and the repayments -- I guess that's the right word -- of any adjustment or difference in the supplementary fund are back into the fund.

7994 What I'm wondering is if you could explain to me, given the fact that of the balance that the company has tracked in order to achieve the objectives that the Commission has laid out, the rational for returning the difference to only one of those sources, being the supplementary fund. Did you consider any other mechanism or an alternative that might share the benefit, if I can call it that, in the same proportion as the pain?

1505

7995 MR. DENNETT: Excuse me. You are talking about the earnings sharing or the excess earning being shared with the fund.

7996 MR. PRATT: That's correct.

7997 MR. DENNETT: No. I didn't consider that it would be shared with anyone else other than the fund. The fund, after all, is the unenviable position of picking up the balance. The other means by which we increased revenues, like the $5 increase on local rates for example, that's -- as you have heard before, we feel that's a reasonable contribution to be made by northerners, $5 million or $4 million out of $40 million.

7998 The supplementary fund is paying by far the lion's share of the deficit in the revenue requirement we face. As such, we felt that in those rare, probably rare, instances when we moved up into the earnings sharing range that it should at least go back to the supplementary fund.

7999 That would just be kind of a modification of existing -- in terms of the mechanics, a modification of the existing regulation where that earnings sharing is with the customers. It's the supplementary fund we feel is what is making this possible. We are simply asking the local ratepayer to pay a reasonable share which we don't envisage changing on an annual basis.

8000 MR. PRATT: I think we will probably address the reasonableness of the $5 at another point. Mr. Dennett, I may be trying to wind too much together here, but if the SIP is not completed on time and there are, I guess, excess funds left over, how does that work? I'm thinking of your response to CRTC 2101 here.

8001 MR. DENNETT: Our proposal in 2101 as written was that we in effect give it back if we  -- say we had to spend, say, $19 million worth of capital, that would lead to us take the half year rule of $10 million times two or three million dollars of actual expenditure which would result from that SIP capital expenditure in the year.

8002 We are talking about that kind of capital funding. We felt that if in fact the capital slipped for some reason, say, and the associated expenses in that year dropped by $200,000, just for argument's sake, that we would then return that to the fund.

8003 As I said in my earlier remarks, that subsequently seems to have been interpreted in that conversation I mentioned between Mr. Batstone and Dr. Booth as a sort of a true-up, a true-which is sort of restoring or eliminating the risk we face in our SIP expenditure program.

8004 As Muriel said earlier, we don't really consider that we face a lot of risk. We are going to do it. Our estimates, while in the initial stages our planning estimates -- I think Ray mentioned that probably 20 per cent or more individual variability, that's at the planning stage.

8005 She stopped to do the engineering and indeed grouped all these projects together -- a degree of stability into it. We don't see a whole lot of risk as we proceed into the year we won't achieve that kind of spending levels on SIP that we had planned at the beginning of the year.

8006 But nonetheless, in CRTC 2101 we responded to what we thought was a concern the Commission may have about us failing to deliver on our promise at the beginning of the year, as it were, and what will we do about that.

8007 As I also said in the earlier remarks, if on the contrary we are mistaken and that is in fact being viewed as a true-up to make us whole in that regard with regard to that component of expenditure, we don't need that protection.

8008 We feel we are going to pretty much stick to our SIP commitments which we make at the beginning of the year. We don't feel there's any great risk to the company associated with making that commitment.

8009 MR. PRATT: We are very interested in seeing the completion of the SIP on schedule and also interested -- I'm viewing this I guess in the context of the regulatory framework. Certainly I'm not doubting your objectives or your intention in achieving the goals of the SIP. I think we are all on the same side on that.

8010 I'm thinking more about the framework and how the Commission is going to apply that. When I do that, Mr. Dennett, it does seem to me a little bit unbalanced in the way that I mentioned earlier, that we are collecting in the non-telecom sense of the word contributions from a number of sources, including the local ratepayers.

8011 In both of these cases, if we are out somewhat -- if we are going to make an adjustment and we are going to make an adjustment mechanism or two, it doesn't seem quite fair somehow. I don't know how the concept of trusteeship enters into this, but it doesn't seem quite fair that the other parties contribute and if the objectives of the plan, of the SIP, are not achieved or if they are deferred, the money goes back to the fund.

8012 MR. DENNETT: Okay. I would say in response to that how much the local ratepayer is paying really depends on where you start. Obviously they are enjoying service at a rate far below cost. That's kind of a given, but it is a fact.

8013 We have just asked them to pay a little bit more towards the cost, but it doesn't begin to breach the gulf between rates and cost. We considered that the ratepayer is getting very good service, especially when you consider the other benefits they are getting, the lower long distance rate and choice in long distance supplier and upgraded service generally. Indeed, I think we determined that the average bill will decline slightly for the ratepayer.

8014 In terms of equity, we believe that the onus is not on us to make doubly sure we are fair to the people who are paying the lion's share of the bill. Should there be these, what would likely be very small surpluses, they should at least go back to the fund.

8015 MR. PRATT: Would you consider including in these mechanisms, the adjustment mechanism, some provision for reporting on the results of the SIP. I know that you have suggested here that a measure should be whether you spent as much as you thought you were going to spend, but from the customer's standpoint and some of the other stakeholders, I expect they will be interested in the results of the project much more than on whether or not you have spent the dollars you thought you would spend.

8016 MR. DENNETT: Yes, a fair comment. I think we have addressed it in fact with the tracking plan. That will be filed annually. I believe we propose to do that at the end of each -- the first quarter of each year. That's described in detail in CRTC 105.

8017 MR. PRATT: And that's a report to the Commission.

8018 MR. DENNETT: A report to the Commission.

8019 MR. PRATT: And would you consider some form of reporting to the broader group of stakeholders again who have made some contribution to this plan?

8020 MR. DENNETT: I think we have committed to continue to consult with customers. Obviously, you can tell from our discussion that we are not just sure what we would do about that. I think in terms of should there be a report, official report if you like, to the public at large, could we leave that to the policy panel, please.

8021 MR. PRATT: Absolutely. I think I am expressing as one of those potential customers an interest. I will let you take it from there.

8022 Mr. Hamelin, I would like to just touch on one more area. This is the question that the Commission put to you in 1414 on the ROE, whether there should be a point or a band.

8023 MR. HAMELIN: Again, you have hit on a line of questioning from Mr. Dennett.

8024 MR. DENNETT: Do you have a question?

8025 MR. PRATT: Sorry, Mr. Dennett. My question relates again in the context of fairness. It seems to me that the ROE is made up once we implement the proposal that you have put forward, the funds are coming from a number of sources, including your operations, including the supplementary fund.

8026 They are not distinguished in any way, are they?

8027 MR. DENNETT: Once they get into the company, no.

8028 But in terms of where they are being disbursed or used, no, they are not distinguished.

8029 MR. PRATT: So if the company earns above the mid-point of the band, those earnings are viewed as being a reward to the company for improved productivity within the band.

8030 That is the concept; right?

8031 MR. DENNETT: Correct.

8032 MR. PRATT: But of those earnings, a portion of it, even though we can't track it or colour code the dollars, as Mr. Hamelin said, it was sourced from supplementary funds; right?

8033 MR. DENNETT: The way the regulatory régime works is that the Commission considers that any earnings that the company makes within the range is fair, and no adjustment is required all the time the earned rate of return is within the range.

8034 There is really nothing to be done with it. It is just the retained earnings remain within the company, and the next year unfolds on that new base.

8035 MR. HAMELIN: That's a good point, Peter. You hit it right on the nose there. The earnings remain in the company, and they are ploughed back in the north.

8036 Currently, in our proposal what we have is a fixed dividend. It is not expected to be changed in the next three years at least, as per the proposal that we have submitted.

8037 MR. PRATT: Right. So even though the incentive effect of the band may be diluted somewhat, because these are not funds that are resulting from your efficient operations, what you are suggesting, Mr. Hamelin and Mr. Dennett, is that there is an ongoing benefit to the subscribers because the funds are remaining within the company.

8038 MR. DENNETT: That's true. Just getting back to your first point about the effect of the efficiency incentive was diluted by there being a large component of cash inflow which was not related to operations.

8039 The incentive to improve efficiency is just as strong when the funds come from a supplementary fund or whether they came from a service revenue source.

8040 The incentive is driven by the fact that there is still room for the company to earn more and keep those extra earnings. Whether the budget is set up with supplementary funding as one revenue source, if you will, or whether the revenue source is actually from a service does not affect the incentive for efficiency one bit.

8041 MR. PRATT: Thank you, Mr. Chairman; those are all of my questions.

8042 Thank you, panel.

8043 THE CHAIRPERSON: Thank you, Mr. Pratt.

8044 Madam Secretary, who is our next party?

8045 MS VOGEL: Our next party for cross-examination of this panel is New North Networks.

8046 Mr. Zubko, please.

1520

EXAMINATION / INTERROGATOIRE

8047 MR. ZUBKO: Good afternoon again, Mr. Chairman, panel.

8048 THE CHAIRPERSON: Good afternoon, Mr. Zubko.

8049 MR. ZUBKO: I would like to talk a little bit about your telephone book. If I look on page --

8050 I guess this would be considered a public document, Mr. Chairman.

8051 THE CHAIRPERSON: Did it come to you in a plain brown envelope?

--- Laughter / Rires

8052 MR. ZUBKO: At page 247 there is an ad for Northwest Mobility, wireless satellite communications. Would they pay for that directly or would that be channelled through your general marketing fund?

8053 How would that be attributed to them?

8054 MR. HAMELIN: Yes, they pay for it.

8055 MR. ZUBKO: I would assume, then, that the one for cable would be the same?

8056 MR. HAMELIN: That is correct.

8057 MR. ZUBKO: On pages 18 and 19 there are two full-page ads for Sympatico; one for Sympatico Internet option and the other one for high speed Internet service.

8058 How would the cost of that be attributed to your various Sympatico services across the north?

8059 MS CHALIFOUX: That specific example, I haven't dealt with yet in the methodology that I put forward to the Commission. In general principles I would be looking at more likely getting a market rate for it from the Marketing Department and assigning the cost.

8060 MR. ZUBKO: On page 88 there is another full-page ad for Sympatico. On page 163 there is another full-page ad for Sympatico, I guess about the same size as all the other Internet ads put together.

8061 And then on page 322 there is another full-page ad for the Internet. It is, I guess, arguable as to whether or not that is an Sympatico ad or not. It is very much the same as the other ones.

8062 Would it be fair to say that all of those ads would be cost accounted for against the Sympatico service?

8063 MS CHALIFOUX: Yes.

8064 MR. ZUBKO: There is also another item in the Yellow Pages. I may be wrong on this, but it would appear to me that every single page in the telephone book has some small bit of Sympatico advertising.

8065 I have never been offered that when I am buying ads. I doubt very much that I would be able to buy that kind of advertising. There are little trailers on every single page that have "www.sympatico.ca" on either a notepad or a little banner.

8066 How would that be paid for? How would that be attributed for, given that nobody else can buy that kind of advertising?

8067 MS CHALIFOUX: Again, the specific details, what you are alluding to on the specific items, have not been addressed.

8068 Perhaps I can read for you a couple of paragraphs from Telecom Order CRTC 99-65. This is the order we got from the Commission approving our methodology for the accounting separation of Internet services.

8069 It states in paragraph 11:

8070 Again, we filed a methodology and we will be filing results to ensure that we are not cross-subsidizing our Internet services category. The Commission will have the opportunity to review the filed results.

8071 MR. ZUBKO: Would you consider this to be joint marketing?

8072 MR. HAMELIN: No. We are not allowed to do joint marketing.

8073 If you were talking with a subsidiary -- is that what you are talking about?

8074 MR. ZUBKO: So I assume, then, that you are taking the attitude that this is the same as advertising, voicemail or the Yellow Pages themselves, or other such things as are strung throughout the Yellow Pages in the telephone book.

8075 It is the same kind of thing. It is Internet. It is voicemail. It is other such enhancements that you might offer as part of the telephone service.

8076 Would that be fair?

8077 MR. HAMELIN: Maybe you should ask marketing that. I am not sure personally that I understand exactly what you are trying to suggest here or say.

8078 MR. ZUBKO: Well, perhaps we will leave it at that. I think you have given me sufficient information on how you might treat this, or the fact that you haven't in some cases.

8079 I guess I would just comment that that's an awful lot of advertising dollars going into a service that is competing with other services that have access to this publication, but not equal access to it.

8080 I will leave it at that. Thank you.

8081 I would assume that your group reviews business plans for the company?

8082 MR. HAMELIN: Yes. All of the executives review business plans.

8083 MR. ZUBKO: All right.

8084 Some of this was gone over by the previous questions. A business plan typically would be given to you with a budget and a schedule for review and approval, I would assume, at the executive level?

8085 MR. HAMELIN: Yes, and to be ratified by the board of directors each year.

8086 MR. ZUBKO: All right.

8087 Now, I would assume also that there would be some process to review, potentially modify with new information progress to date, the budgets and the schedules?

8088 MR. HAMELIN: We monitor the budget as explained before. Monthly we have regular executive meetings and quarterly with the board of directors.

8089 MR. ZUBKO: So if those modified budgets and schedules are approved then they in effect become the target, the new target for expense and schedule. Would that be a fair statement?

8090 MR. HAMELIN: Maybe I should get more information from you. You say "modify budgets". What I am talking about is variance analyses are done on all components, revenue capex, capital and expenses.

8091 We review these monthly and quarterly with our board of directors and we send results with explanations quarterly to the Commission on a regular basis. That doesn't mean it's a different view, if you will, or a modified budget. The target doesn't change as we speak, as the year unfolds, if that's what you mean.

8092 Certainly, we can portray perhaps a better forecast of the outlook as we are converging towards the end of the year, but our goals nevertheless are explained relative to the original budget that was ratified by the board on a yearly basis.

8093 MR. ZUBKO: All right.

8094 I am trying to rationalize in my mind some questioning that was done yesterday between Mr. Henry, I believe, and Mr. Vachon, where when Mr. Vachon was asked about timing and the budget of the Arcticom project and perhaps it was a misinterpretation on my part, but it seemed to me that he said that from a budget a time point of view we have deployed -- from what he said I got the impression that he was saying that the project was on schedule and on budget.

8095 I am not sure that -- I am trying to rationalize that with the statements earlier today that it was a 40 to 50 per cent overrun. I am wondering if that is because of a move forward targeting that is not uncommon to have done in those types of projects.

8096 THE CHAIRPERSON: Mr. Zubko, could you give us the reference in the transcript?

8097 MR. ZUBKO: I'm sorry. I guess it starts at about 5112.

8098 Just hold on a second. I am not sure if we have it.

8099 THE CHAIRPERSON: Sorry, but could you give that reference again, what page in the transcript?

8100 MR. ZUBKO: It's line 5112.

8101 THE CHAIRPERSON: And what page?

8102 MR. ZUBKO: I'm sorry, 808.

8103 MR. ROGERS: Mr. Chairman, we have three out of the four transcripts with us, but not that one.

8104 MR. ZUBKO: If I might, Mr. Chairman, I am not suggesting that anybody was misleading or anything like that. What I am really trying to work towards is the process that takes place in this company for the budgeting and setting of schedules for projects. I deal with this in another role on the Northwest Territories Power Corp. board and so I see these kinds of things progressing through board approvals and approvals of modifications to plans on large capital projects. I am just trying to determine if we go through the same process with this company.

8105 MR. HAMELIN: Well, what I was referring to when I said 40 per cent plus deviation, I was talking of the capital project. It was an original estimate.

8106 As things develop on the capital side of things, we have a capital envelope each year that is blessed by the board and certainly some projects do straddle one year to the next and so on. I am not exactly sure when this was done, I think 1996 or 1997, the 1997-98 time frame.

8107 What I am saying is when the estimate changes on us on the capital program something else has got to give within the capital envelope and it's the same on the operational side.

8108 If one project has a variance, a unique variance, perhaps higher than anticipated, we react elsewhere in order to contain the envelope, generally speaking, in order to achieve our targets for the year. That's it.

1535

8109 MR. ZUBKO: Thank you.

8110 Would a business plan to move into a Sympatico service come to anyone on this panel, such as Norman Wells, for example?

8111 MR. HAMELIN: That's mostly a marketing field department that develops the business plan for a specific project such as the one you are describing, I guess rolled in under a multitude of projects.

8112 MR. ZUBKO: All right.

8113 So do they have guidelines of policies that government the parameters in which they deploy a service?

8114 MR. HAMELIN: Well, the business plan is looked at from an economics point of view and once approved there are certainly -- there is a schedule of authority that permits certain authorities to finance certain levels and so on. Depending on the level of the program it may require ratification by the President or perhaps the CEO or perhaps, in some instances, the board of directors.

8115 MR. ZUBKO: So moving into Norman Wells with Sympatico service, would that stop with marketing and just come as an overall package to the board?

8116 MR. HAMELIN: Well, I'm sure the President would be knowledgeable, as would the Chairman and as would, possibly, the board -- that detail, I'm not sure, but certainly at the working level, if you can call it that, below the board, projects of this nature may.

8117 Now, if it's part of a roll-out, it's just part of a roll-out, if you understand what I'm saying.

8118 MR. ZUBKO: Is Sympatico a roll-out?

8119 MR. HAMELIN: I'm not sure.

8120 MS CHALIFOUX: What Ray is saying is Sympatico in Norman Wells is just one component of the larger business plan that would have been done on Sympatico?

8121 MR. HAMELIN: With destinations in mind and so on, places where we would serve, et cetera, I'm sure the plan would have been reviewed.

8122 MR. ZUBKO: Okay. Now if I move into Internet, or some other service, it was deemed to be a strategic as opposed to an economic decision.

8123 Would that approval go through a different channel?

8124 MR. HAMELIN: Not really. The capital program, each year, is broken under certain lines like you are describing -- strategic, mandatory, growth, that kind of thing -- and we look at the levels of dollars we are spending in each of those categories.

8125 In fact, when we file with the Commission our capital program, I'm sure the same is broken down in various ways -- sliced and diced in various ways. And, again, when it's ratified by the board of directors, they are knowledgeable of exactly what that breakdown is for the upcoming year.

8126 MR. ZUBKO: So, again, it would be part of an overall process; it wouldn't be dealt with on a separate basis?

8127 Let me back up. Would there be a plan for a Sympatico roll-out, a capital plan and a marketing plan, for that specific purpose, say, for the last year?

8128 MR. HAMELIN: Yeah. I would say, yes. Yes.

8129 MR. ZUBKO: Okay. And it would detail, I would assume, all of the costs that would be involved -- I will go back to Norman Wells -- it would include the costs of the access lines, the 24 access lines, or the T-1 line, I guess, the bandwidth, satellite bandwidth use commitment; all of those things would be rolled into the cost side of the plan.

8130 MR. ROGERS: Mr. Chairman, Mr. Hamelin's acknowledged that he's aware that business plans are developed by the Marketing Department, of course, but he's from the Finance Department and he speaks to the overall setting of the company's budget, budgeting process and so on, and he's already acknowledged that he has no more knowledge and certainly couldn't speak to the content of a business plan and is just simply not in a position to address that sort of issue. Nor would it be appropriate for him to do so.

8131 THE CHAIRPERSON: Mr. Zubko...?

8132 MR. ZUBKO: Well, I guess if the answer is that you don't know, I can accept that.

8133 I guess I'm trying to get to understand, clearly, how the decision-making process with Sympatico, for example, might differ from a non-competitive service and if any additional overview is taken for that service, as opposed to, say, a normal capital plan or marketing plan.

8134 MR. HAMELIN: I would say it would be looked upon as a business case. We would look at it and look at the economics of it and see if it makes sense, and so on.

8135 MR. ZUBKO: But that would happen at a level lower than yours.

8136 MR. HAMELIN: Oh, it would be presented, it would be elevated again. It would be one project that would be elevated to our attention.

8137 MR. ZUBKO: Okay. Well, let me ask the question again, just so I understand clearly.

8138 Would there be a Sympatico roll-out plan for 1999? Somewhere in the operation.

8139 MR. HAMELIN: Again, I think that would have to be addressed to the marketing panel. Hopefully, you may pick some of it up in the policy panel. But, you know, you are asking very detailed -- I just don't have that specific knowledge for Norman Wells. I mean I don't know offhand.

8140 MR. ZUBKO: Well, say, for all of the Northwest Territories and Yukon for 1999.

8141 I'm just trying to find out how separate Sympatico is from the rest of your operation.

8142 THE CHAIRPERSON: Mr. Rogers...?

8143 MR. ROGERS: Just a quick observation. Mr. Chairman, you would know that Sympatico is a competitive service. There are multiple ISPs in the north and, obviously, they -- and, as well, the company has had a forbearance order that Ms Chalifoux will refer to.

8144 So, obviously, there would be a sensitivity in responding to this kind of thing, even if it was the right panel.

8145 THE CHAIRPERSON: I appreciate that, although I understand Mr. Zubko is asking more about process than substance, with respect to this issue, but the sense I'm getting is that Mr. Hamelin is probably not able to answer this particular question at this level of detail.

8146 I would note that there is a bit of crossover between the marketing panel and the policy panel and perhaps the policy panel could take a stab at this, from a process point of view, Mr. Zubko; it would appear that Mr. Hamelin, in his capacity here as part of the finance panel, is unable to answer. I would suggest you may pose that broad question to the policy panel.

8147 MR. ZUBKO: I certainly can do that, Mr. Chairman, and perhaps it might be appropriate -- I mean I don't want to see the -- obviously, I'm a competitor in this field; I don't want to see their plan. But I would like either to get enough information to be able to establish some of the questions that have been asked not only by myself but a number of other people at this proceeding and perhaps that plan, if it does exist for 1999, could be filed with the Commission, for their analysis, if you think it's worthwhile.

8148 THE CHAIRPERSON: Okay. Well, we will consider whether it's worthwhile. As Mr. Rogers has noted, we have forborne from the regulation not Sympatico per se; our concern is whether or not the telephone subscribers may be cross-subsidizing the offering of the service.

8149 MR. ZUBKO: I appreciate that, and I guess my concern is, also, that various funding that would be purported to be used for telephone service isn't being used for Internet service and being used to compete with my company and other Internet companies.

8150 Again, Mr. Chairman, it's not something that I think is appropriate that I be able to see; I leave it in your hands as to whether you think your staff might be able to glean some of that information for you.

8151 THE CHAIRPERSON: Okay. Well, we note concerns.

8152 Are there any other questions you wanted to pursue, at this time?

8153 MR. ZUBKO: Yes, thank you, Mr. Chairman.

8154 You mentioned, Mr. Hamelin, earlier, that there's basically two if not -- possibly three but two centres, revenue centres, being Yellowknife and Whitehorse, that would be profitable on a standalone basis, and possibly Fort Nelson.

8155 MR. HAMELIN: Well, for the services we are offering, they are the main centres that support all of the other small communities, I would say.

8156 MR. ZUBKO: Do you do accounting on a community-by-community cost basis?

8157 MR. HAMELIN: Not quite. The reason I'm speaking in those terms, out of the IX hearings, that's the toll competition hearings, 97-42, whatever number it is that started in 1979, we evolved to high cost and so on after that, we did some high level studies on a sampling basis, both by technology, by route and by community size, if you will. We felt it was a representative sample.

8158 We were able to obtain numbers at a rather high level that are quite directionally sound we feel. They may not be precise to the nth degree, but sufficient to indicate quite clearly what's happening with the economics of the company, the cost structure of the company and where the benefits are coming from, whether you are using satellite technology, whether it's analog, whether it's digital, high, moderate route and so on.

8159 It's a kind of split and it's all in the evidence of three years ago and some, or less three years. It would suggest that at large that the two major centres -- it's almost intuitive when you think about it -- are supporting the north. Within those centres arguably you will see in our evidence that there's a few large customers that really have a burden in all of this to support the equal rates and so on across the north.

8160 So it's a broad brush study. We don't do reporting by community on a regular basis or geographic split, if you will. We view the company as serving three territories as it turns out, plus northern B.C.

8161 MR. ZUBKO: So at this time you wouldn't be able to provide or you wouldn't know what specific community is costing in terms of financial performance of a specific community in terms of revenue and expense.

1550

8162 MR. HAMELIN: That's correct. We do not track it in such a way. That's correct. It was a scientific representative sample, if you will, where we did cost studies to determine where a cost structure lies. Satellite technology, as you can imagine, is different from radio technology and analog versus digital and so on.

8163 MR. ZUBKO: Would you be able to structure that kind of information in your accounting system? I'm not asking for it. I'm asking if you would be able to do it.

8164 MR. HAMELIN: Our company is too small for that. We don't have the resources to do that.

8165 The phase three expert is sitting on my right hand here, Muriel. She dedicates half of her time or so on phase three and that's it. When you went to Bell Canada, you used to have districts of 45, 50 people that would do this kind of stuff.

8166 This is the level that we are talking about. Arguably, if you ask me on regulatory matters, it's the same thing. We just have one new person that has joined us. The legal department is one body. My department is stretched the same way. This is a very small company. Let's get real.

8167 If you want to start talking about fancy studies by geographically or what's the economics of Elsa or Paulatuk or what have you, we just don't have those kinds of resources. We are overwhelmed just trying to keep everything in balance and making things happen in the field.

8168 MR. ZUBKO: I understand the argument very well. I heard the argument in very much the same terms when I was on the Public Utilities Board and the people arguing your position at that time was the Northwest Territories Power Corporation, a company about the same size as your company in terms of revenue, what have you.

8169 They do community by community cost analysis, cost accounting now because the Public Utilities Board deemed that that was appropriate from the point of view of subsidy application and what have you.

8170 I think it can be done. I appreciate it does take more resources. I now sit on the Power Corp board and have to deal with those new resources.

8171 MR. HAMELIN: Well, that would add to the cost structure of the company. Obviously if one wants to get the skillset to do this, we can do it, but right now it's not here.

8172 MS CHALIFOUX: It must be remembered too the nature of telecommunications. We have an underlying network that is used by many services in many areas. To apportion that network becomes quite complex. At a certain level, this aggregation loses its value.

8173 Again, you know, within telecommunications, and we are not unique here in any means -- you don't see Bell producing community profitability studies either for that very nature.

8174 Phase three is an example. The reason why you have only eight broad service categories from a cost assignment perspective is to do it down any further, you lose the element of cost causality and you just get into assignments for the sake of assignments.

8175 MR. ZUBKO: Thank you.

8176 THE CHAIRPERSON: Mr. Zubko, it's getting near the time I want to take our afternoon break. Are you going to be --

8177 MR. ZUBKO: I have one more question and I don't think I will get multiple answers to it.

8178 THE CHAIRPERSON: Okay.

8179 MR. ZUBKO: Can you tell me where your billing is processed, printed, mailed from and who owns the company?

8180 MR. HAMELIN: I just wanted to make sure. We process the bill here in the sense of -- we generate the bills here I should say and they are printed in Vancouver. I think it's ISN-BC and they are mailed out of Vancouver.

8181 MR. ZUBKO: Is that a private company?

8182 MR. HAMELIN: ISN-BC, my understanding is I think it's a spinoff of one of BCTel's ventures into the information system subsidiary and ultimately spun it off, I believe. Subject to check.

8183 MR. ZUBKO: That's fine. That service used to be performed out of here, did it not, out of Whitehorse at one time?

8184 MR. HAMELIN: I believe you are correct. We used to have a bill stuffer in our building. However, because of capital constraints, it was not -- it was decided to outsource this part of the billing as we looked at outsourcing our whole billing system. We decided to ultimately build our new information system billing system.

8185 MR. ZUBKO: Mr. Hamelin, when I watch the amount of effort you have to go through to keep your finances in order, I feel rather fortunate that mine are basically A minus B and the answer be a positive.

8186 Thank you very much.

8187 MR. HAMELIN: Thank you.

8188 THE CHAIRPERSON: Thank you, Mr. Zubko. We will take our afternoon break now and reconvene at 4:10.

--- Recess at 1555 / Suspension à 1555

--- Upon resuming at 1610 / Reprise à 1610

8189 THE CHAIRPERSON: Welcome back.

8190 Mr. Vogel, do you have a filing to make?

8191 MS VOGEL: Thank you, Mr. Chairman.

8192 The document showing the 5 per cent productivity offset in southern price cap formula with 2 per cent productivity gain proposed by Northwestel in Interrogatory CRTC-1603 will be marked as Northwestel Exhibit No. 19.

8193 THE CHAIRPERSON: Thank you.

8194 Just before we turn to the next party to cross-examine, I would like to remind all the parties in the room to advise the Secretary -- and I know she has been asking you for your estimated times for questioning. It makes it a lot easier to sort of plan the remainder of the proceeding if we have an idea of who wants to question whom and for about how much time.

8195 We originally had one party wanting to question the Yukon Government's witness. Now I see we have three. If there are any others, it would be extremely helpful for us to know that.

8196 Several days ago I made a projection as to where I thought we would be going in the hearing, and I was dead wrong. So it is with some trepidation that I say this now. It would be my expectation that we would finish cross-examination some time tomorrow and perhaps the earlier in the day the better. Parties would prepare their argument overnight.

8197 I suppose we can chat, depending on how early in the day we finish, about what time we may start presentation of argument on Wednesday.

8198 In view of the schedule and some of the flexibility and the projections, I would suggest that we try to get a bit of a start on the next panel, that being the policy panel following this one, today and maybe get the first two or three parties proposing to cross-examine the policy panel today, if that is not a problem with parties.

8199 I will put that signal out right now. If anybody has a concern, perhaps they can advise the Hearing Secretary over the next while.

8200 With that, then, Madam Secretary, could you call the next party.

8201 MS VOGEL: Yes, Mr. Chairman.

8202 The next party for cross-examination of this panel is Telus.

8203 Mr. Lowe, please.

8204 THE CHAIRPERSON: Good afternoon, Mr. Lowe.

EXAMINATION / INTERROGATOIRE

8205 MR. LOWE: Good afternoon.

8206 Mr. Dennett and Mr. Duck, I am going to ask you the same question. I take it that your role in this evidence is more than flying up here and testifying. You are involved in some fashion in its preparation.

8207 MR. DENNETT: That is correct.

8208 MR. LOWE: Could any one of you be described as the architect of at least regulatory framework, or is this more of a group deal?

8209 MR. DENNETT: It is a group deal, to use your word. I started working with Telus just about the time the evidence was --

--- Laughter / Rires

8210 MR. DENNETT: With Northwestel; excuse me.

8211 MR. LOWE: Maybe we were consulted.

--- Laughter / Rires

8212 MR. DENNETT: I wondered why the plane stopped in Edmonton.

8213 I started working with Northwestel just about the time the evidence was filed, and I picked it up from there and have been working with them continuously since.

8214 MR. LOWE: Is that about the same with you, Mr. Duck?

8215 MR. DUCK: I started working with Northwestel back in August, I guess, of last year more to put together the framework for the financial evidence and the matter of the choice of the external witness, the ROE evidence per se, and all of that.

8216 I am hardly an architect, but those were the areas that I worked on.

8217 MR. LOWE: Mr. Hamelin, you had mentioned about the dividend policy being set for three years. Did I hear that right?

8218 MR. HAMELIN: You mean the forthcoming years?

8219 MR. LOWE: Yes.

8220 MR. HAMELIN: The prospective years.

8221 MR. LOWE: Yes.

8222 MR. HAMELIN: Currently that is how we presented it in our evidence. We have had no discussions regarding dividend policy with our new shareholder, I should say. B.C. transferred us to Bell last May or what have you.

8223 The policy has been stable since 1994 as a fixed dividend per share as $8.80 per share. You would see that in our annual reports, and they have been constant ever since. We do not anticipate, at least in our proposal, a change in dividend policy.

8224 Of course, that would have to be ratified by our board of directors and discussed with the shareholders.

8225 MR. LOWE: That has not been done. You are just assuming that the song is going to remain the same even though there has been this change in shareholder.

8226 MR. HAMELIN: That is correct. Now, Bell is an intervenor in all of this. They have seen our proposal. They get all the documents, as I mentioned the other day -- or maybe I haven't mentioned it.

8227 They are an intervenor and they have access to all of our proposal, and I am sure they are following this proceeding.

8228 MR. LOWE: Is it fair to say that Bell is on board with this proposal?

8229 MR. HAMELIN: On board in what sense?

8230 MR. LOWE: Well, they are not down south fuming away about this: I can't believe these guys are doing this.

8231 MR. HAMELIN: There has been some consultation or discussions with them but not heavily. I am aware of the response of one of the interrogs that I guess the Commission has asked Bell.

8232 MR. LOWE: Could you please turn up CRTC-2506. It is page 5 that I am interested in.

8233 MR. HAMELIN: I have it.

8234 MR. LOWE: The paragraph in the middle of the page -- I don't propose to read it in the record -- begins:

8235 And then it goes down and says at the bottom of the paragraph:

8236 Do you see that?

8237 MR. HAMELIN: Yes, I see the last sentence. Just let me read the sentence before it.

8238 MR. LOWE: Sure. Take your time and read the whole paragraph.

--- Pause / Pause

8239 MR. HAMELIN: Yes.

8240 MR. LOWE: I take it that there is, today, an implicit subsidy built into your settlement rates with carriers?

8241 MR. HAMELIN: That would be more for the carrier services group to answer. I am not sure if I understand an implicit subsidy.

8242 MR. LOWE: Is this your interrogatory or did I miss the boat?

8243 MR. HAMELIN: No. Generally speaking, this interrog is mine, yes. But when you are saying an implicit subsidy, I am not sure I understand that. We have separate contracts with the folks that we settle with.

8244 MR. LOWE: You used the words "implicit subsidy" here in your interrogatory. What do you mean by implicit subsidy?

8245 MR. HAMELIN: It seems to me that we receive more costs than we give away. We are a net recipient in the settlement.

8246 MR. LOWE: So today there is this implicit subsidy which is paid to you by carriers themselves through the settlement arrangements; correct?

8247 MS CHALIFOUX: As Ray alluded to, the actual rates we are not aware of. However, for example, the rates with Telus are not cost-based rates. They are based on a differential. So I am not sure exactly how those rates compare to an average cost.

8248 But as we move to a CAT environment, those rates are going to change. Instead of going from a differential basis, it is going to move to a CAT-based settlement agreement. For us, the particular CAT is a sustainable CAT and a subsidized CAT.

8249 MR. LOWE: So we can agree that there is a subsidy in there today. How much it is we really can't talk about, though -- which I think is fair enough.

8250 Can we agree on that?

--- Pause / Pause

8251 MR. HAMELIN: On the cost side, whether or not it is -- all I know is there is a differential between us terminating minutes versus the south terminating minutes for us. And there is a differential. The net revenue is what we portrayed in our numbers.

8252 MR. LOWE: You say any implicit subsidies from settlement payments will end as settlement rates are revised downward to reflect the new sustainable CAT rate.

8253 To me, that means there is an implicit subsidy which you say will end when rates are revised downward to reflect the new sustainable CAT rate.

8254 Am I missing something in the sentence? Have you got the wrong prescription glasses on for this proposal?

8255 MR. HAMELIN: No, I see it. I do not know the answer to this. We can take an undertaking for it.

8256 MR. LOWE: I will accept an undertaking.

8257 MR. ROGERS: Could we be sure what that undertaking is for?

8258 MR. LOWE: I was going to take whatever you wanted to give me.

--- Laughter / Rires

8259 MR. ROGERS: It may be very little.

--- Laughter / Rires

8260 MR. LOWE: Something like the sentence means what it says it means.

8261 MR. ROGERS: Mr. Lowe has the right panel for this interrogatory. I don't challenge that. I just observe that the word does say "any" and he is exploring that and of course he is reaching nothing with the panel because the panel doesn't have the detail behind the settlements.

8262 MR. LOWE: I'm happy to assume that there is some implicit subsidy right now. If you want to come back and explain to me why there is no implicit subsidy now as the sentence seems to imply, you are welcome to do so. Are you all right with that?

8263 MR. ROGERS: I think the panel will give its best efforts to give some interpretation to that, bearing in mind that the record on this proceeding probably closes tomorrow. So we will give you the best answer we can.

8264 THE CHAIRPERSON: I'm understanding from Mr. Lowe's question that it is just a confirmation of whether or not there is any implicit subsidy.

--- Pause / Pause

8265 MS CHALIFOUX: Perhaps what I might just add, then, Mr. Lowe, is I think it is a fair statement to say that our high toll rates today provide a subsidy to an economic toll, and I would also say that our settlement rates also provide a cross-subsidy to uneconomic toll areas.

8266 MR. LOWE: Let's work with that, then.

8267 So if there is a subsidy in there, you are saying that subsidy is going to end as the settlement rates are revised for the CAT?

8268 MS CHALIFOUX: Well, as we move to a sustainable CAT and then settlement based on a sustainable CAT, the revenues collapse. Just as to our billed revenues, our settlement revenues also collapse.

8269 MR. LOWE: And the implicit subsidy would be reduced, then? As your revenues collapsed, the implicit subsidy is eroded away?

8270 MS CHALIFOUX: That's right. Our ability to cross-subsidy the uneconomic areas is significantly eroded from a billed revenue perspective and a settlement revenue perspective.

8271 MR. LOWE: Then, with the sustainable CAT of course there still is an implicit subsidy, isn't there?

8272 MS CHALIFOUX: I'm not sure what you mean by that. I mean essentially what is behind it is that, you know, you are using high-cost facilities at a subsidized rate.

8273 MR. LOWE: Depending on where you use the facilities.

8274 MS CHALIFOUX: Yes.

8275 MR. LOWE: Mr. Dennett, perhaps this is for you, but anyone who wants a crack at it is fine with me.

8276 In a competitive market, and just from a market design standpoint, is there some merit in rationalizing subsidies and making them explicit, kind of so they are out there on the table and everyone can see where they are, how much they are and who pays them? Is there any merit to that?

8277 MR. DENNETT: I think there could be merit in it. I don't say that it's necessary, though.

8278 MR. LOWE: If you have this kind of mass of implicit subsidies that no one is really sure about, it is harder on competitors to enter a market. Wouldn't you agree?

8279 MR. DENNETT: I think implicit subsidies can be dug out, if you like. One can do things to arrive at a conclusion as what implicit subsidies are. For example, if a service is being offered at a subsidized rate, you may not know what the subsidy is but you sort of have an idea of what your costs might be and therefore what the implicit subsidy might be. But I agree to your general point that in an ideal world everything will be revealed.

8280 MR. LOWE: Thank you.

8281 Your proposal for supplementary funding, and I'm trying to recall some earlier testimony, it runs through the balance sheet and so you can kind of slice a dice it. Is that a fair characterization?

8282 MR. HAMELIN: That's a fair characterization in the sense that the subsidy is there to maintain the company whole relative to the allowed rate of returns.

8283 MR. DENNETT: Could I just add something to that?

8284 I think it is in Interrogatory 403 where we define how the subsidy is calculated, but essentially it is the difference between the revenue requirement of the company and the revenue actually received from services. That difference constitutes the supplementary funding required.

8285 MR. HAMELIN: Yes. It's kind of a -- it's a bottom-up approach to trying to achieve the vision itself. Once the vision is out there and you bring to it a balanced approach on the elements that go into it, whether it's revenue, expenses and capital, the outcome of it is, the resultant outcome, the subsidy requirement to bring us to the mid point of the allowed rates of return that will be decided.

8286 MR. LOWE: Is your proposal, then, designed to be a packaged deal, then?

8287 MR. HAMELIN: Very much so.

8288 MR. LOWE: Mr. Duck, you were in that 98-2 proceeding, weren't you, the proceeding leading to 98-2. I'm not saying you were in it, but you were involved, I notice from your CV.

8289 MR. DUCK: That's right. I worked on the financial side of that proceeding.

8290 MR. LOWE: Bell was seeking a rate increase, as the other telephone companies were, but Bell was seeking a rate increase of $2.00 a month, was it?

8291 MR. DUCK: I don't remember.

8292 MR. LOWE: Were you at the final argument?

8293 MR. DUCK: No. That proceeding, of course, was a paper proceeding throughout. I'm not sure what you mean by being at the final argument.

8294 MR. LOWE: Was there an oral argument phase to that one?

8295 MR. DUCK: I honestly can't recall.

8296 MR. LOWE: So are we going to hear something at the end of the day that, you know, we would like to do a service improvement program, but the only way we are going to do it is if you approve everything else that we have asked for? It's kind of an all or nothing thing. Is that something that you guys have talked about, whether there is any room to slice and dice here?

8297 MR. HAMELIN: You mean like chipping away at various components of the mission or the vision?

8298 MR. LOWE: Well, my idea of chipping and your idea of chipping might be a little different, but let's start with that.

8299 MR. HAMELIN: I would find it unfortunate if we chipped away some major components or part of major components of what we are trying to achieve, such as comparable rates, for example.

8300 I mean we have had interrogatories, I can point to RSL-1, where we have companies saying, "Well, what if local is -- instead of a $5.00 increase, how about $10, how about $15?" What happens to the subsidy if we increase the CAT rate by 2 cents and so on. You see the difference?

8301 Obviously, the supplemental funding collapses under those scenarios, but then what have you achieved. You know, the folks would have perhaps what? Instead of 27 cents a night evening calls per minute maybe it goes down to 22 cents and the local rates could be, I don't know, instead of $31 is $36 or what have you. Just think of what that does. I mean, obviously, if you want to eliminate and bring rates closer to cost well that's the way to do it.

8302 The thing is whether it's achieve the fundamental mission that is suggested, I suggest to you that it would not.

8303 MR. LOWE: Well, have you thought about, and just as you talk about what might happen and what could be, you know, what the choke point would be? Like, we just won't do the service improvement program if, say, there's no competition, say that component of your proposition isn't adopted. Would you say, "we'll walk away from the service improvement program and have nothing to do with it." That was part of our package and no competition, no service improvement program.

8304 MR. HAMELIN: No competition, you mean of its own volition or ordered no competition?

8305 MR. LOWE: Well, let's look at both. Let's say you look at it and you look at the order and you conclude in your own mind that there is just going to be no competition. It's just not going to happen, in --

8306 MR. HAMELIN: It would seem to me in both instances -- excuse me, Mr. Lowe. I am sorry for interrupting.

8307 In both instances the vision would have been missed. It would have been a failure, in my mind.

8308 MR. LOWE: I know that. So you are saying you wouldn't do it then, you wouldn't go ahead with the service improvement program and you would say "this is a complete package, we didn't get the competition we asked for, so the deal's off. We are not going to be ordering those switches and we are not going to be doing our builds out of them."

8309 MR. HAMELIN: I don't see why we are discussing this particular scenario that to me goes totally -- strays away from the principle goals of what we are trying to achieve. What we presented is a balanced approach and we have said it so many times I am sure everybody has heard enough of that. But that's indeed what we have done.

8310 To try and find a formula that will work --

8311 MR. LOWE: Mr. Hamelin, I have heard your statements on this and I am not asking you to agree that it's a good thing to change anything your proposal. I certainly don't want any of my questions to be implied as trying to get you to agree with the sort of hypothesis that I am putting to you. It's just a hypothetical.

8312 All I am trying to understand is what your reaction is going to be. Are we still going to get SIP? Are we still going to get the build out if there's a few changes to the proposal? That's all I am trying to figure out.

--- Pause / Pause

8313 MR. HAMELIN: Can you repeat the question, please?

8314 MR. LOWE: Say that the aspect of your proposal relating to competition is not approved by the Commission. Would you still go ahead with the build out of SIP?

8315 MR. HAMELIN: The Commission has already ruled on this. Decision 98-1 suggests that competition will be offered in the north. How can I answer such a premise?

8316 MR. LOWE: Because it's inconceivable, you are just saying that's an impossible scenario, it's impossible for the Commission to review and vary a decision?

8317 MR. HAMELIN: I suppose anything is possible, but I mean we have been working with that premise in the proposal we've set forward.

8318 MR. LOWE: So it sounds to me like you are saying you probably wouldn't go ahead with SIP if the competition proposal isn't approved?

8319 MR. HAMELIN: Competition is expected in the north. We have submitted a proposal that we feel will cause competition to come in and if it's not to a level that is satisfactory I believe there are mechanisms implicit in the elements that we have embedded in the inputs to our model. The primary one, obviously, that comes to mind is the cap rate.

8320 There are other degrees of freedom that were discussed yesterday. My suggestion is that we, or our suggestion is we feel that our proposal meets most, if not all, I should say, of the proposals of the vision of government.

8321 Now, I suppose a review or vary, or whatever the legal term is, is always possible. We would review the situation at that time, depending on what decision will be presented to us. A company would look at the elements that are asked of us and then if that's the hypothetical situation to decide right here and now not to deploy a SIP I think would be a very sad state of affairs for northerners.

8322 We realize that funds will come from the south and those funds have to be treated with respect. There is an intent of those funds to achieve certain Canadian goals. This network has a lot of values socially.

8323 Economically, for us, we are just the middle person in all of this. We feel we can be deserving of it. We feel we can be accountable. We feel there are various mechanisms that can be used to make sure that these goals are met.

8324 So, to suggest to me that what does it take for the mission to be a failure, we have worked too hard on this. It has been three years we have been at this. We have been under the microscope. You refer to our parent sometimes and so on. The way I explained this to the employees, when we are explaining really what's happening here. I give them the example of a surgeon.

8325 If you have a child that needs surgery and it goes under the microscope, once that surgeon comes in the place, that surgeon will do everything in its power, all the skillset to remedy the problem, regardless if the parent is rich or if the parent is poor, or if it is held by the public at large.

8326 The question is: What is it we are trying to achieve here? There is a goal that is much bigger than applying simple principles, if you will, of competition down south, principles of economics down south, all the economics in the north are in reverse. They are all upside down. It's all public payments. You stop the transfer payments to the north -- well, this Toronto of the north that you are seeing now today in Whitehorse will not look exactly the way it is. The same thing for Yellowknife and let alone the other communities.

8327 So I cannot honestly entertain a situation where you are telling me SIP is not going to happen. I think it would be a very sad state of affairs for the north.

8328 MR. LOWE: So you have told me then that you just can't conceive of SIP not going ahead and you can't conceive of your proposal not being approved and you can't conceive of any aspect of your proposal being changed. Is that your testimony?

8329 MR. HAMELIN: When we will have a decision or obtain the decision out of this proceeding we will have to look at it and see what we can do.

8330 MR. LOWE: Thank you.

8331 Thank you, Mr. Chairman.

8332 THE CHAIRPERSON: Those are all your questions, Mr. Lowe?

8333 MR. LOWE: Yes.

8334 THE CHAIRPERSON: Thank you.

8335 Counsel.

8336 MR. BATSTONE: Thank you, Mr. Chairman.

EXAMINATION / INTERROGATOIRE

8337 MR. BATSTONE: I have just one line of questioning. Based on the discussions with the accounting separation for Internet services that have gone on, both earlier today and earlier in the week, as Ms Chalifoux referred to this morning, Order 99-625 directed the company to establish an accounting separation for its IS activities and to remove the investment expenses from the company's regulated rate base.

8338 I just want to confirm that this accounting separation has been included in the Phase 3 forecast provided in response to CRTC 401 and that in fact the IS activities have been excluded from the 2001 regulated rate base?

1645

8339 MS CHAULIFOUX: No. I filed the methodology and that's been approved, and 1999 would be the first year. So, at this stage -- and those results aren't due until November 30th of the year 2000. So I don't really have any estimates, at this time.

8340 MR. BATSTONE: Could you undertake to provide those revisions in this proceeding?

8341 MS CHALIFOUX: Not in the time, no. I'm sorry.

8342 As I mentioned, I'm not sure, in the -- perhaps in the covering letter that went with the methodology. But once approved, studies would have to be undertaken and I believe we committed to getting those studies undertaken this year and to be compiled for the preparation of the actual 1999 results. So, again, as they are not due until November 30th, you know, I would have a fair bit of work to do.

8343 MR. BATSTONE: Would it be possible to provide some sort of estimate of the assignment?

8344 MS CHALIFOUX: Well, I wouldn't have much basis to make a very good estimate.

8345 I think it's also important to note that, I mean from a total perspective, the materiality won't be significant. Our Internet services is a fairly small piece of the business, so I don't see it swinging the results one way or the other.

8346 MR. BATSTONE: Okay. I would just like to go on with another aspect of that order.

8347 The order made specific reference to the assignment of the estimated costs of DS-3 ATM facilities, based on a market rate -- and you made reference to the market rate earlier today.

8348 Would the market rate be equal to the tariff rate paid Northwestel's customers.

8349 MS CHALIFOUX: Well, in this example, what I was alluding to there was our IP gateway service south and if customers were to establish their own gateway facilities, then, yes, they would be picking up the same rates. It's a market rate that we would be using, I'm not sure -- we don't have a rate for that tariff, so we would be -- we are using I guess we could use the word "market rates versus tariff rates" because, in the cases of down south, these services are forborne, so. But we do know what the market rate is. We can get, like, quotes on that.

8350 MR. BATSTONE: So, what about in circumstances where you are dealing with the tariff rate? For instance, a business line, for instance, if the Internet service used a business line, would you do that on the basis of the tariff rate?

8351 MS CHALIFOUX: In this proposal, no, it was on the basis of assignment of embedded costs. So, it's similar to market rates.

8352 MR. BATSTONE: So you don't currently have a tariff for DS-3? That's what you were saying earlier. Right?

8353 MS CHALIFOUX: Correct.

8354 MR. BATSTONE: Okay. If you did, would you impute the tariff rate, then?

8355 MS CHALIFOUX: Yes, I would impute our tariff rate.

8356 MR. BATSTONE: What about Yellow Pages, then, and the advertising there? I guess -- sorry. There's no tariff for that. Okay.

8357 How would you determine the market for an advertisement in the Yellow Pages?

8358 MS CHALIFOUX: Well, our Marketing Department is familiar with what they are, and through my OTS adjustments, I do recognize that there are, you know, directory revenues but, at the same time, we consume directory costs, so I do some adjustments there that take some of that into account.

8359 MR. BATSTONE: Thank you very much. Those are all my questions.

8360 THE CHAIRPERSON: I don't know whether I should go and get a nitroglycerine tablet or not.

--- Laughter / Rires

8361 THE CHAIRPERSON: Commissioner Williams...?

--- Laughter / Rires

8362 COMMISSIONER WILLIAMS: I'm giving my boss a little stress with these questions.

--- Laughter / Rires

8363 COMMISSIONER WILLIAMS: I will try and keep them relatively brief. I know it's been a long day, but there are some areas that I would like to cover.

8364 I guess, Mr. Hamelin, just very quickly, how long have you been here and how long have you been with Northwestel? I already understand you are the senior finance person with access to senior management committee, the board of directors and every finance employee within the organization has something to do with you. Right?

--- Laughter / Rires

8365 MR. HAMELIN: I have had the pleasure of joining Northwestel in February, 1993.

8366 COMMISSIONER WILLIAMS: Thank you.

8367 I guess one of the things I want to talk about is the communities, the Type A or Part A communities, or Type A communities I think you referred to them, the uneconomic ones, and then take a quick look -- maybe, first, we will start with Iqaluit, Yellowknife and Whitehorse.

8368 Who's your largest customer? In each of those communities, for example. Would you have that information? Who would be your most important customer or provide the most revenue?

8369 MR. HAMELIN: I believe that was all filed in confidence, the main customer --

8370 COMMISSIONER WILLIAMS: I don't need the amount -- okay, could it possibly be the Government of the Northwest Territories and Yellowknife?

--- Laughter / Rires

8371 MR. HAMELIN: I'm sure if they are not, they should be up there --

8372 COMMISSIONER WILLIAMS: Okay. Can I just say: Are they in the top three, four or five?

8373 MR. HAMELIN: The top 10, I'm told.

8374 COMMISSIONER WILLIAMS: Top 10.

8375 And would that be the same in Whitehorse and Iqaluit?

8376 MR. HAMELIN: There's some sense to that.

8377 COMMISSIONER WILLIAMS: Yeah, people seem to think that anyway.

8378 Now, would government expenditures be considered to be spent on all communities on a partially representative basis, regardless of community size or where the actual bill was mailed to or the cheque was processed and mailed from? The governments for all the people, I guess that's what I'm -- I'm just trying to explore that area. Or do you code all government -- like Yellowknife is -- where your government customer comes from? Or is government revenue from each specific community accounted for?

8379 MR. HAMELIN: Just like any other account, everybody has an account, whether an individual or a large business, or medium, or small.

8380 COMMISSIONER WILLIAMS: Okay. And --

8381 MR. HAMELIN: I guess, Mr. Williams, we just don't start doing finances, or financial statements, if you will, separately by geographical -- let alone at the community --

8382 COMMISSIONER WILLIAMS: No, I understand. I was just wondering, on your coding, like, if you called -- if you removed the government as a customer, would Yellowknife still be not in the Type A level, I guess? You indicated earlier that Whitehorse would no longer be the Toronto of the north if --

8383 MR. HAMELIN: Oh, no, no, no. What I meant is -- when I say "Toronto of the north", when we speak of Whitehorse, is exactly it; I'm talking in terms of customers of Northwestel, per se, in that vein I mean. Toronto of the north is Whitehorse in the sense of what it is as a city and population; it's the largest community. It's in that vein that I was talking.

8384 COMMISSIONER WILLIAMS: Okay. Thank you.

8385 The next area I want to cover is your investments in subsidiaries and their effect on your ROE. You have made a number of investments in many of the projects, such as Arcticom, NMI Mobility and NCA-TV. How much of your surplus earnings or borrowing capacity or co-signing or financial capacity has been used up by the investment into these types of businesses? Outside of your core business.

8386 MR. HAMELIN: Well, parts of these investments outside of our core business -- first of all, I would like to ensure that everyone understands that the subscriber of telephony, telephone, if you will, on a regulated basis, has been insulated from all the effects of the investments, whether it's in cable TV or in the spin off of mobility. We have provided a mechanism -- and there's many interrogs to that effect that are rather technical.

8387 When it comes to the financing of the two main subsidiaries we have, and they are small, one is cable TV and the other one is mobility, I guess they are the main -- together they don't add up to more than perhaps 10 per cent or so by revenue, both taken by together.

8388 Just to put things in perspective so that people, you know -- I don't want people to get the wrong idea. The way they were financed, in the case of NMI, it's a spinoff of what existed in telco. Really, the way we have taken that investment, if you will, is we have extracted under a pooling of funds. Frank can add to this.

8389 What it means is we have assumed that the assets we have transferred were the same debt equity that existed in the telcos, so there is no transfer of cash here happening or anything. You are just a spinoff. Right?

8390 When it comes to cable TV, there were a variety of financing mechanisms here. The shareholder invested some moneys in Northwestel which was then used to pay part of the purchase.

8391 The previous shareholders of cable TV, of which you are here, Mr. Williams, also took on some preferred shares from Northwestel, so that helped finance the deal itself. Perhaps a portion was also debt.

8392 It's a combination of three financial instruments: preferred, common and debt.

8393 COMMISSIONER WILLIAMS: Thank you very much. I guess where I want to go is just a heads up and we will play fair here. Right? It's a public process. I want to explore strategic priorities and discuss how you concentrate on your core business at the same time as doing other things.

8394 Some of the areas I am going to go into, and I appreciate what you just answered because you have answered about three of them already, what has been the --

8395 What has been the impact on the ROE for telephone customers? It may help us if we go to 401, attachment 5, because you have a chart there. I will give you a minute.

--- Pause / Pause.

8396 COMMISSIONER WILLIAMS: Okay. When you talk about writedowns in subsidiaries, let's say columns 2, 3 and 4, there's about $17,365,000 worth of writedowns over that time period of two years, 1997 and 1998. Then if you look back a little lower, you see adjustments in share price, cable subsidiary. That's another six million, so 6 and 17 is 23 million.

8397 Then there's an effect on equity due to investment in Northwestel mobility of 4674 and 4590 for another 9.2 million. My just quick crude math here gets it up to $26,629,000 that's no longer -- I'll hear your answer.

8398 My layman's knowledge of these financial statements -- I'm not a Chief Financial Officer by any stretch of the imagination -- is that the effect of some of this -- in spite of that, you have still been able to report 11.7 ROE, 11.4, 11.5, 11.6, 12.6 and 10.3. I guess I just need to understand that a little bit better.

8399 MR. HAMELIN: First of all, you mention three columns. One column is a restatement, so you have double counted, so that may reduce your number quite a bit, but still --

8400 COMMISSIONER WILLIAMS: Four million. It's only 22 million. You are right.

8401 MR. HAMELIN: Okay. Let's get back to the first column. The six million that you see there is the six million that came about in terms of common stock. What that is is the parent company at the time was BCE. It brought in $6 million to Northwestel which simply went towards the purchase of cable TV.

8402 By the way, when you -- maybe I should start by the conclusion of your question. These writeoffs and adjustments are just there indeed just to make sure that these impacts do not impact the ROE. This is why when you said 11.7 per cent, 11.5, 11.6, et cetera, those results are after having extracted the impacts that may be on the telco. That's what we mean by we have insulated the telco operations.

8403 COMMISSIONER WILLIAMS: I appreciate that.

8404 MR. HAMELIN: Okay. Let's start with 1998, adjustment of 4.2 million. That 4.2 million is after tax. In fact, pretax would be 7.3 million. It's split half and half between a writedown in cable TV and a writedown in mobility.

8405 In the case of mobility, what it was is a writedown of a system. You have perhaps heard of this over the last several days. The system was a cellular 400 system. It used a 400 frequency as opposed to cellular 800 as we know down south. The system is manufacturer discontinued, obsolete, and was not Y2K compatible.

8406 Effectively, when we spun off NMI originally, if you go back two years or so, what they started with was a system that was obsolete right off the start, right out the gate. That, of course, has changed over time. The 400 has evolved to the 800 system as it's commonly known down south.

8407 The other writedown of that 4.2 million after tax comes to cable. What it is, this is rather unfortunate, as you know, when we obtained cable TV permission to be the first company really to acquire a cable television in 1996, we had the plan of using the Yellowknife cable TV platform as a springboard, if you will, to go and deploy cable TV where cable TV never existed since human mankind.

8408 These are in small communities. There was about 30 licences or so we were entertaining at the time. Well, after having done a dozen or so of these, we realized that our assumptions in terms of penetration were too high. As it turned out, the take, if you will, in the smaller communities was not as high as we anticipated.

8409 Yellowknife had a very high penetration level, but Yellowknife, the income per capita is rather high yet. When you go outside in the smaller communities, the income per capita is not the same anyways.

8410 What we have reflected here, and as in the previous year also, is the economic value of the asset in terms of earning power was impaired. It simply is not there. Today we are walking away from small licences unfortunately. That's what happens when the economics aren't there. You can't fulfil your initial goal.

8411 That's what essentially happened on the cable side and mobility side.

8412 COMMISSIONER WILLIAMS: That's great, I guess, or not so great, depending.

8413 MR. HAMELIN: You lose some, but --

8414 COMMISSIONER WILLIAMS: Yes. There must be some effect on Northwestel's capacity, Northwestel's equity and there must be some effect on its core business. Has there been any effect on Northwestel's capacity as a result of this? Is there increased or diminished capacity for raising financing?

8415 MR. HAMELIN: In principle, obviously when you go see a banker and you are trying to raise some debt, you bring in the consolidated statements. You don't go in "Well, here's a small piece for mobility, here's a small piece for cable and here's a small piece for telco".

8416 You do borrow on the capabilities of a consolidated entity. To date suffice to say we have had -- we were able to raise debt with one exception. One year we had covenants -- obviously we have covenants that we have to honour on our debt. That covenant has two elements to it. One is that the company at large cannot be in debt to more than 66 per cent of its tangible assets.

8417 What that means is your mortgage can't be more than two thirds of your house. That has always been honoured. It's not a problem to date.

8418 The other element is that you need an interest coverage ratio of at least two times. Well, when we did take a major write down in 1997, we were temporarily, and I say temporarily, subject to some constraints on raising debt without asking the other debt holders, if you will.

8419 So what we ended up is issuing 17 million at the time, perhaps instead of 30 million that we would have liked to have, although it was not necessary -- these were not necessary funds for the capital program, in the sense that all we have done is take short-term debt and make it a long-term mortgage, if you will, a long-term debt.

8420 So overall I would say, no, we were not affecting in achieving or trying to reach our goals in all of the three companies regarding debt capacity. However, you are correct in saying in principle our debt capacity has come down slightly due to these write-offs.

8421 COMMISSIONER WILLIAMS: Would it slightly be that 22 million that I talked about because 8.9 million in 1997 and the 4.2 in 1998 in one company and I guess the effect on equity of 4674 and 4590 in the other company, in very round numbers, is approximately $22 million.

8422 We talked about a $75 million SIP, representing 50 per cent of your balance sheet earlier today and butterflies were around or something. This seems like a fairly significant portion. It's a large sum of money or to me it is anyway.

8423 MR. HAMELIN: I understand your concern. However, maybe there are a few small things we have got to clarify. The 75 million is 25 per cent of the balance sheet. Let's start with the easy stuff first.

8424 Secondly, when you are adding numbers, I follow you when you say the 8.9 million, the 4.2 million, but then I lose you afterwards. I think those are the only write-offs we have done.

8425 COMMISSIONER WILLIAMS: I guess I am speaking to the line entitled "The effect on equity due to the transfer of assets to Northwestel Mobility," or as Northwestel's equity was reduced, I take it, from that statement, 4674?

8426 MR. HAMELIN: Those two negative numbers that you see there --

8427 COMMISSIONER WILLIAMS: Yes.

8428 MR. HAMELIN: -- are in principle the equity that you released by Northwestel in order to make the creation of NMI happen.

8429 COMMISSIONER WILLIAMS: All right. So when you consolidate them you get the benefit of them back?

8430 MR. HAMELIN: It's not dollars that you are seeing here. All it is is a reduction in equity of telco, but consolidated it's --

8431 COMMISSIONER WILLIAMS: So consolidated you are fine.

8432 MR. HAMELIN: That's true.

8433 COMMISSIONER WILLIAMS: I understand.

8434 MR. HAMELIN: So now your number has come down a bit, has it, from 26 or whatever?

8435 COMMISSIONER WILLIAMS: Yes, it is almost halved. We are doing well. I was worried for the subscribers. I think it's about 14 million now.

8436 MR. HAMELIN: That would be correct.

8437 COMMISSIONER WILLIAMS: So, 14 million has been taken out of the phone company's --

8438 MR. HAMELIN: Consolidated statements.

8439 COMMISSIONER WILLIAMS: Yes, or financial tools they have available to do work in the north in their core business, in the phone business. Would that be correct, or give to your shareholders or do what you want with 14 million I guess?

8440 MR. HAMELIN: Suffice to say the shareholder has absorbed these without causing -- this is all transparent to the telco operations and its subscribers. It's the shareholder that has absorbed these.

8441 COMMISSIONER WILLIAMS: All right.

8442 I am sorry to take so long, Mr. Chairman. I am getting to the question now. I wanted to build some and I should have spent more time on it, obviously, but I think we are close enough that we can understand it.

8443 So, 14 million probably could have been spent on underserved or unserved communities in the north, that being that you are in the phone business and your goal is to serve your area?

8444 MR. HAMELIN: Not really. If I get the gist of the question, the 14 million was earmarked to two different businesses than the telco operations. To suggest that that 14 million could have been earmarked towards uneconomic projects, I am not sure I would still have my job here.

8445 COMMISSIONER WILLIAMS: Are these projects economic? NMI Mobility, is that a profitable company?

8446 MR. HAMELIN: I'm not -- I would just like to ensure this is -- I am not sure if I am allowed to release that in the public domain.

8447 COMMISSIONER WILLIAMS: Maybe you can look in your financial statements. They are on page 13. They are your statements, so you probably have a far better understanding than I have been able to demonstrate.

8448 I guess I would be curious as to how much profit was flowing from these, being that the criteria not to invest in the communities was that they were unprofitable.

8449 MR. HAMELIN: Well, these companies, they are geared -- they are profit-oriented companies.

8450 Now, they are at the embryonic stage, if you will, of the strategies we are deploying for them. In the case of NMI it's growing. They are profit oriented.

8451 I mean, before you realize the goals of any investment of the sort, sometimes there's a buttonhook, as we call it in the trade. What we are saying is it takes time before you break even and then after that you reap the benefits of your investment.

8452 So we run them as total separate business entities, totally from the telco operations and they have their own staff and their own board of directors.

8453 COMMISSIONER WILLIAMS: So with these writedowns there is probably a good chance that they will be profitable then?

8454 Well, would they be profitable without the writedowns?

8455 MR. HAMELIN: Have the writedowns been absorbed by the shareholders?

8456 Sure. If you are referring to -- let's say you go in the telco side, for example. Bell Canada wrote down, I don't know, $4 billion of its network, as did a lot of other phone companies.

8457 Once a writedown has gone in time, if you will, their returns may appear more attractive forward looking subsequently, but somebody somewhere has taken the hit for these writedowns.

8458 COMMISSIONER WILLIAMS: And who has taken that hit? You are saying the shareholder has taken that hit?

8459 MR. HAMELIN: That is correct.

8460 COMMISSIONER WILLIAMS: All right.

8461 The last area is the dividend. You say it was fixed in 1994. It has not been changed since that time?

1715

8462 MR. HAMELIN: That's correct.

8463 COMMISSIONER WILLIAMS: Was the company a stronger company financially in 1994 than it is today, in general terms?

8464 MR. HAMELIN: Relatively speaking, I guess it was pretty much the same. It was under the same regulatory environment. Debt ratio may have come up a little bit since, but that's because we have done a lot of large capital one time kind of things, such as Arcticom and others.

8465 Generally speaking, currently today we are in need of rate relief in year 2000. So I would suggest in that vein we are not performing perhaps at the level we would like to.

8466 In 1994 we did come out of an unsuccessful rate case from 1993, where we still made 12 per cent in 1994, but some of it is when you look at the quality of the earnings that were earned in 1993, 1994, 1995 and so on, the quality of those earnings was not as strong perhaps as they are today, in the sense that we were taking this artificial draw down from the eastern Arctic purchase, this purchase from Bell Canada.

8467 Well, that subsidy, if you will, was amortized over time and exponentially, so you had large chunks of numbers that were taken in the early years, which artificially bumped up the earnings for that year.

8468 So when you see 12 million, pretty flat, what Mr. Rondeau brought up today, if you recall that table, we have been at 12 million flat for the last five, six, seven years, but the quality of that 12 million is starting to be of higher quality because we have now finished with this amortization of this subsidy, which is a cashless entry with which I can't pay bills and so on.

8469 Today we have got better quality earnings. However, we are not achieving the allowed return that we would like.

8470 So to say "are we exactly comparable", I think so, in general terms. But we are in need of rate relief.

8471 Rather for applying for a rate case, I guess we are applying for a whole new state of affairs as of January 1, 2001.

8472 COMMISSIONER WILLIAMS: The reason I ask that -- and it is an old financial statement that I have here; it is your 1998 results.

8473 In that particular year your banking indebtedness increased by about the same size as the dividend. That is why I was asking about that.

8474 MR. HAMELIN: The bank indebtedness may be a bit misleading. If you added it to the long-term debt and look at total long-term debt, plus bank indebtedness, that would give you a better picture.

8475 That bank indebtedness, from time to time, depending on if it is the opportune time to convert a portion of that bank indebtedness into long-term funds, we do so. We approach the market and we float a long-term bond as we have in the past. We have done I would say about four or five issues since I joined the company.

8476 COMMISSIONER WILLIAMS: Mr. Hamelin, I have been most impressed by your quick grasp of a lot of intricate pieces within your company. Thank you very much for clarifying some of these questions. It certainly gives us a better understanding.

8477 MR. HAMELIN: Thank you, Mr. Williams.

8478 THE CHAIRPERSON: Thank you, Commissioner Williams.

8479 I just have one quick question. It was a question I asked of Mr. Wells a couple of days ago. I appreciate that it is hypothetical, somewhat similar to the hypothetical question Mr. Lowe asked, but I think it is time. I said I would refer to the use, so I will do that.

8480 On this issue of setting what has been characterized as a sustainable CAT, but subsidized, if one were to conclude that competition -- that being choice among suppliers -- would not take place at five cents, would it matter financially to the company if the CAT was at six cents or something higher than five cents?

8481 MR. HAMELIN: The higher you bring the CAT, the more of a barrier you have for competitive entry. Lowering the CAT entices the companies -- makes the market more attractive.

8482 Imagine if the CAT were headed toward the lower levels that we have down south, it is hard to say how much competition would come in. In principle, if everything was modelled that way, the lower the CAT the more competition.

8483 THE CHAIRPERSON: I understand that. Even in the south we are under a lot of pressure to get the CAT down below two cents, even below half a cent.

8484 MR. HAMELIN: Could you --

8485 THE CHAIRPERSON: If there was no competition, no new entrants at five cents, would it make any financial difference to the company if the CAT was higher than five cents?

8486 MR. HAMELIN: I guess if no competition were coming in -- therefore no one would be paying a CAT per se, so the CAT revenue would be nil. However, the settlement is CAT based. It may have some implications for the settlement portion.

8487 Up or down? One would think it would bring the settlement revenue --

8488 THE CHAIRPERSON: Let the record show the thumb was pointing up.

--- Laughter / Rires

8489 MR. HAMELIN: We are a team here.

8490 THE CHAIRPERSON: Okay. I will accept that.

8491 MR. BATSTONE: Mr. Chair, could I just ask one quick follow-up to the question I was asking earlier -- if, of course, you are done. I assumed you were.

8492 THE CHAIRPERSON: I'm done.

EXAMINATION / INTERROGATOIRE

8493 MR. BATSTONE: I just wanted to ask if you could provide total Internet services revenue for 1999 and then forecasts for 2000 and 2001.

8494 If that is something you need to file in confidence, of course that would be acceptable.

8495 MR. HAMELIN: It is already filed. I believe it is Interrog 502.

--- Pause / Pause

8496 MR. HAMELIN: I think it is 501.

--- Pause / Pause

8497 MR. HAMELIN: That is correct. It is filed in confidence with the Commission. It is Interrogatory 501.

8498 MR. BATSTONE: You are right. Sorry about that. Thank you very much.

8499 MS CHALIFOUX: Just to clarify, it's our Internet services retail plus our Internet gateway service.

8500 THE CHAIRPERSON: Thank you.

8501 Thank you very much, Ms Chalifoux, gentlemen. That is all the questioning for this panel.

8502 Perhaps we will take a five-minute break and then we will bring forward the policy panel.

--- Recess at 1725 / Suspension à 1725

--- Upon resuming at 1732 / Reprise à 1732

8503 THE CHAIRPERSON: Madam Secretary.

8504 MS VOGEL: We will now proceed to Panel 6, Strategic Direction and Policy.

8505 I would ask CRTC counsel to swear the panel.

8506 MR. BATSTONE: Thank you. Do you all wish to be affirmed or sworn?

8507 MR. FLAHERTY: Affirmed, please.

AFFIRMED / DÉCLARATION SOLENNELLE: PAUL FLAHERTY

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: RAY HAMELIN

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: RAY WELLS

PREVIOUSLY AFFIRMED /

SOUS LA MÊME DÉCLARATION SOLENNELLE: CLAUDE VACHON

8508 THE CHAIRPERSON: Mr. Rogers.

EXAMINATION / INTERROGATOIRE

8509 MR. ROGERS: Mr. Flaherty, can you state your position with the company.

8510 MR. FLAHERTY: I am the President of Northwestel.

8511 MR. ROGERS: Mr. Wells, can you state your position with the company.

8512 MR. WELLS: Vice-President of Corporate.

8513 MR. ROGERS: Mr. Vachon, could you state your position with the company.

8514 MR. VACHON: Vice-President, Network Services.

8515 MR. ROGERS: And Mr. Hamelin, your position with the company.

8516 MR. HAMELIN: I am Controller, Treasurer and Chief Financial Officer.

8517 MR. ROGERS: Gentlemen, did you provide general policy direction in respect of the preparation of various parts of the company's evidence or interrogatory responses?

8518 MR. FLAHERTY: I did.

8519 MR. WELLS: I did.

8520 MR. VACHON: I did.

8521 MR. HAMELIN: I did.

8522 MR. ROGERS: And is that evidence and are those responses accurate, to the best of your knowledge and belief?

8523 MR. FLAHERTY: Yes.

8524 MR. WELLS: Yes.

8525 MR. VACHON: Yes.

8526 MR. HAMELIN: Yes.

8527 MR. ROGERS: Mr. Chairman, Mr. Flaherty of course is the chair of this panel. The panel is assisted this afternoon by Mr. Dallas Yeulet.

8528 The panel is available for cross-examination.

8529 THE CHAIRPERSON: Thank you, Mr. Rogers.

8530 Welcome, Mr. Flaherty. Welcome back, gentlemen.

8531 Madam Secretary, our first party to cross-examine?

8532 MS VOGEL: The first party to cross-examine is CAC/NAPO.

8533 Ms Lawson, please.

8534 MS LAWSON: Thank you, Madam Secretary, Mr. Chairman.

EXAMINATION / INTERROGATOIRE

8535 MS LAWSON: Good evening, panel members. I just have a few questions for you. I think they are all following up on other issues that have been discussed in this proceeding.

8536 First of all, I would like to ask: What kind of procedures or management directions have you put in place to ensure that Northwestel is aware of all possible least cost technological options available to you in order to make the service improvements that you wish to do?

8537 MR. FLAHERTY: You are talking about specifically the technology pieces that we are going to implement within SIP in particular?

8538 MS LAWSON: Within SIP in particular. However, we can talk generally too.

8539 I am just wondering what kinds of management procedures you put in place to make sure that you are in fact using least cost technology and that you are aware of all the options out there and of the experiences, for example, of other jurisdictions.

8540 MR. FLAHERTY: I think Mr. Vachon talked the other day about the number of organizations that we have that our employees belong to. Many of our employees, depending on the various parts of the company, would belong to different organizations, whether they be with supplier groups, whether they be with other telcos.

8541 In those forums there is lots of discussion on new technologies that come along. Periodically, they will have reviews with new suppliers coming in and talking about new technology that is brought forward.

8542 I think that is one important part. We obviously go through training for our employees as well, to make sure that they stay current with state of the art technology as well.

8543 At a very high level those would be the two areas that I would identify.

8544 MR. VACHON: Maybe I could add too, that Northwestel was part of the participants of the Stentor member company who were participating in various engineering meetings. Now that Stentor has been dismantled, we are part of Bell Alliance, working with other companies, MTS, Sasktel, Maritimes, and we participate in various engineering meetings with them talking about future technology.

8545 MS LAWSON: Okay. These organizations that you are referring to, are these international organizations? To what extent are your employees involved in international organizations?

8546 MR. FLAHERTY: They cross boundaries. Mostly North American. I wouldn't say they would be worldwide, but we had some employees recently at a Nortel conference down in the United States that were reviewing Internet type services in particular, gaining more insight on where some of the latest technology is going in that area.

8547 The other area I think to ensure we try and drive least costs as well is obviously through purchasing policies. We are working now, as Mr. Hamelin mentioned earlier, with Buyco, a company that Bell is forming to use buying power from all the companies. So that is another forum but another way in which to save costs.

8548 MS LAWSON: B-U-Y-C-O?

8549 MR. FLAHERTY: Yes.

8550 MS LAWSON: I'm wondering to what extent you have examined the experience in other northern high-cost jurisdictions. We, I think, mentioned Alaska. I'm also wondering whether you have looked at all to see what is happening in northern Scandinavia, Greenland, Siberia, other northern regions that are struggling with the same issues as you?

8551 MR. FLAHERTY: We actually had the opportunity to have a Russian delegate join us for a period of two to three weeks within the last two or three months, and through that dialogue we were able to share some experiences. Probably that is the greatest extent, that we don't belong to formal organizations that would do this on a regular basis, but when the opportunity does present itself, we do take advantage of it.

8552 MS LAWSON: This is a huge challenge. There may be something to be said for consulting with others who are facing the same challenge and making sure that you are not, perhaps, unaware of some option or experiment that is being used elsewhere.

8553 MR. FLAHERTY: I would agree with you.

8554 As I said, in our discussions with the particular individual from Russia, it seemed that we were much further advanced. They were facing a lot of the same challenges. They were very interested in some of the things that we had done with satellite and they were going to be pursuing those much greater.

8555 I think Canada is recognized as being a bit of a telecommunications leader in many respects, but, again, I wouldn't profess to say we know every technology being employed everywhere in the world, though.

8556 MS LAWSON: Just on the issue of satellite service, first of all, how long a term is your current contract with Telesat?

8557 MR. HAMELIN: That was filed in confidence with the Commission.

8558 MS LAWSON: The length of the contract term?

8559 MR. HAMELIN: The length, the terms and all the conditions of the contract.

8560 MS LAWSON: Mr. Chairman, I'm not sure why the length of the contract term with Telesat would be confidential.

8561 MR. ROGERS: We had an issue on the disclosure round when that was filed originally and it was actually CAC/NAPO that challenged that very point and lost.

8562 What the Commission did do, for the benefit of CAC/NAPO, is provide an order to the company to show all payments made and all payments received. But everything else beyond that the Commission ruled was to be held in confidence.

8563 MS LAWSON: I'm sorry, Mr. Chairman, for forgetting that. Okay.

8564 Maybe you can just tell us, then, Mr. Flaherty, how can you assure us that you are getting the best deal possible from Telesat.

--- Pause / Pause

8565 MR. FLAHERTY: I will ask Mr. Vachon to answer that question.

8566 MR. VACHON: The way we have negotiated this contract, we looked to the other satellite suppliers in North America, at their rates. Telesat came with the better rate, the best rate for us, and mainly the best coverage. With other companies we might have had to make business with two satellite providers in order to cover the overall territory, which was a pain for us.

8567 The other thing to prove that I think we made a good deal is a lot of other companies, and I'm thinking about Cancom, who provides broadcasts for cable companies signing also a long-term contract with Telesat. So there are also other companies who signed long-term contracts with Telesat for the new F1 satellite.

8568 MS LAWSON: Okay.

8569 MR. FLAHERTY: The other thing I guess, as you can appreciate, we pay an awful lot of money in transponder costs. The last thing we wanted to have is fluctuating costs as we go forward. I think one transponder is costing us something like $150,000 dollars a month or something like that. So it's very, very costly. We need to have some stability in what those costs are as we go forward.

8570 MS LAWSON: So it is just coincidence that Telesat is a corporate affiliate of Northwestel?

8571 MR. FLAHERTY: I would say so. As I said, as Mr. Vachon said, we looked at coverage amongst a number of different things and that's one element.

8572 MS LAWSON: Okay. I would just like to ask you a question that I put to Mr. Hamelin earlier today which is: What initiative has the company taken to raise money from government sources for these service improvements? I'm talking about initiatives, I'm not talking about when the governments come to you or put out some request for improvements. I'm talking about you taking the initiative.

8573 MR. FLAHERTY: I think there are examples of government programs that have been made available, federal government programs, that the company had made application to. So whether you consider that the same thing as the government taking the initiative, I'm not sure.

8574 For example, some of the work in terms of Internet, putting on community access services. That was a program that the federal government made funding available, but it had to be applied for.

8575 We did some work with the City of Yellowknife in submitting a smart community bid on behalf of the City of Yellowknife.

8576 So, again, I think those are examples of things where the company did more than just wait for someone to come to them.

8577 MS LAWSON: Would you agree with me that in the case of these service improvements that we are talking about, we are talking about uneconomic capital investment which we want to do because it's a social benefit and that, therefore, it is appropriate for governments to provide direct funding.

8578 MR. FLAHERTY: Well, I gather that issue was debated in the high-cost serving area decision. If I recall, a number of the telephone companies, including the Northwestel, took the position that their preference would be that government funding be provided to address the issues you spoke of. But, as I understand, that decision has already been rendered.

8579 MS LAWSON: I don't think it is up to the CRTC to decide what governments do. I don't think the CRTC has any power over that, do you?

8580 MR. FLAHERTY: You would have to ask the CRTC.

8581 MS LAWSON: So would you agree that once the CRTC announced that decision, that there was less of an incentive for governments to take the initiative and invest in these kinds of facilities?

8582 MR. FLAHERTY: Maybe just to back up a step.

8583 You mentioned that you didn't think it was the CRTC's decision to look at some of these things. I think the Telecom Act was revised to give the CRTC powers to determine whether a funding mechanism was required to provide basic telephone service. So I would suggest that indeed the federal government has given the CRTC some specific powers in this area.

8584 MS LAWSON: I wouldn't disagree with that, but I think my last question remains unanswered. Shall I repeat it?

8585 MR. FLAHERTY: Yes, please.

8586 MS LAWSON: Once the CRTC rendered its decision in the high-cost area proceeding, which basically paved the way for this supplementary funding, would you agree with me that there is less incentive on governments to provide direct funding to subsidize the investments?

8587 MR. FLAHERTY: I guess you could draw that conclusion, although, you know, the fact that we were unable to work out an arrangement with the Yukon government would suggest that is not entirely true.

8588 MS LAWSON: Okay. I would like to move on to the $5.00 local rate increase. I take it you consider this affordable for all of your customers?

8589 MR. FLAHERTY: We considered it as Mr. Hamelin and others have mentioned through this whole process, as a share that northerners should put forward to help contribute to this overall plan that we are trying to bring forward. Very much when we look at affordability, we are looking at the total bill.

8590 We have talked numerous times I think through this proceeding about what the average impacts are, what the median impacts are, and clearly there will be some people that it will be more of a burden than others. So at the end of the day affordability will become a matter of judgment with the Commission.

8591 I think, as Mr. Wells talked about the other day in his panel, when we look at what is happening with the other telephone companies, the one I have most recently come from, Northern Telephone, we have recently applied to the CRTC for something like a $29 local rate.

8592 So very much you are seeing telephone rates across the company -- across the country, I should say, rising in levels.

8593 Whether 3133 is the exact number that should be -- I think, as I said, that's a matter of judgment that ultimately the Commission will have to decide on.

8594 MS LAWSON: So do you consider it affordable for all of your customers.

8595 MR. FLAHERTY: We felt it was a reasonable contribution at that time to ask for northerners given on the other costs we were going to be asking southerners to help contribute towards.

8596 MS LAWSON: I'm wondering what sort of knowledge you have of your customer demographics.

8597 MR. FLAHERTY: Judging from some of the questions in the last few days, not enough.

8598 MS LAWSON: Do you have any sense of the level of poverty and unemployment in your serving territory?

8599 MR. FLAHERTY: I can't say specifically. No.

8600 MS LAWSON: But you would agree that's relevant to the issue of the affordability of the local rate increases you are putting forward.

8601 MR. FLAHERTY: As it is in all jurisdictions in Canada.

8602 MS LAWSON: Okay. Now, finally, I just want to look at the whole goal of this application which, I understand, is reasonably comparable service at reasonably comparable rates. I don't think that -- certainly my clients don't have any dispute with that goal.

8603 There are three aspects of this, I think. There is the service, the reasonably comparable services and the reasonably comparable rates for long distance and the local. At the level of services the way you design reasonably comparable, as I understand, close to what's available in the rest of Canada, but a little less where the costs are exorbitant. Is that fair?

8604 MR. FLAHERTY: Similar services, you are right. They are not exactly the same services. We haven't proposed to include all the CMS features that are available in southern Canada, so yes, I would agree that we are similar services, not exactly the same.

8605 MS LAWSON: I went through with an earlier panel where you cut back and why. So you made some judgments. You were trying to get as close as you could to the rest of Canada without getting too expensive.

8606 MR. FLAHERTY: I wouldn't say we were trying to get as close as we could to the rest of Canada. I would say we tried to fulfil a basic service definition that the CRTC has laid out. Within that definition, call management features was loosely described.

8607 I think what we did was try to incorporate the services that our customers felt were most important. Rather than going at it and saying here is all the services that are in the south, let's put all those in, it was more of well, let's make sure we are putting something in that makes sense, it's not excessive, so let's go to our customer base and see which of those services are most important rather than do it the other way around.

8608 MS LAWSON: Okay. Fair enough. With respect to long distance rates, the way you have approached it is to set rates virtually identical to those in the south. Correct?

8609 MR. FLAHERTY: I think that's a bit of a necessity, shall we say. We have seen that there is bypass occurring. More and more of it is occurring. I think through this consultation I noted at least three people who more or less admitted to the fact that they were doing by pass. That was probably in a group of only about 50 people overall.

8610 I think it is a bit of an economic necessity. Northwestel's sole revenues have been slowly been eroded through bypass. Unless we step up and recognize that, there will only be further incentive for people to continue to bypass our network.

8611 MS LAWSON: Okay. So if it weren't for the bypass problem, how would you design reasonably comparable long distance rates? What would be the margin of difference that you would consider acceptable?

8612 MR. FLAHERTY: Well, you are asking me about a situation that doesn't exist and I can't see how it would exist in the near future, so very much the rates are going to have to be very close.

8613 Again, my colleagues have talked about the customer surveys that we performed. It has been very clear in those surveys that over 60 per cent of the customers said they would leave us for slight differences in long distance rates.

8614 The whole model of how this company has been able to operate in the last number of years has been entirely subsidized by long distance rates. Consumers are very frustrated at it, as my colleagues again mentioned in this survey we do.

8615 It doesn't matter which question we ask them, almost every single one has a comment about long distance rates in it.

8616 MS LAWSON: So you don't see any inconsistency in your approach to reasonably comparable service at reasonably comparable rates in terms of having long distance rates virtually identical to those in the south, but local rates 40 per cent higher than the southern average.

8617 MR. FLAHERTY: Again, I'm not sure it's fair to compare it to the southern average. If I look at the upper ends of the various telcos and the proposals that have been made, I believe Telus is proposing an upper end rate of something like $18. Bell is proposing a rate somewhere like $28. I talked to Northern Telephone. That was at $29. We heard of Telebec. There's a slight twist there in that they have extended area service included, but they are at $34.

8618 It is a little bit higher, but it is nowhere near 40 per cent higher than these proposed rates at the top end. I think we should be comparing comparable areas, those areas that are likely to see those kinds of rates in those companies I spoke of are the ones that are more comparable to the territory that we have.

8619 Compare it to an average, including downtown Toronto. Although Mr. Hamelin talked about Whitehorse as being similar to Toronto, it's got many, many differences as well.

8620 MS LAWSON: But when it comes to service levels, you are comparing with other rurals in Canada.

8621 MR. FLAHERTY: To some degree. I think Mr. Vachon talked about the need to adapt our out of service better than 24 hours to recognize the uniqueness of our territory. Again, this territory is unique. It requires some unique treatment. The fact that we are having this proceeding indicates the unique treatment that it deserves as well.

8622 MS LAWSON: Okay. Thank you very much, gentlemen.

8623 THE CHAIRPERSON: Thank you, Ms Lawson.

8624 Madam Secretary.

8625 MS VOGEL: The next party to cross-examine this panel is the Utilities Consumers Group, Mr. Rondeau.

EXAMINATION / INTERROGATOIRE

8626 MR. RONDEAU: First of all, I didn't expect to be here this evening at this time. Some of my papers were left behind at home. I compliment your staff for helping us out big time here.

8627 Good day, panel.

8628 MR. FLAHERTY: Good evening.

8629 MR. RONDEAU: Mr. Flaherty. My first question is what are your policies for buying local?

8630 MR. FLAHERTY: I think like any other company that's located in the north, to the extent we can, we want to buy local. I will leave it at that.

8631 MR. RONDEAU: But you have no set policy?

8632 MR. FLAHERTY: I would suggest that is the policy.

8633 MR. RONDEAU: How about a policy for contracting out local?

8634 MR. FLAHERTY: Again, we would try as much as possible to contract out locally. The big challenge that we have is the number of things that we are doing involve a fair bit of strong technical knowledge where northerners demonstrate that they have that bill and are competitive in pricing, then by all means we would.

8635 I think the important thing that we want to keep in mind here, as we have heard, this is a high cost area and we need to find ways to continue to reduce costs. I think you yourself were concerned about productivity improvements.

8636 Again, it's a balancing act. We want to try and make sure that we can contribute to the northern economy as others do, but likewise, if there's a significant cost disadvantage from using some southern provider, then obviously we would want to take it to ensure we continue to improve our efficiency.

8637 MR. RONDEAU: So if you would have an Internet provider or cable provider that could do technical work, would you entertain going into partnership with these folks to do the infrastructure, the SIP?

8638 MR. FLAHERTY: We would have to sit down and talk to the individuals to understand what they could bring to the table, but we would be open to any discussions for sure.

8639 MR. RONDEAU: Okay. What's your direction for regulation that would have an ROE adjustment mechanism built into it?

8640 MR. FLAHERTY: Could you clarify a little bit more about what you mean by an ROE adjustment mechanism.

8641 MR. RONDEAU: I know this is done in other jurisdictions, perhaps not in the telecommunications field, but in the energy field. They will look at the times they can put an ROE every year, change the ROE every year.

8642 If the economic times or --

8643 MR. FLAHERTY: Maybe just a comment. Like through processes like this, the Commission does review our ROE range to allow it to earn.

8644 Obviously we had quite an interesting discussion the other day with the experts on ROE, so I would suggest that process is like other processes. To do that on an annual basis I think perhaps would be rather excessive and raise a lot of costs. Holding a proceeding like this is very costly.

8645 MR. RONDEAU: I agree with that. But if you look at what happened in the past, the last time that ROE was set was in 1993, if you add an adjustment mechanism in there you could take the sign of the times. Are interest rates going down? Are they going up?

8646 MR. FLAHERTY: I think, unfortunately, it's more than just simply interest rates going up and down. There is a whole wide range of things that need to be included when you look at this.

8647 The other thing, I would suspect that the CRTC, at any time as it feels appropriate, could conduct a rate-of-return type hearing as we are having today. So that ability is there for the Commission to exercise if they feel it is warranted.

8648 But to say that you would have a mechanism just tied to interest rates, I think again through the evidence that both our company and CAC/NAPO have put forward, it is a very complex issue and not something that can be done simply.

8649 MR. RONDEAU: I agree.

8650 Thank you. I'm just exploring.

8651 Your policies concerning joint marketing of Northwestel with subsidiaries or other independents, what is your policy?

8652 MR. FLAHERTY: In terms of subsidiaries, the Commission has just recently issued a decision, I think within the last month or so, indicating that we are not allowed to do joint marketing. So, for example, groups like NMI and our cable company, joint marketing is not allowed.

8653 That doesn't stop us from doing joint marketing within our company, and I think that is important when we talk about Sympatico. Sympatico is not a subsidiary. Sympatico is a registered name that we are licensed to use, but we are the provider of that Internet service.

8654 So my understanding is, we do have the ability to joint bundle within the telco, but not across the boundaries with the subsidiaries.

8655 MR. RONDEAU: Okay.

8656 The first day of the hearings I presented an Exhibit No. 1, evidence, showing some statistics on Yukon families' distribution of income. These last sheets here are updating this.

8657 The reason I handed this sheet in the first day was because it was the only one that compared -- that I could find that compared family income. I think with the sheets that I am putting in front of you today, the evidence, what I am going to try to show you is that Yukon is even in more dire straits than they were in 1992 when these facts were presented.

8658 If you look at the first page showing the unemployment rates in the Yukon, you will see that they have risen since 1992, whereas the rest of Canada they have dropped significantly.

8659 Maybe I can deal with all of this information and then you can comment.

8660 The second sheet shows you a breakdown for 1997 tax year, which is the latest one we have. If you look at -- this breaks it down between males and females.

8661 If you look at the next page it amalgamates the two. The Bureau of Statistics in Yukon were good enough to amalgamate these for us.

8662 Now, if you look at our returns in 1997, which I say is the last statistics that are presented, if you add the first four of these it will bring you to the poverty level. You get approximately 48.3 per cent of your Yukon public, the Yukon taxpayers that are at or below poverty level.

8663 MR. FLAHERTY: It's just a question for you: These numbers that are shown here, these are individual tax returns. Is that correct?

8664 MR. RONDEAU: Yes, that is correct.

8665 MR. FLAHERTY: So we wouldn't know that if a spouse, husband and wife were working and one of them happened to be earning in the 45 to 50 range and the other one happened to be earning in the 20 to 25 range, we wouldn't know that, I guess, by looking at this. Is that right?

8666 MR. RONDEAU: No, but that's why I presented the family income in 1992 as well to show that there may be some discrepancy.

8667 But, nonetheless, it is high. Whether you take 23 per cent of the family or 48 per cent of the individuals, it is nonetheless still a high amount of people who are at or under the poverty level.

8668 The last page, what I'm trying to show here if you look at what is marked, shows the age level of people who are leaving the Yukon.

8669 If you look at that, I would suggest that most of the people who are leaving are income earners. They are people who are in their middle ages who are earning an income. The increase is the elderly.

8670 So my question is: In Northwestel's strategy and proposal, did you do an analysis of the demographics for affordability in your operating area?

8671 MR. FLAHERTY: The short answer would be no.

8672 MR. RONDEAU: My last question is: Would not your corporation believe an evaluation of whether some 40 to 50 per cent, or even 20 to 30 per cent of your Yukon customers and future customers could afford to pay $31-plus dollars was not important to examine?

8673 MR. FLAHERTY: I think it's important to examine, but I think it is also important, as we have said numerous times, that you look at the total bill. You know, without having the evidence of the total bill for the individuals you are talking about it is difficult to do.

8674 It still comes back to, as I said earlier, a judgment call.

8675 You know, I look at some of the statistics that we have had over the last two years. We have had a number of significant raises in rates, although being rebalanced rates.

8676 I think in 1998 we had a total of 10 people who cited affordability as being an issue. Three of them indicated it was because of local rates. In the first eight months of 1999 we had no one indicate that they had disconnected for affordability reasons.

8677 I'm not trying to suggest that is a precise sample, I'm just trying to indicate that is some of the information that -- anecdotal information we have.

8678 MR. RONDEAU: Yes, that's logical. But my rebuttal to that would be: What good is an average bill if you can't afford to have a telephone in your house?

8679 MR. FLAHERTY: Agreed.

8680 MR. RONDEAU: Thank you, panel.

8681 THE CHAIRPERSON: Thank you, Mr. Rondeau.

8682 It's six o'clock. I think I'm inclined to finish here for the day. It has been a long day since 8:30 this morning, so I think we will pick it up tomorrow morning at 8:30.

8683 So with that we will adjourn for the day.

--- Pause / Pause

8684 THE CHAIRPERSON: I'm sorry. Madam Secretary, we need an exhibit number for Mr. Rondeau's exhibits.

8685 MS VOGEL: Yes, Mr. Chairman.

8686 The document entitled "Monthly and Annual Employment Figures Adjusted Estimates Canada and Yukon" will be marked as UCG Exhibit No. 2.

8687 THE CHAIRPERSON: Thank you.

8688 That concludes our business for the day.

--- Whereupon the hearing adjourned at 1805,

to resume on Tuesday, June 20, 2000 at 0830 /

L'audience est ajournée à 1805, pour reprendre

le mardi 20 juin 2000 à 0830

Date modified:

2000-06-19