ARCHIVED -  Transcript - Yellowknife, NWT - 2000/06/21

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 21, 2000 le 21 juin 2000

Volume 7

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 21, 2000 le 21 juin 2000

Volume 7

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

Peter Dunn Territories

Peter Macdonald Government of Yukon

James Pratt

Terry Hayden

Tom Zubko New North Networks

Phil Rogers Northwestel

Paul Flaherty

John Lowe Telus Corporation

TABLE OF CONTENTS / TABLE DES MATIÈRES

PAGE

ARGUMENT BY / PLAIDOIRIE PAR

Ms Lawson 1475

Mr. Rondeau 1493

Mr. Henry 1504

Mr. Dunn 1521

Mr. Hayden and / et Mr. Pratt 1540

Mr. Zubko 1563

Mr. Lowe 1570

Mr. Flaherty 1583

Addenda/Errata (volumes 1 to 6) 1614

Whitehorse, Yukon / Whitehorse (Yukon)

--- Upon resuming on Wednesday, June 21, 2000,

at 0835 / L'audience reprend le mercredi 21 juin

2000 à 0835

9894 THE CHAIRPERSON: Good morning, ladies and gentlemen.

9895 Before we get started with this phase of this hearing, that being the argument phase, are there any matters anyone wishes to bring to the attention of the Chair? No. Okay.

9896 Madam Secretary...?

9897 MS VOGEL: Our party for final argument this morning is CAC/NAPO, Ms Lawson.

9898 THE CHAIRPERSON: Just before you start, Ms Lawson, I indicated that we would have a maximum of 30 minutes, so I would ask the Secretary just to give a little reminder when there's about two minutes left to go, so if you get a bit of an interruption --

9899 MS LAWSON: That would be helpful. Thank you, Mr. Chairman.

ARGUMENT / PLAIDOIRIE

9900 MS LAWSON: Thank you, Mr. Chairman, Members of the Panel.

9901 The Northwestel proposal before you is carefully designed to respond to customer demand for better service and lower long distance rates by taking full advantage of supplementary funding from the south to subsidize not only the service improvement plan but also long distance rates which they want to make, essentially, identical to those currently prevailing in the south where toll competitors, as we all know, are still struggling to make money.

9902 If toll competition ever occurs under this plan it will be heavily subsidized. However, the more likely scenario, in CAC/NAPO's view, is that Northwestel will retain a stranglehold on the long distance market in the north such that competition remains, for northerners, no more than the allusion it is now.

9903 As a result, Northwestel will make much more profit than it leads us to believe.

9904 At the same time, northerners are being asked to bear another $5.00 basic rate increase on top of increases amounting to 200 and 300 per cent over the past few years, bringing their basic access rates to a level well above the Canadian average.

9905 Putting it all together, Northwestel is asking for far more money than necessary from its basic access subscribers, and from other Canadians. It is asking us to subsidize not only the desirable infrastructure upgrades but also unnecessarily low toll rates and inflated profit.

9906 In CAC/NAPO's view, this plan is serious flawed in four key respects.

9907 First, the inconsistent application of the reasonably comparable standard in respect of rates; second, Northwestel's inflated return on equity proposal; third, its overstated market share loss estimates, under the proposed plan; and, finally, its choice of a long distance plan which does not maximize its revenues.

9908 Let's look, first, at the issue of reasonably comparable rates.

9909 In its opening statement, Northwestel stated that its guiding principle has been to develop a plan to deliver reasonably comparable services at reasonably comparable rates to all communities in the north. CAC/NAPO agree entirely with this goal.

9910 Canadians living in rural and remote areas should enjoy reasonably comparable service at reasonably comparable rates to that enjoyed by their urban counterparts.

9911 This, as we understand it, is the principle underlying the Commission's high-cost area decision.

9912 But Northwestel has interpreted this principle inconsistently. On one hand, it is proposing service improvements that will achieve the reasonably comparable service objectives. Northerners in remote communities will enjoy much improved service and new services that southerners now take for granted.

9913 It won't be identical to that in the south because the cost of upgrades to achieve identical service simply can't be justified. Northwestel has appropriately drawn a line somewhere. But it will be reasonably comparable in light of the extraordinary costs of serving this territory.

9914 With respect to long distance rates, however, Northwestel takes a different approach. Reasonably comparable here means virtually identical, despite enormous cost differences between toll service in the north and the south.

9915 And, finally, when it comes to local rates, we find that Northwestel defines "reasonably comparable" in yet a different fashion. Rates 40 per cent higher than average rates in the south. This is considered reasonably comparable?

9916 Northwestel tries to justify this by saying that the comparison is with high-cost areas in the south, not with average southern rates.

9917 But the point of the reasonably comparable principle, we thought, was to ensure that rates in high-cost areas are comparable not among themselves but, rather, with those in urban areas.

9918 The appropriate comparison for Northwestel's local rates is the Canadian average, not the highest rates currently charged in other high-cost areas.

9919 Mr. Chairman, by what stretch of the imagination can 40 per cent -- a 40 per cent difference be considered reasonably comparable? CAC/NAPO submit that the $5 local rate increase proposed in this proceeding will bring Northwestel's basic access rate to a level which is well beyond anything that could be considered reasonably comparable. Moreover, it will take Northwestel's basic service rate beyond a level of affordability for many of its customers.

9920 I will not repeat the many eloquent pleas for local rate relief made by Northwestel's customers during the regional hearing. Suffice it to say that for many of Northwestel's customers, basic access rates are an issue now and will become more of an issue if this increase is permitted. They will simply not be able to afford it.

9921 It is apparent that Northwestel has no knowledge of the demographics of its own customer base. They told us they have no idea of the rate of poverty or unemployment in the communities they serve. They have no idea of the number of households in their serving territory which do not have phone service because they can't afford it. Yet, Northwestel is blithely proposing to force another 19 per cent increase in basic access rates on its subscribers, having already pushed through increases of 200 to 300 per cent over the past few years.

9922 As one party said in the regional consultations, this is likely to be the straw that breaks the camel's back.

9923 Northwestel hurries to point out that it's not the basic access rate that matters, but rather it's the total customer bill that we should be look at and that even with the $5 local rate increase, most of its subscribers will be better off in the end.

9924 This is what I call evasion, Mr. Chairman, evasion of the problem that so many of us are trying to point out. We don't dispute that Northwestel's average customer will be better off under this plan. That's not the point. The point is that a minority, an important minority, of Northwestel's customers will suffer and even risk losing basic access service in order that a majority can have lower overall bills.

9925 What is more important, that everyone have basic access or that high spenders enjoy big savings? That's the decision you must make. I can't say it any better than Mr. Rondeau when he said "What good is an average bill if you can't afford to have a telephone in the first place?

9926 On to Northwestel's revenue requirements. Northwestel is claiming a revenue requirement far in excess of what is necessary for it to cover its costs and make a fair return for its shareholders. The problem lies primarily with Northwestel's inflated return on equity request, its understatement of toll revenues under the plan and its failure to put forward a long distance plan which maximizes revenues.

9927 Let's look first at its return on equity. Northwestel is requesting an ROE of 12.25 per cent, 300 basis points above Drs. Booth and Berkowitz have recommended, 9.25 per cent.

9928 What's wrong with Northwestel's proposal of 12.25 per cent? First of all, it's based on an outdated equity ratio of 45 per cent. Northwestel fails to use an actual equity ratio or the equity ratio that it is forecasting for the test year. This difference requires a reduction on the return in equity to compensate for the reduced risk of a higher equity ratio.

9929 Secondly, it's based on an over-assessment of the company's risk. Northwestel has relied on a figure for reliance on toll revenues from 1998. We found out in cross-examination that in fact this is almost twice what is expected in the test year.

9930 Reliance on toll revenues is a major factor and risk, but Northwestel's reliance on toll revenues will be substantially reduced next year from about 60 per cent to about 30 per cent.

9931 Secondly, there is no local competition even considered in this territory and, as will become clear before I finish my argument, only limited long distance competition is likely.

9932 Third, Northwestel has available to it supplementary funding to make the company whole as a result of its new service improvement expenditures. This has a tremendous impact on risk.

9933 Mr. Chairman, as Drs. Booth and Berkowitz have testified, this company, in fact, faces lower risk than it did in 1993.

9934 Now, finally, the 12.25 recommendation includes a number of bells and whistles which adds almost 300 basis points to Ms McShane's baseline return recommendation and would translate into approximately $10 million in extra costs for the test year 2001. In particular, Ms McShane's return on equity recommendation is inflated by 25 basis points as a result of her use of the comparable earnings method which relies entirely on historical data and therefore provides no insight into what investors require in the future. Moreover, in her use of the comparable earnings test, Ms McShane failed to screen out firms with market power.

9935 Her estimate is further inflated by her use of an upwardly biased method of estimating market risk premiums. She inappropriately included American data when Canadian data already accounts for the globalization of markets. She used American estimates significantly higher than those recommended by Fama and French, recognized leading experts in this field. She used investment analysts' growth forecasts which produce a patently unrealistic long-term growth rate of 13 per cent, 2.5 times that of the Canadian economy. She upwardly adjusted her beta estimates contrary to the clear evidence that Canadian utility betas regressed to something less than one. Finally, she upwardly adjusted her rate of return recommendation by 50 basis points for financial flexibility.

9936 All of these data choices and adjustments point in the same direction, a higher recommended rate of return, but none are justified. Indeed, when you look at Ms McShane's market risk premiums based on Canadian data, you will find that she produces the same result as Drs. Booth and Berkowitz.

9937 Drs. Booth and Berkowitz arrive at their estimate through two models: the well established risk premium over long Canada's model and a new multi-factor model.

9938 The multi-factor model measures the required returns for the additional risk associated with company size and growth orientation. Drs. Booth and Berkowitz explicitly capture any incremental risk beyond the raw data using this model.

9939 The multi-factor model is now well accepted in the finance literature and adds an important and salient piece of information for the Commission to use in arriving at a fair return for Northwestel.

9940 It's important to note, Mr. Chairman, that neither of these models were challenged by Northwestel in its cross-examination of Drs. Booth and Berkowitz.

9941 CAC/NAPO submits that the evidence of Drs. Booth and Berkowitz be accepted in full and that an allowed return for Northwestel of 9.25 per cent be granted for the test year 2001.

9942 On to the issue of market share loss and long-distance competition.

9943 Northwestel has designed a plan which instead of facilitating toll competition ensures that toll competition will never happen. Instead of maximizing revenues on its toll side, Northwestel has decided to go for broke and match the current toll plans in the south so that it maintains its dominance in this market by satisfying customer demand for lower toll rates before competitors can even get off the starting block.

9944 It doesn't take a lot to see that there isn't going to be much competition under this plan. Look at it from the perspective of a competitor. First of all, Northwestel is offering rates identical to mine so I have no price advantage.

9945 Secondly, they get a three-month lead in equal access during which time Northwestel can get all of its customers on the discount plan.

9946 I would just note it is not that much trouble for a call centre to call every single one of Northwestel's customers in this period of time.

9947 Third, for calls within Northwestel's territory, I will have to pay a total CAT, at best, equal to the price I'm paying for off-peak calling and in most cases a lot higher since once that $20 monthly CAT kicks in my revenue per minute starts dropping and once a customer makes 600 minutes of calling, that 10 cent rate has fallen to 3.3 cents per minute.

9948 For calls between Northwestel and the rest of Canada I will have to pay a CAT that is still much higher than the national average.

9949 Looking at the potential for resale, there is simply no business case to be made based on Northwestel's proposed rates, unless the bulk of my resold traffic is placed in peak periods.

9950 Looking at the potential for large customers up here, it's obvious that Northwestel's biggest customers, the territorial governments, are clearly loyal to Northwestel and have reason to stick with Northwestel regardless of any price difference.

9951 Those businesses which are national Bell customers have nothing to gain from a new competitor.

9952 So why would I bother? Why would any competitor bother to enter this market to market its services to high-cost customers, the few high-cost customers in Northwestel's territory, when the same companies are not yet making money even in low-cost areas?

9953 Northwestel raises the spectre of AT&T, Call Net and Telus, the giants, coming in and grabbing significant market shares. Mr. Chairman, it seems everybody but Northwestel is aware that AT&T stopped offering long distance service to residential customers some time ago.

9954 As for Call Net, their absence from this hearing speaks volumes.

9955 That leaves Telus who can speak for itself.

--- Laughter / Rires

9956 MS LAWSON: No surprise, Mr. Chairman, that competitors are not exactly lining up at Northwestel's door. Northerners will be lucky to see any competitors actively seeking their business under this plan.

9957 Yet Northwestel is basing its revenue requirements on forecasted market share losses of 13 per cent, 20 and 22 per cent under its proposal, losses similar to those experienced in the south. These estimates cannot be taken seriously. They are vastly overestimated and, as such, will translate into higher revenues and hence unnecessarily high supplementary funding.

9958 The results could be one of two things. It could be overearnings, in which case the first level of Northwestel's excess profits will be shared with ratepayers and earnings beyond that will be returned to the supplementary fund.

9959 But there is another possibility, which is that Northwestel spends the excess funds before they appear as such on its balance sheet, thus obscuring the fact that they have overearned.

9960 Finally, Mr. Chairman, the issue of Northwestel's choice of a long distance plan. Not only has Northwestel seriously underestimated the revenues that it would generate under its proposed long distance plan, it has failed to seriously consider alternative rate scenarios which could generate higher revenues overall for the company.

9961 Based on some highly judgmental estimates of customer propensity to switch in order to get lower rates, as well as to curtail calling in the event of higher rates and based on inconsistent use of elasticity measures in relation to bypass minutes, Northwestel decided that it was all or nothing. Its southern rate plans must be matched in order to retain customer business and maximize revenues.

9962 Northwestel's position that its cut-rate plan will maximize revenues is based on the flimsiest of foundations. Elasticity estimates that even their expert, Dr. Taylor, admitted have a wide margin of error. In this context it is highly possible that Northwestel could in fact make more money by charging a higher CAT and higher long distance rates than it has proposed. All you need to do is use other equally likely assumptions about customer and competitor response.

9963 The company has acknowledged that the driver of market share loss is Northwestel rates relative to competitor rates, not relative to southern rates. The comparison to southern rates only affects Call Pack bypass.

9964 So whatever scenario is adopted for long distance rate reductions, and when I say that I think we all acknowledge we are going to see some significant reductions, Northwestel will repatriate calls that were previously lost to bypass.

9965 CAC/NAPO submits that Northwestel understates its revenues under higher long distance rate scenarios by not adequately accounting for these repatriated bypass minutes.

9966 Overall, there is no clear evidence on the record that bypass is more harmful to Northwestel's bottom line than is reducing rates.

9967 We submit that if the CAT were set at, say, seven cents per minute, instead of five, and if long distance rates were set somewhat above southern rates, Northwestel's aggregate revenue would be higher. Under this scenario, Northwestel would get higher revenues on its retained minutes; it would get higher CAT revenue -- it would get CAT revenue on any market share loss that is comparable to that of its retained business; and it would get almost the same revenue on bypass minutes.

9968 With a higher CAT rate and higher long distance rates competitors can subsidize customers in the north, if they so choose. But this will not be sustainable, in the long run. Over time, competitor long distance rates will reflect costs and Northwestel will be held harmless for market share loss if the CAT is set at an appropriate level.

9969 CAC/NAPO want northerners to benefit from lower long distance rates. There's no doubt about that. But we have serious reservations about subsidizing competition, as Northwestel is proposing to do.

9970 Northwestel's long distance rates need to be reduced, but they should be set, together with the CAT, at levels which maximize Northwestel's revenues rather than levels which simply replicate those in the south.

9971 Instead of leaping from rates of 27 cents per minute to rates of 3.3 cents per minute, Northwestel should see how it can do with long distance rate reductions in the order of, say, 50 per cent and a CAT set accordingly.

9972 Northwestel has not adequately demonstrated that radical rate reductions set out in its application are necessary or desirable, particularly from the perspective of those seeking to minimize the subsidy.

9973 Mr. Chairman, I will wrap up.

9974 In conclusion, this application bears the mark of a big money grab. And, really, what else would you expect when you dangle the prospect of external subsidies before a profit-oriented company?

9975 Northwestel is asking for far more money than it needs to accomplish the service improvement plan, to satisfy customers' demand for lower long distance rates and to make a reasonable profit.

9976 Yes, Northwestel has engaged in some balancing of the various forces competing for funds and it's made some reasonable comprises, in terms of service improvements; however, it has been inconsistent in the application of its guiding principle reasonable comparability and it has failed to appreciate the importance of affordable local rates for its most vulnerable customers.

9977 The local rate increase should not be allowed -- at least not before an effective targeted subsidy is put in place to ensure affordability for Northwestel's many low-income customers.

9978 Mr. Chairman, that concludes my argument.

9979 THE CHAIRPERSON: Thank you, Ms Lawson.

9980 Would you be proposing to address the issue of costs, at this time?

9981 MS LAWSON: Sure. If you prefer.

9982 CAC/NAPO would like to apply for an award of its costs in this proceeding.

9983 We would submit, in this respect, that we represent an important constituency of Northwestel and of other telephone companies who are being asked to pay for much of what is requested in this application.

9984 We submit that we have participated in a responsible manner and have contributed to a better understanding of the issues through our evidence and participation in the hearing and would, therefore, request an award of our costs.

9985 Thank you.

9986 THE CHAIRPERSON: Thank you, Ms Lawson.

9987 I guess we will turn to the next party, Madam Secretary.

9988 MS VOGEL: The next party for final arguments this morning is Utilities Consumers' Group, Mr. Rondeau.

0900

ARGUMENT / PLAIDOIRIE

9989 MR. RONDEAU: Good morning, Mr. Chairman, ladies and gentlemen of the Commission.

9990 It's pretty hard to follow behind that excellent presentation.

9991 The Utilities Consumers' Group has complete faith that the vision of Minister Manley, the policy objectives of the Telecommunications Act and the CRTC Decision 99-16 will deliver to the north affordable and reliable telecommunication services.

9992 We also have faith in our incumbent Northwestel's capability of building infrastructure used to carry out the implementation of these objectives.

9993 Northerners will not only benefit from the modern infrastructure but the economies of the three territories will be stimulated.

9994 Northerners buy many of our goods and our products from our southern neighbours, so they will benefit as well.

9995 The CRTC recognized, under the high-cost serving area decision, the need for supplementary funding in Northwestel's operating area. It is a unique operating area.

9996 The Commission further directed Northwestel to file a service improvement plan, or SIP, with specific goals spelled out.

9997 Northwestel responded with an in-depth SIP; however, it lacked in options.

9998 Northwestel's panel members continually referred to their SIP as a balanced approach. It is here the UCG has reservations with portions of Northwestel's concept.

9999 UCG has six concerns we need clarified.

10000 One: the rate base. Our organization has problems with the idea that external funding dollars will be added to Northwestel's rate base. It would appear that some $9 million per year will be needed to supplement the cost of Northwestel upfronting 75.8 SIP and amortizing this amount for the next 20 years. Then, at the end of each year, the funding mechanism will reimburse the cost per year to Northwestel.

10001 Where will that money go?

10002 The mortgage payment should only be for one year or until the upfront money is reimbursed.

10003 If this is not a working model, then I would suggest the funding mechanism upfront the requested yearly amounts to Northwestel with stringent parameters placed on the SIP work-in-progress. The mechanics of ownership would have to be worked out.

10004 Northwestel would be paid operation and maintenance costs for caretaking the system, but no mortgage.

10005 Number two: the CAT. It would appear to UCG that a desegregated CAT for peak and off-peak would benefit residential consumers as they are the ones using the majority of the off-peak time.

10006 Number three: the rate on equity. UCG does not deny any corporation the right to make a reasonable profit, a fair return on equity.

10007 Northwestel, in their proposal, wishes to increase their rate base with external funding while increasing the equity-to-debt ratio by the same means.

10008 They then ask for the same rate of return regime. They cannot eat their cake and have it too. Northwestel cannot expect such a high risk premium for rate of percentage when they increase their assets with external funding. As well, evidence on fair return presented by Mr. Booth and Mr. Berkowitz paints a different picture from Northwestel's evidence.

10009 Number three, affordability of the $5 local rate increase. UCG has provided evidence beyond a reasonable doubt that many Yukoners live at or below the poverty line. Northwestel has not provided any demographics that dispute our evidence.

10010 Some 25 to 40 per cent of Yukon households may be denied access to basic service because of affordability or budget money spent to have a telephone in the homes may deny other necessities of life. Looking at the average bill savings does not serve these citizens justice.

10011 Number four, a level playing field for competition. Parameters must be set to ensure a level playing field in long distance, Internet and mobile service. Our organization does not wish to see a Wal-Mart scenario here. I don't know if the members of the Commission are aware we are presently in Whitehorse undergoing a decision process on a Wal-Mart being constructed here.

10012 One of the things we are hearing is that large companies come into an area, lower the prices in the short term and when they drive out all their competitors, they can charge what they want. We don't want to see that here.

10013 Use of local talent. We want to see policies laid out for buying local and constructing or contracting out local. Northerners generally, and Yukoners specifically, do not wish to longer live in a monopoly telecom situation as this is not in the best interests of our public.

10014 We recognize Northwestel's operating area as a special case. We also recognize Northwestel as our incumbent service provider. It has been a reasonable corporate citizen while at the same time has provided employment and commerce for the territories.

10015 Monopolies customarily become arrogant. Their quality of service deteriorates and greed for corporate profits become the norm. It would appear that Northwestel has taken on some of these characteristics.

10016 Northwestel's panels under cross-examination continually stated that bypass and reverse calling patterns has been affecting the bottom line of their business, yet the 1999 financial statements would indicate this is not so.

10017 Operating revenues increased, including their long distances services revenue. Net income increased. Equity to debt ratio increased. The return on common equity increased a healthy 1 per cent from the previous year. This begs the question, Mr. Chairman and fellow Commissioners, are Northwestel just crying wolf for 2000 as well?

10018 UCG1-13, attachment 1, also shows Northwestel is the most profitable per NAS as compared to the other telcos in western Canada.

10019 To conclude, ladies and gentlemen, I will reiterate three statements UCG made at the Tuesday Town Hall Consultation.

10020 The Commission has a special stewardship in the north. There are two key words in section 22: reliable and affordable. In other words, northerners must experience up to date technology which is not cost prohibitive. Having the technology available will not be of any use if the citizens cannot afford to drive this information highway.

10021 In local competition, Telecom Decision 98 -- 97-8, the first of May 1997, the Commission found, and I quote:

10022 The Commission further concluded in this decision, and I quote again:

10023 It stands to reason that this decision for southern telcos must be recognized in future proceedings. It is our understanding that southern consumers did not experience a further increase in rates when long distance competition was implemented.

10024 It appears that some incumbents in the south are now applying for local rate increases, but this is several years after competition and decisions by the Regulator have not yet been made.

10025 The Commission has a difficult task facing them. UCG appreciates your time and perseverance going through the many trying issues. We also acknowledge the professionalism of Northwestel's panel and the competency of the various intervenors.

10026 For the record, Mr. Chairman, UCG would like to state that we concur with Mr. Cardozo in his dissent decision 99-16. He felt all high cost areas in Canada should be available to access the supplementary funding.

10027 We hope that the Commission has ensured that there are mechanisms in place for our southern neighbours to ensure that they will have access to affordable and reliable telephone services.

10028 Contrary to what southerners may think or believe, we are not only thinking only of ourselves.

10029 Thank you.

10030 THE CHAIRPERSON: Thank you, Mr. Rondeau.

10031 Did you wish to address the cost issue at this time?

10032 MR. RONDEAU: I do.

10033 THE CHAIRPERSON: Or would you prefer to do it in writing? This note that Ms Lawson just handed you.

10034 MR. O'CONNOR: Given the nature of our organization, we are under no compunction to agree with each other. We are a non-profit organization and totally democratic. I have a few points of view that Mr. Rondeau and I do not share.

10035 In particular, I would ask that the Commission entertain the idea of reviewing varying decision 99-16, particularly in regards to the issue where the incumbent will be maintained.

10036 We must -- pardon me -- my public speaking experience comprises primarily talking back to the teachers, so I'm very --

--- Laughter / Rires

10037 I'm trying to relax.

10038 I too totally concur with Commissioner Cardozo's descent. Northwestel has introduced testimony or implied in its testimony that it has been the carrier in the Yukon for 50 years. That's not my recollection. I haven't researched it, but my recollection -- I'm a long-time Yukoner. I have been here since 1950. My recollection is that Northwestel purchased assets --or acquired the assets. I'm not even sure they purchased them -- that were on the ground, had been installed by the U.S. Department of Defence as part of their dew line operations, that Northwestel acquired these assets in the late seventies and has essentially been managing an increasingly outmoded, extended communications system in the north of Canada since that time, which is more like twenty-two or twenty-three years, not 50.

10039 Implied by that statement of 50 is that they have built this network. I believe that is not a subtle distinction. They did not build it. They are still running the equipment that was state-of-the-art when the U.S. army put it in 50 years ago, but it hasn't been state-of-the-art for the last 20 years anyway.

10040 If the review and variance request is not flyable, I would request that the Commission direct Northwestel to upgrade its network to the level of CNS extended services' capability at its switch levels, that it abandon and scrap all analog components and bottlenecks in their network and that the switches that they are going to be installing be TNM compatible and also to direct Northwestel to purchase and operate their own aircraft so the eventualities of service personnel and their tools and equipment not be separated, things like that could be avoided.

10041 I have a friend who operates his own business here in the Yukon. It's a service-oriented business. He and his tools have to get into remote locations. He finds it beneficial and has extended his business quite dramatically by purchasing and operating his own aircraft personally, so I don't believe that it's unfeasible.

10042 Finally, straws do break camels' backs.

10043 Thank you.

10044 MR. RONDEAU: Thank you, Pat.

10045 THE CHAIRPERSON: I assume, notwithstanding the fact that you may disagree on a few little items, that you are both representing UCG.

10046 MR. RONDEAU: That's correct, yes.

10047 MR. O'CONNOR: That's correct.

10048 THE CHAIRPERSON: Thank you.

10049 MR. RONDEAU: For the taxation of costs, Mr. Chairman, we respectfully submit that UCG represents a group of ratepayers, that being residential and small business consumers, in the Yukon territory.

10050 We also submit that we have filed competent submissions, IRs and responses. We have participated fully in all areas of this public notice. We have participated in the consultation process, the preliminary submissions, and this full week or more of hearings.

10051 We also believe that we contributed a better understanding to the issues and offered legitimate argument in this hearing process.

10052 Thank you.

10053 THE CHAIRPERSON: Thank you very much, gentlemen.

10054 MS VOGEL: The next party for final argument this morning is Council of Yukon First Nations.

10055 Mr. Henry.

0920

ARGUMENT / PLAIDOIRIE

10056 MR. HENRY: Good morning, Mr. Chairman, Commissioners, Secretariat. We are almost done.

10057 When I was coming in, Mr. Makin and Mr. Flaherty both said because it was National Aboriginal Day they would just give me a blank cheque but I said, "Geez, I still want to talk."

--- Laughter / Rires

10058 This is not a joke. When you get a bunch of lawyers and engineers and accountants together, sometimes you forget why we are here and what we are talking about. I'm going to remind you and remind myself why we are here. It's for access to a basic level of service that in many instances is a lifeline.

10059 Two weeks ago we had the great misfortune of a relative being Medivaced to Vancouver because the services at the local hospital were not sufficient to do a CAT scan, and a family member had to drive down or fly down so they could make the decision of whether to take her off life support. They made that unfortunate decision because there was no choice.

10060 The father to this family member lived across a river and, yes, there are boats, but they had no telephone. There was a public pay phone about a mile away on the other side of the river and the father is unemployed, is not seasonally employed, and in the winter he tries to trap or make his living by hunting. The only way that they could get messages to him as a grieving father was moccasin telegraph.

10061 Vancouver -- I don't know what switches they went through -- would phone the Yukon. They would phone this community, and through the good graciousness of the host they would go across the river and give him an update: How is the daughter doing, what is the status? That was all they could do.

10062 This is somebody that is going to be asked to pay $1,000. That's what we are talking about here today. That's the context of what we are talking about.

10063 How are we going to go -- it's not a public relations exercise to go to these people -- and at the end of the day when you are talking about remote, unserved, underserved, however you call it, you are talking about Indians. You are talking about them in their traditional homeland, you are talking about them where they live, where they were born, where they are going to die.

10064 We have the good grace to be still part of Joe and Annie Henry. Of all things, they are in the world book -- what's it called -- the Guinness Book of World Records. They are an Indian couple from the Han nation around Dawson City -- you have heard of Dawson, the gambling, Diamond Tooth Girtie's -- and the road that goes to Inuvik. They are both from that region. They are celebrating their 79th wedding anniversary. Some marriages can't get through 79 days.

--- Laughter / Rires

10065 But they are 79 years and they are still going strong. He is 104 now. They moved from the highway where they were born to Dawson City to Moosehide.

10066 Moosehide is another traditional village that is being rebuilt. It's downstream on the Yukon River to Dawson City. Dawson City has basic service. Is it affordable? That's a question for you to answer.

10067 But in Moosehide that's a community that is being rebuilt. It was there before Dawson City. And when we are talking about 25,000 or the proverbial four, I don't know if it's four horsemen, but the proverbial four and $100,000, it's this kind of community that you are talking about.

10068 So you have the white people in Dawson City. They have basic, affordable service. And then downstream where the original people come from, all of a sudden it's $100,000. Anything beyond that you have got to pay yourself. You have got to look for your own subsidy.

10069 So it's from that point that I want to remind the Commission of what we are talking about up here in the Yukon. You talk about competition. This is not the Toronto of the north. Look around you, I drive in from Marsh Lake every day. Nineteen miles south of here it says "Entering the City of Whitehorse".

10070 If trees were people maybe, but that's it. There is no Toronto of the north. Don't let anybody try and kid you.

10071 And from that point of view I just want to make a few comments dealing with what we have talked about and you know I am obviously against the local rate increase. You know that. I don't have to tell you that that's something that we think about.

10072 But what we are against is the way these numbers came about and part of it is looking at the costs. How much does it cost? I don't know yet. Yesterday at the end of the hearing we were still trying to figure out how much it was going to cost, let alone who was going to pay.

10073 I got a clear message that in some instances there is going to be people that need service at the end of the day, even though the SIP has been approved perhaps, implemented and monitored. Okay? How many? Who? Where? What's it going to cost? What are you going to get for the thousand dollars? What are you going to get for the $25,000? What are you going to get for the difference? Is there an administration charge built in there that looks at how much it is going to cost? We don't know.

10074 We asked for accounting for communities. We can't get a break down. How do we know they are underserved? How do we know they are unserved? There is no break down in costs.

10075 If you ask for a community, let's pick any community, you can't get a break down. So what are you going to upgrade in that community and how much is it going to cost? We don't know, except that at some point Indians are going to be asked to pay for that. And that's what we just want assurances of, that the Commission looks after and continues to look after the interest of the consumers that can't afford a basic level.

10076 I can't tell you your job. I can only say that we have been here and we still do not have services in some communities.

10077 Now, it's not going to be me applying for a job to go to the Indians and say "hey, there has been a four year roll out of a $175 million program and we still don't have a phone there." That's a tough sell.

10078 And when you look at the way that they have put together the numbers, we are not concerned about the rate of return. If they are concerned about the rate of return, buy into a southern company. Buy into a dot com. Buy into a billion dollar -- today Seagram's is gone. We lost a major SIP. It sold to the French in Paris. That's a big industry that's gone.

10079 We live in Vancouver. We watched the legacy of the Griffith family go down the tube. That was hard to watch. Somebody's lifelong interest in working to build a communications systems for Canadians go down the tube, plus we got the Grizzlies, which is pretty bad, but when you look at that that's what you are trying to balance.

10080 Those are American interests now. One American sold it to another American and now there is no more Griffith family legacy left for broadcasting.

10081 I am not saying it's a good or bad thing, their family business. But if you look at the Canadian industry that's what we are faced with.

10082 You have been in our territory before. You have looked around. You have seen what it's like up here. There is no mining. Right now we are dependent on government and that's 80 per cent as Mr. Hamelin pointed out.

10083 There is not a monopoly that can be looking at competition. It has to be regulated, but you can't -- I can't say you can't, but you can't look at the bottom line when you are looking at services.

10084 We were talking about a sustainable CAT, 5 cents. We still haven't got an answer. If they don't come for 5 cents, who cares if it's 8 cents? Who cares if it is 7 cents? We still haven't got an answer to that.

10085 And when we look at what's going on in the north I think we made progress this week. I want to thank Commissioner Williams for his contribution to look at stats, to look at how Indians live up here.

10086 But when you look at the First Nations, when I walked in, big as I am, I am invisible. That was clear. You saw that. You saw there was no market data. There was no consideration. There is a quotation in the record, on the public record that you look at Indians as little Indian bands. That was said.

10087 They are not little Indians bands. Look at your agreements. Canada, Yukon and the First Nations have entered into land claim and self-government agreements. It deals with what is settlement lands, first and foremost. It deals with what is Indian land.

10088 And I use the term "Indian" purposely. People want to be politically correct, they say First Nations or something like that. Indian is by law, is under the Indian Act. It includes Indian, Métis and Inuit and until the Indian Act is gone that is going to have to be the term, even though we are not Indian. I am Tlinget.

10089 When you look at the land claim agreement it's a new order of government. With the greatest respect for my colleague Mr. Rondeau, when you look at -- actions speak louder than words and when you look at the submission of Northwestel it says we consulted, we worked very close with Nunavut, with the Northwest Territories government, with Yukon government. Then we looked at the consumers. Then we looked at the businesses. Then we looked at the people that live in places seasonally. Then we looked at the consumer group and, who was last, First Nations, and that has to change.

10090 I know it's not the Commission that's going to change that perspective, but it has to be turned on its head because the Indians were here first. They are going to be here last. You have to go after these deliberations, you have to go back home. We have to live here. We have to work with those guys.

10091 We have to figure out how it is going to make our life better and what is going to happen in the seasons and how we are going to be able to look after our families and still try to get out kids out to schools so that they can come back and make contributions.

10092 It is not because it is my sister; it is because she did a tremendous accomplishment: computer science and mathematics. Sometimes she would show me a half page mathematical question about how fast digital data moves and ask me what I thought about it. I didn't have a clue.

10093 I could tell her how I felt about it maybe, but that's about it. And yet this is what she knows.

10094 Somebody mentioned it earlier, zero and one. She knows that. Times have changed here in the Yukon. You can't be a monopoly that keeps going down the road, and I need another increase in this because I am trying to make my row, or the Board is going to kick my butt.

10095 Okay, let's get it from here. Increase the rate. No? Okay, well, let's go over here. Give me some supplemental funding. That's not it? Well, let's get a grant.

10096 And that's the testimony. I am not making this up. You heard it. It is pulling numbers. How are you justifying this number? Well, we just feel that northerners have to make a contribution. Well, why not 20 per cent then? Why not 30 per cent?

10097 Somebody said well, it's because you chose to live here. We didn't choose to live here. God put us here. He didn't say well, it's remote and unserved so now you have to pay the price for it.

10098 Our charter, our constitutionally protected rights say you shouldn't be penalized for where you live. It's great that we are trying to work out access to our basic service. But there is long way to go.

10099 There are a couple of other issues I should touch on.

10100 I feel it is clear that I have made an argument for First Nation self government, for First Nation land claim agreement. But it is not an interpretive question; it is law. There are access requirements; there are easement considerations.

10101 It is too bad we had to come here and remind people of that. Oh yeah, I heard about this. I vaguely have a notion. This is law. This is in the supreme law of the land, these constitutionally entrenched and protected land claim agreements. I thought that it was a big shelf. Yes, it's a big shelf, but look behind you. That is a lot of material to read. It is not the same thing as land claim agreements.

10102 So when we look at the SIP, I can't stand here and say the SIP is something I am totally against. If it is going to extend services to First Nation communities and to First Nation individuals, then in principle you have to support it.

10103 What we are talking about is the process: due process as well as due diligence on behalf of the phone company. They have to know their market.

10104 You can't be a monopoly trying to get your heart vaguely in the right place for open competition or open markets while at the same time your brain is saying to heck with everything else. We are just going to keep going the way we are going. And that is what I think is happening.

10105 It is that change that has to be made. I commend the Yukon Government. I know there are problems with the way that it was done in that it accessed federal funds when perhaps it shouldn't have without the consent of First Nations. That is what we are also trying to change.

10106 At some point when SIP or the shortfall of SIP is considered, First Nations will be working, we hope, with the phone company or with the government to supplement or to augment the shortfall, although we don't know how the shortfall is determined, what is remote, what is unserved, what is underserved. Where are we going to have to make a need? Where are we going to have to make an adjustment?

10107 We concur with the tracking process. We do. We believe it is very important. We think that it is very, very -- I don't know. I can't see how somebody can just say there was a 40 per cent to 50 per cent cost overrun. We ate it and boy it was a burp, but now we are making more money than we thought we should have made in the first place.

10108 Where did those numbers come from? How did that happen?

10109 We agreed that the Commission will be called upon, and we have complete faith that the process will be monitored to look at what happens, to look at the objectives, to look at how it is going to be met.

10110 There is one other area that I need to point out, and I am not trying to play games. I am not trying to pit one against the other, although it appears that this is what this process is about.

10111 There is a Da Ka Nation. It is a tribal council. It comprises Tlinget groups. I am Tlinget. I am from Teslin. There is a community in Atlin. There is a community in Carcross. They have coastal Tlingets that are part of Alascom.

10112 There are three different phone companies: Northwestel; Telus and Alascom.

10113 When we talk to Telus we say: "Well, if we are going to have improved services, how much is that going to cost? What are we going to get?" They can give us numbers, they say. Northwestel should be able to give us numbers. Alascom should be able to give us numbers.

10114 That is what we need to work out as a balance, because these groups, even if they don't know or ought to know or should have known, or what have you -- Northwestel has to know that these groups meet regularly. They meet seasonally. They talk about their self-government. They talk about their communities. They talk about the community development. And they talk about improved services, what they want.

10115 Many of their members are elderly. Many of them have diabetes. Many of them have heart conditions, open heart surgery. When they go to their communities, they need access. They need it more than Call Display.

10116 If you are in a small community away up north, I don't know if you need Call Display. I don't know if you need Call Waiting. What are you going to do? It's dark. The winters are long. You are not going to be in a hurry. And chances are you know who is calling you, because you saw them at the local co-op and they told you they were going to call. And even if they don't call, they are going to walk across the street. It is probably half a block. You know better than me what the clusters in the north are.

10117 Here in the Yukon we are going back to where we come from. It's full circle. When I talk about full circle, the First Nations -- and Mr. Williams will know this.

10118 In the hoop of life there are four directions: the four grandfathers, the four grandmothers, and there are four nations represented by colour. From the north it is the red. From the east is the yellow. From the south is the black. And from the west is the white.

10119 That is why I said earlier "Connect Red Yukon" was the concept. I wasn't being facetious. That is where we come from. That is our contribution to trying to make our communities better.

10120 And now in a way, when we talk about telecommunications or communications, it is like "beau dommage". It is like watching your children graduate from high school and leaving home. You are happy; you are sad.

10121 And global communications is like that. Seagrams, Bronfmans, gone. What is going to happen now? And when we look at what we are doing in the north, we are trying to bring our forces together, to look at Arctic sovereignty. They are opening up the airwaves now. It has taken five hours off global flights. That is a big achievement, especially if you are the guy, like us, sitting here on a plane.

10122 On the other hand, what are the protective measures we need to make sure we don't lose it, to make sure that we are going to be fine?

10123 We talk to other First Nation groups. We talk to them in Russia; we talk to them in Finland; we talk to them in Greenland. We don't say "hello, how are you" while we are trying to learn how to do the knuckle hop as part of the Arctic Winter Games. It is a true consultation.

10124 You sit down. Where are you going? What are your plans? What do you need? What is your bandwidth? What are your requirements for government? How are you treating alcohol and drug treatment in your community? They are the same problems.

10125 The Samis have a lot of the same problems as we do. They have a lot of the same growth that we want. So it pays to pay attention to them, to learn from them.

10126 You heard from Northwestel. Not really, we belong to clubs. That is how we keep up with technology. We talk to these different groups. It needs more than that. That is thinking like a monopoly.

10127 I don't have to tell them how to do their job. Suffice it to say there is a lot of dialogue going on. I believe there is a lot more that has to go on, and I believe the Commission has to monitor the progress of the SIP.

10128 I think one of the great concerns we have is if you roll out a $175 million program over four years and you are going to the street to raise capital, if we have to come back before the Commission in four years and say the person that was medivac last week, they were still having to cross the bridge through the goodness of somebody else's kindness to tell them of the progress -- I know it is hard, Commissioners, to balance, but I don't think it is a bottom line question. I don't think it is 12.2 or 9.2.

10129 They make enough money. We don't have to worry about that. We worry about the increase in rates, and we worry about the communities that need basic affordable service.

10130 With that, Commissioners (foreign language/langue étrangère). I appreciate your time. Thank you very much, Secretariat, and thanks for my copy.

10131 THE CHAIRPERSON: Thank you, Mr. Henry.

10132 MS VOGEL: Our next party for final argument this morning is Government of the Northwest Territories.

0947

ARGUMENT / PLAIDOIRIE

10133 MR. DUNN: Good morning, Mr. Chairman, Commissioners. We will have copies of our presentation this morning at the back of the room when this is done.

10134 My name is Peter Dunn, and I am the Director of Systems and Communications with the Department of Public Works and Services of the Government of the Northwest Territories. I live in Yellowknife.

10135 Today I am pleased to present the oral final argument of our government in this critical proceeding. We will also be submitting written final argument later this week and at that time will provide some further analysis and more detailed recommendations than we are presenting here.

10136 For the purposes of today's argument I will try to focus on those issues we consider to be most critical or where there appears to be the greatest divergence of views.

10137 The first is toll competition.

10138 In Decision 98-1 the CRTC stated, in paragraphs 9 and 10 -- and I am quoting:

10139 In paragraph 20 the Commission stated, and I quote again:

10140 The rate rebalancing, which was the first of the reasons cited above for delaying competition in the north, has been completed. And this current proceeding will complete the reference timetable for addressing high cost area issues.

10141 In other words, the Commission's reasons for delaying the introduction of long distance competition now have been addressed.

10142 Northwestel has proposed to introduce long distance competition on January 1, 2001 and to cut over to equal access on March 31st.

10143 In its interrogatory responses and during cross-examination Northwestel confirmed that it saw no major obstacles to meeting these dates, and it confirmed its customers dissatisfactions with delays to date.

10144 Northerners have watched for approximately seven years as southerners have enjoyed the benefits of competition that they have been denied. Two years ago they were told to wait just a little longer, and reluctantly they have done so. Now they have been told that competition is not coming this July 1st, and the reaction has been profoundly negative again.

10145 Any further delays would be unacceptable to them, as they would be to the Government of the Northwest Territories.

10146 If the Commission is concerned that the terms and conditions proposed by Northwestel will not allow sustained entry, then the Commission should change these terms and conditions rather than reward Northwestel and punish the customers further by delaying competition again.

10147 If it is concerned that limited entry -- limited, pardon me, if any entry may result under the terms and conditions it is prepared to approve, the Commission should nonetheless not delay further entry but should, as it has done in every other jurisdiction in Canada, leave it to prospective entrants to decide if, and to what extent, they wish to enter the market.

10148 With regard to toll rates, in Decision 99-16, the Commission stated at paragraph 60 of that, once again quoting:

10149 The decision went on to state that:

10150 In these circumstances, it comes as no surprise that no party in this proceeding has disputed that toll rates must come down. The issue is rather how much and how fast.

10151 Northwestel's position in this regard is that rates must come down to levels comparable to those now available in the south. In support of this proposal, it has put forward three principal arguments.

10152 Firstly, that such reductions are mandated by the principle that northerners should have access to the services at rates comparable to those available elsewhere in Canada.

10153 Secondly, that without such reductions, a two tier rate system will come into the north. Residents of larger communities such as Whitehorse and Yellowknife will be able to enjoy the low national rates offered by competitors while the residents of smaller communities where competitive entry does not occur will have to pay the higher rates offered by Northwestel.

10154 Thirdly, that without such reductions, the competitive market share losses that Northwestel would experience would lead to greater financial losses than would be the case for Northwestel to reduce its rates to southern levels.

10155 In this regard, the Government of the Northwest Territories unequivocally supports Northwestel's proposed rate reductions. Our government believes that as a matter of principle, northerners should be entitled to rates comparable to those available in the south and that such access must exist for both residents of small and the relatively larger communities.

10156 Nevertheless, the GNWT does recognize that some doubts have been raised in this proceeding regarding Northwestel's assertion that lowering rates to southern levels would have a less negative financial impact than would a failure to do so.

10157 Our government submits that if Northwestel's toll rate plans are not approved as filed, then substantial toll rate reductions should nonetheless be implemented and that these should include new flat rate calling plans for both business and residential customers.

10158 Provided that the flat rate plans established are not much higher than those proposed by Northwestel, this could also help reduce the heavy reliance on toll denial service to which there are now apparently 8,000 subscribers in Northwestel's territory.

10159 Furthermore, we feel the Commission should indicate its intention that ultimately northern rates must be brought to southern levels and should be ready to move quickly in this regard should Northwestel lose competitive market share more rapidly than is anticipated by the Commission.

10160 With regard to local rates, a short five years ago Northwestel's local rates were among the lowest in Canada. As you have heard during this proceeding over and over again, since that time Northwestel has implemented a series of local rate increases of a magnitude and frequency unmatched anywhere else in Canada.

10161 In the case of residential service, the cumulative amount of these rate increases has been between $17 and almost $20 a month. As a result, today while free local calling areas in the north are extremely small and while Northwestel offers no extended area service, its monthly toll rates are the second highest in Canada.

10162 If charges for extended area service are excluded, its rates are already now the highest in Canada. Despite this, Northwestel is now seeking a further $5 a month increase and has indicated that while no specific plans are on the drawing board, additional increases may be necessary in the future.

10163 Last Monday at the regional hearing in Yellowknife, the Hon. Roger Allen, representing Hon. Vince Steen, Minister of Public Works and Services, stated that, another quote:

10164 Many other individuals and groups at that hearing and throughout this process have also voiced their opposition to any further local rate increases.

10165 The GNWT has heard nothing during the oral portion of this proceeding that would cause us to modify our opposition to any further residential local rate increases. Indeed, if anything, we have only been reinforced in our belief that Northwestel has not given adequate consideration to the affordability implications of its proposal.

10166 Accordingly, we continue to believe that no increase to residential local rates should be permitted at this time.

10167 To limit the amount that would otherwise need to be derived from supplementary funding and because northern business rates, while high, are slightly below the rates charged in some other jurisdictions, there may be some room to modify business-local rates at this time.

10168 The service improvement plan. In Decision 99-16, the Commission directed Northwestel, quote:

10169 Northwestel's existing network requires major surgery to achieve this objective. Currently, many of its switches are either incapable of or lack the necessary software to provide enhanced service features.

10170 Portions of its transmission network have yet to be converted to digital and there are a number of locations that are either unserved or inadequately served.

10171 The service improvement plan constitutes a unique opportunity to address these shortfalls and to bring the northern telecommunications network to a point where it can now furnish northerners with comparable service to that available in the south. Without it, northerners will continue to be the second class citizens insofar as telecommunications services are concerned.

10172 The Government of the Northwest Territories, along with many other parties, participated in numerous consultations with Northwestel during the development of their system improvement plan. Throughout, our concern was to ensure that Northwestel developed a plan that would satisfy the above noted requirement of Decision 99-16 and for the most part we are satisfied that the plan goes a long way in doing so.

10173 It will extend service to unserved locations, upgrade the toll network and increase -- result in increased availability of services, including toll free Internet access. These services are generally available in the south and in larger northern communities and are increasingly necessary for both economic and social purposes. In fact, such services can be particularly important in small communities.

10174 Internet access, for example, could be used to perform certain online banking transactions in the 60 northern communities where Mr. Hamelin indicated that no ATM machines or other banking services now exist.

10175 Unfortunately, in our government's view, Northwestel's system improvement plan does not go far enough.

10176 As you heard, during the proceeding, the plan does not provide CCS7, with the result that a number of call management services will not be available in some communities or will be available for local calls only. Neither will voicemail be provided in all communities. And I would refer you to GNWT Interrogatory 7 for a list of other enhanced services not included in the plan.

10177 This results in two problems.

10178 Firstly, a two-tier system of telecommunications in Canada will result as many northerners are denied access to enhanced calling features that are: (a) generally available in the south; and (b) thus, are included within the basic service objective set out at paragraph 24 of the Decision 99-16.

10179 Secondly, a two-tier system of telecommunications in the north will result as residents of smaller communities are denied enhanced features, such as name display and voicemail, that are available in larger centres, such as Whitehorse and Yellowknife.

10180 While the GNWT recognizes that it will put upward pressure on the supplementary funding requirement, the GNWT believes that the system improvement plan must be expanded so as to include the full range of enhanced features available in the south.

10181 Moreover, we categorically reject any suggestions that, so as to limit supplementary funding requirements, the program of extending service to unserved, the areas upgrading of the toll network or the provision of enhanced features should be curtailed.

10182 We feel that the current proceedings should, in our view, be a proceeding to implement the requirements of Decision 99-16 not to revoke them.

10183 Furthermore, it should do so on a timely basis and, in our view, this requires that the SIP should be completed in four years or less.

10184 We urge that no action be allowed to chip away at the proposal solely in order to reduce the required supplementary funding.

10185 We would consider such a move to be penny wise and pound foolish and fear it could lead to the installation of equipment and technologies that could not easily be expanded to accommodate new software and growth in traffic.

10186 It would be regrettable to again find the north in a position where Northwestel's network included undersized and obsolete equipment which could not easily be replaced due to a lack of economic justification.

10187 In conclusion, we realize that to some people it may look like we are asking for a lot in this proceeding. We want lower long distance rates, frozen residential toll rates and a service improvement plan that is even more ambitious than that proposed by Northwestel.

10188 From our perspective, however, we are only asking for parity with southern Canada; that is, to get the things that most Canadians already have. These include: competition; low long distance rates; greatly improved access to basic service, including enhanced features; and improved quality of toll service.

10189 If achieving this requires a larger external subsidy than some would like, then I would suggest to these people that this is a very strong indication of just how far away we are today from any form of parity with the south, in terms of services and rates.

10190 Furthermore, I would suggest to them that this subsidy is only at issue because it is a so-called external subsidy. It is, however, no different from the so-called internal subsidies that flow from low- to high-cost areas in the territories of Telus and Bell in the south. In either case, there is a subsidy from low- to high-cost areas and, in either case, the subsidy may cross provincial or territorial boundaries. Whether it is considered internal or external is purely a question of which areas are served by which telephone companies and says nothing else about the desirability, or otherwise, of the subsidy.

10191 Canada has a national policy for telecommunications and a national funding support is required to implement it.

10192 The territory of Northwestel simply does not have sufficient low-cost areas to generate the required funding support.

10193 Thank you very much.

10194 THE CHAIRPERSON: Thank you, Mr. Dunn.

10195 MS VOGEL: The next party for final argument is the Government of Yukon, Mr. Pratt.

1012

ARGUMENT / PLAIDOIRIE

10196 MR. HAYDEN: Good morning, Commission, Commission staff.

10197 My name is Terry Hayden. I'm the Director of Technology and Telecommunications Programs for the Government of Yukon. With me this morning is Mr. Jim Pratt, who has been assisting the Government in these proceedings.

10198 The history books don't say that John A. MacDonald had a good business case for a national railway nor that the Alaska Highway was intended to deliver an above average return on investment but each of these projects have profound influence on the growth and development of the west, in the case of CPR, and of the north, in the case of the Alaska Highway.

10199 Granted, there are lessons to be learned in how these services, or projects, were implemented but, in both of these visionary investments, the good of the entire nation was improved. Not only were the regions enabled to begin realizing their own tremendous potential, the establishment of stronger connections with the rest of the country created more opportunities for everyone to visit, work and to live.

10200 The vision is clear and it is well-known, but this is the time, this is the opportunity to act, to put into place another plan that achieves this vision.

10201 Yukon Government believes that this is a watershed opportunity for the Commission to make a decision that will have a permanent impact on the wellbeing of the north and have an impact, in terms of the wellbeing of the country, as well.

10202 Yukon Government's approach to participation in this hearing has been to bring forward a point of view that represents the interests of our stakeholders as a government and to better explain how the government's telecommunications policy can implement it alongside the national policy; the national policy that is under the mandate of the CRTC.

10203 We view that telecommunications development has provided a critical opportunity for the improvement of the economic and social wellbeing of the north. That is why we are involved. That is why we have presented our views on the share of responsibility for telecom development.

10204 Yukon Government strongly believes that a share of responsibility for implementing and then realizing on the optimum solution that is decided upon by the Commission belongs to each of the parties in this room and to others outside. Acceptance of a shared responsibility will greatly facilitate the achievement of a telecommunications policy, the national policy that we are looking at today and then, ultimately, in the development goals that we have set, for the north, and for the country in general.

10205 With that, I'm going to turn it over to Mr. Pratt, who will go into detail in terms of our views on the proposal in front of you.

ARGUMENT / PLAIDOIRIE

10206 MR. PRATT: Let me begin by saying that, first, we fully support the application of national telecommunications policy goals through comparable services at comparable prices.

10207 We are, however, concerned about the schedule on which these goals may be achieved in the north, particularly because of the potential impacts on northerners.

10208 The issues in this hearing are extremely broad, encompassing change for Northwestel on several dimensions, and that change is happening simultaneously.

10209 The introduction of competition, the implementation of a massive service improvement program, the implementation of a new regulatory framework are each changes of daunting magnitude. In combination, these changes will pose significant challenges for the company to cope.

10210 Turning to local rate increases.

10211 The Yukon Government is very in support of the need for all of these changes and, indeed, some, like the service improvement plan, cannot come soon enough to meet the telecommunications needs of Yukon homes and businesses. However, not all of the aspects of Northwestel's plans are acceptable.

10212 The company proposal of a local rate increase of $5.00 per month, starting January 1st, 2001 -- the rationale for that increase is tied closely to other aspects of the proposal. Indeed, it's been described as a package deal or a balanced approach to solving a number of needs of the company.

10213 In the view of the Yukon Government, the case for a local rate increase of this magnitude simply has not been made.

10214 Local ratepayers are being asked to pay rates at the level of the highest in Canada for service that is less than the standard in the rest of the country.

10215 Certainly, the plans to extend and improve service will be beneficial when the SIP is completed and the prospect of lower long distance prices will benefit only those who make long distance calls.

10216 So the proposed benefits do not really match the cost of the additional contribution that local customers are being asked to pay. This is not the time for a $5.00 local rate increase.

10217 The service improvement plan element of Northwestel's proposal represents, in our view, the most important aspect for telecommunications development in the Yukon. It's critical that service be extended to unserved and underserved customers as soon as possible. Customers have also been waiting for some time for upgraded service quality.

10218 Some of the projects included in the SIP have been rolled over from budget to budget in Northwestel's normal capital program with no recognition that that investment would ever become economic.

10219 The Yukon government submits that the investments in the SIP must be given the highest priority and would ask the Commission to direct the company to preserve that top priority and to not have any of the projects that are part of the service improvement plan cut to meet financial concerns that might arise sometime later for the company.

10220 There have been some questions about the scope of services that should be included in the service improvement plan, whether the network should be provisioned to provide enhanced calling features to all customers. Our view is that while the principle of comparable services would suggest that the technology be upgraded everywhere, that the reasonableness of such investments must also be examined.

10221 The technology must be chosen that will continue to deliver benefits in the future, but it may well be that economic decisions must be taken. If that is the case, we would urge the Commission to try to avoid a regime that results in two-tier service standards within the north.

10222 The Yukon government is also interested in seeing a very strong feedback mechanism to stakeholders for the SIP projects and understands that the company is able and willing to provide feedback to customers who were consulted and to develop reports perhaps based on project management metrics that the company is recording and that would give customers a very clear picture of the progress of the project. That's a very important aspect, in our view.

10223 Long-distance prices. These prices in the north are just simply too high and they have been too high for too long. Northerners need lower prices to rectify this disparity. Northwestel has proposed that the long-distance rates be dropped to the level of those in southern Canada immediately on January 1st, 2001.

10224 Regarding further price changes, the company has stated it will be a price taker following the lead of other competitors. Presumably, this means that if competitor prices in Northwestel's market are changed, the company will match those prices. It would be absurd to cut prices on, say, the Whitehorse to Vancouver route, for instance, because a competitor started offering cheaper prices between Montreal and Toronto. If Northwestel wants to be a price follower, there must obviously be an opportunity for a market base price to be established in Northwestel's territory.

10225 If the rates are allowed to collapse at the instance of Northwestel, then the price has been set by Northwestel, not by the market. The preferable approach, in our view, would be for Northwestel to move its prices down in graduated increments while monitoring the market. This can provide the benefits of much more comparable prices, without creating the same pressure on local rates that could lead to rate shock.

10226 There are several reasons why this may be a more sensible approach.

10227 First, it is not self-evident that this long-distance market in the north will behave in the same fashion that the southern market has behaved.

10228 Second, there is some indication, through the consolidations that have been seen in the industry, that the extent of competition in long-distance may have gone too far, a situation that just simply can't be -- we can't afford to have duplicated in the north.

10229 Thirdly, the present level of long-distance rates in southern Canada was achieved through the operation, the continuous operation of market forces with competitors simultaneously taking actions to reduce costs, improve efficiencies and make further investments of capital. Northwestel has not yet experienced the salutory effects of the sometimes painful changes that competition can bring to a company.

10230 On the topic of competition more generally, the Yukon government supports the principle of competition in the telecommunications market because of the benefits it can bring in improved efficiencies, increased innovation and the choices made available to consumers.

10231 However, where competition is not feasible or may not be viable in the long-run, there should be great care and careful consideration of the terms under which competition will take place.

10232 One of the key aspects of a true competitive market is the absence of barriers to entry and to access. This means that in a normal competitive marketplace some businesses succeed and others fail. In the north where the business space is very small and the economy very fragile, the failure of a firm has a much greater impact than in larger and more robust markets. In fact, the failure of a major firm can be catastrophic to a northern economy. This is known all too well here in the Yukon where a mine closure, for instance, can have a very marked effect on the economy. Failure of a company like Northwestel would be devastating.

10233 At the other end of the spectrum, competition from small companies, like the ISPs that were frequently discussed during this proceeding, may offer an alternative path to the development of competition. So the terms and conditions of competition must allow for the success of both of these potential sources of innovation and competitive choice.

10234 The Yukon government submits the Commission should consider very carefully the competitive regime that is put in place in the north. Today there may be an opportunity to establish a next generation competitive model, one that builds on the lessons of experience in the Canadian telecommunications market but is specially adapted to the circumstances of the north.

10235 We have heard in this hearing that local service throughout the north is uneconomic and that the rates charged for local service will likely never be fully cost compensatory. Consequently, the staged deployment of long-distance and then local competition is not likely to occur in the same pattern as it has done in the south. Indeed, though Northwestel appears to have made some plans for local competition by considering investments in equal access, the company's position is that there should be a three-year moratorium in effect while it absorbs the changes of long-distance competition.

10236 On the other hand, one of the pleasant realities of the telecommunications market in the north today is the establishment of small independent ISPs in some 22 communities. The effect of this entrepreneurship, as Mr. Hayden described yesterday, has been to speed the advance of Internet access leading to, at least in the Yukon, a higher penetration than in many jurisdictions in southern Canada.

10237 It is our belief that these companies may represent a more likely means of delivering the benefits of choice to consumers in the north.

10238 Consequently, we would be recommending that the Commission consider establishing a competitive regime that would have rules facilitating economical access by competitors of this type to Northwestel's facilities, while at the same time considering means to provide protection for these firms from potentially anti-competitive behaviour on the part of Northwestel.

10239 Some comments on the sustainable CAT. With respect to the contribution payment proposal of Northwestel, the Yukon government finds that conceptually the concept of a sustainable CAT is acceptable and potentially it is a useful means of enabling a through transition to the competitive environment.

10240 It seems obvious that the establishment of a cost-based CAT would severely restrict or prevent competitive entry, but on the other hand a market-based CAT would result in insufficient contribution to the higher costs of providing local access in the north. Northwestel's proposal aims for a point in between these extremes. Although it's the company's recommended approach, witnesses did acknowledge that there could be a balanced approach at other levels of a sustainable CAT.

10241 The Yukon government recommends, for several reasons, that the CAT for Northwestel be set at a higher level, perhaps in a 6 to 7 cent range. The benefits of this approach would be: to shift more of the burden of the revenue loss to the long-distance sector which is the primary cause of the reduction in revenues under the Northwestel proposal; and, secondly, to allow competition to grow more slowly and perhaps more rationally since it would be the highest margin elements of the market that are first targeted; and, lastly, it may provide another means of buffering local ratepayers from an immediate rate shock.

10242 This approach would also allow for the CAT to be stepped down in subsequent review periods to gradually increase the attractiveness of the market and allow the northern-based competitors that I spoke of earlier a better opportunity to become established.

10243 A graduated approach to the CAT would also enable a more graduated approach to the introduction of cost-based local rates.

10244 Northwestel has proposed, in addition to the service improvement plan, a capital program of over $100 million through 2004. These projects included in the capital program contain many that have very strong impacts on service to customers. It is very important to us, the government and the constituents in the Yukon, that this program, like the service improvement plan, not be used as a control mechanism for earnings.

10245 There has been evidence that suggests this is a genuine risk based on the past performance. Consequently, once the Commission has reviewed the capital program for its reasonableness, we believe every effort should be made on the part of the company to complete the projects that have the greatest impact on the provision of customer service.

10246 The establishment of monitoring and reporting obligations in the capital program would also be helpful to customers and other stakeholders.

10247 In our written material we may include some more specific comments on the capital program, but at this point let me make a brief observation with respect to one particular project on the TMN, the Telecommunications Management Network. The discussion there related to the description of that project as a potential evolution in the management of the company, which we certainly agree is valuable in the long run. It may be a very expensive undertaking, as Mr. Vachon acknowledged.

10248 At this point it may well be that those funds could be better directed towards achievement of a more immediate customer service objective.

10249 With respect to the revenue requirement, the Commission may well determine that the company's revenue requirement should be adjusted or that the rate of return should be different than what the company has proposed. We have not taken a specific position on these issues because in our view the most critical element of the company's proposal is the opportunity to develop the telecommunications infrastructure.

10250 However, the Yukon government does believe that Northwestel should be encouraged to improve both efficiency and productivity, but not to a degree that leaves the company to make compensating adjustments to the service extension program or to service quality.

10251 Where the Commission may find reason to make adjustments to the revenue requirement, the Yukon government would like to recommend that the continued ability of the company to meet its service requirements be continually factored in. One particular example is the staffing levels.

10252 All indications seem to be that the implementation of service improvement plan projects will be a massive undertaking for the company, yet it seems that the staffing level will remain the same through 2001.

10253 The Yukon government believes that Northwestel should be encouraged to hire the resources needed to get the job done and on schedule.

10254 Similarly, it will be important for the company to have sufficient resources, both financial and human, to meet the challenge of the competitive market. The company should be able to engage in marketing and sales activities to protect its market share without having to redirect resources away from capital projects, particularly the service improvement plan, or from other service affecting activities.

10255 In a similar vein, the Yukon government would be concerned with expense reductions which have the effect of diminishing the company's participation in the community. The example of declining spending in donations and sponsorships is a particular element of concern.

10256 Participation in the communities where Northwestel operates is an important benefit to those communities and is a genuine opportunity for Northwestel.

10257 I have indicated that we have not taken a detailed position on return on equity. Certainly there is enough information on the record for the Commission to reach a conclusion.

10258 In general, our view is that the fair return to the company should be a demonstrable balance between the amount needed to attract capital and the impact on subscribers.

10259 Aside from the supplementary funding, which we believe is best understood as the addition of capital and revenue required to meet the policy goal of extending basic service, Northwestel's operating environment seems to be characterized by increasing rather than decreasing risk.

10260 The challenges of being exposed to competition and the company's ability to manage the significant change resulting from the service improvement plan at the same time would seem to be legitimate elements of increased risk.

10261 The Yukon government notes that some consideration was given in the interrogatories to the possibility of changing Northwestel's allowed rate of return from a range to a precise point ROE. All else being equal, the Yukon government would favour a rate of return that provides incentives to the company.

10262 However, if this proposal would result in earnings above the mid-point of the range, being at least partially sourced from the supplementary fund, the rationale of incentive may be called into question.

10263 The Yukon government suggests that the Commission may want to consider that the earnings between the mid-point and the top of the band as being subject to discretionary approval of the Commission during the annual review of the service improvement plan, so that if project targets are met and the delivery of customer benefits is proceeding according to plan, the company would be rewarded with that incentive return on equity.

10264 If, however, the SIP is behind in delivering on the promised benefits, the Commission would have the discretion to penalize that poor performance and redirect the additional earnings.

10265 Another topic of considerable interest to Yukon government is the importance of ensuring that there are positive local impacts from the operation of Northwestel's business. As indicated during the cross-examination phase, Northwestel accepts this responsibility to contribute to the communities in which it works.

10266 Mr. Flaherty spoke of the company's commitment and described programs and initiatives ranging from education and training, to volunteerism and cultural support, such as the art for directory coverage program. The Yukon government wants to stress the critical importance of these activities in providing benefits to our society and to the quality of life.

10267 It is of great interest to us that the company be encouraged to continue these activities and that the costs of providing these benefits be recognized as appropriate and necessary in the company's revenue requirement.

10268 With respect to the regulatory framework, Northwestel has proposed continuation of rate of return regulation for at least the next three years. At the same time, the company has rejected the split rate base methodology.

10269 The Yukon government believes that while rate of return regulation does not provide the appropriate incentives for efficiency, that during the next three years the importance of the Commission's ability to have continuing oversight of Northwestel's activities should take priority to the concern over incentive.

10270 However, we do agree with the company that the split rate base should not be imposed because of the unique nature of the company's so-called monopoly and so-called competitive segments this would be a costly and unnecessary requirement.

10271 Northwestel's proposal also contains some additional regulatory or review mechanisms. The annual review of Northwestel's budget, the setting of a productivity target establishes the basis for drawing on the supplementary fund.

10272 Another annual review of the audited financials would be required to assess whether overearning occurred and determine any adjustments to the supplementary funding requirement.

10273 The significant item of concern to the Yukon government here is the apparent inequity in handling of funds that may turn out to be in excess of the current period requirements. It seems to us that if there are several stakeholders being asked to contribute to funding the program that those same groups should be given an equivalent credit when their contribution was more than what was required.

10274 We will address aspects of the regular framework in written argument, but will simply observe now there is a degree of complexity that may be potentially very resource intensive for a company the size of Northwestel.

10275 Quality of service. In this proceeding the company has proposed a revised quality of service indicator for the unmet repair indicator, by adopting remote communities' definition and a standard that the company feels is more manageable.

10276 With the qualification introduction during the hearing that the company would not through its management actions be able to affect the performance of the indicator, the Yukon government finds that proposal acceptable. However, we would note the very sincere comments of Mr. Vachon on service qualify, where he indicated in cross-examination that even where the CRTC indicators are met and customers are not happy, then the company must take actions to improve service.

10277 Since the Yukon government, like other stakeholders of Northwestel, is keenly interested in the company's quality of service performance, it seems there are two possibilities open here. One is to have these more pertinent measures developed and implemented from the Commission's reporting perspective and the other may be to have some reporting by the company on performance indicators that the company itself believes are critical.

10278 It's the latter course that we would recommend, particularly in the case of projects like SIP where there is a great deal of public interest in the outcome. We recommend that Northwestel propose to file or perhaps publish quality of service measures that would track the improvement in service that will be generated by the investments made with shared funding.

10279 I will speak briefly about community involvement. One of the more important themes that arose during this hearing was that of community involvement. The Yukon government believes that this is truly one of the keys to success in establishing a strong telecommunications infrastructure and a strong industry in the north.

10280 Northwestel has made many references to consultations that have taken place and those that will take place. The Yukon government wishes to reinforce the message of importance in involving all communities.

10281 It is particularly important to include emerging First Nations' governments to gain the benefits of their input and provide opportunities for involvement.

10282 In the very small community that is our society in the north, co-operation is essential to success and very often to survival itself. By finding ways to focus the limited resources for the maximum benefit, the opportunity to reach an optimum balance is attained.

10283 The recommended model for involving communities in the development of telecommunications has three components: first, shared information wherever possible; second, shared decisionmaking where appropriate; and third, shared responsibility for implementing and maintaining the solutions in every case.

10284 Our written argument will provide a more detailed list of areas where the community involvement principle should be implemented. But a few examples will suffice here.

10285 The service improvement project implementation, needs that were initially assessed from a very wide range of consultations. As the more detailed plans are developed, user specific consultations should be undertaken, at least on an annual basis.

10286 The Yukon Government submits that the company should be required to report back to the same groups that were consulted as to the progress of achieving the goals of the service improvement plan.

10287 MR. HAYDEN: Yukon Government's Connect Yukon project was the subject of considerable attention during these proceedings. We submit now that it is clear on the record that the intent of this endeavour is to provide assistance in meeting the local -- meaning, the Yukon defined -- needs.

10288 The telecom priorities in a fashion that is co-ordinated with the program that is now under consideration by the Commission. The Commission is considering the programs on a national policy objective to meet national policy goals for basic service.

10289 Connect Yukon was also designed to address immediate needs. Northwestel's SIP proposal will address service needs over the next four-year time frame.

10290 We view our project as a successful example of co-ordination of the shared responsibilities for telecom development and look forward to similar development of other initiatives, whether involving the Yukon Government or other governments like the First Nations, Northwestel and the industry in general.

10291 This approach can be our means of building a new link between our region and the rest of the world, one that will allow the development on the same scale as the other visionary great projects in Canadian history.

10292 I want to summarize with a number of key principles.

10293 The $5.00 increase again is not supportable. It puts local access costs at a rate that is not comparable with the rest of the country and is in a range that is unaffordable.

10294 Long distance rates need to be addressed immediately and set at a level to enable Northwestel to be competitive in this territory while also offering our residents and businesses benefits comparable to the rest of the country.

10295 SIP needs to be rolled out sooner than later and monitored for its effectiveness.

10296 Thank you for your attention.

10297 THE CHAIRPERSON: Thank you, Mr. Hayden, Mr. Pratt.

10298 We will take our morning break now and reconvene at ten to 11:00.

--- Recess at 1036 / Suspension à 1036

--- Upon resuming at 1054 / Reprise à 1054

10299 THE CHAIRPERSON: We will return to our proceeding.

10300 Madam Secretary, who is our next party to present argument?

10301 MS VOGEL: Thank you, Mr. Chairman.

10302 It is New North Networks.

10303 Mr. Zubko.

ARGUMENT / PLAIDOIRIE

10304 MR. ZUBKO: Thank you, Mr. Chairman.

10305 Mr. Chairman and Members of the Commission, I appreciate that this is almost over for me. I also appreciate that it is not close to being over for you.

10306 Mr. Hamelin stated during the hearing that he hoped that we would look back in 30 years and say that this was a great thing we did here. I agree.

10307 The great thing that we should see when we look back is the fact that this was the start of a process that freed the people of the north and Northwestel from the shackles of regulation -- the start of the end of the last structured communications monopoly in North America.

10308 I start my argument with the premise that the CRTC has determined that long distance be implemented in the north, because it has been clearly demonstrated in other parts of Canada, the world and other industries that competition brings benefits to the consumer.

10309 Those benefits go far beyond the simple benefit of choice. They go to efficiency, innovation and alternative options. They lead to the places that we cannot even envision today.

10310 Industry giants and visionaries like Bill Gates, Gordon Moores, Larry Ellison and others, have all said that inception and degree of uptake of the Internet as the public phenomena was now within their vision of the world a mere ten years ago.

10311 Only 15 years ago many thought that McCaw was on a financial suicide mission. After his $9 billion sale of McCaw Cellular to AT&T Wireless he need not worry about having the last laugh. Products stemming from that technology are found in over 50 per cent of households in some parts of Canada, higher in some other countries.

10312 If the CRTC completes the framework to protect and implement basic telephone service as we know it today, they must be most careful not to smother the future benefits, most of which will likely come from other entrepreneurs. This is where the real benefits of competition will emerge.

10313 Much has been heard from and about Internet providers at the public and oral hearings. These are the most recent innovators in communications in the north.

10314 While Internet is well suited to be delivered by telcos in the north, as in most of the world, these services are now being delivered for the most part by the private entrepreneur, the innovator, the risk taker.

10315 These entrepreneurs are amongst other communication providers who have found niches where service, for a variety of reasons, was not being provided by the telco. Whatever the reasons may be, they stepped into the breach and created infrastructure, took risk and delivered a service. They did so without guarantees based on ROR, ROE, subsidies, or any other securities of the nature enjoyed by the telco.

10316 Much has been made of the need to protect the asset base of Northwestel during this process. That is fine. Incredibly, however, it is the total asset concern by Northwestel for the financial health of other companies in the same industry: the pioneers, the pesky risk takers.

10317 It is not at all clear whether this was an oversight by the company or possibly seen as an opportunity to pick up all the little pieces they had not quite got to yet, and with guarantees along with it.

10318 Northwestel has made much about the risk that they are taking. The fact is that the only risk they are taking is if the government, through the CRTC, will renege on the implicit contract they are making with their chosen vehicle for implementation of policy, to use the words of Northwestel or by demonstrating a level of incompetence too great to be ignored by the CRTC in the event that adjustments to the subsidy program are needed.

10319 Did Northwestel create a model that will need no adjustment in the future? I suggest that they did not. There is a large degree of uncertainty in the model. Adjustment is almost a given. The company recognizes this and has suggested that a review may be necessary.

10320 However, the current model clearly precludes any competition in some types of intra markets. Yes, carriers may come in to serve their larger national customers. In fact, they may come in simply because the market is too small to concern themselves with the relatively small losses contributed to their national service model.

10321 But this is only choice. This is not competition. Such a model will not bring the disciplines of competition that has been so important in the stimulation and innovation of developments in the industry, all to the benefit of the consumer.

10322 Northwestel needs real competition to break them out of the monopoly mould in which they are so deeply entrenched. They need to be dragged, kicking and screaming if necessary, into the real world. Then they will truly be able to deal with the future needs of the north.

10323 There are clearly communities and areas where the prospect of self-sustainability is not to be expected. However, much of the north can support real competition.

10324 I believe that given a fertile environment such competition will grow and spread, such a development will be fed by the combination of efficiencies imposed by competition on Northwestel and the introduction of technologies by newly invigorated pioneers and innovators.

10325 What will be the cost of such a model of competition? To Northwestel it could be great if they do not change. It could in fact cause them to contract to be only the carrier of last resort in areas where there are no economics, and they operate merely as a subsidized instrument of government social policy. But this is within their own control.

10326 To the contributors of subsidies, it may even cost less in the medium term. To the consumer the benefits will be commensurate with those in the rest of the country.

10327 Also consider this: Given the total financial collapse of Northwestel, the impact to the ultimate shareholder, the B.C. investor, would be substantially less than a rounding error on the balance sheet.

10328 The impact of failure of a northern business, and northern business that I have spoken about, could be devastating right to the family level and ripple throughout the community.

10329 There are others at this hearing who can argue the technical aspects of various methodologies on setting sustainable CAT and appropriate ROE and such things. I can tell you that Telus NAS, the five plus four equals more than the discount contract rate to large consumers, as described by Mr. Lowe and my math share much more in common than the approved methodology for the attribution of costs for Internet services not completed, but trust us, it's fair and equal but not the same approach as Northwestel.

10330 I can also tell you that the level of trust in Northwestel as a gatekeeper of access is not there. They say they will be fair in their dealings.

10331 They say they will compete with some services, but without clear tests for fairness, and they will act without prejudice in the implementation of public policy in accessing subsidized services even if they are competing.

10332 I can tell you that the likelihood of needing to provide for two Internet carriers in tiny markets is as unnecessary as the likelihood of those markets becoming economically self-sufficient. It is a complete waste of money. Such a plan raises the spectre that the second gateway is to provide unfettered access for Sympatico services should they decide to enter the market for strategic rather than economic reasons.

10333 In closing, I would make the following points and recommendations.

10334 Separate utility and competitive subsidies. It will be required sooner or later. Require imputation tests for Internet services, even if it means a variance of previous decisions. Create or appoint a third party to arbitrate access to Internet backbone in the subsidized system. Create a process that encourages small niche competitive services, particularly by the northern innovator. Look for ways to utilize currently in-place infrastructure which may be owned by other companies to satisfy the CRTC basic service requirement.

10335 Finally, err on the side of over-stimulating the competitive market rather than creating further paralysis.

10336 Ladies and gentlemen, the results of your decision will persist in the lives of northerners for a long, long time. For our sake, I wish upon you wisdom and good judgment.

10337 Thank you, Mr. Chairman.

10338 THE CHAIRPERSON: Thank you, Mr. Zubko.

10339 MS VOGEL: My next party for final argument is Telus, Mr. Lowe.

ARGUMENT / PLAIDOIRIE

10340 MR. LOWE: It was a late night.

10341 Thank you, Mr. Chairman. Telus is the only southern telephone company here at this proceeding. You may ask why are we here. There's three self-interests and I would like to just put them on the table right now because they go to our perspective.

10342 We think our southern customers will pay into the fund. Secondly, we have our own service improvement plan that we need to develop and think about. We have our own high cost areas. Third, we are thinking about whether to compete up here.

10343 Now, another reason that we are here is because we think it's a really important case and there's some terribly significant policy issues.

10344 You know we are a southern telephone company. We serve areas that are remote and areas that do adjoin with Northwestel. We can certainly sympathize with the challenges of serving, you know, a far flung network. We are not saying that ours is as unique as Northwestel. Its network is different, but, you know, we can sympathize with them.

10345 You know, our perspective may be different from those that do all or a lot of their business in the north, but I think this is one of these cases where you have got to have everybody's perspective and you have got to see where people are coming from as well. You know, maybe there's no right answers here.

10346 As a general observation, the Commission laid down this process with the best of intentions. There's no question but the company has pursued it with vigour. We don't doubt that the company wants to help the north and the people here have aspirations. They live here.

10347 Somewhere along the way, though, things went wrong in our view. You could call this -- you know, when good people do bad proposals. The Commission has an extremely ambitious plan before it. You know, it's deliver the high cost service objective, upgrade a network that's antiquated.

10348 The company said that it may not be technically feasible to meet the roll-out schedule with, you know, lead times for the long delivery equipment and the need to staff up and so on.

10349 There's a sizeable local rate increase we have heard about. You have been asked to approve toll plans which mimic the south and, you know, still kind of manage and allocate the roll-out of competition which is one way of characterizing the proposal.

10350 On top of all that, the shareholder is to get a fair return. He said that as well. There's talk of leading employment and social development aspirations of a host of stakeholders here in the north.

10351 Is it too much? Can everybody get what they want? Has the company tried to do too much too quickly? Has the company done what it was expected to do and who should pay for all of this?

10352 We said -- Telus said at the high cost proceeding that Northwestel may be a candidate for supplementary funding. We have listened to the evidence. I'm bound to say as a Canadian you have to say something has to be done. We take issue with a number of aspects of the proposal.

10353 You told Northwestel in no uncertain terms in the high cost decision that they should consult with stakeholders prior to preparing service improvement plans. By our way of thinking, Northwestel only spoke to those who stood to benefit at these stakeholder meetings.

10354 It's a proposal, you know -- I don't really know how to put it, but it's kind of built on the ethic of spending other people's money. There isn't the balance that you would expect to see or, I put to you, that you wanted to see when you said get all the stakeholders in the room.

10355 Now, these projects, they all involve, you know, choices and tradeoffs. It's kind of like a tragic choice thing in a lot of ways when you look at, you know, should we spend our dollars here or there. You know, reasonable people can disagree on where you spend your money.

10356 You know, when you forge this kind of a plan, and I'm not talking about in the hearing room after it has already been developed, but when you actually kind of forge it, that's when you have got to get everybody putting forward their perspective and everybody sort of weighing the cost and the benefit.

10357 Again, I think Northwestel kind of, you know, and I'm not saying there is any malice or anything, but the fact is they blinkered themselves to the views of some of the stakeholders.

10358 Throughout this hearing it seems to me that Northwestel is kind of laying off the service improvement plan on the Commission. You know, they are saying "You told us to do this and this is what we did and we are just doing kind of what you told us to do".

10359 You have your own views on what you told them to do or not, but as I read this decision, there were some pretty general directions. There were some choices that had to be made on a lot of points. In many cases Northwestel made decisions which made the plan more expensive.

10360 Why is it four years? We don't see anything in the decision which says it has to be four years. It seems somewhat obvious that if you do things in a rush, it's going to be more expensive, particularly when you got, you know, difficult geographic and climate conditions.

10361 Is there, you know, a better way to do the high payout ones first? That's a kind of a concept that you can float out there, but, you know, can you sort of get more social bang for buck up front? It's a terribly hard calculus to do, but I think it's something that has to be done.

10362 Maybe it's impossible to do and, I say, it may be impossible to get the right answer, but it's got to be done.

10363 And you look at, you know, in Decision 99-16, you said, at paragraph 41, "serve unserved areas prior to providing upgrades, and I don't see that that's been done. I don't see that priorization in this plan. You said, "serve permanent dwellings before seasonal ones" and, again, I just don't see that in this plan. You know. I think it's someone, you know, down south and they are told, you know, "You have got to pick up the tab for some $25,000 lines at someone's cottage in the north", you know, and maybe you are underserved yourself, or maybe you are not. Is that fair?

10364 And what about business lines? Is it fair to have res. consumers in the south subsidize business upgrades in rates? And there's the parable of the ISP roll-out: sufficient capacity Northwestel has installed to permit two local ISPs -- and that's a clear add-on to decision 99-16. So you have to ask yourself, "Whose agenda advanced that one?".

10365 And, in some cases, you have this result where there's more ISPs than residence customers. And, you know, couldn't you use an 800 number, if that's clearly more economic?

10366 And the real issue, the heart of this, I think, is: Is there a serious consideration of the economics of the project or is this really a "money is no object" kind of proposition? Which -- you know, I'm just going to put it another way: Did the Commission write a blank cheque? And only you know that.

10367 Did you say -- you said, "Deliver the service level to as many Canadians as feasible". And how can you decide what's feasible? Unless you kind of look at the costs of doing something. I mean maybe it sounds a little, I don't know, "rational wealth maximizy" or something but, you know, if you are looking at benefits, you have got to look at costs side by side with them.

10368 And then, what about weighing the cost of the toll network upgrade? I mean is that supposed to be "and add any costs" sort of deal? It's toll. It's competitive.

10369 And I just throw this out. If you did mean -- or if you did write Northwestel a blank cheque, did you write one for the rest of the country, as well? Because, you know, the unserved and underserved in Canada are probably going to want the same deal. So, you know, you have this kind of, you know, pyramiding or domino effect. And do we even know what it would cost if you did this version of the service improvement plan south of 60? There's a lot of land down there.

10370 So, if you think that maybe painted yourself into a bit of a corner today, what's it going to be like down south?

10371 So what -- and I say this with the greatest respect -- you may be in kind of a tough position, you know, the sell job on the service improvement plan has been done by the company, now, and expectations have been created and you need to be very disciplined to do the right thing -- and I think you know what the right thing to do is, but it's going to take a lot of courage to say, "SIP will go ahead but not as proposed".

10372 Now I also want to talk about the level of rates.

10373 Generally, this is a policy matter and -- but I'm just giving you some thoughts on it. And in cross-examination, we kind of reminded people that Bell said, back in the high-cost serving area proceeding, that the test should be the highest rates in Canada to qualify for supplementary funding here in the north. And Northwestel kind of dialled that test back to comparable rates. And, you know, I mean I'm not trying to say they are bound by their shareholder, and they are different guys, and that's fair enough.

10374 But then we go through the proceeding and we hear that the rate increase proposed by Northwestel, the $5.00 a month is simply too much. Lots of people have been saying that.

10375 And we also heard that the rate increase covers 10 per cent of the expense increase -- I think I have got my numbers right here -- $40 million increased expenses with SIP, and the rate increase brings $4 million.

10376 So it speaks volumes when you have got people that are paying 10 cents on the dollar saying, you know, "This is just too much". I mean doesn't that show that the plan is out of control?

10377 So, the rates you set, at the end of the day, are -- as I say, I am certainly not going to propose a number for you.

10378 On competition, Telus has consistently endorsed full competition in our industry. And, in this case, I think you either do it or you don't. You know. This model of mimicking the real item and, you know, creating prices which are similar to competition and allocating very narrow and costly entry by competitors, you know, it may create the illusion of competition but it's not going to fool competitors, I submit, and I don't think it's going to serve the north well, in the end, either.

10379 And so, if there are to be competitive benefits for northerners that are comparable to the south, the rules for competition should be similar to the south, as well.

10380 So, at a minimum, introduce split rate base, break the link like you did in the south -- I didn't hear any good reason to preserve the link up here; there was a lot of talk about it --make the subsidies explicit but just get them all out on the table there and see where they are coming from. And, you know, we put an exhibit to the panel and we will commend it to staff's consideration and your consideration.

10381 Now who pays for all this? You have got a brand new power, under the Telecommunications Act, 46.5, and you are going to be hearing a lot about this in about a week or a couple of weeks. And it says: The Commission may require any telecommunications service provider to contribute, subject to any conditions the Commission may set, to a fund to support continuing access by Canadians to basic telecommunication service.

10382 It's a broad power you have been given, but it's not limitless. It's not intended to be used to create jobs or confer economic benefits on regions. That's not the purpose of it. It's to cover basic telecommunication services. And I think we have heard evidence that some of the expenses of SIP and, indeed, the revenue requirement -- I mean they have sort been hidden in a secretive way but some of those expenses kind of go beyond basic telecommunication services. And we are not saying that these aspirations don't have merit. But you would have to work the new section beyond recognition to take funds out of the fund to pay for them.

10383 And, you know, you have been invited to get into the tax and spend business by some intervenors at this proceeding, and I put it to you that Parliament hasn't given you that invitation.

10384 So maybe you need some help from others to fund some of the revenue requirement -- and I'm not saying where you draw the line but maybe you have some stakeholder meetings to kind of help parse out some of the stuff that's regional development and have the dialogue about, you know, whether should pay and get government to the table and, you know, talk about it.

10385 On that point, I guess I would have to ask -- and it's not a terribly original question -- what do you expect if you dangle a bunch of job creation money of territorial governments?

10386 You know, I have seen some rate cases before the Commission and I have seen some governments really go after the telephone company on the expenses and -- I will probably regret saying this, but -- and I know he's just taking instructions but, at some points, I thought Mr. Pratt was going to jump over and start hugging the witnesses.

10387 Sorry, Jim.

--- Laughter / Rires

10388 So, all this being said -- and I hate to be negative because you have got a noble mission here -- there has got to be a way to bring the lasting and important communication reforms to the north. It's not an easy answer. It's going to require a deft touch, some moral courage and all of the expertise and experience of the Commission.

10389 So, we wish you the best of luck.

10390 And, on a final note, I would like to say we, you know, we recognize that the people at Northwestel are themselves trying to do the right thing and, clearly, a lot of what we heard came from the heart.

10391 I can understand why the proposal was put forward by the company. Even though we take issue with it, I'm not trying to doubt the sincerity of the people who did put it forward. You know, they are decent folk and they are in a tough position themselves and we are grateful for the courtesies that we have received from Northwestel in this proceeding.

10392 Again, the Telus companies have a long history of exchanging traffic on cordial terms with Northwestel and we have been able to work out our differences in the past and we do value the relationship.

10393 On a personal note, we have enjoyed this hearing. We have had a chance to reacquaint ourselves with old friends and make some new friends in the back of the room. There are some powerful voices back there. I learned some things that I never would have learned without coming here.

10394 We have been struck as well by the Commission's own commitment to this proceeding, seven Commissioners coming out here and staff. I think it speaks volumes for, you know, how important it is to get it right for the north and right for Canada too.

10395 Thank you.

10396 THE CHAIRPERSON: Thank you, Mr. Lowe.

10397 MS VOGEL: The final party for closing argument will be Northwestel.

1125

ARGUMENT / PLAIDOIRIE

10398 MR. FLAHERTY: Thank you very much.

10399 Good morning, Mr. Chairman and Members of the Commission.

10400 In early 1997, the Commission began a process to consider the public benefits of long-distance competition in Northwestel's operating territory. Now, three proceedings and three years later, the Commission is in a position to render a decision which will have a significant impact on all northern Canadians.

10401 Throughout the public consultations, the Commission has heard from both residential and business customers regarding the importance of reasonably comparable services at reasonably comparable rates. These customers are saying they have waited long enough.

10402 At Tuesday's public consultation, Ms Blake, a resident of McConnachie Creek, told us, and I quote:

10403 Mr. Nielsen of the Yukon Chamber of Commerce stated, and I quote:

10404 Customers are saying the time to act is now! Northerners have communicated their views on the Commission's objectives of reasonably comparable services, reasonably comparable rates, and customer choice.

10405 On the first objective of reasonably comparable services, Northwestel has proposed a model that will ensure that all northerners, no matter where they reside, even in the smallest communities such as Griese Fiord, Elsa and Kakisa, have access to the same basic level of service as defined by the Commission in the High Cost Area Decision.

10406 The Service Improvement Plan will improve the quality of service to underserved customers, extend service to unserved customers, provide enhanced features, including call display and privacy features, provide network facilities for local dial access to the Internet, and improve the quality of long-distance service. All of this is achievable within our proposed four year service improvement plan.

10407 The second objective is to deliver these services at rates reasonably similar to those available in the south. Due to the distances between communities and isolation from the south, northerners are more dependent on long-distance services than southerners. Equivalent access to long-distance services at reasonably comparable prices is essential.

10408 To achieve this objective, Northwestel proposes to introduce new toll plans, patterned on those available in southern Canada, for residential, small/medium business, and large business customers. These toll plans will be offered ubiquitously throughout Northwestel's territory, even to the smallest most remote communities. These are the communities least likely to attract competitive entry. If these communities are to receive reasonably comparable long-distance rates, it is Northwestel that is going to have to provide them.

10409 With respect to the third objective of choice, the Commission recognized in the High Cost Service Area Decision that a unique solution was required for Northwestel. For example, it stated that sustainable rates for both switching and aggregation and contribution would be required in order to encourage competition and provide customers with the benefit of choice. Northwestel has proposed a model to encourage long-distance competition. It is our belief that a 5 cent CAT will attract competition.

10410 Experience at Telebec and QuebecTel indicates that entry occurs at CAT rates higher than 5 cents. Competitors have also demonstrated that they are willing to pay settlement rates higher than 5 cents on traffic that bypasses Northwestel service. However, to address any concerns regarding the level of the CAT, it would be appropriate to monitor the situation and, if required, adjust this element of the model as we go.

10411 While recognizing that long-distance competition in the North is in the public interest, in its Northwestel Long Distance Decision, the Commission expressed concerns that appropriate terms and conditions must be set to ensure that Northwestel will continue to be a full service provider throughout its operating territory.

10412 The federal government, through Industry Canada, has articulated the need for a fully connected nation. At all levels of government and particularly the northern territorial governments, it has been recognized that Northwestel is the primary vehicle in the North for achieving this national objective.

10413 Northwestel's sensitivity to local interests and objectives, and accountability at the corporate level to the northern public, clearly indicates the value of the corporation continuing as a full service provider. A locally based full service provider gives northerners direct local access to services which are adapted to the unique conditions of the north.

10414 For example, Northwestel has a service centre in Iqaluit which provides a full range of service ordering, customer inquiry and operator services in Inuktitut. No other provider of long-distance services, especially one based in the south, is likely to establish staff in the communities of the north or deal with northern service requirements in northern aboriginal languages.

10415 In addition, local presence is essential to responsiveness and to the diffusion of modern telecommunications technology in this region.

10416 Northwestel has put forward, in its view, a balanced, workable plan to meet the objectives of the Commission. The company has calculated the revenues and expenses for this plan. Incorporating the target rate of return recommended by our expert witness, Ms McShane, the result is a $40 million shortfall annually.

10417 We propose to address this in part through a $5.00 a month increase in local access rates. This will generate approximately $4.3 million annually. The remaining shortfall, some $35 million, Northwestel proposes be addressed through supplementary funding.

10418 Northern Canadians have been patient. It is time now to provide all northerners, even in the most remote communities, with the benefits of competition. These benefits are choice and reasonably comparable rates. If the benefits of competition do not extend to all customers, clearly we will not have met the expectations of the customers, the governments, the Commission and the company. That's our objective as well.

10419 In such an event, we need collectively to go back and review the model and propose changes, as appropriate, to ensure the goals are achieved.

10420 In its High Cost Serving Area Decision the Commission stated:

10421 The Service Improvement Plan proposed by Northwestel is designed to meet the Commission's basic service objective throughout the company's operating region.

10422 This program upgrades services across the north to a uniform level. It benefits all communities, not just a few major centres. It will bring to the customers in the north telecommunication capabilities similar to those enjoyed by Canadians in the south.

10423 Mr. Chairman, access to the Internet has been mentioned many times throughout this proceeding. I would like to take a moment to clarify the principles behind the company's proposal.

10424 Today there are 66 communities in the north with no local ISP. We propose to provide facilities for up to two local dial-up ISPs in every community under 2000 NALs. First right of refusal will be offered to any existing ISP in these communities. If there are more than two ISPs interested in using the facilities in a community, the right to use the facilities will be determined by an independent accounting firm applying a random selection process. Sympatico Internet service will have no guarantee nor any priority over other ISPs.

10425 Some may suggest that the company's plan should exclude those communities with an existing ISP. If those communities were left out of the company's plan a virtual monopoly would be established for the incumbent ISP. The customers would not be provided the same choice or price competition as found in other communities. Should the incumbent ISP withdraw from the market at any time, the customers would be left with no Internet access at all, and there would be no funding mechanism for Northwestel to become the service provider of last resort.

10426 The company believes that leaving out these communities is not in the best interests of the customer. It would not provide a consistent model for Internet access by all northern customers.

10427 Now let's turn to the company's own Internet service offering. The Internet market is highly competitive in the north. There are numerous competitors here in Whitehorse including Microage, Internet Yukon, Polarcom, and YKnet. Northwestel is not dominant in the Internet market. In fact, we have less than a 20 per cent market share.

10428 In Whitehorse where ADSL is offered, there is a competitive high-speed alternative offered by the cable company, WHTV, as well as the recently announced ExpressVu Service. Both Northwestel and the cable company are required by Commission order to offer wholesale high speed access to any independent provider who requests it.

10429 Northwestel's wholesale ADSL tariff was approved by the CRTC on December 23, 1999, in Telecom Order CRTC 99-1219. I would note that our retail ADSL rates and service charges are comparable to the residential high-speed Internet cable service offered by the Whitehorse cable company.

10430 As well, some concerns have been raised regarding safeguards for competitive neutrality in Internet services. The company notes that accounting separation for Northwestel's Internet services has been ordered by the Commission to ensure that the company does not cross-subsidize its Internet services or give itself a competitive advantage. The Commission's Order concluded that Northwestel has an appropriate methodology to assign assets, revenues and expenses to the Internet category, thereby ensuring competitive neutrality.

10431 Now I would like to turn to consideration of the overall size and content of the proposed service improvement plan. Some have suggested that the SIP program, the service improvement program, does not go far enough. Others suggest that it has gone too far.

10432 Northwestel believes that its proposal strikes an appropriate balance between providing the basic service objectives to the people of the north, and keeping costs at a reasonable level. For example, the cost to implement a CCS7 signalling network to enable long distance call management services over the satellite network, was prohibitive. However, we have included the features most in demand by our customers. Cutting back on some of these features in certain communities to save costs would create, in effect, a two-tiered system or grade of service.

10433 In developing the service improvement plan, the company has consulted widely with customers, First Nations' organizations, governments, regional districts of B.C., hamlets and municipalities. The company will continue to consult these stakeholders as the plan is rolled out to specific areas. Northwestel will continue to communicate and to keep its customers informed as to the progress of the plan.

10434 The company proposes a very aggressive and challenging four year service improvement plan, estimated to cost $76 million, which will deliver the program in a timely manner. The challenges involved with the implementation of SIP include workforce and technology availability, the logistics of construction in this large northern region, the short northern construction season and potential delays in obtaining required approvals or rights-of-way.

10435 Northwestel has proposed a tracking mechanism that will report, by community, on the progress of the SIP on an annual basis. This progress report will be provided to the Commission as well as to our customers to demonstrate that Northwestel is fulfilling its obligations under the SIP.

10436 In the area of quality of service, Northwestel has proposed to the Commission a third classification for the reporting of quality of service indicators which we refer to as "remote". This would recognize the practical operating challenges faced by company technicians in quickly restoring service to remote, difficult-to-access communities. The company recognizes the concerns raised regarding potential staffing reductions, and the impact any reductions may have on community reclassification.

10437 In response, Northwestel has committed to the Commission that no community identified in its response to Interrogatory NWTel(CRTC)91Nov99-102 Revised would be reclassified as a result of any future staffing level changes.

10438 The SIP will substantially improve the quality and reliability of the long distance network. In addition, the program will provide access for unserved customers and improve services to underserved areas. When these projects are completed, the company is of the view that quality of service will improve and customer complaints will be reduced.

10439 Turning to long distance services, as the Commission has heard, the principle of reasonably comparable rates for reasonably comparable services, including toll services, is very important to northerners. It is even more important to those who live in the remote villages, since long distance calls are an essential means for them to connect to other communities in their region as well as the rest of the country.

10440 Northern residents have a very high awareness of competitive alternatives and of prices offered by national long distance competitors in the south. Consequently, people in the north are highly sensitive to the price of long distance service.

10441 Regular monthly surveys consistently indicate that, given a choice, at least 60 per cent of customers in the north would switch from Northwestel if competitors were to offer slightly cheaper rates.

10442 Even more concrete evidence of customer awareness and price-sensitivity lies in their actual behaviour -- specifically, in their willingness to go to great lengths to use call reversal and other forms of bypass.

10443 As the Commission heard from Mayor Dave Lovell of Yellowknife, quote, "high long distance rates are grossly unfair and business and residents are forced to use options that are not kosher".

10444 Extensive bypass has already occurred through such means as the use of competitor calling cards and 1-800 numbers, prepaid calling cards and reversal of calling patterns.

10445 Given the relative simplicity of the well advertised national plans, customers can readily recognize any differences in rates between competing plans. For example, Northwestel believes that if it were required to modify its proposed residential toll plan such that the maximum monthly rate for 600 minutes were $25, customers would perceive a sufficient difference between Northwestel and competitive offerings to cause substantial numbers to switch to a competitor.

10446 It is critical that Northwestel price long distance at rates comparable to those in the south to ensure that all customers in the north benefit from long distance competition, including those in rural and remote areas where competitive entry is least likely to occur. The Commission itself expressed its desire that the benefits of competition reach all Canadians. In our view, this includes the remote areas of the north. In such areas, customers will have to rely on Northwestel for comparable services at rates that are generally close to southern rates.

10447 I would note, Mr. Chairman, that many northerners rely very heavily on intra toll traffic. To set intra rates higher than inter rates would essentially discriminate against subscriber in the small traditional northern communities, for whom communication within the north is most vital. These customers tend to have much stronger ties to other northern communities than to southern Canada. Setting intra rates higher than inter rates would result in a two-tiered system. This would clearly prejudice those customers with the least opportunity to access alternatives to high priced toll service.

10448 In the course of this proceeding, the Commission has asked questions regarding how would it regulate Northwestel's long distance rates following the introduction of competition and, specifically, to ensure Northwestel does not price its toll services below market rates.

10449 Northwestel's objective is to remain competitive by offering rates that are generally comparable to those offered by large national carriers. Moreover, there is no incentive for Northwestel to price below competitive rates. Setting prices below the level determined by national competition would result in giving up revenues unnecessarily.

10450 National markets will determine rates for toll plans, and Northwestel will be a price follower. Northwestel lacks market power relative to its national competitors. It does not have the ability to influence the level of market prices established by national carriers or to discipline the market conduct of such carriers. It is clearly not in the interest of Northwestel to price its toll services in a way that is likely to provoke large carriers to respond by targeting specific toll offers aimed at the company's most lucrative sub-markets and customers.

10451 In addition to being subject to market forces beyond its control, the company will also continue to be obligated to request Commission approval for any toll rate changes. To remove concerns regarding an appropriate benchmark against which to judge rate changes, the company proposes to benchmark its toll services against those offered by the large Canadian incumbents.

10452 I would like now to turn to the principle of choice of long distance suppliers. Northwestel supports the principle of choice as a key objective of introducing long distance competition.

10453 The availability of choice depends a great deal on setting a sustainable CAT.

10454 The high cost of providing service outside the larger centres may deter the entry of some long distance competitors. However, the company believes that, if its large business discount toll plans are approved, reseller entry will occur where facilities based entry is not attractive.

10455 The Commission concluded in the High Cost Decision that a sustainable CAT is necessary to facilitate the provision of competitive long distance services to subscribers throughout Northwestel's territory. Northwestel agrees.

10456 The company's proposed sustainable CAT rate of 5 cents was established based on the following considerations: cat levels and CAT component rates in the rest of Canada, including the rates in the operating territories of the independent companies in Ontario and Quebec; promotion of competitive entry; the impact on supplementary funding.

10457 CAT components calculated using conventional methods result in a high CAT rate of more than 8 cents in 2001, rising to over 10 cents per minute end with the completion of SIP. A CAT rate at this level would simply not be sustainable and would likely result in extremely limited entry by competitors. Entry would likely be targeted primarily at high volume customers in our larger communities. High concentration of toll traffic and revenues in two or three large centres makes Northwestel extremely vulnerable to targeted entry. With a high CAT rate, most residents of the north -- particularly those in our smaller communities -- would not have the benefit of choice.

10458 Based on the experience of the Ontario and Quebec independent companies, CAT rates of 10 cents per minute or higher lead to little or no entry by alternate carriers.

10459 Furthermore, high CAT rates and/or components would potentially encourage bypass, i.e. through the use of DALs. Consequently, the company proposes to charge the full 5 cent CAT for DAL usage, estimated to be 8,000 minutes per month.

10460 Mr. Chairman, some parties appear concerned that a CAT rate of even 5 cents may be too high and that competitors may not enter.

10461 While a lower CAT rate would potentially lead to a more competitive entry, it would also increase the company's supplementary funding requirement. For example, as indicated in our response to Interrogatory CRTC-1427b), a sustainable CAT rate of approximately three cents per minute would lead to an estimated increased subsidy requirement of $4 million in 2001.

10462 In the end, the appropriate level for a sustainable CAT is a judgment call for the Commission to make. As competition evolves, if entry is seen to be too slow or too targeted, the Commission could make adjustments to the sustainable CAT rate during the initial three year period.

10463 Mr. Chairman, I now move to a mercifully brief discussion on return on equity, not a topic I'm very knowledgeable on. The return on equity issue is an important one. It governs to a large degree the financial position that Northwestel can achieve as it enters the next three difficult years.

10464 Last Friday, you and the Commissioners had an opportunity to hear Ms McShane. While I am sure your technical staff with be familiar with betas, raw and adjusted, with the infamous CIA data source and other financial niceties, we would note that Ms McShane's evidence is based on methods that are tried and true.

10465 In this case, she uses two methods, the equity risk premium test and the comparable earnings test that the CRTC has seen many times before. They are not fair weather approaches that are used on when the methodologies produce the "right" answer.

10466 Ms McShane and her approaches are well known to the CRTC. She has appeared before the Commission for approximately 15 years. Ms McShane carefully analyses the data that is available for the average southern telco and finds its fair return is 11-3/4 per cent to 12-1/4 per cent. A careful risk assessment concludes that a fair return for Northwestel should be set at the upper range end of the range, with a point estimate at 12-1/4 per cent.

10467 Further on the matter of rate of return, the CRTC in interrogatory CRTC-3701 proposed a regulatory regime which was intended to reduce the risk somewhat of the business by providing a true-up based on actual toll/settlement revenues compared to the forecast for that year. The company supports this proposal.

10468 Now, as to Doctors Booth and Berkowitz's work, we cannot agree with their conclusions. They rely on the results from statistical models, then make arbitrary adjustments to the statistical answers. In particular, this time around, they use a new untested multi-factor model. However, I won't go any further at this time. Instead, I invite those interested in our critique to read the appendix attached to our final argument.

10469 Finally, we would urge the CRTC to perform those reasonableness checks on the final ROE determination that the Commission has performed in the past. For example, does the final determination provide Northwestel with the financial underpinnings, including high quality earnings with a minimum of regulatory adjustments, to encourage the planned investment of $176 million over the next four years?

10470 I would like to turn now to the subject of funding this plan. Accomplishing the vision set forth by Northwestel in this proceeding will lead to, on average, an additional revenue requirement of $40 million per year.

10471 Northwestel considers that a $5 local rate increase is a reasonable contribution from northern customers towards supporting this extensive package of benefits. The resulting local rates would be approximately 10 per cent higher than rates just approved by this Commission for similar areas in Bell, TCI and TCBC.

10472 Following these increases, residential local rates would remain significantly below cost and business rates in small remote communities would also be below cost.

10473 Mr. Chairman, some parties in this proceeding have raised questions regarding the affordability of service. The question of what is affordable is ultimately a matter of judgment. There are parties in the proceeding, particularly interests from the south, arguing that the Commission should set rates higher than proposed by the company.

10474 They argue that if costs to provide service in the north are high, then northerners should be required to pay for such services through much higher rates than those that prevail in southern Canada. On the other hand, there are some in the north who argue that services should be extended and the network upgraded, but that no increase in rates is justified.

10475 The company has tried to strike a balance between these positions. We have proposed a $5 local rate increase effective 2001 to apply equally to all customers, business and residence. We are aware that local rates have been rising in southern Canada in order to move rates closer to cost recovery. It would be impossible to set rates at full cost recovery in the north since in our communities with less than 500 lines, the real cost of residence service is $92 a month.

10476 In this regard, I would note that our filing shows for the average residential customer that the total bill will drop by $7.56 per month. This decrease occurs as a result of the substantial savings that will flow from the drop in long distance rates.

10477 Northwestel's average total bill is currently among the highest in Canada. Having regard to all of the factors discussed above, Northwestel considers its proposed rates for primary exchange service to be fair and reasonable.

10478 After applying the revenues from the local rate increase, the company proposes that the balance of its financial requirements, some $35 million, be met by supplementary funding.

10479 Northwestel proposes that supplementary funding be calculated on an annual basis. The supplementary funding requirement is then equal to the shortfall or the residual between the revenue requirement and the forecast operating revenues.

10480 The company notes that almost no party has objected to the principle of supplementary funding. The root cause of Northwestel's deficit is the fact that northern costs are so much higher than southern costs.

10481 Northwestel has achieved excellent productivity gains over the years. However, it is not realistic to expect that future productivity gains would be sufficient to close the gap between northern and southern costs. Consequently, supplementary funding from the south will be required for the foreseeable future.

10482 Mr. Chairman, Commissioners, I want to be clear about one point. It is the company that will raise the $76 million of capital required for the service improvement program. We are not proposing that the supplementary fund provide the capital dollars required for the service improvement plan. Rather, the company proposes that the carrying costs of the capital be recovered through supplementary funding.

10483 In conclusion, Mr. Chairman, Commissioners, are you are no doubt aware by now, the people of the north want and need a telecommunications system fit for the 21st century. Building such a system is a complex undertaking, but we look forward to the challenge. Under your direction, we just have to put the last piece of the puzzle in place.

10484 Northwestel is ready to play its role and we believe the people of Canada are wiling to lend a hand. I know you will consider carefully all of the evidence presented to you, but whatever you decide, I hope we can all agree to get on with this job as soon as possible.

10485 I would like to thank the Commissioners, Commission staff and the other intervenors for contributing to this process over the past period of time.

10486 Thank you.

10487 THE CHAIRPERSON: Thank you, Mr. Flaherty. Would you or your counsel wish to address the issue of costs at this time?

10488 MR. FLAHERTY: I will address the issue, sir.

10489 THE CHAIRPERSON: Thank you.

10490 MR. FLAHERTY: With regard to the request for costs, we agree that CAC/NAPO and UCG have met the Commission's standards for awarding costs. We understand that the Commission will apply its normal review process to review the amounts proposed.

10491 Thank you.

10492 THE CHAIRPERSON: Thank you very much.

10493 Well, that concludes the argument phase of this proceeding then. Are there any other matters anybody wishes to raise just before I make a few closing comments?

10494 Ms Lawson.

10495 MS LAWSON: Yes, Mr. Chairman. It's purely a matter I should have raised earlier, but I just really thought of it now.

10496 Northwestel is the only party to have an opportunity to make reply argument. I'm just wondering if you would consider providing Doctors Booth and Berkowitz with an opportunity to reply at least to the appendix Mr. Flaherty was referring to, Northwestel's argument on their evidence.

10497 THE CHAIRPERSON: Well, as I said at the outset, it's been a little rusty in terms of these sorts of proceedings. Mr. Lowe raised the issue yesterday about whether other parties would have an opportunity to provide reply.

10498 I'm not sure what the sort of legal situation is here, but it has been my experience that many of the proceedings that we have had have been sort of broader policy proceedings where we did provide opportunity for many parties to reply.

10499 It is my recollection in sort of the rate case proceeding, which my interpretation fundamentally is, that the company has an opportunity to reply to the argument. So that would be my understanding in this case, that fundamentally being a rate case sort of proceeding that we would not provide the other parties with an opportunity. That's my sort of layman's sort of observation. Counsel.

10500 MR. BATSTONE: I don't think I would have much to add to that.

10501 I guess in that vein I would add that ROE is very much a rate case type of concept and it would seem appropriate.

10502 I don't know how you would distinguish between that particular piece, replying on that particular piece of evidence without allowing everybody else a similar sort of opportunity.

10503 MS LAWSON: Mr. Chairman, the distinctive features that Drs. Booth and Berkowitz are the only expert witnesses to have appeared in this proceeding and that's all I was suggesting, that the authors of the expert evidence have a chance to reply to the argument addressed to their evidence.

10504 THE CHAIRPERSON: I understand your position, Ms Lawson, and I guess we have their expert testimony.

10505 Anything else then?

10506 Mr. Rogers.

10507 MR. ROGERS: Yesterday we made a best efforts undertaking to Ms Lawson and we have that response here.

10508 THE CHAIRPERSON: Thank you very much.

10509 Does the Secretary have that?

10510 MS VOGEL: Yes.

10511 THE CHAIRPERSON: Perhaps we could get that and give it an exhibit number for the record.

10512 Madam Secretary.

10513 MS VOGEL: Yes. This is a response to an undertaking, revised June 21, 2000. That will be Northwestel Exhibit No. 30.

10514 THE CHAIRPERSON: Thank you.

10515 I believe that concludes this phase of our proceeding. I will remind parties again that written argument may be submitted by the close of business day on Friday and with reply the close of the day a week Friday, that being June 30.

10516 I would like to take this opportunity to thank all of those who have participated in the proceeding, including our sound technician and our court reporter and the staff and my fellow Commissioners, who have in some cases made sure I was sharp and on the spot here through the week.

10517 I want you to know that we sort of discuss how the hearing is going along and everybody has commented on how valuable this proceeding has been and how professional and responsive the company and all of the parties have been. It has been an extremely useful learning exercise for us.

10518 I guess if you look at this process as having gone back, as has been noted to us, almost three years, some of us have been not only to Whitehorse at least once and, as has been noted, Commissioner Williams is from the north, so he has certainly experienced it and helped make us better aware of what is going on, but some of us have been to Whitehorse a couple of times and Yellowknife and Iqaluit as part of the original proceeding that started this and the high cost proceeding and then this one subsequently.

10519 But this hearing in particular I think has given us a much better understanding of all of the issues. I want to say that even though some of the parties have noted that they were not lawyers or engineers or accountants, it has been our observation that they did an excellent job of pursuing the issues.

10520 We try to undertake these hearings so it isn't necessary that someone be a lawyer or an engineer or an accountant. As one of the lawyers even noted, his skills with math were perhaps somewhat limited and was keeping the example simple too. So, I guess I just want to underscore we try to make the process, even though somebody noted that you get perhaps a little bit nervous in speaking, we hope that we provide an opportunity that people can feel comfortable to come to this proceeding and raise issues and have a good debate about the issues that we have in front of us.

10521 It has been our observation that it has been an excellent opportunity and, as I say, we certainly got a better understanding of the north and a better understanding of the application and a much better understanding of the issues that parties have and the concerns that they have about elements of this application.

10522 I want to thank you all for an excellent contribution to our sort of learning process. I think everybody in the room has learned from this exercise.

10523 So with that, again, I just want to thank everybody for their participation and I will declare this phase of our proceeding concluded. We look forward to reading your argument and reply and we will be studying all of this.

10524 What we have heard this week and what we get from you over the next week or so, over the summer, and hope to be rendering a decision in the fall.

10525 Thank you very much.

--- Whereupon the hearing concluded at 1200 /

L'audience se termine à 1200

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Date modified:

2000-06-21