TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
CONTRIBUTION COLLECTION MECHANISM
AND RELATED ISSUES
TELECOM PUBLIC NOTICE CRTC 99-6 /
MÉCANISME DE PERCEPTION DE LA CONTRIBUTION
ET QUESTIONS CONNEXES
AVIS PUBLIC TÉLÉCOM CRTC 99-6
HELD AT: TENUE À:
Conference Centre Centre de Conférences
Outaouais Room Salle Outaouais
Hull, Quebec Hull (Québec)
July 4, 2000 le 4 juillet 2000
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Canadian Radio-television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Public Hearing / Audience publique
Contribution Collection Mechanism
and Related Issues
Telecom Public Notice CRTC 99-6 /
Mécanisme de perception de la contribution
et questions connexes
Avis public Télécom CRTC 99-6
BEFORE / DEVANT:
David Colville Chairperson / Président
Jean-Marc Demers Commissioner / Conseiller
Barbara Cram Commissioner / Conseillère
David McKendry Commissioner / Conseiller
Stewart Langford Commissioner / Conseiller Andrée Noël Commissioner / Conseillère
Ron Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Geoff Batstone Legal Counsel /
Leah Ackerman Hearing Coordinator /
Scott Hutton Team Leader / Chef d'équipe
Shirley Soehn CRTC Staff / Personnel du
HELD AT: TENUE À:
Conference Centre Centre de Conférences
Outaouais Room Salle Outaouais
Hull, Quebec Hull (Québec)
July 4, 2000 le 4 juillet 2000
TABLE OF CONTENTS / TABLE DES MATIÈRES
ARGUMENTS / PLAIDOIRIES
Bell Canada 5
ARC et al 171
RSL Com 273
Hull, Quebec / Hull (Québec)
--- Upon commencing on Tuesday, July 4, 2000
at 0903 / L'audience débute le mardi 4 juillet
2000, à 0903
1 THE CHAIRPERSON: Order, ladies and gentlemen.
2 Good morning everyone. I'm the Vice-Chairman of Telecommunications for the CRTC. I will be the Chairman for this oral phase of this proceeding, this hearing.
3 With me on the panel today are Commissioners Jean-Marc Demers, Barbara Cram, Stewart Langford, David McKendry, Andrée Noël and Ron Williams. The Commission staff here today include our Hearing Coordinator, Leah Ackerman, Shirley Soehn, our Executive Director of the Telecommunications Branch, Scott Hutton who is the team leader for this proceeding, and Geoff Batstone who is counsel.
4 As you know, the purpose of the proceeding is to review the current contribution collection mechanism in light of the current and expected technological market and competitive conditions.
5 The current regime was originally put in place in the Toll Competition Decision 9212 -- and I think we finished their hearing in 1991. Just about this time of year, we were sitting in the rather warm summer weather in this window of this room, putting together the framework that we are addressing here today.
6 The contribution mechanism has been modified extensively since that time in response to various pressures and concerns. Today, in an environment that includes packet switch and Internet protocol networks, lower long distance rates and a changed telecom regulatory environment, the question arises as to whether the current system is still appropriate.
7 With your help, we will determine whether the existing per minute regime remains appropriate in these circumstances, and if not, the type of alternative mechanism that should be substituted for it.
8 Some of the issues under consideration are the definition and calculation of the subsidy requirement, the types of services and service providers that should be required to contribute and whether a uniform collection charge or rate should be applied nationally or by ILEC's serving territory.
9 At this point, I would like to review a few general matters.
10 First, arguments will be presented by each of the parties at the table in front to ensure an accurate transcript. Please make sure your microphone is on. If not, I will be reminding you.
11 Parties wishing to purchase copies of the transcripts, either on hard copy or machine readable form, should make their own arrangement with the court reporters.
12 Since this oral phase in the proceeding is limited to final argument, you may have noticed that unlike in other instances, there are no microphones throughout the room at each of the parties' tables. Accordingly, should the need arise for you to make representations on the record when you are not making a final argument, I would suggest that you give me a sign at which point I will invite you to step forward to the front table.
13 With respect to sitting hours, we propose to sit until 5:00 p.m. today with a lunch break between 12:30 and 2:00, and we will break for coffee in mid-morning and mid-afternoon. Tomorrow, we will begin at 9:00 a.m. again.
14 Selon notre progrès, il est possible que nous puissions terminer demain en fin de journée. Si par contre nous l'estimons nécessaire, nous pourrions siéger au-delà de 17 h 00. Nous examinerons l'évolution des présentations.
15 I remind parties that they will be given a maximum of 20 minutes in which to present their oral final argument which may be followed by questions of clarification by the Commission.
16 You are also reminded that the purpose of this oral phase is to present argument and not to present reply argument. Accordingly, parties are not to use their presentation to reply to oral or written argument made or filed previously by other parties. As you know, written argument is to be filed and served today and written reply argument is due on July 21st.
17 Unlike in other proceedings, you will have noticed we do not have an imposing wall of binders behind us containing the record of the proceeding. As we indicated in our June 27th letter, parties are reminded that if they wish to refer members of the panel to specific portions of the record during their oral argument, they should provide appropriate copies to the Hearing Coordinator prior to commencing their oral argument.
18 Inclus dans cette même lettre, nous vous avons fourni une liste des parties intéressées qui nous ont démontré leur intention de présenter une réplique verbale ainsi que l'ordre proposé des parties comparantes.
19 The Commission is prepared to allow changes to the order of appearance provided that we are advised of any such changes and the parties affected by the change agree. I would invite you to inform the Hearing Coordinator of any such matters.
20 Now, Bell Canada has requested it be given 35 minutes in lieu of the normal 20 minutes as it will be presenting oral argument on behalf of itself, as well as MTS, MTT, NBTel, Newfoundland Tel and Island Tel and we consider this as appropriate in the circumstances.
21 So if there are no questions, we will now turn to the first party to present, that being Bell Canada. Good morning, Mr. Henry.
ARGUMENT / PLAIDOIRIE
22 DENIS HENRY: Good morning, Mr. Chairman. Thank you very much. It's nice to be back.
23 As you mentioned, I am appearing today on behalf of six companies and we propose to make one continuous presentation here this morning.
24 Let me introduce our panel here today. I am Denis Henry, Vice-President, Regulatory Law at Bell Canada. With me on my right is Mr. Rick Steven, Director of Regulatory Matters for Alliant Telecom which, as you know, is the parent company of the four Atlantic telephone companies. On my left is Mr. Bob Farmer, Vice-President of Regulatory Matters at Bell Canada and to his left is Mr. Carl Condon, Vice-President, Technology at Bell Canada. In the back row, we have Ms. Sue Dawes sitting closest to you, Director of Regulatory Matters at Bell Canada and Mr. Roy Bruckshaw, Director of Regulatory Affairs at MTS.
25 Mr. Chairman, the Commission has initiated this proceeding to examine whether reform or replacement of the current mechanism is required and, if so, what changes to it should be made. It is perhaps useful at the outset to remind ourselves of the context in which this proceeding takes place.
26 In recent years, the telecom industry has undergone rapid technological and structural change. The Commission, for its part, has not stood still either, having instituted a number of fundamental changes to the regulatory landscape in recent years. The Commission's major regulatory framework decisions have been characterized by the introduction of competition, but always based on sound economic principles.
27 One of the anomalies peculiar to our industry, however, remains its complex subsidy system. Despite the introduction of competition in all sectors of the business, we still look to the industry to fund a system of subsidies, or contribution as we call it, to ensure that basic residential local prices remain low.
28 To be fair, the Commission itself has consistently recognized throughout its decisions that any system of subsidies, including the current contribution regime, distorts economic incentives and market forces and that industry-generated subsidies should therefore be minimized. And although the Commission and the industry have been successful in substantially reducing contribution rates since the inception of competition, there is still substantial reliance in this country on subsidies for the provision of local service. At the same time, we find ourselves in a sea of technological change and industry structure change that is calling into question whether the current mechanism for collecting and distributing this contribution can remain effective in the future.
29 The subject of contribution and how to collect it can be an extremely difficult one to grapple with. And perhaps no better proof of this lies in the evolution of the thinking of a number of parties, including ourselves I might add, through the course of this proceeding. Many parties who once favoured a change to one form of mechanism are now proposing different mechanisms. As for ourselves, in our original comments, we set out our view that the current mechanism was not in danger of imminent collapse and, based on that view, we suggested no changes were necessary at this time.
30 But having reflected on further developments and reviewed the record of this proceeding, however, our thinking has evolved. In the proposal I am about to discuss in detail, we are suggesting that a new mechanism be introduced at the earliest opportunity and that the current mechanism be phased out over time.
31 Now before describing the features of this proposal in more detail, let me describe very briefly the main considerations that underlie the proposal:
32 First, consistent with the Commission's thinking in past decisions, subsidies should be no more than absolutely necessary to meet social objectives.
33 Second, it continues to be our conclusion that the current per minute mechanism will remain workable for some considerable period of time, but may well be in need of replacement at some time in the future, more likely the longer term.
34 Third, we have been influenced by the views of the long distance providers that it would be desirable to introduce, on a timely basis, means of placing less reliance on long distance services as a source of the subsidy.
35 Fourth, a per line charge is far superior to any other alternative replacement mechanism provided that the per line charge is not so high as to materially hamper growth for services which have not previously been subject to contribution.
36 Fifth, the amount of subsidy to be distributed should be just enough to make the provision of service in all areas economic.
37 Mr. Chairman, based on these considerations we have drafted a proposal which we think balances a number of interests and, at the same time, can be implemented fairly quickly.
38 Our proposal consists of the following three main elements, each of which I will go into in more detail. The first of these elements is a program of further rate rationalization to move residential rates toward costs thus lowering the subsidy requirement over time, and eventually confine it to high cost serving areas.
39 The second element is the introduction, as soon as practically possible, of a regionally based, per line charge of a limited amount and, we would suggest, a better dollar, with the balance of the subsidy requirement being recovered through the current per minute contribution mechanism which would be phased out over time.
40 The third element is the introduction of a method of calculating the subsidy requirement based on phase two economic costs and to be introduced after expiry of the current price cap period.
41 Let me turn now, Mr. Chairman, to a more detailed description of each of these elements starting with the program of rate rationalization.
42 As I mentioned at the outset, the Commission has consistently held that industry generated subsidies should be minimized in order to mitigate the distortion of economic incentives and market forces.
43 For example, as far back as the Commission's landmark regulatory framework decision, 94-19, the Commission noted that improper pricing policies can result in a misallocation of resources, a reduction in choice of supply in certain markets and the suppression of demand in others, resulting in increased costs to information intensive enterprises and barriers to telecommunications amongst Canadians.
44 In our view, Mr. Chairman, these conclusions are as valid today as they were in 1994. Moreover, if we are to move to a new contribution mechanism this will create new burdens on new players. Further rate rationalization will ensure that this burden is minimized.
45 Local rates still remain well below cost in many areas of the country. We think that further local rate reform can be realistically accomplished, though we recognize not overnight. For example, subsidies could be reduced substantially in many areas of the country if local rates were permitted to increase over time to levels in effect in other areas of the country. Recently, the Commission has approved residential basic service rate increases for the independent telephone companies which will bring some of their rates close to $30.00 per month. And in the case of Télébec, the Commission recently approved rate increases which will bring the average residential basic service rate to about $31.00. In fact, some Télébec customers are currently paying close to $35.00 per month.
46 In contrast, the average residential rate in the high cost portion of the companies' serving areas is only about $21.00 per month. Mr. Chairman, the Commission does not have to look far to find a precedent for the kind of rate rationalization that could substantially reduce subsidy requirements while still meeting social policy objectives of affordability and accessibility. However, we also recognize the need for a transition period to achieve such rationalization and I will discuss how and when we think you could determine that when I describe the timing and mechanics of our proposal.
47 Before doing that, let me describe in more detail the precise nature of our proposed changes to the contribution mechanism and the reasons for them.
48 Our proposal contemplates the early introduction of a modest per line charge. Because of the size of the subsidy requirement, however, the line charge alone will be insufficient to recover the entire subsidy requirement, at least for some companies for some period of time. We therefore also propose some continued but reduced reliance on the current mechanism which assesses contribution on long distance minutes.
49 The genesis of this proceeding, Mr. Chairman, lies in the proposition originally advanced by a number of long distance providers that the current mechanism could not be sustained in the future in light of technological changes such as voice over Internet protocol, as well as market developments such as flat rate long distance pricing.
50 When we looked at this initially we too had concerns about the current mechanism's ability to deal with these developments. But as we examined it more closely we came to the conclusion, and we expressed this in our original comments, that these developments would not endanger the viability of the current mechanism for some considerable period time. Let me explain the reasons for this.
51 Although new technologies, such as voice over IP, are beginning to emerge in the marketplace, there are various technical, service quality and economic issues which persuade us that the migration of significant volumes of voice traffic to IP networks is not imminent. These issues include the need to develop standards to provide high quality service and inter-operability between legacy networks and IP networks, the existing inconsistent quality of voice over IP service, the unavailability as yet of means to make local service features widely available over the Internet, the need to develop appropriate operational support systems to perform functions such as billing and network maintenance, and the lack of a viable business case to provide widespread voice telephony on IP networks. Moreover, even if and when IP telephony becomes more widespread, this does not mean that the current mechanism must be abandoned. We expect that usage base measurement mechanisms will still be available to meet market requirements for some time yet. For example, despite the introduction of flat rate long distance calling plans, all indications are that long distance providers still need to and do measure minutes in conjunction with these plans. Most plans, for example, either have maximum limits above which pricing is still usage based, or they are confined to off peak periods requiring usage measurement in peak periods.
52 So, in the end, we concluded that the current contribution mechanism is not in danger of imminent collapse. And initially we suggested that no fundamental change be made at this time.
53 We recognized all along, however, that eventually we may well be faced with the need to move to some other form of mechanism. And, indeed, the companies have concerns that the distinction between local and long distance traffic will become increasingly blurred making it difficult to distinguish the two over the longer term. We have also become concerned that eventually the ability to implement innovative pricing plans could be hampered by the requirements of the current per minute contribution mechanism.
54 We have also become increasingly aware of the views of long distance providers that it would be desirable to reduce the amount of reliance on the long distance industry as a source of the subsidy. In fact, we note that the Governor in Council, in an order last week upholding the Commission's frozen contribution rate decision, concurred with the urgent need for a review of the contribution mechanism and, in so doing, noted that it may no longer be sustainable "to place the entire explicit subsidy burden on one segment of the telecommunications service industry".
55 So, in light of all those factors, Mr. Chairman, we have now become convinced that it would be appropriate to begin implementation of a replacement mechanism at this time provided that it can be done in a way that minimizes customer and industry impact. We are also convinced that of the two primary alternatives, that is a per line charge and a percent of revenue scheme, the per line mechanism is by far superior provided again that it is implemented properly and kept to a reasonably small amount. It appears to us that telephone numbers are going to be used for a very long time yet and that they will generally be associated with some form of identifiable line. Although far from perfect, a per line mechanism is more likely to remain workable in the longer term than the current mechanism.
56 Specifically, what we propose is implementation of a per line charge at a modest level of about $1.00 per line per month, while retaining, but phasing out, the existing long distance contribution regime to pick up the balance of the subsidy requirement. Over time, with growth in lines, further cost reductions and a program of further rate rationalization, the per minute contribution mechanism could likely be eliminated for most if not all of the companies over the medium term and, in the case of Bell Canada, would be capable of being substantially eliminated from the initial introduction of the per line mechanism.
57 I should stress, Mr. Chairman, that there are two features of our proposed per line mechanism that we view as critical. First, it is essential in our view that the per line charge be kept to a modest level, and we have suggested about $1.00. We say this because we are mindful that the introduction of a per line charge will result in the payment of contribution by markets which currently pay little or no contribution, for example, the wireless and multi-line business markets.
58 It is our firm view that the imposition of a large per line charge in markets such as these, which has not been subject to contribution, would result in considerable market distortions and could impede the development of these markets.
59 Some parties may suggest simply avoiding the application of per line charges to specific sectors such as the wireless industry and we thought about that carefully too because, as you know, we also participate in those markets.
60 However, on reflection, we have concluded that it really is essential to apply the per line charge to all forms of PSTN access to ensure competitive and technological neutrality. Wireless services, for example, are substitutes for wire line services and if the per line charge were to apply only to wire line services, this would also lead to significant market distortions and it would also result in higher per line charges.
61 So having considered all of the various puts and takes, it is our view that it is best to capture all lines that provide basic service but to keep the charge at a modest level.
62 The second critical feature of our proposed per line mechanism is that the per line charge should be required to be displayed as a separate line item on the customer's bill.
63 Now, at the beginning of this proceeding, we tended to the view that the manner in which contribution charges are recovered from end customers and whether or not the amounts should be shown as separate line items on customer bills should be decisions best left to the service provider.
64 However, it has become increasingly clear to us that a change to a per line mechanism will be easier to achieve on a competitively neutral basis if, to the greatest degree possible, it is mandatory that each telecommunications service provider collecting the charge, show that charge on each customer's bill.
65 This will promote increased customer understanding of subsidies, better ensure regulatory accountability for social policies that affect the customer's bill and better ensure that all service providers flow the charges through to the end customer in a competitively neutral way.
66 It will also eliminate any concern that the contribution regime itself would give a competitive advantage to a multi-service company relative to a company that provides a more narrow range of services from which the subsidy could be recovered.
67 I know other parties have agreed with us on this point, AT&T, in particular.
68 Let me turn now, Mr. Chairman, to the timing and mechanics of how we propose the changes I have discussed should be introduced.
69 I mentioned earlier the importance to our proposal of further rate rationalization.
70 We would propose that for the year 2001, which is the last year of the current price cap period, that any residential rate increases would simply be made at the discretion of the companies in accordance with and subject to the current price cap rules so that the Commission would not have to prescribe anything in particular in this regard for that year.
71 Now, for 2002 and beyond, we would propose that the Commission specify a series of residential rate increases and that the extent and pace of such changes be determined by the Commission in the price cap review proceeding.
72 In your decision in the current proceeding, we would propose that the Commission mandate the mechanism which we have suggested and require that telecommunication service providers show the per line charge as a separate line item on the customer's bill.
73 In your decision, the Commission should provide direction on the manner in which the per line charge would apply to different categories of lines and we have given our views on the types of lines that should be covered in our written material.
74 The Commission should also establish a task force made up of industry representatives with Commission staff representation. The task force should be mandated to begin work immediately after the Commission's decision to develop and implement the industry processes required to introduce the per line charge mechanism. And as the Commission is aware, a similar process has been used in the past, for example, when we implemented the current portable contribution mechanism.
75 Once the necessary industry processes are in place, the per line mechanism would be implemented immediately. In our view, this could be accomplished as early as July 1 next year.
76 In order to accomplish this, however, we would suggest that a decision in this proceeding would be required by the end of October this year, with recommendations from the industry task force by March 31 next year.
77 Given that we would have Commission staff participation on the task force, we think that a Commission determination on those recommendations could be made by the end of April next year which would then allow a period of two months to implement the changes for July 1. During that time, the Commission could also determine the level of the per minute contribution rate for each company.
78 If, as we suggest, the per line mechanism were implemented next year, the last year of the price cap period, the total subsidy to be recovered would simply be the forecast of contribution revenues calculated at the frozen contribution rate. Any portion of this subsidy not recovered through the per line charge would continue to be recovered through the current long distance contribution mechanism.
79 The per minute contribution rate, of course, would be lowered so that the amount of subsidy recovered through the combination of per line and pre minute contribution rates in each region would equal the same amount that is forecasted to be recovered under the current frozen per minute contribution rate.
80 For the years 2002 and beyond, the amount of subsidy requirement in each region would be calculated using our proposed residential subsidy requirement methodology which is based on Phase II costs and which I will speak about in more detail in a few moments.
81 The residential subsidy requirement would be recovered through the per line charge and then to the extent necessary, through a per minute long distance charge as well. A long distance contribution charge would be reduced annually to equal the amount that is just sufficient to recover the subsidy requirement not covered by the per line charge. Once the per minute contribution rate can be eliminated, reductions in the subsidy requirements will serve to reduce the per line charge.
82 The amount of residential subsidy requirement for 2002 in each region, as well as the per line and per minute contribution rates required to recover this amount, would be determined by the Commission in the price cap review proceeding.
83 As I mentioned earlier, the amount of per minute contribution required after introduction of the per line mechanism, as well as the period of time over which the per minute mechanism would be required, will vary from company to company, depending on the size of their subsidy requirement, their current rate levels and the pace and extent of rate rationalization.
84 In the case of Bell Canada, the per minute mechanism could be substantially eliminated with the initial introduction of the per line mechanism, that is, July 1 under our proposal, while for the other companies, the per minute mechanism will likely be required for some time.
85 Mr. Chairman, another important feature of our proposal that I just touched upon is the methodology for defining and calculating the total subsidy requirement to be recovered from contribution. This is a topic on which you requested comment in your public notice and one to which we have given a great deal of thought. It also appears, I might add, to be a subject upon which, I think at least at the conceptual level, there appears to be a fair amount of industry consensus.
86 In establishing the current price cap regime, the Commission froze the contribution rates which were determined, at the outset of the price cap period, based on each of the incumbent telephone companies' utility segment shortfalls, calculated on the basis of Phase III costing.
87 Now, given the interdependency of all of the parameters of the price cap regime, including this contribution determination, it would be neither appropriate nor practical to revise the calculation of the total subsidy requirement prior to the end of the current price cap period scheduled to terminate at the end of next year.
88 However, at the expiry of the current price cap period, the companies propose that the subsidy requirement could be determined on a different basis.
89 To meet the policy objectives of access to residential basic local service, the subsidy regime must provide incentives for the supply of residential basic local service. In a competitive marketplace, a supplier will generally provide service only if there is a reasonable expectation of generating sufficient revenues, either through prices or from other sources such as subsidies, to recover forward-looking incremental costs plus an acceptable mark up over a reasonable period of time.
90 The appropriate amount of subsidy for a particular geographic area must therefore be determined based on the typical forward looking incremental costs that a typical local exchange carrier would incur to enter that area.
91 Measuring the subsidy any other way could overcompensate or under compensate the service provider. Continuing to calculate subsidies with reference to aggregate utility segment Phase III shortfalls of specific incumbent carriers bears no relationship to the economic costs facing entrants and is therefore incompatible with the evolution of the marketplace.
92 In Canada, the Commission has, for over 20 years, used forward-looking incremental costs, referred to as "Phase II costs", to assess the economic impact of carriers' proposals.
93 In the High Cost Serving Area decision, Decision 99-16, the Commission has indicated that high cost serving areas will be established based on Phase II costs.
94 So to ensure the amount of subsidy provided is consistent with the development of a competitive marketplace, as well as the definition of high cost serving areas, the subsidy requirement must also be quantified on a Phase II basis.
95 Many other parties in this proceeding who have addressed quantification of the subsidy requirement also support the use of Phase II costs in a competitive environment. Mr. Chairman, I should also make mention of the Governor in Council's conclusions in last week's Order-in-Council upholding the Commission's frozen contribution rate decision. That order sets out the Cabinet's findings that there is a need to ensure that, and I quote, "an appropriate link is maintained between the contribution revenues collected and the requirements they are funding." Mr. Chairman, our proposed approach would do just that.
96 Consistent with all of these principles, the companies have proposed that the residential subsidy requirement to be recovered in each region be determined as the sum of the subsidy requirements in each rate band where there is a shortfall. Subsidy requirements would be calculated based on the difference between the costs of providing residential basic local service in each band developed on a forward-looking incremental basis, including a mark-up, and the revenues from residential base of local service in the band.
97 The band structure used in calculating the residential subsidy requirement would be that approved by the Commission in the proceeding currently under way pursuant to Public Notice 2000-27. The subsidy requirement in each band should then be lowered by a target amount of implicit subsidy from optional services that a service provider could reasonably be expected to generate from each residential customer in the band.
98 Once the amount of the residential subsidy requirement for the year 2002 is determined for each company, it would be appropriate to update this number on an annual basis. While we envisage that the process for doing this will be finalized in the price cap review, I should point out, Mr. Chairman, that there are means at the Commission's disposal to streamline this process and avoid the need for companies to file annual Phase II cost studies.
99 For example, the Phase II cost component of the residential subsidy requirement determined for the year 2002 could be adjusted by a predetermined productivity target that would apply to all local exchange carriers and which would be set to reflect residential cost reductions in high-cost areas that could reasonably be expected to be achieved by carriers operating in such areas.
100 Mr. Chairman, let me now turn to another important feature of our proposal and that is the requirement that contribution amounts continue to be determined on a regional basis, as is currently the case. In this proceeding, several parties have once again advocated expanding the scope of industry-funded subsidies to include "national" subsidies; that is, the provision of subsidies by one region of the country to meet subsidy requirements in another region of the country.
101 To pay for this subsidy fund, these parties propose that contribution rates be blended into a common national contribution rate. This would have the effect of requiring customers in certain regions of Canada to carry a large part of the burden of subsidy requirements in other regions of Canada, regardless of the need for such external support.
102 In a number of proceedings, the Commission has held that inter-regional funding of this nature is inappropriate and, as you know, the federal Cabinet has recently upheld the Commission's findings in this regard. The companies continue to be strongly opposed to any transformation of the current mechanism into a national fund. Moving from a regionally-based mechanism to a national mechanism would be to penalize customers in regions which have made the most progress in reducing subsidy requirements and reward companies in regions which have made the least progress in reducing subsidy requirements.
103 A move to a national mechanism would create perverse decision-making incentives in regard to a company's ongoing operational activities because that company's operations would be financed, at least in part, by companies in other operating territories. Regionally-based subsidies, on the other hand, provide much better incentives for it is the recipient of the subsidy, the local telephone company's customers, who are also the majority of those who must pay higher prices for other services in order to recover the cost of the subsidies.
104 Mr. Chairman, the possibility of a national fund has been examined at length and rejected on more than one occasion in the past. There has been considerable opposition to it in the past from a number of parties, including the government of British Columbia and the government of New Brunswick. Blended contribution rates were considered and rejected by the Commission in Decision 99-5 dealing with the independent telephone companies.
105 Again in dealing with the international contribution regime, the Commission held in December last year that a blended contribution rate would create inter-territorial subsidies equivalent to a national fund and that this would not be appropriate. Finally, in the high-cost serving area decision, the Commission rejected proposals for a national fund and limited the potential for any inter-territorial explicit subsidy to the very special circumstances of Northwestel. Of course, as I mentioned, the Cabinet recently upheld that aspect of the Commission's high-cost serving area decision.
106 Mr. Chairman, nothing has changed that should cause you to reverse field at this juncture. Transforming the current regionally-based contribution regime into a national regime was and remains a bad idea and we ask you to reject these requests one more time.
107 Before concluding, Mr. Chairman, let me say a few words about the possible alternative of a per cent of revenue mechanism that has been discussed by some parties in this proceeding. I will admit, at first blush a per cent of revenue mechanism has some appeal, but when we scratched beneath the surface and examined how to implement such a mechanism, it became clear to us that a per cent of revenue approach suffers from a myriad of practical problems.
108 These problems start with the difficulties inherent in isolating contribution-eligible revenues from ineligible revenues. At the outset, the Commission would have to determine which service providers are "telecommunications service providers" within the meaning of the Telecommunications Act. The Act stipulates that only telecommunications service providers can be required to pay contribution and to find such providers as those who provide "basic telecommunications services." That term is left undefined.
109 After determining which service providers could be potentially captured, it would then be necessary to determine and isolate those services which should be subject to contribution. In making that determination, it would be important not to subject to contribution services of telecommunications service providers that compete with those of non-telecommunications service providers who, of course, would not be subject to contribution. To do so would result in competitive inequity.
110 Another problem with the per cent of revenue mechanism would arise in those situations where service providers offer bundles of contribution-eligible and ineligible services. In such cases, means would have to be found to isolate the contribution-eligible component of the bundled price.
111 Yet another problem with the per cent of revenue mechanism would arise from the potential for what I will term "multiple taxation". Since contribution-eligible services may be provided by one telecommunications service provider to another telecommunications service provider who then provides contribution-eligible services to the end customer, it would be necessary to institute procedures to ensure that contribution is not levied at both the wholesale and the retail level and acknowledges a couple of ways of doing this, but both involve considerable administrative complexity.
112 So tackling each of these issues surrounding a per cent of revenue mechanism would not only be time consuming, but it would be very contentious amongst the competing interests and it would be administratively complex as well. The record of this proceeding, Mr. Chairman, confirms this, as various parties have expressed differing and conflicting views on what revenues should be considered contribution-eligible, for example.
113 While the per cent of revenue concept has superficial appeal, upon analysing it we came to the firm conclusion that such a mechanism would be a nightmare to implement and administer and should be avoided at all costs. It appears, Mr. Chairman, that others have come to similar conclusions. For example, in their original application which led to this proceeding, AT&T, Call-Net, ACC, which is now part of AT&T, and London Telecom, which is now part of Primus, sought the introduction of a revenue-based mechanism.
114 During the course of this proceeding, however, Call-Net and Primus have come to oppose a revenue mechanism and AT&T now expresses a slight preference for a per line mechanism. I point this out, Mr. Chairman, not as a criticism of these parties, but, rather, simply to highlight that there are significant operational difficulties with a revenue-based mechanism that may not be obvious at first blush. It has caused us to come to the conclusion that a per cent of revenue mechanism would introduce more problems than it would solve.
115 That brings me to the conclusion of our remarks this morning, Mr. Chairman. We appreciate that the entire topic of contribution is complex and we acknowledge that we, too, have had difficulties and face challenges in crafting our proposal. After a great deal of thought and reflection, we think we have come up with a balanced approach that can move the industry forward.
116 With a deliberate program of further rate rationalization, we think the Commission can maintain affordability objectives while over time removing the need for subsidies everywhere except in high-cost areas and for those areas our proposed approach reduces the subsidy burden on long distance providers while imposing only a modest and competitively neutral obligation on the wireless and wire line industry. At the same time, it avoids any material impacts on the Internet service provider industry.
117 By moving to a Phase II based calculation of the subsidy requirement at the end of the current price cap period, we will move to a sound economic approach while minimizing administrative complexity and regulatory burden. Finally, we think our proposed approach is also completely in harmony with the Cabinet's conclusions last week as to the need for an appropriate link between the contribution collected and the contribution required, as well as the appropriateness of reducing the subsidy burden on the long distance industry.
118 Of course, by adopting the type of approach that we have suggested in this proceeding, we think you will be well on your way to solving one of the thornier issues that would otherwise be left to deal with in the price cap review proceeding. We hope you will agree, Mr. Chairman.
119 Those are all my comments, Mr. Chairman. I want to thank you and the Panel for your attention. I have lots of help here this morning, so my colleagues and I are ready, willing and able to answer any questions you may have.
120 THE CHAIRPERSON: Thank you, Mr. Henry. I think we have a few questions.
121 Commissioner Langford?
122 COMMISSIONER LANGFORD: Thanks for the presentation. It's really more a philosophical question, I guess. In this move from the status quo, if I can call it that, to today's position, is this your preferred position -- in other words, a per line charge and a per minute contribution -- or would you prefer to go all the way and have just per line? Are you in transition here or is this your stopping point?
123 MR. FARMER: When we have looked at the balance of all the considerations that we had to take into account, I would have to say, Mr. Langford, that this is our preferred position. I think Mr. Henry indicated in the oral comments we have struggled with this issue for quite some period of time and we looked very carefully at just a line-charge mechanism.
124 As our initial comments indicated and as our current position shows, we just didn't think we could make it work. It just had too many problems. It's what we have sometimes called rough edges. There are some of them. Wireless is one of the issues -- i.e., when you introduce a line charge -- but if it's at a high level, we are afraid it's going to have an impact on the growth of the wireless industry.
125 When we went to speak to our wireless folks about the possibility of a line charge, I have to say it wasn't welcomed particularly much. Though with a dollar line charge they swallowed pretty hard, I have to say at anything much more than that, it just, frankly, wasn't coming down. So that was very much of a concern.
126 We have another concern that we spent some time talking about in our written comments, so I won't go into it in detail, but it relates to the rate relationships between our Centrex business and our single-line business and our PBX business, the trunkline business. It's a question there of trying to make sure that the contribution mechanism itself doesn't skew the relationships.
127 So when we looked at that, we thought a line charge, though, conceptually, is reasonably attractive. To introduce it becomes rather difficult, particularly the higher the level. So we thought two things were really required: Keep the line charge low, but also reduce the amounts of subsidies to the extent that we could, and that's the rate rationalization which Mr. Henry spoke about, leaving in some territories for some period of time another requirement, something else that's going to have to fill in the gap, and that's the per minute charge.
128 It's a long answer to a short question. I would have to say, yes, it's our preferred position given where we are.
129 COMMISSIONER LANGFORD: As a follow up to that, if I may, you are talking about balance here and we are great ones for balance. It seems to be a Canadian approach. As a follow up, if we were to prefer a very simple approach -- in other words, let's go for administrative simplicity here and all of the benefits that come with that; Mr. Henry spoke quite eloquently about that earlier in his presentation -- how high, in your estimation, would a simple line charge have to go in order to take out the other piece? Have you examined that in your investigation of this issue?
130 MR. FARMER: It varies by company, as I think Mr. Henry comments also indicated. For Bell Canada --
131 COMMISSIONER LANGFORD: We are around a buck. We are talking generally about a buck.
132 MR. FARMER: It's around a buck for Bell Canada.
133 COMMISSIONER LANGFORD: So where would we go generally? I am not asking you to be accurate to a tenth of a cent or anything.
134 MR. FARMER: I am building towards that. For Bell Canada, it's around a dollar. There is very little of the per minute charge that would remain and it would disappear within a year. So we are talking around a dollar.
135 For the other companies, it certainly varies because the contribution amounts, the subsidy amounts, are quite different. I think for MTS -- and perhaps Roy Bruckshaw can correct me if I am wrong -- we are looking in the order of $3.00. Quite frankly, I don't recall what it is for the Alliant companies. It's more than $1.00. I think we are talking in the $3.00 to $4.00 range. I believe NewTel was in excess of $4.00, but those are just the numbers. That's the arithmetic of it.
136 To pick up on your words "a simple approach", it would be a simple approach in terms of just doing the arithmetic and describing it to somebody. If you describe it to somebody on the street or you describe it to my brother, who knows nothing about telecommunications, it would probably be much simpler to describe that.
137 I would have to say I think for the industry, though, it wouldn't be simple because it would introduce those problems that I talked about, those very rough edges associated with high line charges, where it would start interfering with the relationships that we have established with many of our services and, to go back to the wireless issue, would start interfering with the growth in that industry. Though on the surface it perhaps looks simple, I think the consequences wouldn't be simple at all.
138 COMMISSIONER LANGFORD: Thank you for that.
139 To switch to your regional, not national, approach that Mr. Henry spoke about coming near the end of his remarks, he used the words penalizes companies -- I may not have this exactly right, but he used the words penalizes companies that have made the most progress and reduces subsidies and rewards those who haven't. There is kind of a fault notion there. Should we be subscribing to a fault notion or is that just a verb that you picked out of somewhere and should we not put too much currency on it?
140 Are you trying to tell us that there are companies out there that just aren't trying and are sitting around with their fingers crossed hoping we will do something to help them out? I am trying to get a sense of what your feeling is when you use these words -- maybe I am being picky here and if I am, tell me -- or did you choose these words carefully?
141 MR. FARMER: We do try to choose our words carefully. I won't say we agonized over that one particularly long. It's really intended to convey a notion. It wasn't intended to convey companies not doing their bit, certainly not that at all. We just hadn't, frankly, turned our minds to it.
142 What we did turn our minds to was the sort of incentives that would be put in place if you moved from a regional fund to a national fund basis. I can think of a couple of examples, one that relates to spending and another one that relates to pricing. If you have a particular job to be done, if I can put it that way, in a telephone company that requires a good deal of money -- and these come up all of the time -- one of the things that company management does is it weighs very carefully how can it afford to do that and how can it afford not to do it, if I can put it that way. There is always again a balance that has to be drawn.
143 If you are living in a situation where perhaps funding for that particular job can come not from your customers but from somebody else's customers, then maybe the decision to do something is a little bit easier, which makes it sound good, but maybe that's not all that positive because you should really look at the consequences of embarking on certain tasks. In much the same way, pricing really has the same implications.
144 One of the things that we struggle with all of the time is how do we price services to customers. Certainly for many of our services for our customers the prices that we charge are lower than the cost, so how does one go about rationalizing those prices? If you can put off that question and say, "Maybe I don't have to face that tough question about dealing with my customers because rather than asking my customers to pay for it, I will ask somebody else's customers to pay for it", then I can forgo that tough decision.
145 What we are saying is that these incentives I don't think are positive, that they are not something that should be introducing into our business because what I think it does do is it perpetuates the subsidy system as opposed to trying to solve it and to make it as narrow as it can be.
146 So when we use the word "penalize", we are talking about some companies and those companies' customers will perhaps see themselves as being penalized if, over the past number of years, they have made the tough decisions in terms of pricing and made the hard choices in terms of spending, but now see with the change in the regulatory regime that those kinds of hard choices are not going to be required of other companies and they may, in fact, see themselves as having to pay for -- and here I am not choosing my words particularly well -- but the delinquency in decision-making because there is another facet that has been introduced into the regime.
147 COMMISSIONER LANGFORD: But in another sense, it's very Canadian. It's very much like Mr. Henry's balance notion. I mean there is still a relatively new constitution that goes back to around, what, 1981 or something when it came in. It's funny how soon we forget. In that constitution was enshrined -- and I know I am getting a little esoteric here, but we get our guidance where we can and Mr. Henry is taking a great deal of guidance from the Governor in Council these days, and at least one of the gentlemen in that august group had something to do with the new constitution so I thought it wasn't that far a stretch. But enshrined in the new constitution, if I may call it that, is the concept of equalization. That puts a different kind of texture on the notion of penalizing and rewarding because what it does is recognize that we are very much a regional country and there are differences and that we help each other out. It's very Canadian.
148 Did you look at it on that kind of a philosophical -- this is my last question, by the way. I won't come back. So you can use any words you want.
--- Laughter / Rires
149 COMMISSIONER LANGFORD: But did you look at it from that approach, that rather than the notion of rewarding and penalizing, the sort of sense that we are helping each other out in that very Canadian way?
150 BOB FARMER: Well, we did. In fact, this is -- I have probably had my first discussions about national versus regional funds a year and a half ago, maybe even longer ago. So we have had quite a number of discussions on it and we did look at it in that light as well.
151 But I have to say our conclusions weren't that well, perhaps a national fund is not bad because that is the Canadian way. Our objection is not a national fund in the sense that we object to certain regions of Canada helping out other regions of Canada. And here I am getting philosophical too and I am removing myself from the telecommunications industry and speaking as a citizen.
152 Certainly that is part of the fabric of our country that we do have these regional disparities and steps are taken to correct those regional disparities. And we look to the federal government to do that. That is part of their job. Those are the tough decisions that they make. I certainly wouldn't object, don't object to them making those decisions. That is part of their job.
153 Therefore, when we look at this whole issue of regional disparity and correcting regional disparities, we look upon it as a task for the government to tackle it, not to ask a particular industry to tackle. Therefore, if the national fund is to be introduced, then we think it should be funded through the General Revenue Fund, not through a particular industry.
154 Therefore, let the government make that decision and let them use the taxpayers' dollars as they think is best suited, but leave the industry to handle the industry problems and don't build into the industry some of these perverse incentives -- to use the terminology we used in our oral piece -- don't build into the industry these perverse incentives which I talked about just a moment ago.
155 THE CHAIRPERSON: Thank you. Commissioner Cram?
156 COMMISSIONER CRAM: I just had one question.
157 Did I read into your presentation that you have defined "line" as a working telephone number? Or what definition are you using for "line"?
158 BOB FARMER: Yes, thank you for that question because we have been using a bit of a shorthand in our oral piece and you will find, when you read our much larger, unfortunately much larger final argument in its written form, that when we refer to the "line charge mechanism" which is the only name we have come up with so far to describe it, the word "line" is in there. But really, it has a connotation of both lines and numbers. I will just give you an example.
159 Typically, you can think of it as working telephone numbers so that there would be a charge per working telephone number. There are some working telephone numbers. Bell Canada has a service called Ident-A-Call which doesn't actually supply a different line, but your telephone rings differently if one number is dialled instead of another one. We didn't think it was appropriate there to have two charges just because there were two numbers. There is really one line.
160 So we tend to think of it as a number/line mechanism. We are using the shorthand "line" to describe it. But typically, it's the working telephone number with some exceptions, like the Ident-A-Call issue.
161 THE CHAIRPERSON: Commissioner McKendry?
162 COMMISSIONER McKENDRY: Thank you, Mr. Chair.
163 If I understood your proposal correctly, you are proposing that contribution will be recovered through a per line charge with respect to Bell in the short term and with the other companies in the longer term. It's my understanding that now contribution is recovered through rates for certain services, primarily long-distance service. If your proposal was put in place and there was a per line charge, what undertaking are you making with respect to reducing the rates for the services that recover contribution today?
164 MR. FARMER: We have for quite some years now, I would say, been seeing that the prices on long distance are being driven by pretty fierce competition. And though perhaps in the long run and on a very aggregate basis, they are driven by the contribution rates which are required.
165 Certainly when it comes to these very competitive situations where we are dealing with customers, I have to tell you the contribution rate itself does not play a large part in the final offers that are being made.
166 So what that tells me is that it is really the market conditions which are driving long-distance prices and will continue to drive long-distance prices. So I would have to say we are making the same undertaking that we made back in 1995 and that is that we should continue to let the long-distance prices be driven by market forces and they will be certainly in the long run, but not undertake anything over and above that.
167 COMMISSIONER McKENDRY: I just want to make sure I understand this point.
168 You and your competitors all pay contribution and that is a cost you have to recover in the market place and it is being recovered through the rates you charge for your services.
169 I'm not quite sure I understand your response. If per line charge was put in place, that is a cost that you don't have to recover through the rates that you are charging today and that cost presumably is being recovered through those rates. I think Bell is profitable.
170 You are saying that you are not making an undertaking to reduce any of those rates that are recovering contribution today.
171 MR. FARMER: I am not making an undertaking to impose -- how can I put it? -- to impose any arbitrary rule that says when the contribution rate is reduced for the long-distance business then prices will be reduced in the following way.
172 I am telling you, Mr. McKendry, that my expectation is that, in the long run, that is going to happen anyway. I have to also say I think that to some extent, it has already happened in that prices have been reduced and continue to be reduced. Certainly, there have been price reductions since 1998 and the contribution rate hasn't changed since 1998.
173 So that is really the dynamic of the business, that long-distance prices are very competitive. Margins have been squeezed already to very tight levels. I will leave it to some of my colleagues as our competitors to talk about the profitability of the long-distance business, but certainly they have been making public statements saying that they are not finding a great deal of margin there either.
174 So the bottom line is the expectation is that over the long run, long-distance prices either do or will reflect any change in the contribution rates. But I wouldn't undertake, other than to state my expectation, I wouldn't undertake any other arbitrary changes.
175 COMMISSIONER McKENDRY: Putting yourself in the shoes for a moment of a residential subscriber, and taking into account what you have just told us, assuming a per line charge is put in place, would a residential subscriber be wrong to consider the per line charge, in effect, a local rate increase?
176 MR. FARMER: I do not think there is any doubt that a customer looking at his bill and there is an extra item on it and it costs a $1 and he does not understand what it is for, he is going to see that as an increase, which is again one of the difficult things one tackles when looking at what do we do about this whole contribution regime in Canada. So he probably will see that.
177 I would hope that the customer would also understand, it being visible on his bill, that it does relate to a subsidy system in Canada. I would also hope that he would understand that in the past a role has been played by long distance and would understand that there have been some considerable price reductions in long distance. Over a 50 per cent reduction since 1993 as I recall and, again, even in recent years some further reductions.
178 So I would hope that he would on balance see a trade off.
179 COMMISSIONER McKENDRY: But he or she will not be able to look at their bill and see that trade-off because I think you have told me that there will not be any reductions in the rates that are now recovering the contribution. There will not be an increase on one hand and then a decrease on the other hand.
180 MR. FARMER: Again, to pick up on the words, we will see no reductions, I hope I am clear here. I am saying that there should not be some mandated reduction in long distance associated with the reduction in the contribution rate. Whether the customer sees reductions or not I think will play out. As I say, these reductions have been happening on an ongoing basis since 1992 and I expect will continue to happen. If the charge is introduced on the bill in July, not to say that there will not be some decreases in August, September or a year from now, that in fact have risen from that.
181 Will the customer be able to make the connection? I grant you it will be difficult for the customer to see that because there will not be that direct linkage.
182 MR. HENRY: I just want to add something. Of course the last time the Commission mandated lower contribution rates on the long distance side, or when we did a rebalancing as it was called then, there was no mandated reduction of the retail rates. It was left to the marketplace to do that in an entirely similar situation. And it was felt that the marketplace was competitive enough and mature enough to allow it to do that rather than having the Commission mandate a flow-through.
183 COMMISSIONER McKENDRY: Just so I am clear. Some of your customers would see, in addition to the $1.00 per month per line charge, an increase in their local rates, because I think you are advocating that local rates move closer to cost and you seem to imply that $34.00 or $35.00 would be a ceiling for that.
184 MR. FARMER: We would expect that probably less than a year from now we will be before you again in a price cap review and we will be talking about the specific form, extent and pace that rate rationalization would take. So we would be able to speak some numbers at that point.
185 I think we mentioned $31.00 in our oral piece just as an indication of the kinds of prices which customers are already paying for local services. A year from now we will be able to talk about just how far we would move along that track. But, yes, it is true, for each of the companies represented here there would be some requirement for some price increases to be able to reduce the subsidy amounts.
186 COMMISSIONER McKENDRY: Just as a last question, the per line charge, and I guess this goes to your point of helping your customers to understand what it is all about. I assume you would not call it a per line charge on the bill. Have you given any thought to what you would call it so that people would understand what it was about?
187 MR. FARMER: We have given thought to what not to call it, Mr. McKendry. I have already been given some very strong advice from folks back in the office saying "Well, you are not going to call it this are you?" All to say, we have given it some thought but we have not come yet to a determination. We do not know. We are still looking for a good name.
188 COMMISSIONER McKENDRY: Thank you.
189 THE CHAIRPERSON: Thank you, Commissioner McKendry. I just have a couple of questions. I was a little confused in your presentation about the timing of this. Earlier on in different passages in your presentation you talked about doing this at the earliest opportunity and then, as you read a bit of it, I sort of thought that we would do it when the new price cap regime kicked in because you talked at one point about continued pricing according to the current price cap regime and then when the new one came we would be dealing with certain issues. Then you, at one point, talked about implementing this July 1 next year, at least for you if not others. On page nine it reads "in our view this could be achieved as early as July 1 next year". What is your sense of timing? When do you think we could implement this?
190 MR. FARMER: There are three things in play here that we should talk about. The first one is the rate rationalization, the changes in prices. And, as I just indicated to Mr. McKendry, I think the price cap review is the place to talk about the extend and pace of that. Next year the companies will come forward, as they do every year in the price cap review, and some companies may have some proposals that would move some prices closer to cost.
191 That is kind of the general flow of things in price cap regulation as it relates to rate rationalization.
192 The second item is the residential subsidy requirement which is the proposal we had made as it relates to calculating what the subsidy amount should be. And that, we suggest, should be introduced at the end of the price cap periods. I assuming that is January 1, 2002. We would be again discussing in the price cap review the specifics of the numbers associated with a residential subsidy requirement.
193 The third element is the line mechanism itself, the introduction of the $1.00 line charge. That we are saying could be introduced as early as July 1 of next year. Again, to be clear, we are suggesting that it is introduced for all companies on July 1, 2001. It is just that for Bell Canada alone that almost entirely wipes out the per minute rate which is the only difference and there would continue to be a larger per minute rate for the other companies.
194 So we are suggesting that we could introduce as early July 1, assuming a timely decision, and then work by the industry task force that could be done under the auspices of CISC. The wherewithal, all of the mechanics of actually putting it into place, could be ready for implementation on July 1. But that is strictly the line charge portion of our proposal.
195 THE CHAIRPERSON: In responding to Commissioner Langford, you were talking about your preference being the subscriber line charge. How long do you think it would take, with this hybrid mechanism, to get to the point where we would just have a pure subscriber line charge and no per minute?
196 MR. FARMER: I have talked about Bell Canada so it would be 2002, I think, when we would be there with just the line. For the Alliant companies and MTS, I am going to let my colleague speak to that.
197 THE CHAIRPERSON: I am not looking for something really precise like the exact year but are we talking five years, ten years?
198 MR. FARMER: I think we are talking three to five years.
199 THE CHAIRPERSON: And over the interval of the three to five years would you not be concerned that we would end up with a scheme that is in fact more complicated than the one we have today, because we have all the problems with the per minute, plus now we have a subscribe line charge on top of it?
200 MR. FARMER: It is true that there would be two mechanisms and with two it is going to be more complicated than with just one. The one mechanism is already in place. It does work reasonably well although there continues to be a whole series of annoyances around it as you know. Would there be any additional complications? I believe there would be some additional complications. Is that complication worth it? Again, I would say, yes it is worth it because we are moving out of the LD contribution and into something entirely different.
201 I think it is important that we do that, not only because of the uncertainty for the future and, as Mr. Henry said, we have always had a very great deal of uncertainty as to what happens after the medium term, that uncertainty continues to persist. So I think we do have to move away from the per minute.
202 And at the same time, it will address some of the concerns which have been raised mostly by our competitors who are paying the long distance charge that -- about that charge. So if we can remove that annoyance, I think that is worth it as well. Again, annoyance is not a particularly well chosen word but it has been a cause for concern and I think we can remove it with putting two mechanisms in place.
203 THE CHAIRPERSON: You sound quite adamant about this concern about regional versus national.
204 I am actually kind of curious about your use of the term "regional". What does that mean?
205 MR. FARMER: Regional means company in this case. It is really as simple as that. By "regional" we mean -- I mean when I am talking about the regional fund that I am particularly interested in, it is the one in the Bell Canada territory, the Bell Canada central fund. Mr. Steven will refer to a regional fund. He is talking about the four individual central funds, each one set up for each of the aligned companies and so on.
206 THE CHAIRPERSON: Well, that is helpful.
207 I guess I find it interesting that you are sitting in front of us representing a number of companies with this proposal, the Alliant companies, in particular, are operating more as a single unit, aggregating, I presume, many of their back office operations. Bell Canada is through various arms, is owning less. TELUS will be coming up later on but we see Alberta and British Columbia merging and the TELUS organization moving east. Such that the Bell group of companies will be operating, if not already regional, certainly will be soon and indeed, perhaps move national. I don't know how far east TELUS is proposing to go but they may well be operating on a national basis before long.
208 And considering that the subscriber line charge in and of itself starts to break the link between the collection of the subsidy and the specific local service charge, if you will, the rate for the service, why wouldn't one want to consider possibly doing this on a national basis? And if one did do that on a national basis, why did it address the issue about being able to get to a pure subscriber line charge sooner if not right away?
209 MR. FARMER: I have already spoken about some of the difficulties with a national fund which I won't repeat but it basically relates to the incentives that it sets up.
210 THE CHAIRPERSON: But to pick up on that point, because I heard your answer to that and it is not clear to me that to the extent you can draw from a fund, regardless of how the money is collected, it deals with the concern you have raised in any event.
211 MR. FARMER: If we had an industry that looked quite different than it does today, then it might make sense for a national fund but this, I think, would be the conditions.
212 The conditions would be that I think we would be looking at truly national competitors where we can speak about companies moving on a national basis and it is true but it is very much in its beginnings.
213 If, for instance, Bell Canada was operating in Ontario -- in Alberta and British Columbia and had half of the market and TELUS had the other half, just to pick a wild example, then possibly you might start talking about national funds because there would be a discipline that would be put on would be in place that doesn't exist today.
214 Today what you have is you have decisions being made -- and again, I will just stick with the TELUS example just because I mentioned Alberta a minute ago -- decisions are being made in Alberta by TELUS as it relates to their cost structure and their pricing decisions and so on.
215 Bell Canada has no say whatsoever over those things, and in fact, those costs and pricings, if, under a national fund, would affect the prices that Bell Canada's customers are going to have to pay. That is my interest as a Bell Canada person. My interest is what are my customers going to have to pay because of decisions that are being made in Alberta and British Columbia.
216 Now, if we were at a kind of a much more homogenous basis in terms of the row out of competition, my perspective might be quite different because those decisions would have far less impact on me than they do today.
217 But that simply is not the situation and I don't expect it to be the situation for many years to come.
218 So that is one of the conditions.
219 Another condition, I suppose, could be because of my concern about pricing decisions being made in other territories because that affects again what my customers pay. Well, maybe you say, "Well, we will only give you subsidies over as long as..." -- let's assume the company is charging $35.00, no matter what they are charging -- let's assume it is $35.00 and nobody has to pay subsidies for any choices that they make in terms of their pricing below $35.00.
220 Well, that kind of assuages some of my concern in terms of what my customers are going to have to pick up because of their pricing decisions because, in fact, the pricing decision has been removed. But that is very rough too and it is very rough on, I would say, TELUS in this example, just to continue my example, because maybe they can't charge $35.00. Maybe it is just unacceptable in their market to do it.
221 So then we get into a debate as to well, what is possible for them to do and what is it, that they just don't care to do because they would rather have my customers pay for it instead and that is going to be quite a debate and we would probably never come to a good answer and that is part of the problem.
222 THE CHAIRPERSON: You are making this pricing thing seem a lot more complicated than I suspect it likely is in terms of the impact of this subsidy on it at least.
223 If there was a national subscriber line charge of -- I don't know what it would be, maybe you know. Maybe you have looked at the numbers of, let's say, $2.00 on every line or equivalent line across the country. That is factored out at your pricing decision now. That is the separate item. You and Commissioner McKendry will figure out a name, and then we will tag that on the bill, and now your pricing is left within that just like every other service operating company in the country, whether they are an incumbent or a new entrant, you are going to factor around that known item as your pricing.
224 So why does that -- I don't understand why this complicates your life so much.
225 MR. FARMER: Well, let's say it is $2.00, just to pick a number. I think it is higher but let's say it is $2.00.
226 The reason it is complicating my life is because maybe it could be $1.50 and maybe it could be $1.50 if only this company over there just increased its prices somewhat more, lowering the overall requirement for subsidies. That difference of 50 cents, I have to go to my customers to get and that is why it is an issue for me.
227 So it is not certainly meant to be a terribly insightful comment. It is not terribly complicated. It is just that there are decisions being made entirely outside of the management of my company that affects my customers.
228 THE CHAIRPERSON: I presume that if you are Bell Nexia in Western Canada, then you have that same problem. You would have to be collecting this for your equivalent subscriber lines.
229 MR. FARMER: If I am a Bell Nexia or Intregna competing in western Canada and there is a line charge of $2.00 or whatever in Alberta, yes, absolutely, that would be part of the deal.
230 The reason it doesn't present me a problem is because, again, to continue the example of Alberta, TELUS has some pretty tough decisions to make too and it decides what that subsidy requirement is going to be and therefore alights on a particular line charge, regional line charge in its area. It may be, again, a combination of the line charge and the per minute charge. But it makes a decision and when it bases -- when it comes to its decision, it is because it is again trying to draw a balance between the interests of those customers who are paying the subsidies and those customers who are being subsidized.
231 Many of those customers, and in fact, the majority of them for many years to come, are going to be TELUS' customers. That imposes a discipline on TELUS which I, as a competitor, am perfectly happy to live with. I think that discipline works to drive TELUS to the right decisions as it is going to relate to what I would have to do in terms of my own contribution obligations and I am okay with that.
232 THE CHAIRPERSON: How about the operation of the alliance of companies, Mr. Steven?
233 MR. STEVEN: Mr. Colville, in terms of the Alliant companies, as you are aware, we are common ownership and common management in terms of the individual telephone companies and while at this time we hadn't looked at proposing to have, I will say, one contribution regime for the Alliant companies, I think part and parcel of that would be, as well, probably common price cap and a number of other things would be on a common basis.
234 I wouldn't rule that out. It was not something that we were specifically proposing today, but certainly, given the common management and the common ownership, I wouldn't say it's out of the question.
235 But again, it is part, in my mind, of a larger decision that would have to be made in terms of how we wished to be regulated in terms of more than just the contribution, but price cap in particular.
236 THE CHAIRPERSON: Sorry, I don't understand this, how you wish to be regulated.
237 MR. STEVEN: Well, today, each individual company is regulated, as you know, as a separate entity. What I am suggesting is that at some appropriate time, perhaps we would come forward and suggest to the Commission that we be treated as one company for regulatory purposes and/or that we become legally one company.
238 But neither of those situations exist today. That is not something that, you know, we have not come forward to the Commission to talk about in terms of being treated as one entity.
239 THE CHAIRPERSON: Do you think that a common subscriber line charge across Atlantic Canada would require regulating the companies as a single entity?
240 MR. STEVEN: It becomes that if the calculation of determining -- well, it may or may not. I guess that is one of the things we have to understand is how the computation would work. If it is just a straight rate, chances are that that wouldn't require then to have a lot of other things done on a common basis.
241 So if it is just a straight per line rate, then I wouldn't see that as being terribly alarming to have the same rate across the region.
242 THE CHAIRPERSON: What about the independent companies in Ontario and Quebec? You mentioned earlier three to five years we could possibly get rid of the per minute and get to a single subscriber line charge which would pick up the shortfall. Do you think that would apply for the independent companies in Ontario and Quebec as well in Bell's territory?
243 MR. FARMER: I guess the short answer to that one is I really don't know.
244 I mean I would see them certainly living with a combination of a line charge and a per minute rate for some time. I know their contribution rates are higher than ours. But I also know that they at least have the flexibility to be increasing their prices by as much as $10 over the next few years.
245 To what extent that would drive the contribution rates down and allow that to be eliminated with a line charge, I just don't know. I would have to do the arithmetic and I have not seen it.
246 THE CHAIRPERSON: So I assume your argument would be the same if somebody was going to float the notion about a single subscriber line charge for Ontario and Quebec for Bell territory, including the independents?
247 MR. FARMER: It's exactly the same argument for all the same reasons.
248 THE CHAIRPERSON: Now, I presume the new entrants would collect the subscriber line charge as well. Your view would be all lines regardless of who the providers would be?
249 MR. FARMER: That's right.
250 THE CHAIRPERSON: What about resellers?
251 MR. FARMER: That's a tough one. Again, we had liked it to be kind of an end-user charge, if I can put it that way as much as possible, but see a problem in regulation as I understand it in terms of regulating leasers, though I suppose it could be done through our tariffs. We don't, as you know, care to have resellers regulated through our arrangements with them.
252 So what we would be proposing is that the line charge would be put on the buy-ins that facilities-based carriers would provide the resellers and then they could choose to float through to their customers however they feel fit.
253 THE CHAIRPERSON: Currently, a number of companies collect a fair bit of their revenue from contribution on the international traffic. How does one deal with that in this transitional phase that you are proposing?
254 MR. FARMER: We propose that the international contribution rate be eliminated. Now, in our initial comments, we said "eliminate it". Eliminate it and put in an exogenous adjustment factor that would make up the difference.
255 The proposal that we have in front of you today amounts to the same thing even without an expressed separate decision to eliminate the contribution charge. The international contribution charge is at the lowest level that pertains in Canada which, for Bell Canada and by 2002 would be zero. So that would eliminate it as well.
256 What would happen is that the difference would be picked up in the line charge itself. So you could think of the transition or the change while introducing the line charge, think of it as introducing a line charge which generates X millions of dollars. That X millions of dollars should be run out of the per minute charge.
257 I would propose that you first of all ring out entirely the international and whatever is left over, say the line charge introduces $50 million, to just pick a wild number, you have to lower the contribution per minute charges by $50 million. Now, let's say international is generating $10 million. So that is the first $10 million. There is $40 million left over. You reduce the per minute charge which then pertains on domestic minutes to amount for $40 million.
258 So the net effect is by allowing the line charge to soak it up, so to speak, the international one can be eliminated.
259 THE CHAIRPERSON: We froze the contribution rate for companies unless they were bottoming out on the price cap regime over the period of the price cap regime. What do you see with the subscriber line charge should one be implemented either on a company specific or regional or national basis? Would you see that as being frozen for some period of time?
260 MR. FARMER: First of all, we would suggest that it be introduced as early as next year at a dollar. I think that you will find that the workings of the numbers that we have looked at certainly -- because if we wanted to keep it low, it should remain low. And then as time rose on with cost changes, cost reductions really -- think of them as productivity improvements, lines which are the basis upon which we are charging it growing, there continues to be growth not only in the wire line, but also in wireless, so the denominator grows -- that you would actually see the line charge go down.
261 So we are not proposing a frozen charge. Once we move into the next form of regulation past this price cap period, I would expect that we would recalculate the line charge each year. But we would not recalculate it in the way we used to calculate contribution charges which used to take, as you know, months to do, fairly lengthy paper proceedings to work out a new number.
262 Our line charge calculation, our initial one is based on the residential subsidy requirement which requires phase II costs. All of that would be worked out in the price cap review next year and then I would see a rather simplified form of recalculating -- or call it recalculating -- the line charge which would really take into account the growth in revenues, some assumed productivity improvement or cost reduction in the services that are being subsidized and basically, it's a simple A divided by B. That number just ramps down over time.
263 So it wouldn't be frozen. It would actually decrease over time.
264 THE CHAIRPERSON: But how would we deal with the per minute piece of this for the length of time that it continues on? Because I presume for every company except Bell, if we go with a provincial SLC, or a company-specific I guess is a better way to put it, we still have that calculation.
265 So I don't know what comes first. I guess we have got the dollar subscriber line charge. We get the phase II cost and I appreciate it's complicated by we don't know what the new price cap regime is going to look like or what we will do the per minute assuming we went with that. But we still have the per minute to figure out how much revenue we are going to get from that.
266 MR. FARMER: Yes. What comes first is, in answer to the question, how much subsidy is required, how much do I need. That is what we call the residential subsidy requirement as our proposal for how one does it.
267 So whether you recalculate it every year or you take a simplified approach as I have just discussed, the first thing you get is this is what is required. Then you take the line charge which we set at a dollar and say all right, apply that to all of the lines, telephone numbers as I discussed earlier, apply that on how much money does that generate. If that doesn't generate enough money to meet the requirement, then something is left over. That something is what should be generated from the per minute charge. So take that something amount and divide it by the number of minutes and that is your per minute charge.
268 THE CHAIRPERSON: So we will arrive at a new per minute.
269 MR. FARMER: We will arrive at a new per minute every year and eventually it will disappear and then the line charge would start to ramp down.
270 THE CHAIRPERSON: I think those are all the questions I have.
271 I think maybe this might be a good point to take our mid-morning break actually. I thought we might do two parties. But we will take our break now.
272 By my watch, it's 10:30, but on the clock on the back of the room, it's almost 10:35. So let's say we will reconvene at 10:50.
-- Upon recessing at 1035 / Suspension à 1035
-- Upon resuming at 1055 / Reprise à 1055
ARGUMENT / PLAIDOIRIE
273 MR. MELDRUM: Good morning. My name is John Meldrum, Vice-President Corporate Counsel and Regulatory Affairs of SaskTel. I am pleased to be representing SaskTel in its first hearing before the Commission as a federally regulated company, only four days after coming under the authority of the CRTC. Mr. Chairman, it did take 91 years, but better late than never I always say.
274 Telecommunications is recognized worldwide as an enabler of development, an important component of the social fabric and a measure of the wealth or development of a particular region or country. The accessibility and affordability of the Canadian telecommunications systems are the envy of the world, and with today's emerging technologies, telecommunications is becoming more and more fundamental to the day to day affairs of Canadians in a geographic and demographic regions.
275 We within the telecommunications industry, and you as our regulators, must continue to ensure that all Canadians can reap the full benefits of the new economic opportunities and social and community developments that universal and affordable access to quality telecommunications services can and should provide.
276 Turning first to the scope of this proceeding, the purpose of this proceeding is to determine if the current per minute mechanism for the collection of contribution should be retained, modified or replaced by a more appropriate collection mechanism, as set forth in Public Notice 99_6. Throughout this proceeding SaskTel has concentrated its attention on the reform of the existing collection mechanism and not on the method of measuring the subsidy requirement. It is Sasktel's position that attempts to review the methodology itself of calculating the contribution requirement are beyond the scope of this proceeding and that in any even the current method of calculation, that is, utilizing forecasted Phase III split rate base results is the appropriate method to determine the total contribution requirement and will remain viable for some time to come. The split rate base methodology is especially appropriate for high cost serving areas insofar as incumbent carriers, such as SaskTel, who have made the capital investment for high cost serving areas are assured that they can recover their embedded costs.
277 The first issue to be addressed by the Commission is whether the current collection mechanism needs to be changed. We have seen incredible changes in the telecommunications industry since 1992 when the contribution collection mechanism was established. The environment has changed from an almost purely monopolistic one to one where competition exists in nearly all market segments and in nearly all regions of the country.
278 Cable television operators offer local and long distance telephony services and wireless service providers propose to enter to the local services market.
279 Consumers are more knowledgeable and are demanding both voice and data solutions customized to meet their needs.
280 Long distance, once the primary source of subsidy revenues, has become a commodity with declining profit margins.
281 Internet protocol and other emerging technologies are replacing traditional circuit switching, providing opportunities for service providers to bypass their contribution responsibilities
282 SaskTel believes that the current contribution collection mechanism does not meet the criteria of sustainability, simplicity and technological and competitive neutrality that are essential to meeting the national basic service objective set out in the Commission's decision on service to high cost serving areas.
283 As a result, the current system has become exceedingly complex. The complexities inherent in the current system create several recognizable drawbacks. The regulatory loopholes that accompany any overly complex system create the incentive for bypass and gaming. The reliance on specific technologies has the result of creating network inefficiencies and distorting natural technological evolution and innovation. The sum of these parts is that the current system is becoming more and more unsustainable.
284 Lastly, in reference to whether the current collection mechanism should be changed, I make reference to Order in Council 2000-1052, issued last week and attached for your reference, wherein the federal cabinet concurred with the urgent need to review the contribution collection mechanism in this proceeding in light of increased competition and technological change. Indeed, there appears to be industry and government consensus that the contribution collection mechanism needs to be improved.
285 So what are the options? In our view there are three main options to the current contribution collection methodology that are being debated, namely, government funding, a subscriber and user charge, and lastly, a revenue based contribution collection mechanism.
286 With respect to the government funding option, some parties to this proceeding have suggested that the contribution system should be eliminated and the shortfall covered by the government funding. SaskTel concludes from the policies and actions of the federal government and the Commission that contribution is in essence a social tax which was established as, and should remain, an industry responsibility. In a perfect world of unlimited government funds and no competing interest for the public treasury, government funding may indeed be the perfect solution. However, clearly the need for governments to deliver tax reductions and, at the same time, increase funding for health and education make this option totally unrealistic in SaskTel's view.
287 The second option is the end user charge. Many parties to this proceeding have recommended that an end user charge should be the source for contribution. While there are varied proposals for end user based mechanisms, a per line mechanism or subscriber line charge is a dominant theme.
288 A subscriber line charge assessed only on local exchange carriers and perhaps other local carriers such as wireless service providers does not satisfy the competitive equity principle insofar as only one segment of the industry would bear the burden of the charge. Many other Canadian carriers would directly benefit from the infrastructure used to provide local service but would escape any responsibility for the subsidy.
289 For example, an inter-exchange carrier would be able to originate and deliver long distance messages to Buffalo Narrows but would bear no responsibility for the contribution that keeps affordable local service in Buffalo Narrows.
290 It is not, in our view, technologically neutral. Assessing charges on the basis of lines would, in our view, be passed by technology in the very near. ADSL technology is enabling one line to function as many lines. Cable modems will provide many substitutable services but would not be subject to the charge.
291 In practical terms, in the case of SaskTel, we estimate a subscriber line charge in Saskatchewan, based upon the Teleglobe methodology that indicated that the charge in TELUS territory would be over $6.00 per month per line, would be just under $10.00 per month per line in Saskatchewan. This charge, plus taxes -- and we cannot forget about taxes when we are talking about the poor and the working poor because with what they pay their bills at the end it is the amount of this charge plus taxes -- would have to be passed on to all customers, which would then raise the issues of universality and affordability and the need for a lifeline service. For example, having just spent $20 million to increase telephone penetration levels to 80 per cent on rural and remote First Nations reserves in Saskatchewan, an increase of $10 per month per line would drive those penetration levels down once again in our view.
292 Regardless of the community, consumer backlash would be very large and in the absence of programs to maintain basic telephone service drop off would occur in our view.
293 In addition, SaskTel is cognizant of what the federal cabinet had to say in Order in Council 2000-1052 issued just last week. Again, in that Order in Council, the federal cabinet concurred that increased competition and technological change may "make it unsustainable to place the entire explicit subsidy burden on one segment of the telecommunications service industry".
294 In the event the CRTC decides to collect contribution through charges assessed against each access line or telephone number, won't we have simply replaced the burden on one segment of the telecommunications industry with another? Won't we have simply gone from having long distance as a sole source of contribution to local service being the sole source of contribution? A subscriber line charge would be inconsistent with this recent pronouncement by the federal cabinet.
295 In summary, a subscriber line charge is not sustainable, neutral or equitable and would, in our view, be contrary to section 7(b) of the Telecommunications Act, which has as one of the goals and regulations "to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada".
296 While still on end-user charges, a pre-subscribed inter-exchange carrier charge, known as a PICC, has also been discussed. Any PICC charge assessed against inter-exchange carriers would have to be passed on to customers by those carriers, which would likely result in minimum charges to access long distance service. This would present an additional barrier to low-income users who make few long distance calls.
297 It is also fraught with other problems in terms of competitive neutrality and administrative simplicity and is not sustainable insofar as it does not address the issues of emerging services and technologies. It is, in our view, worse that the status quo.
298 The last option is a revenue-based mechanism. SaskTel strongly supports a revenue-based mechanism to collect contribution. The revenue-based approach meets all of the criteria for a sustainable contribution system.
299 It is sustainable. Its base of collection is broad and stable enough to be virtually impervious to changes in technology.
300 It is technologically neutral. The requirement of the recovery of contribution is applied to all Canadian carriers and is assessed on a broad base of revenues without requiring distinctions between services that are becoming less and less relevant in today's market.
301 It is competitively neutral. It is assessed uniformly on all participants as opposed to singling out a segment or a technology. It would eliminate incentives for regulatory gaming and uneconomic service provisioning to avoid contribution requirements.
302 Lastly, it is administratively simple. It is based on readily available financial data, which is recorded as a normal consequence of doing business. While data such as originated minutes can disappear or not be reported, financial results are easily auditable.
303 The benefits of a revenue-based collection mechanism have been recognized by many of the parties to this proceeding, as well as by independent researchers. AT&T, Call-Net, O.N.Tel, QuebecTel and the three consumer groups party to this proceeding have all at one time or another voiced support for a revenue-based mechanism. Other parties, including Teleglobe and Telebec, have stated that they would be open to the exploration of a revenue-based alternative. The revenue-based model has also gained support from a variety of rural municipalities, school divisions and library associations.
304 If you accept that a revenue-based assessment is the best approach, the last issue for the Commission to wrestle with is whether the fund should be national in scope or regional in scope. Not surprisingly, SaskTel continues to believe that using a regional mechanism in a national/international telecommunications market is inappropriate.
305 Throughout this proceeding, SaskTel has discussed its preference for a single national contribution rate. Other parties have expressed the same preference, including industry participants, consumer associations and the governments of Saskatchewan, Manitoba and the Yukon.
306 SaskTel has proposed a national funding mechanism for the following reasons:
307 The federal government and the Commission have national jurisdiction and authority over telecommunications;
308 The basic service objective as defined in the high-cost serving areas decision is a national objective;
309 A fully-competitive telecommunications marketplace, coupled with technological advancements, has changed the very structure of the telecommunications industry since 1992. The market is now national, not regional;
310 Lastly, a national mechanism would ensure that the revenue-based contribution rate is consistent in all regions of the country. Furthermore, the customers of incumbent telephone companies and other local service providers with relatively high proportions of high-cost serving areas would not be disadvantaged either by having to accept a lower level of support for high-cost areas or a higher collection rate.
311 As a side note, SaskTel would observe that the regional disparities present in the current per minute system are also problematic in the subscriber line charge or end-user charges collection mechanisms that have been proposed by other parties.
312 The lowest subscriber line charge would be enjoyed by the customers of the companies with the greatest number of lines and end-users, while in the least populated regions, typically those with the greater proportion or high-cost areas, customers will be charged considerably greater amounts.
313 The Commission has commented in the past that a national fund would result in subsidies flowing from one region of the country to another region and that that would be wrong. I note, however, that that is precisely how the telecommunications system was built in this country.
314 Within telephone companies themselves, subsidies flowed from urban regions to rural regions and in the case of Bell Canada between provinces. As between telephone companies, billions of dollars have flowed from one region of Canada to another through the revenue settlement plans as a result of the disproportionate sharing of long distance revenues. The disproportionate sharing of revenues occurred as a result of the cost-based nature of the revenue settlement plans, which meant that high-cost rural and remote service was subsidized by these plans.
315 I would note that these inter-regional subsidies were clearly accepted in the past by the Commission and in fact were incorporated into the contribution calculation when long distance competition was initially introduced. It was only in 1995 that the contribution rules changed to eliminate consideration of these subsidies.
316 Inter-regional subsidies helped build the telecommunications systems in rural and remote areas of Canada. If it weren't for those inter-regional subsidies, Canada wouldn't be able to boast about being the second most connected country in the world.
317 Inter-regional subsidies are a reality of confederation and to now paint them as wrong will ultimately be contrary to the objectives of the Telecommunications Act and to the detriment of telecommunications users in rural and remote regions.
318 Lastly, should we be perceived as simply looking for a hand-out or perhaps having been considered delinquent, please note that SaskTel fully supports reducing the subsidy requirement to only that needed for rural and remote services. To that end, SaskTel, with the Saskatchewan government's approval, has been as aggressive as any phone company in Canada in rebalancing local telephone rates to the point that the remaining subsidy requirement in Saskatchewan is restricted to rural and remote areas.
319 In conclusion, Mr. Chairman, in the course of this proceeding we have seen a variety of options to the current contribution mechanism. SaskTel has considered these options and come to the conclusion that a revenue-based mechanism provides the most simple, adaptable and neutral way to collect the subsidy. Our view is that this mechanism should be national rather than regional in order to ensure that the Canadian industry leads the world in quality, affordable access to the benefits offered by today's technologies.
320 SaskTel believes that the Commission has a tremendous opportunity in this proceeding and, I might say, a tremendous challenge, but the opportunity is to establish a contribution collection mechanism that will enable Canada to maintain long-term affordable access to quality telecommunications services across the country.
321 We have the policy framework, that being the policy objective set out in the Telecommunications Act, the goals established by the Commission in its high-cost serving area decision, and Industry Canada's "Connectedness Agenda". Now we must ensure that we have the tool most fundamentally necessary to obtaining these objectives: a sustainable, national, revenue-based contribution collection mechanism.
322 I would be pleased to answer any questions that you may have.
323 THE CHAIRPERSON: Thank you, Mr. Meldrum. I have just a couple of questions.
324 I note that SaskTel is supporting the continuation of Phase III costing approach and using that approach fundamentally the subsidy is intended to pay for the access shortfall, access being one of the categories. I am not questioning the calculation of whether it's Phase II or Phase III here. I am getting to one other issue. I guess it's the concern that you seem to have about the subscriber line charge as being seen to be a burden or an imposition, however one wants to characterize it, on the people or companies providing local service.
325 If one viewed this as a subsidy to pay for the access shortfall -- access being access to the local or toll or whatever network, but you have to be plugged in, so to speak -- and fundamentally the view was that the consumer of the service, the user of the access, was going to pay for that through the subscriber line charge -- and we have talked about maybe the name being somewhat problematic, but since we don't have anything else right now, let's use that name.
326 If it was viewed as the end-user of the access facility was going to pay the access charge and that that was a requirement that they do pay that and that be a separate item on the bill regardless of who is providing the service, would you still have the same view about what you see as an apparent inequity in the system and that the provider of the local service would be charged that as opposed to providers of some other services?
327 MR. MELDRUM: Well, certainly there would be a linkage between the source of the subsidy and the use of that subsidy but I think we are concerned about it more from the perspective of the revenue-based methodology, spreading the pain, so to speak, over a much broader segment. I think that is really why we come at it in terms of not wanting to zero in solely on local.
328 THE CHAIRPERSON: But I guess that is my point is that if one looks at this as the consumer is paying the bill rather than the service provider paying this bill so when you talk about spreading it over, you are talking about spreading it over service providers; right?
329 MR. MELDRUM: But ultimately though, that would be passed on to all of their customers indirectly.
330 THE CHAIRPERSON: Yes.
331 MR. MELDRUM: Indirectly it would be passed on to all the customers but it would be passed on over a broader range of services --
332 THE CHAIRPERSON: I see.
333 MR. MELDRUM: -- not just on local.
334 THE CHAIRPERSON: Now, if one takes the revenue approach then, do you have a concern about the services that have the elasticity of demand that the revenues could go up or down markedly, depending on the price of the service in that we could have considerably wide swings in the usage or revenues for different companies, depending on the service?
335 For example, the companies who may be only in the local business may be offering services that have relative inelasticity or some others may be providing services that are quite elastic.
336 How would that impact on your concerns over equity?
337 MR. MELDRUM: If it was a national revenue-based assessment that was made, I wouldn't think that that assessment would then impact those individual companies in terms of their individual products, if I follow your question.
338 THE CHAIRPERSON: Well, I am thinking if, for example, we need to collect, let's say a fixed amount of money in any given year, it is relatively easy to calculate what that revenue might need to be for the services that are relatively inelastic.
339 Local service charges are fairly consistent whereas, for example, long distance total revenues could go up considerably, depending on calling patterns or they could go down, depending on various service offerings, flat rate calling. There may be other usage-sensitive services where, depending on the pricing, the usage could go up considerably in any one year.
340 How would you deal with that?
341 MR. MELDRUM: Well, I guess if you went with a national fund and more money was collected in a given year than what you had budgeted, which I think is maybe where your question is taking us, I guess I would certainly support the concept of a true-up that would, if there was more money collected than was necessary to go up as a subsidy, that it would just be carried over to the subsequent year.
342 I have always been sort of the view that there shouldn't be any more money collected than necessary or any less money than what is necessary.
343 THE CHAIRPERSON: So how would you deal with the true-up then in terms of those companies who say had more offering of service that was elastic and you decided you collected more money than you needed? Would it be those people who get a credit?
344 MR. MELDRUM: Again, it would be a set percentage of their total revenues so in relation to all the other carriers and entities that put money into the pot, it would have been on an equal basis.
345 THE CHAIRPERSON: The percentage might be equal but the amount of money collected from them could be more if their usage went up.
346 MR. MELDRUM: And I guess the extent to which your revenues went up then I don't think that would be an equitable is that the amount that you paid towards -- the subsidy went up.
347 THE CHAIRPERSON: But, if as a result of that, you collected more money than you needed?
348 MR. MELDRUM: I would carry that forward to the next year through the central fund administrator.
349 THE CHAIRPERSON: Oh, I see, okay. Okay. Those are all the questions I have. I don't think we have any more.
350 Thank you very much.
351 MR. MELDRUM: Thank you.
352 THE CHAIRPERSON: So the next party is TELUS.
ARGUMENT / PLAIDOIRIE
353 MEMBER LANGFORD: I think we should call it "YAC", "Yet Another Charge". That is where I am sitting anyway.
354 THE CHAIRPERSON: Good morning, Mr. Grieve.
355 MR. GRIEVE: Good morning, Mr. Chairman, members of the Commission and Commission staff.
356 My name is Willie Grieve. I am Vice President of Government and Regulatory Affairs for TELUS Corporation.
357 With me this morning is Mark Kolesar, to my right, Director of Regulatory Policy, and to my left, Dr. Charles Jackson, who has filed technical evidence on behalf of TELUS in this proceeding.
358 We are pleased to be here today to offer our perspectives on the questions before the Commission in this proceeding.
359 There really are two principal issues before the Commission in this proceeding. The first is how to calculate the amount of contribution that needs to be collected, and it was in the public notice. The second is, how do we collect it?
360 This is not the first time the Commission has had to deal with these two questions. Indeed, the Commission has confronted them both in virtually every proceeding about telecom competition since and including Decision 79-11. They both are and always have been complex and controversial.
361 This time around is no different in that respect but it is quite a bit different from two other perspectives.
362 The first difference is that the whole telecommunications market is now open to competition. This affects how the amount of required contribution is calculated and it affects how it can be collected. It also affects how it is paid out but that is not a central issue in this proceeding.
363 The second difference the Commission has to deal with in considering contribution this time is technological change. We are not dealing with a minor change in technology. We are dealing with a whole new way of transmitting messages.
364 This new technology and the innovations it is spurring is the single biggest factor that the Commission must understand before deciding how contribution is best collected.
365 The calculation of how much contribution is required is different because the recipient of the contribution is no longer a single monopoly provider of the subsidized service. Recall that the contribution requirement calculation used to be about how to replace the contribution lost by the incumbent when competition was introduced in a particular sub market while at the same time ensuring that the incumbent was not compensated for market share loss.
366 A lot of time was spent on the question of how much lost contribution was required by the ILEC. But with the introduction of competition and the Commission's determination that all carriers providing residential basic service are entitled to receive contribution in high cost bands, the objective must be to ensure that there is enough contribution per residential line available so that when combined with the approved subsidized rate, the total combined rate per residential NAS satisfies two tests.
367 The first test, the total combined rate, must be just and reasonable for the ILEC. Therefore, it should include the costs of the obligation to serve. Second, the combined rate per residential NAS available for CLECs must be sufficient to attract entry by CLECs that are at least equally efficient when compared to the ILEC and must also recognize that the CLECs do not have an obligation to serve.
368 A detailed explanation of TELUS' proposal for calculating the contribution requirement is included as an appendix to our written final argument. Briefly, the ILEC's Phase II cost plus 25 per cent for residential NAS in each band is calculated and compared to the basic residential rate in the band. In bands where the average rate is less than Phase II plus 25 per cent, the difference is the amount of the contribution required per residential NAS in that band and it is multiplied by the total number of residential NAS in the band to get the total contribution requirement for the band.
369 This is repeated for all of the bands and the sum of the contribution requirements for all high-cost bands is the total contribution requirement.
370 The calculation of the contribution requirement per residential NAS served by CLECs would be the same except that the Phase II costs would exclude the costs of the obligation to serve.
371 Once the total contribution requirement is calculated in this way, it is used to calculate the end-user percentage contribution charge proposed by TELUS. this is also explained in the appendix to our written final argument and will be addressed later.
372 We do not propose to reduce the amount of the contribution requirement by the implicit subsidies from compensatory services such as optional local services or integral services, nor do we propose to reduce the contribution requirement by margins fro compensatory services. In our view, these types of reductions are remnants of rate of return regulation and the focus on the ILEC's lost contribution.
373 Our concern is that every time the amount of subsidy per NAS is reduced in this way, the Commission reduces the likelihood of entry in high cost areas because the CLECs will have to secure their own sources of implicit subsidies in order to enter.
374 The sum of the regulated rate and the per NAS subsidy under such an approach would simply not be great enough to attract entry.
375 Under our approach, the sum of the regulated rate and the subsidy pronounced is equivalent to what the fully rebalanced rate would be. That is the rate against which CLECs would compete in a fully rebalanced world and it is, in effect, the rate they will compete against under our proposal.
376 Having determined the amount of the contribution requirement, the Commission must decide on the most effective way to collect it. We began our examination of contribution collection mechanisms by identifying the principles that such a mechanism should satisfy. Those principles are: the mechanism must be sustainable, it must only recover what is necessary, it must be competitively and technologically neutral, it must be equitable for those who pay the subsidy and those who benefit from it, it must be transparent so that all participants understand its purpose, and it must be efficient in collecting the contribution requirement and maximizing economic efficiency.
377 Our examination led us to the conclusion that there is no industry-specific contribution collection mechanism that can satisfy all of these principles. It is for that reason that we would prefer direct funding from the federal government. We are not the only party that has stated its preference for this approach and we are not the only party that recognizes that the Commission cannot direct the federal government to fund the contribution requirement.
378 All we ask is if you find, as we have, that technological change will make it impossible for the industry to generate the subsidies required in a way that reasonably satisfies the principles we have set out, that you say so in your decision. But we do have a proposal for your consideration that we believe is the industry-specific approach that best satisfies the principles.
379 Before asking Mr. Kolesar to review it for you, I will ask Dr. Jackson to explain why contribution collection mechanisms based on identifying network elements or minutes will not be sustainable.
380 Dr. Jackson?
381 DR. JACKSON: Good morning, Commissioners. Thank you for permitting me to present my views today on this important topic.
382 A quick introduction. I am an engineer by training. I began my career as a computer programmer and digital designer. I earned a PhD degree in electrical engineering from Massachusetts Institute of Technology and I have worked in the telecommunications electronics industry for a little bit more than 30 years now.
383 I prepared a written statement in this proceeding several months ago and today I am going to summarize the key points from that statement. I have four points, and they are:
384 First, telephone calls using packet technology, an alternative sometimes called Internet telephony or IP telephony, which is sort of an unfortunate name because it doesn't really need to be hooked into the Internet, telephone calls using packet technology provide acceptable quality and it's relatively easy-to-use technology.
385 The second point is consumers, especially business consumers, will find IP telephony easy to adopt; that is, it will be a technology that is not disruptive to the organization or to the end-user to put in place. It won't be costly, difficult or disruptive for an organization to begin employing this.
386 My third point is that with packet-based telephony, measuring the minutes of use or even the number of access lines that are active over a high-speed data link -- say over a cable modem or an ADSL line -- is really beyond the capabilities of the access service provider. They can't count how many voice telephone lines are being provided over a high-speed access line.
387 The final thought is IP telephony is good for consumers. It will lower the cost of telecommunications and provide consumers with additional options, but it will pose some new challenges for regulators.
388 This is a real technology. It's available today. IP telephony depends upon some complex building blocks, but the fundamental idea, the fundamental concept, is easy to understand. To begin with, a voice signal is converted into a digital signal and compressed much as it is with a digital mobile telephone service, other digital calls.
389 These compressed digital signals are then placed into packets and sent over a packet network; perhaps the Internet, perhaps private packet networks used by a corporation. It is the case that today's Internet does not always provide acceptable voice quality. You will find particularly on international connections or something like that that there are long delays. It's even worse than the old satellite circuits.
390 In contrast, high-performance networks such as a good corporate data communications network will support high-quality voice connections using this technology. Most computers sold today have both the hardware and software needed for IP telephony. All you need to do to make your computer provide IP telephony is to add a handset, turn on the software -- the IP telephony software comes bundled as part of Windows 98 -- and establish a connection to a data network.
391 I must observe that, as with many computer set-up tasks, this is not quite as user-friendly as it should be, but it's more user-friendly than it used to be. I will just observe that I was at an airport a couple of weeks ago and I picked up a copy of PC Magazine. It had a review of seven Internet telephony solutions, including one that's available in the United States that provides free long distance phone calls in return for your watching some ads while you are dialling your calls and accepting some advertising on e-mail.
392 Another way to facilitate hooking up to these services are through what are called integrated access devices. This is a FlowPoint 2200. They are more designed for business than residential use. They connect to a high-speed access line on one side, they connect to telephones on the other. This particular one connects four telephones to a high-speed line. As I said, this will be very easy-to-adopt technology, more like switching to e-mail than going to HDTV. The building blocks will be put in place in offices and homes for other purposes.
393 In the context of this proceeding, the interesting fact about IP telephony is that it makes it hard to measure either minutes or lines. You can make this measurement accurately at, say, this box where you can count the number of phone conversations that are going in, but once they are converted into packets it's very hard for the access service provider, unless they apply very sophisticated techniques, to analyze whether there is one call or two calls. If the consumer is concerned about privacy and has encrypted those calls, it's really impossible for the access service provider to understand how many connections or how many minutes are going by.
394 To sum it up, IP telephony is an efficient technology. It will bring benefits to consumers, but it does pose challenges to regulators.
395 Thank you again for the opportunity to present my views. This concludes my prepared remarks.
396 MR. KOLESAR: In the time that we have left, I would like to provide an overview of the TELUS proposal for a contribution collection mechanism. If subsidies to maintain the affordability objective must be generated from within the industry itself, then the Commission should adopt a contribution collection regime that is both workable and sustainable in the emerging technological world that Dr. Jackson describes.
397 TELUS has explored at length over the last year and a half every alternative for a contribution collection mechanism that we could find. What we have found is that delivering on all the elements of a really good contribution collection regime comes down to two fundamental characteristics.
398 First, keep the amount of the contribution to be collected to a minimum and, second, make the base of services over which contribution is to be collected as big as possible. By doing this, the contribution to be collected by any telecommunications service provider will be kept low and the incentives to avoid collection and payment will be minimized.
399 Keeping the amount of contribution to a minimum means rebalancing rates further to ensure that rates paid by customers are no lower than they need to be to achieve the affordability objective. That is why we will be proposing further rate rebalancing in the upcoming price cap proceeding.
400 With respect to the second characteristic of a really good contribution collection regime, a large base of collection, the best alternative next to direct government funding is a revenue-based contribution collection mechanism. A revenue-based contribution collection mechanism is also the most sustainable industry-specific mechanism no matter how technology or the market evolves precisely because it's based on the collection of revenue. The one thing about the future of the industry that the Commission can know with certainty is that revenues will always be with us or at least we certainly hope so.
401 Let me briefly review the TELUS proposal from the perspective of a potential provider of contribution-eligible services. If you are a provider of telecommunications, how do you know that you are required to participate and what are you required to do?
402 First, the TELUS revenue-based contribution collection mechanism provides for a simple two-part test to determine who should be required to collect and remit contribution and on what services contribution is to be collected. The first part of the test states that if you are a provider of basic telecommunications services, you are required to collect and remit contribution.
403 The second part of the test states that all you are required to collect contribution on the revenues from all of your telecommunications services with a few exceptions that I will explain in a moment.
404 We established the first part of the test specifically because section 46.5 of the act authorizes the Commission to collect contribution from providers of basic telecommunications services. We think, however, that to be meaningful in today's environment the Commission should be and can define basic telecommunications services broadly to make the base of service providers who are required to participate as broad as possible.
405 Ideally, the Commission's regime should capture services provided by all local and inter-exchange carriers, re-sellers, wireless service providers, broadcast distribution undertakings that provide basic telecommunications services and Internet service providers.
406 Apart from the equity and neutrality advantages of cutting a broad swath with the definition of a basic telecommunications service, maximizing the base of collection also increases the sustainability of the contribution regime by minimizing the burden on any one service and reducing incentives for avoidance.
407 Once you have determined that you are eligible to participate in the contribution regime, the second part of the test is easy. You simply collect a contribution levy in the form of a percentage charge, in the same way you collect sales tax now, on all the revenues from telecommunications services you sell to end use customers and then remit the amounts monthly to the central fund administrator in each territory in which you operate.
408 Our proposal is that the contribution charge be shown as a percentage charge on customers' bills. We believe this better satisfies the transparency and competitive neutrality principles.
409 As I mentioned earlier, Telus is proposing a few exceptions to the list of revenues to which contribution will apply. The first three are really intended to provide greater clarity.
410 First, you do not have to collect contribution on revenues derived from inter-carrier payments.
411 Second, revenues received in the form of contribution payments from the CFA are excluded. And, finally, GST and PST payments collected on the sale of telecommunications services are not contribution eligible.
412 These exceptions are made because none of these are really revenues you get from telecommunications services provided to end use customers.
413 There is one other exception which we are proposing in order to make our proposal competitively neutral. You don't have to collect and remit contribution from any telecommunications service that can also be provided by someone who is not a provider of basic telecommunications services.
414 Once you determine that you are eligible to collect and remit contribution and you know what services you are to collect it on, you need to know what amount to collect. The amount is a fixed percentage charge calculated annually by the CFA from information you and every other eligible provider submit.
415 The fixed percentage charge is calculated as the amount of subsidy requirement based on the year end NAS count from the previous and the proposed rates for the current year divided by the total revenue from all eligible telecommunications services collected in the previous year.
416 We are also proposing a true-up adjustment in this calculating every year to account for any over or under collection in the previous year. This ensures that the CFA can meet its commitments year to year.
417 One of the potential issues raised by opponents of revenue based collection mechanisms is service bundling. Where contribution eligible services are bundled with non-contribution eligible services how do you know what portion of the revenue from the bundle is contribution eligible? The answer is not complicated. Where stand alone prices are available for services provided as part of a bundle that are contribution eligible, the stand alone prices are used to determine the value of those services in the bundle to which contribution will apply. Where there are no stand alone prices, publicly available prices for comparable services in the market can be used as a proxy. The bundling of services presents no significant challenges to the Telus proposal.
418 The day to day administration of the contribution regime can remain the responsibility of the central fund administrator. We would rely on the CISC process to determine issues such as auditing and monitoring responsibilities.
419 MR. GRIEVE: Mr. Chairman, that concludes our oral presentation. We would be pleased to respond to any questions you may have.
420 THE CHAIRPERSON: Thank you, Mr. Grieve. Commissioner Cram.
421 COMMISSIONER CRAM: Thank you. I am trying to get this around in my head. In 10 years time, if I can place you there, and I want to place you first on Bell's proposition of the SLC versus the revenue proposition, in 10 years time who is not paying under the SLC versus who would be paying under your proposal? It would be the inter-exchange carriers, and I understand that, but who else would be paying?
422 MR. GRIEVE: Dr. Jackson is going to love this. I am going to punt it over to him. But the reason that we chose a revenue mechanism rather than a subscriber line charge was precisely because we do not know who will be providing accesses in the future that we can get at and count on. That is the problem with subscriber line charge. You just do not know.
423 I heard Bell talk about tying it to telephone numbers. Well, we looked at network access addresses as well as a potential and rejected that because it is going to disappear into the ether-like lines. Who will not be paying? I do not know who they will be and 10 years from now we would not be able to look and identify them anyway, is my feeling.
424 COMMISSIONER CRAM: Well, then I will take it back to today. If 10 years ago an SLC or a revenue charge came into effect and we were today looking at that as a method of collection who would be paying today under your revenue base idea versus who would be paying under Bell's SLC?
425 MR. GRIEVE: Apart from the IXCs that you mentioned, and anyone else who does not provide an access type of service would not pay under the Bell proposal. So that would include IXCs and enhanced service providers, people who do voice mail, optional services that do not provide access themselves is my understanding.
426 COMMISSIONER CRAM: Thank you.
427 THE CHAIRPERSON: Commissioner Langford.
428 COMMISSIONER LANGFORD: I do not know if I am just leading myself into the valley of death here but I will have a crack at it.
429 I know we are not supposed to get into comparisons here. We do not want to open this up to debate and it is certainly is not fair for me to be trying to step in for one person, but I am fascinated by one thing, Dr. Jackson, on the technological side and that was, I think it was Mr. Henry for Bell who said, very early in his opening remarks, kind of looked at the Internet situation not in as much detail as you did and did not see it as yet a big problem. Recognizing the technology, it is very difficult to speak for another person who is only sitting across the room but, as I say, we are not to open this to debate.
430 The sense I got, anyway, was that yes, it is there and there will be some bypassing but it is not there yet is a very worrisome proposition. You painted another picture. I just wonder if you could help me with that a little. The earlier intervenor from Saskatchewan painted more along your line too, so there is a two to one at this point.
431 Can you help me understand why you are so far apart on this?
432 DR. JACKSON: Let me try to, without engaging in debate, present my view more clearly. The Internet telephony is a technology that is a big change and people have been trying to make it work. I remember the first demonstration I saw of voice over the RPNet was in the early 1970s.
433 But in those days, we didn't have high speed access lines. We didn't have DSL lines to small businesses and residences and we didn't have PCs in every house. I guess it's about 50 per cent of households now and basically all offices.
434 So my view is based on the fact that the building blocks for this technology are going to be purchased by both residential consumers and businesses for other reasons. People will buy high speed Internet access not to make low cost telephone calls, but because they want to browse the net rapidly. They want to be able to browse the net while perhaps listening to an audio program delivered over the net. Once they have that capability in place, it will be very easy for them to also place telephone calls over it.
435 I guess an analogy that comes to mind is e-mail and there, the technology was around for a long time. Then about five or six years ago, we got a very rapid growth in the use of e-mail among organizations because the building blocks were e-mail, having a computer on people's desk and having those connected by high speed data networks, local networks in the office were in place.
436 There isn't the same kind of network effect with regard to this technology as there is with e-mail because people can connect their IP telephony through a gateway whether it is located at your local carrier, your long-distance carrier or even in another country to complete telephone calls from an IP telephone to a regular telephone. So it's an easier adoption process. You put it in.
437 I guess I am much more sceptical that telephone numbers are going to stay around for a long time, certainly when you have an IP telephone, you can use maybe your e-mail address to also address that same telephone or your name and your organization, something more complex and more humanly understandable than 10 digits. The directory mechanisms to do that will soon be in place.
438 So I suspect that we will see a fading away of telephone numbers.
439 Also observe that even when we are talking about telephone numbers, there is a question of if you have three telephone numbers associated with a single access line, should they pay three fees or one, it becomes hard to count. In this, if a consumer has one of these and they plug a DSL line in here, should they pay for four voice lines which is what this box enables or should they only plug in two if they have only plugged in two lines? If they only pay for the ones that are plugged in, does that mean when they want to make that extra call, they can plug it in and only pay for that brief period of time?
440 So there are going to be very difficult issues in counting with the new technology because of the way it dynamically assigns capacity on a demand basis.
441 COMMISSIONER LANGFORD: Looking at the other side of difficulty -- and this one you will be glad to know is not directed to you, Dr. Jackson, especially after you hear it -- but if we look at difficulties in the future, it seems to me that one of the early experiments in basing things on revenue would be the Income Tax Act and that never seems to get any simpler.
442 When I hear your proposal, that starts so simply: we are to get the revenues and we are going to take a percentage. But it unfortunately didn't quite stop there and we have, you know, competitive services and optimal services and you begin to add the if's, but's and maybe's. Do you have any sense -- I know I'm asking you to play your own devil's advocate here but you, like everyone else, would be stuck with the system, so perhaps it's a legitimate question -- of how complicated this could get and how much of a kind of a Court of Appeal role we are going to be playing here as people come up with yet another loophole?
443 MR. GRIEVE: Well, first, I will start the answer to this by saying that we think that a revenue-based charge is the best of a bad lot. We think that the industry cannot sustain this. It will not be possible even based on revenues. But the Commission is charged with the responsibility of getting it from the industry. We think an impossible task going forward.
444 So we weren't looking for something perfect because we knew when we looked for something perfect, couldn't find it except on government revenues. So we didn't want to shy away from saying that. It didn't seem like the right thing to do for us. So we said we thought it should be government revenues but then we said okay, now what is the best of the bad lot here. And we think it's a revenue charge. Okay?
445 How difficult is it going to be administer? Well, you know, you heard a couple of references today to the fact that the per minute contribution rate has gone through many changes since 1992. It hasn't been easy to administer. It has been difficult.
446 We know that a revenue charge such as this, a percentage revenue charge, certainly there will be things that don't pay it. Well, it's not much different in that regard than provincial sales tax where children's clothing doesn't pay GST, where one donut pays, but a dozen doesn't.
447 So you know, I mean every method of raising funds to subsidize something to pay for something, charge somebody else to pay for something and try to do it in a competitively neutral and technologically neutral fashion is fraught with many difficulties.
448 We are not saying there are no difficulties. We are saying that at least revenues will always be there. So at least we can fight with that. We don't have to worry about coming up with all of the things on a subscriber line charge or telephone numbers only to see that disappear into the ether five, six, seven years down the road.
449 We don't believe in going through and saying we will keep per minute until it disappears and then we will pick something else until it disappears and then we will pick something else until it disappears. From our perspective, revenue, as Mr. Kolesar has said, hopefully will always be there. So let's tackle that and let's start that process now instead of going through three or four iterations of contribution collection mechanisms over the next 20 years.
450 THE CHAIRPERSON: Mr. McKendry?
451 COMMISSIONER McKENDRY: Thank you, Mr. Chair.
452 I just want to make sure I understood something related to the administration of this.
453 You know, on page 6, for example, there are references to once you have determined that you are eligible, is this a self-assessment, self-identification system?
454 MR. GRIEVE: I think the way we conceive of this is that if you are a telecommunications service provider, like you have to today, whether you are a reseller or anything else, you will have to register with the Commission and in order to provide many of these services, you have to get services from Canadian carriers. A reseller, for example, can't own its own transmission facilities. So it has to get them from a Canadian carrier.
455 Well, I mean it could be a requirement that you can't buy these services for resale as it is today unless you are registered. I don't see this as a big difficulty unless you are seeing something I am not.
456 COMMISSIONER McKENDRY: So the answer is no, there is no self-assessment or self-identification here as there is, for example, with the Income Tax Act where you self-assess --
457 MR. GRIEVE: Well, there would be --
458 COMMISSIONER McKENDRY: -- when you fill out your tax return.
459 MR. GRIEVE: There would be self-identification in the sense that you would register with the Commission.
460 Now, if someone didn't register with the Commission and they were offering these services that should be paying taxes, then in order for them to be providing that service, they are going to have to be buying services from a Canadian carrier in order to provide them.
461 COMMISSIONER McKENDRY: So an Internet service provider that was providing telecommunications services, we would require the ISP to register with the Commission. Is that --
462 MR. GRIEVE: Yes.
463 COMMISSIONER McKENDRY: Have I got that correct?
464 MR. GRIEVE: Yes.
465 COMMISSIONER McKENDRY: And then once they had registered with the Commission, in terms of doing their calculations, the steps that you outlined here about what is included and what is excluded, is that a self-assessment process?
466 MR. GRIEVE: Yes, it is. But as with the current central fund administrator, this is one of the things I would expect us to discuss in CISC as we discussed the last time we went through this: what are the powers that the central fund administrator has for auditing, what are the investigation powers that a central fund administrator has and what are the kinds of records that various carriers or service providers have to keep.
467 We went through that in the last round and my understanding is -- and I haven't been involved in all of them as much as I was in the initial one -- that some of those things have changed along the way as people have gained experience.
468 COMMISSIONER McKENDRY: So the auditing function then -- I take it you are saying there should be an auditing function -- would rest with the fund administrator. Is that correct?
469 MR. GRIEVE: Yes, as it does today.
470 COMMISSIONER McKENDRY: Good.
471 I wanted to also ask a question about packet switching and IP telephony. In termed and in your view that -- I think you used the period of five to seven years this will become a significant development in Canadian telecommunications.
472 Is TELUS undertaking investments in this area? Is there something in your own network planning that is a reality for you?
473 MR. GRIEVE: Yes, it is.
474 I have heard various time frames but the most recently -- the time frame I most recently hear is that our network will be IP in five years. Some people doubt that we will be moving all our switches out by then but it is the most commonly stated target.
475 COMMISSIONER McKENDRY: Thanks.
476 At the bottom of page 6, there was a sentence that I didn't quite understand and I am hoping you can explain it for me. It is the last sentence, as a matter of fact, and it says -- and I quote"
"You don't have to collect and remit contribution from any telecommunications service that can also be provided by someone who is not a provider of basic telecommunication services."
477 Could you perhaps, by way of example, explain that to me?
478 MR. GRIEVE: I guess the example that comes to mind most readily is -- we will go back and define the way we have tried to broaden the base of this is to look at the Commission's basic service objective and one of the things in there is access to a toll network, okay.
479 So today you could say today's long distance providers pay the contribution so there is access to a toll network, therefore the toll carriers are paying.
480 So then we went through all of them and the last one is a directory. Now, telecommunications service providers provide -- some of them may provide directories. Other directories are now provided by telecommunication service providers. These aren't people that the Commission can get at in any way so the tax directories provided by a telecommunications service provider but not a stand alone directory provider is somebody who must provide an internet site that has all of the listings on it would be competitively inequitable and that is the point.
481 COMMISSIONER McKENDRY: Would that be the primary example of a situation like this?
482 MR. KOLESAR: Well, actually, there are quite a few things like the provision of inside wire.
483 Certainly in the act is the provision of a telecommunications and service but the provision of inside wire could be provided by an electrician so that would be one more example of a situation where it would be competitively inequitable to tax a telephone company that might provide that where you are not going to tax a non-telephone company that is going to provide exactly the same thing.
484 MR. GRIEVE: And just one more, Commissioner McKendry.
485 The one that usually comes to mind first within today is telephone terminal equipment where a telephone company reseller, any telecommunications service provider may be selling terminal equipment may be bundling it in, PBXs or even handsets and would have to tax them but Radio Shack would be free of the extra charge. So then we would say well, for terminal equipment, you don't have to collect it.
486 COMMISSIONER McKENDRY: Thanks.
487 And as a last question, I just wanted to refer you to the top of page 5 where you deal with the point about keeping contribution to a minimum and you say that means further rate rebalancing. I take it that it is your view then that local rate increases can be accompanied by offsetting decreases and long distance rates?
488 MR. GRIEVE: No. I think that when you increase residential rates or you reduce contribution, that the market will respond to reduce -- the market will respond sooner or later and sometimes sooner even than the reduction in the amount of contribution as has been the case to that reality of the lower costs. So I think it does get past through in the market, if that was your question.
489 COMMISSIONER McKENDRY: Well, typically, rate rebalancing in the regulatory context is meant regulated local rate increases and regulated offsetting decreases to long distance revenues.
490 I just wanted to confirm that is what you meant and I took your answer to be no, that is not what you mean. You see regulated local rate increases and let the market take care, sooner or later, to use your words, of the reductions in long distance rates or revenues.
491 MR. GRIEVE: Since about 1995, after the rate base was split, we have fairly consistently referred to rate rebalancing as the increasing of residential rates and the reduction in the contribution charges, leaving the market to determine what the long distance rates will be.
492 And as Mr. Farmer said -- and AT&T and Call-Net, I am sure will address -- the long distance rates have gone down far more quickly than the contribution rates have gone down.
493 COMMISSIONER McKENDRY: Thanks.
494 THE CHAIRPERSON: Thank you, Commissioner McKendry.
495 Just a couple of questions.
496 What do you see as the benefit of your proposal over the subscriber line charge?
497 MR. GRIEVE: I think there are two. One is that there is a much broader base, that of revenues and services, that will fund the contribution. And then picking up on one of Mr. Meldrum's points -- and I am not sure this is where he was going with this is what led me to thinking about -- if you want to talk in terms of equity, the customers who consume more telecommunication services on a revenue-tax basis and user revenue tax basis, end up helping to fund the system more.
498 The other one, and I think the reason that was stated that we chose -- the best of the bad luck and revenue charge is that we just don't think subscriber lines are going to be there --
499 THE CHAIRPERSON: Well --
500 MR. GRIEVE: -- to measure.
501 THE CHAIRPERSON: -- I guess it was that notion that I was having a little difficulty understanding because when you say on page 5, Mr. Kolesar was reading his portion, the second-last paragraph, the middle sentence, it says:
"The first part of the test..."
and I guess this you characterized, I think, as being the simple first step:
"...states that if you are a provider of basic telecommunications services, you are required to collect and remit contribution."
502 So it is that simple. If I am a provider of basic telecommunications service and you talked about revenues, and I guess to get revenues you need customers or subscribers.
503 So I am missing a connection here because if this step is so simple, how do I get to the next step which gets it so complicated if I was in subscriber line world?
504 MR. GRIEVE: Well, I think what -- yes, the first step is the same if you are a telecommunications service provider or provider of basic telecommunications services then under subscriber line charge mechanism you would be required to count the subscriber lines just as you would be required under our proposal once you had customers and revenues to count revenues.
505 Our concern with subscriber line charges, as Dr. Jackson said, we don't think it is going to be possible to count them. It is going to be far more difficult to determine, for example, on the flow point box there, how many lines there actually are.
506 I was interested to hear Mr. Farmer say, "Well, if you have more than one particular comparate loop can sustain more than one telephone number, you still only count it as one line."
507 Well, you know, Commissioner McKendry said, "Well, it sounds so simple." Then you start going down these things, well, subscriber line charge sounds so simple and then you start going down -- well, what about these lines and what about those lines, and as I said earlier, we just picked revenues because it was better because we think revenues will be there and it is going to become more and more difficult to count access lines and determine which ones should pay and which ones should not.
508 THE CHAIRPERSON: But then we would net out a lot of revenue sources like terminals and directories and options and features.
509 MR. GRIEVE: No, options and features wouldn't be netted out.
510 THE CHAIRPERSON: They would still be there?
511 MR. GRIEVE: Yes.
512 THE CHAIRPERSON: The tax rate, whether it's the percentage figure, would that be unique to each telephone company or would it be regional, as your predecessors referred to, or company-specific?
513 MR. GRIEVE: We started off saying it would be company-specific and in the first round of interrogatories realized that if we were going to use the same collection mechanism or if we were going to use the same kinds of processes that provincial sales tax uses, then it would be easier for people to collect on a provincial basis. Knowing that some companies serve more than one province, some former Stentor companies -- one, in particular, and soon to be two -- we thought we should make these regional and include the independents in the region of the particular ILEC.
514 Of course, Bell has a lot of independents. We have one in B.C. There was an interrogatory about what do you do about the portion of British Columbia served by Northwestel and we responded to that. We would make them regional in that sense simply because it's easier to administer.
515 We also don't think it has quite the same incentive problems because in these areas where a current Stentor company has many independents in its territory, those independents are going to have to respond directly to competitive pressures from that incumbent, whereas if you do it across the country, you don't have another ILEC sort of right in your territory.
516 THE CHAIRPERSON: So if you support regional, you don't see any particular problem to go national then?
517 MR. GRIEVE: I see a couple of problems in going national and some of them are similar to what Mr. Farmer discussed. The biggest concern, I think, from our perspective, not only for national but also regional funding -- and I think it has to be dealt with in either case -- is service improvement programs. As you know, Albertans paid for individual line service throughout the province.
518 When TELUS comes before you with its service improvement program, there will not be any for Alberta, unless we still have our problem with -- I can't remember the name -- Fort Fitzgerald, which I think maybe is the only community in Alberta that doesn't have individual line service and hasn't achieved all of the basic service objectives. British Columbia is different.
519 Is it right for people in one part of the country to be paying for a service improvement program in British Columbia -- say people in Ontario to be paying for that -- and vice versa. Is it right for people in other parts of the country to be paying for service improvement programs in Bell's territory because Bell isn't meeting the basic service objective throughout its territory, either?
520 You have to ask yourself those questions and that's what Mr. Farmer was talking about. If you want to go to national funding and you sort of figure out a way to back that out, then that's one issue where you could make sure that a particular telephone company's territory that hadn't already done its service improvement program couldn't draw on funds from other parts of the country to do it. That's a possibility.
521 The other reason that I thought was quite compelling and one that has concerned us is provinces -- I will use the word "provinces" -- where the telephone company might choose to keep the rate lower, thereby keeping the contribution rate paid by other parts of the country higher.
522 First of all, just on the regional funding basis, independent companies -- you will recall in 1994 there was a recommendation to the Commission that independent companies would have to raise their rates to at least the Bell level and I think that that's something that could be done. If you were going to go to a national funding mechanism, then you have to turn around and start saying the rates have to go to a certain level across the country in order to make it equitable.
523 So I think there are lots of difficulties there with a national fund, but with a regional fund with the independent companies once again they will be competing. They will have Bell right on their doorstep, as Prince Rupert does. Right now, of course, BCTel cannot go into Prince Rupert because of the special Act, as you know, but there are certainly competitive pressures exerted by the former Stentor company on the independents and its territory that don't get exerted across the country.
524 THE CHAIRPERSON: So if the Commission were to continue with its current practice of dealing with service improvement plans with rate increases in that company's territory, that would deal with the first concern you had raised?
525 MR. GRIEVE: Yes, except to the extent that then that might drive the rates up above what the maximum affordable rate the Commission might determine would be, in which case you would have to look elsewhere for the funds.
526 THE CHAIRPERSON: How would this charge show up on a customer's bill or would it? I don't know whether I missed that in your presentation here today.
527 MR. GRIEVE: Yes, it is our proposal that it show up on the customer's bill. Actually, what is interesting is it's for exactly the same reasons that Bell gave. I remember we did have discussions about it some time ago. We would put it on the customer's bill. It's more transparent to the customers.
528 THE CHAIRPERSON: So how would that show up then?
529 MR. GRIEVE: Like a percentage charge.
530 THE CHAIRPERSON: It would be a percentage of the taxable services that they --
531 MR. GRIEVE: Consumed.
532 THE CHAIRPERSON: -- are using that month?
533 MR. GRIEVE: Right.
534 THE CHAIRPERSON: And there would be a line item on the bill to say: Based on your telephone usage and based on the percentage this year for this company or this region, this is the amount you pay.
535 MR. GRIEVE: Yes. You would see in some parts of the country, not Alberta, GST, PST and -- I can't remember how the CRTC would charge it.
536 THE CHAIRPERSON: Those are all my questions. Thank you very much, Mr. Grieve and gentlemen.
537 MR. GRIEVE: Thank you.
538 THE CHAIRPERSON: The next party is O.N.Tel, I believe.
539 Good morning. I guess it's afternoon now.
ARGUMENT / PLAIDOIRIE
540 MS MAYER: Good afternoon, Mr. Chairman, Commissioners, Commission staff, ladies and gentlemen. My name is Susan Mayer and I am here today with my colleague Stephanie Traynor representing O.N.Tel Inc. With us today is Mr. Rick Cushing, Director of Business Development and Regulatory Matters at O.N.Tel.
541 O.N.Tel greatly appreciates the opportunity to present to you its comments in this proceeding. The review of the contribution regime and, in particular, the reform of the contribution collection mechanism are critical to O.N.Tel.
542 O.N.Tel is filing written comments today and in those comments we address the issues the Commission raised in the Public Notice 99-6. We refer you to those comments for our detailed views. Due to limited resources, however, certain matters, you will find, have not been dealt with in great detail. Rather, our written submissions concentrate on those issues that are of particular concern to O.N.Tel and the customers in its serving territory.
543 Also, we will be restricting our presentation today to those particular issues of utmost concern to O.N.Tel.
544 From O.N.Tel's perspective, this proceeding is about solving a problem: the problem being what to do with the contribution collection mechanism. Others in the proceeding will tell you to minimize the subsidy burden. They will urge you to aggressively rate rebalance and to explore the availability of general tax revenues. They will tell you that industry contribution is the last resort.
545 These parties will also talk to you about rapidly changing technology. With traffic increasingly migrating to networks based on new technologies, they will tell you that any contribution collection mechanism that is based on measuring minutes is simply not sustainable.
546 They will also talk to you about subsidizing access by Canadians to basic telecommunications services and how that is a social burden that must be equitably distributed. They will explain to you that the contribution collection mechanism must be broadly based both with respect to the number of parties and the number of services that are subject to contribution. They will conclude that, unless the base is broadened considerably, competitive inequity will continue and worsen.
547 Finally, many of these parties will tell you that the current collection mechanism is too complex.
548 O.N.Tel agrees with all of these issues and we fully support these comments. In this regard, O.N.Tel faces particular challenges.
549 ON.Tel is a small regionally based company providing predominantly voice and data services over a sparsely populated territory covering approximately 200,000 square kilometres between North Bay and Hudson's Bay. O.N.TeL's high cost serving territory is shared with three other incumbent Independent Telephone Companies.
550 In many ways, O.N.Tel has shared the experiences of other Canadian Independents. In our territories, the current mechanism simply cannot be applied to provide our customers a market place remotely resembling that enjoyed in the territories of the former Stentor-member companies. What has become imminently clear to O.N.Tel is that the minute-based contribution collection mechanism is not working.
551 CAT rates are generally higher in all independent territories. This is largely due to the size and the high cost nature of the independents' operations as well as their inability to spread their costs over a diverse customer base. These exorbitant CAT rates have discouraged new entrants even in those independent territories where toll competition has been permitted for some time. In short, competition simply has not happened in the independent territories.
552 Although it is true that toll competition has yet to be permitted in O.N.Tel's territory, the contribution collection mechanism has already impacted O.N.Tel considerably. At this time, CAT rates in O.N.Tel's territory remain nearly 10 times that of Bell's adjacent territory. This makes the CAT O.N.Tel's single highest cost of doing business. And because O.N.Tel is not the local exchange carrier in most of its territory, O.N.Tel absolutely no control over that cost.
553 Not to be forgotten as well is the significant difference between the other independent territories and O.N.Tel's. In most other independent territories, Bell is the incumbent toll service provider. This means that customers living in those territories have, in fact, benefited from competition because those customers enjoy lower rates for toll services. This is a direct result of Bell being able to average its costs over its entire diverse territory.
554 O.N.Tel's situation is unique in this regard. O.N.Tel does not have the large urban centres and the variable costs that are available. It is not in a position to average costs and, therefore, cannot provide the services to which most Canadians have now become accustomed since the advent of toll competition.
555 This became abundantly clear with the introduction of flat rate calling plans. With the movement away from usage-based pricing to flat-rated pricing, the link between usage and revenue was broken and consequently, the existing contribution collection mechanism lost its foundation.
556 Furthermore, customers do not understand the mechanics of the existing contribution regime and, so, cannot understand that O.N.Tel is simply not in a position to give them the services and rates that they want. With the constant bombardment of advertising relating to services in other parts of the country, O.N.Tel's customers understand that telecommunications services are available to other Canadians at much lesser rates than what is available to them. Customer frustration continues to grow and, for O.N.Tel, this has already become its most significant competitive disadvantage.
557 O.N.Tel does not have its own solution to the challenges of its territory, but we need a solution badly. In our view, through its decision in this proceeding, the Commission is in a position to provide one.
558 In this regard, O.N.Tel has three key recommendations:
559 The first key recommendation is that we must broaden the base upon which contribution is collected. Only if we can spread the contribution burden over as many parties, as many services and as many technologies as we can muster, will we make the burden on each individual part bearable. Also, by minimizing the burden on each individual part, we will minimize any negative impacts that might flow from loading a subsidy burden on particular markets.
560 In O.N.Tel's submission, contribution must be collected from as many parties as is permitted by law. In O.N.Tel's view, this is a very wide group.
561 Section 46.5 of the Telecommunications Act states that the Commission may require any telecommunications service provider, or TSP, to contribute to a fund to support continuing access by Canadians to basic telecommunications services or, if you will, the contribution fund. Critical to the determination of who is a "telecommunications service provider" is the meaning of the word "basic".
562 In Decision 99-16, with respect to high cost serving areas, the Commission identified the basic service objective. That objective states that each Canadian must have access to various services. Why be concerned with a Canadian's access to those services unless those services are basic to a Canadian's way of life?
563 Thus, in O.N.Tel's view, the Commission has already identified what are basic services: those are the services that Canadians can reach once they have access services meeting the basic service objective.
564 Those services include: local services, long-distance services, low speed Internet services, operator services, directory assistance services and enhanced calling features.
565 But this is only the starting point. Access to these basic telecommunications services is available using technologies such as wireless and Internet. In order to ensure that the basic service objective is technologically neutral, basic telecommunications services must also include accesses through these other technologies.
566 There has been a significant amount of debate on the record of this proceeding as to which services should be considered basic. In O.N.Tel's view, we do not need to define the outer limits of the group of services that may be caught by the term "basic" to identify the TSPs in Canada. Just looking to the list of basic services that spring from the basic service objective, we can identify who they are likely to be.
567 Any party that provides access to these basic telecommunications services, or actually provides the basic services, is a TSP. O.N.Tel submits that this is the group to which the Commission should look for contribution.
568 The second way to broaden the base so that the subsidy burden is spread as thinly as possible is to assess contribution on as many services as possible. In O.N.Tel's view, contribution should be collected from all services provided by each TSP.
569 There has been a lot of debate as well on the record over how to distinguish a contribution-eligible service from an ineligible one. The very fact that none of the parties seem to agree on how to do this shows us that trying to identify which services are not contribution-eligible is going to be very difficult and will likely be a continuing source of questions and problems for our industry.
570 Section 46.5 does not limit or restrict in any way the COmmission's ability to require that all services pay contribution. In O.N.Tel's view, the Commission's discretion is unfettered, except to the extent that it must make a decision consistent with the Act, including the policy objectives.
571 There are several significant advantages to assessing contribution on all services provided by TSPs. There would be no need under this approach to establish criteria to identify whether a particular service is or is not contribution-eligible. Similarly, for what otherwise might be contribution-eligible and ineligible services combined in a service bundle, there would be no need to establish a mechanism to distinguish between the two.
572 As a result there would be no need to be constantly assessing new services and new service bundles to determine to what degree they are contribution eligible.
573 An additional significant benefit is the administrative simplicity of this approach which will save a significant amount of time and money for industry participants.
574 There is also, of course, the issue of equity. Some parties have alleged that residential services and business services should not necessarily contribute at the same level. Other parties have distinguished between services provided within high cost areas and those provided outside high cost serving areas. Others again have limited their distinctions to utility services.
575 O.N. Tel submits that all services should be equally affected by the requirement to pay contribution. In this way, the obligation to pay contribution will not distort competitive positions in the marketplace.
576 The Commission has express and full authority to broaden the base over which contribution is collected. O.N. Tel urges the Commission to seize this opportunity and do so.
577 The second key recommendation that O.N. Tel wishes to make is concerning the selection of the best mechanism. There are four different types proposed from which to choose.
578 As discussed earlier, a per minute based mechanism is not acceptable since it is inequitable and not sustainable. Similarly, a PICC-type charge is not acceptable since it will also leave too much of the contribution burden on the IX market. As well, the thought of moving to a dual mechanism regime is unbearable. One mechanism is difficult enough.
579 This leaves two choices: a revenue based model either as a percent of revenues at the TSP level or as a percentage of billings at the end user level; and, a subscriber line charge, or a flat rated end user charge.
580 After reviewing both choices, O.N. Tel has determined that the best choice is a revenue based approach. Also, O.N. Tel believes that assessing contribution at the TSP level would be preferable over assessing contribution as a percent of billings to end users.
581 Essentially, O.N. Tel arrived at this recommendation because of three key points. The preferred revenue based mechanism meets the criteria described in our written comments which correspond very closely with the criteria that virtually all the parties to this proceeding thought were important.
582 The preferred revenue based mechanism will allow us to avoid the monumental task of defining a subscriber.
583 The preferred revenue based mechanism relies on revenues. Revenues will remain constant despite any changes in markets, services or technologies and, therefore, a mechanism based on revenues is likely more sustainable than a prescriber line charge. As was stated previously, there are always revenues, we hope.
584 O.N. Tel would like to emphasize, however, that even though it has determined that a revenue based approach is preferable to a subscriber line charge, either approach is superior to the status quo.
585 While it is important to choose the right approach, for O.N. Tel what is most critical is that the Commission adopt a national and uniform mechanism. This is in fact our most important recommendation.
586 A national mechanism will broaden the base considerably since it will average out the inequities associated with varying costs due to regional differences. All Canadians in all regions of Canada are equally entitled to have access to basic telecommunications services. This is stated quite clearly in the Canadian telecommunications policy objectives.
587 The companies and TELUS have both made proposals that include retaining a regional mechanism. The companies have said that a national mechanism would create perverse decision-making incentives. The companies seemed particularly concerned about who, in their words, "the winners and losers" might be if a national mechanism were adopted.
588 What these parties seem to have ignored is that many Canadians are currently at a significant disadvantage because they cannot obtain the services that are equivalent to those available in other regions. The benefits of competition, or the lack thereof, are being experienced very differently in many regions of Canada.
589 With the advent of flat rated pricing packages, toll services have become less distinct, not only with respect to rating models but also with the resulting impact upon patters of network usage. More Canadians are more often working from their homes. This has also served to diminish the traditional differences between local, toll, residential and business service offerings. At the same time, evolving package switched technologies are facilitating the convergence of voice data and video applications.
590 In short, communications services, which are beginning to look more and more alike as the communications industry evolves at an unprecedented rate, are taking on an ever-increasing importance to both the home and work lives of Canadians. It is not surprising that as the opportunities provided by these advancements explode, customers and territories, such as O.N. Tel's, are becoming less and less tolerant about being treated differently.
591 For O.N. Tel and its customers, therefore, it is critical that we move to a national mechanism as soon as possible. The current regionally based subsidy relies upon implicit urban to rural subsidies that are not available to any significant degree within O.N. Tel's territory. In a competitive market, O.N. Tel's territory is simply not equipped to rely on traditional cross subsidies.
592 Frankly, O.N. Tel needs an outside subsidy component so that the contribution requirement will become low enough to stimulate competition and bring equivalent services at equivalent rates to most of the communities served by O.N. Tel.
593 For O.N. Tel, moving to a national mechanism is probably the most important change that is required at this time. O.N. Tel urges the commission to adopt a national mechanism and adopt it without delay.
594 Canada needs a new contribution collection mechanism no later than January 1, 2002. As to its own circumstances, O.N. Tel expects that a fully competitive IX regime will be implemented in its territory on or shortly after that same date. The new contribution regime must predate or coincide with the implementation of IX voice competition in O.N. Tel's territory so that O.N. Tel will have a fair chance to compete once the gates are open.
595 In conclusion, the telecommunications industry in Canada desperately needs the contribution regime to step up to the mark. The contribution regime must continue to support access by Canadians to basic telecommunications services. It must do this, however, without standing in the way of progress, and it absolutely must treat all Canadians equitably.
596 O.N. Tel urges the Commission to move to a revenue based contribution collection mechanism as soon as possible. If not that, then as a second choice, to a subscriber line charge. Either way, it must be a national mechanism. It is the only way to ensure that all Canadians everywhere will be better off both now and in the future.
597 Thank you.
598 THE CHAIRPERSON: Commissioner Demers.
599 COMMISSIONER DEMERS: Just a question on what you consider to be your most important point, the national mechanism. You described your company, of course, from North Bay to Hudson Bay. I suppose the bulk of your subscribers are closer to Hudson Bay than North Bay.
600 MS TRAYNOR: They are actually distributed fairly evenly across the territory.
601 COMMISSIONER DEMERS: Oh, okay.
602 MS TRAYNOR: There are a number of communities that are quite far north. The most northern is Peewanik which is up in the James Bay region.
603 COMMISSIONER DEMERS: Could you comment on why you would not go for a regional fund rather than a national one? What are the advantages to your company and on what basis would you eliminate a regional fund?
604 MS TRAYNOR: Perhaps a little bit more detail about the characteristics of the territory might help. Of the 43 communities about half of them have a NAS of less than 500. There is only one community which has a NAS of over 7,000 and that is Timmins with about 21,000, and another three or four communities than have a NAS around 5,000. There just simply is not within the territory the ability to raise the funds that are required in order to meet the high cost nature of the territory. There is just not the population base. With 76,000 NAS across 200,000 square kilometres it is just not possible for us to raise the funds that are required to provide equivalent services as can be provided in Toronto, especially with the advancement of technology.
605 If we do not see a national mechanism in our view our customers are going to become more and more disadvantaged over time.
606 COMMISSIONER DEMERS: I think I was more thinking of a provincial fund. I understand that in the past, and maybe still now, you have daily or your relations are very close with the other companies serving the area, let's say the province. Why would this provincial fund not answer to your needs?
607 MS TRAYNOR: When we say "regional", the current regional mechanism being Bell Canada's definition of regional being company by company, we have not seriously looked at a provincial mechanism although considering Bell has got the largest population density in the country, if we move to a regional mechanism which included Bell Canada's subscriber base, that should be acceptable to us as well.
608 COMMISSIONER DEMERS: Maybe just a point of information.
609 I was interested in a previous speaker's remark on the fact that some areas in the country would not have had a SIP Program, for example. For example, are your subscribers served by single line service everywhere now?
610 MS TRAYNOR: O.N.Tel's territory is unique in the country. We are a non-vertically integrated territory largely. O.N.Tel itself has a mass of about 3,900 customers. We serve Moosonee, for example, and they have had CMS for years. Our network is as modern as anywhere else in Canada. That is for our 3,900 NAS and our toll network.
611 Most of the subscribers within our territory are served by Northern which is a wholly owned subsidiary of Bell Canada. The CAT rate in the territory is about 4.62 cents and the local rates are more or less equivalent to Bell Canada's rates.
612 So we are not quite sure what is going on there. There is a SIP process for proceeding under way at the moment and interrogatories are due in the next couple of days.
613 One of our biggest challenges is the fact that we don't have any control over the CAT in our territory. We simply can't become more -- we can't improve productivity. We are left to watch northern and now Cochrane PUC improve their productivity.
614 COMMISSIONER DEMERS: Thank you, Mr. Chairman.
615 THE CHAIRPERSON: Thank you.
616 Just a couple of questions from your presentation this morning.
617 At the bottom of page 5, you said that:
"Also, O.N.Tel believes that assessing contribution at the TSP level..."
So that, I assume, just charging them a per cent of their revenues, not charging the company:
"...would be preferable over assessing contribution as a percent of billings to end-users."
618 It is not clear to me why you prefer one over the other, and do I assume from that that you would not see this as an explicit charge on the customer's bill? This would be just imbedded in the rates for various services.
619 MS MAYER: We had considered both options. In the end, we would still prefer either over subscriber line charge and any of those over the status quo. But between the two, we did arrive at a conclusion that assessing the charge at the TSP level was preferable because it would be easier administratively. We wouldn't have to necessarily explain this to every person in Canada. We wouldn't have to figure out whether they were going to call it "YAC" or something else. It just -- none of that would have to happen. So from the perspective of trying to figure out, you know, how do we collect the money in a way that permits the whole process to be relatively contained and simple? We felt that that would be better, but again, we would take other revenue-based approach over the other possible options in the bad lot we have to choose form.
620 THE CHAIRPERSON: So do I take it from that, you don't have a concern about this being an explicit charge that consumers would see that they are paying?
621 MS MAYER: No, we were not especially concerned that the charge be explicit or buried. It wasn't that particular concern that motivated us to select the TSP level as the preferred option, although we do recognize that burying it would at least require fewer explanations at the beginning.
622 THE CHAIRPERSON: Okay. And just one final point.
623 On the last page, the third paragraph down, you talk about:
"Frankly, O.N.Tel needs an outside subsidy component so that the contribution requirement will become low enough to stimulate competition and bring equivalent services..."
624 I was taking your position that this charge would get rid of contribution all together and maybe I am misunderstanding your use of the term here.
625 When I read this, I saw "we still have contribution" plus.
626 MS TRAYNOR: Not in the sense of the current mechanism so that the subsidy requirement will become low enough.
627 THE CHAIRPERSON: I don't understand the link here then between the subsidy requirement and being low enough to stimulate competition.
628 MS MAYER: To the extent that we have to obtain -- the steps we go through, of course, are how much subsidy do we need, how do we get the money?
629 If we continue to calculate the subsidy on a regional basis or a company basis, then what will happen is we will have an exorbitant amount of money that we have to somehow collect among the subscribers within that territory which is what happens today which is why our CAT rates are so incredibly high.
630 What we meant by this statement was that if we move to a revenue-based mechanism that will permit us to spread the contribution burden or the subsidy burden rather over as many parties and services as we can nationally, then really, the amount of money that has to be collected within our territory will go down which means that the cost of entering our territory for any new entrants that want to come in in a competitive environment will also go down because currently we know that the CAT rates that we have, we are unlikely to see any competition in our territory even if the competition were permitted. It is only if those CAT rates can come down that we can actually stimulate competition and in that way ensure that all customers have choice and access to services that they want.
631 THE CHAIRPERSON: So in your view, I take it -- put the question perhaps a different way.
632 If we took the approach of the revenue tax on a service provider on a national basis, this would not be an issue?
633 MS MAYER: Yes.
634 THE CHAIRPERSON: Okay.
635 Thank you. Well, I think those are our questions and I think this is probably an appropriate time to break for lunch.
636 So we will take our lunch break now and reconvene at 2:00 p.m. and the next party will be Québec-Téléphone.
--- Upon recessing at 1200 / Suspension à 1200
--- Upon resuming at 1400 / Reprise à 1400
637 THE CHAIRPERSON: We will return to our proceeding now and the next party to present is Québec-Téléphone, Madame Dorothy Biron.
PLAIDOIRIE / ARGUMENT
638 Me BIRON: Merci, Monsieur le Président.
639 Mesdames, messieurs les commissaires, membres du personnel. Je suis Dorothy Biron, Chef des Affaires corporatives de Québec-Téléphone et il me fait plaisir de vous présenter aujourd'hui quelques brefs commentaires.
640 Suite à la requête déposée par AT&T Canada Services interurbains le 17 septembre 1998, le Conseil a lancé deux avis publics par lesquels il confirmait la nécessité de revoir en profondeur le mécanisme de perception de la contribution. Dans l'instance qui nous occupe aujourd'hui, soit l'avis public Télécom CRTC 99-6 intitulé Révision du mécanisme de perception de la contribution et questions connexes, le Conseil demande si des changements doivent être apportés à la méthode actuelle de perception de la contribution. A l'instar de nombreuses autres entreprises de télécommunications canadiennes, Québec-Téléphone souscrit à la pertinence de la révision du mécanisme de perception de la contribution.
641 Aussi dans l'avis public 99-6, le Conseil avait mentionné que plusieurs points abordés dans le cadre de l'instance amorcée par l'avis public Télécom CRTC 97-42, intitulé Service dans les zones de desserte à coût élevé pourraient avoir des répercussions sur les propositions des parties au présent dossier.
642 Bien que depuis, Québec-Téléphone a pu prendre connaissance de la décision du Conseil dans la dite instance, cette dernière croit toujours que le mécanisme de perception choisi devra prendre en considération la situation particulière des entreprises de téléphone indépendantes qui ne peuvent bénéficier de l'apport de centres urbains pour augmenter leurs revenus de contribution et incidemment, équilibrer les coûts de prestation du service dans les secteurs à faibles revenus.
643 Québec-Téléphone a donc réitéré, à son mémoire initial, plusieurs éléments de réflexion qui, selon elle, demeurent cruciaux pour l'avenir des entreprises indépendantes et ce, tel qu'antérieurement présenté au Conseil dans de nombreux dossiers. Aussi nos observations de ce jour visent deux objectifs: le premier, souscrire à la révision du mécanisme de perception de la contribution et un deuxième, soit de favoriser la mise en place d'un fonds régional, pour chacune des régions canadiennes, fonds régional devant s'entendre ici d'un fonds provincial, assurant ainsi un meilleur équilibre de revenus aux entreprises dites indépendantes et particulièrement celles ayant un statut de transporteur interurbain.
644 Le mécanise doit être révisé: Depuis l'avènement de la concurrence interurbaine au Canada, les changements furent tout aussi nombreux que rapides. Plus récemment, soit depuis 1998, la modification des grilles tarifaires et l'apparition des tarifs à forfaits dans les produits et services interurbains ont fait ressortir la désuétude du mécanisme de perception de la contribution à la minute mais surtout l'inéquité qu'il engendrait chez plusieurs entreprises. Pour les concurrents, le mécanisme actuel peut nuire à la pénétration des nouveaux marchés et, de ce fait, freiner la concurrence. Le problème revêt un autre aspect pour une entreprise indépendante qui ne dessert aucune capitale provinciale. En effet, il la prive de la plus élémentaire forme d'interfinancement naturel par le biais d'une contribution implicite.
645 Pour pallier à ces diverses problématiques, le Conseil doit en révisant le mécanisme de perception de la contribution, satisfaire le plus grand nombre d'intervenants. Il doit s'assurer que la concurrence continuera de se développer et en même temps, il doit s'assurer de rétablir l'équité pour les entreprises indépendantes ayant un statut de transporteur, dont Québec-Téléphone, en instaurant une politique minimale d'interfinancement conciliant l'atteinte de hauts standards d'amélioration de la productivité chez les entreprises qui en bénéficieront et une compensation minimale pour le maintien de leur infrastructure.
646 A contrario, la disparition de toute péréquation et l'avènement de la concurrence sur le territoire des entreprises indépendantes ayant un statut de transporteur affectera grandement la capacité de Québec-Téléphone de rentabiliser ses investissements dans des régions comme la Gaspésie et la Basse Côte-Nord pour le déploiement de nouvelles infrastructures.
647 A ce jour, Québec-Téléphone satisfait aux dispositions de l'alinéa 7b) de la Loi sur les télécommunications et atteint l'objectif de niveau de service fixé par le Conseil dans la décision 99-16 et ce, malgré la modicité de ses moyens et la faible densité de la population sur son territoire de desserte. Cependant, avec les mouvements de ré-équilibrage déjà amorcés et la tarification des services le plus près possible des coûts, Québec-Téléphone est plus que jamais préoccupée par le maintien d'un haut niveau de qualité de ses services à un tarif abordable à la grandeur de son territoire.
648 Un mécanisme de perception basé sur les revenus: Québec-Téléphone a déjà signifié sa préférence pour un modèle de perception de la contribution basé sur les revenus. Le modèle préconisé par Québec-Téléphone suite à l'avis public 97-42 était constitué "à partir d'un pourcentage des revenus prélevé chez toutes les entreprises qui possèdent ou utilisent les installations de transmission filaires ou sans fil pour des communications personnelles (résidentielles et Internet) et d'affaires et incluant circuits privés, réseaux LAN, Internet, et cetera. Le modèle préconisé aujourd'hui pourrait s'apparenter au modèle existant pour la perception des droits de télécommunication.
649 Cependant, tout autre mécanisme de perception de la contribution, qu'il soit basé sur les revenus des compagnies ou encore sur les services offerts aux utilisateurs, serait acceptable pour l'Entreprise dans la mesure où il permet l'atteinte des objectifs poursuivis par le législateur à l'article 7.
650 Un fonds régional: une solution pour les compagnies indépendantes: Bien que Québec-Téléphone a toujours préconisé un modèle basé sur la mise en place d'un fonds national, ayant en tête les objectifs poursuivis à l'article 7 de la Loi sur les télécommunications, l'Entreprise ne voit rien d'incompatible ou d'incohérent que de procéder plutôt à la mise en place d'un fonds régional, soit un fonds par province, mieux adapté à la réalité de marché de chacune d'elles.
651 La méthodologie choisie devra être simple, facile à gérer et efficace dans sa gestion. Elle devrait être durable dans le temps.
652 Le pourcentage de cotisation à prélever sur les revenus des entreprises visées sera établi comme le rapport entre le total des besoins identifiés sur une base régionale sur le total des revenus de l'ensemble des entreprises cotisantes. De ce fait, la part que devra verser chaque entreprise sera établie comme le produit du pourcentage de cotisation établi au niveau régional multiplié par ses revenus annuels cotisables.
653 Conclusion: Québec-Téléphone soumet respectueusement au Conseil qu'il est impératif de remplacer la formule actuelle, d'autant plus que ce mécanisme confère à certaines entreprises un avantage non négligeable par rapport aux indépendantes ayant aussi le statut de transporteur de même que par rapport aux autres transporteurs interurbains et ce, en fonction de la région desservie. En ce sens, l'implantation d'un mécanisme basé sur un pourcentage des revenus provenant de l'ensemble des services de télécom dispensés dans une région, encore une fois comprendre province, par tous les fournisseurs de services filaires et sans fil, incluant les fournisseurs de services Internet, les revendeurs et partageurs, serait souhaitable. Seul le maintien d'une politique d'interfinancement minimale permettra de réaliser les objectifs fixés par le législateur.
654 Je vous remercie. Je suis maintenant disponible pour les questions.
655 LE PRÉSIDENT: Merci, Madame Biron. Mr. Demers?
656 CONSEILLER DEMERS: Merci, Monsieur le président.
657 Maître Biron, à ce que je vois, vous avez pu établir le service de base que le Conseil a décrit dans sa dernière décision sur les régions à coûts élevés. Et d'un autre côté, est-ce que je devrais comprendre que vous, en quelque sorte, prenez le point de vue que votre entreprise devrait recevoir une contribution d'autres entreprises?
658 Me BIRON: Effectivement. Monsieur le commissaire, Québec-Téléphone est très fière d'avoir atteint le niveau de qualité de service prescrit dans la décision 99-16 sur les zones de desserte à coûts élevés et ce, depuis maintenant l'année 1995 où le service Internet est disponible à chacun de nos abonnés.
659 Cependant, comme vous le savez, la déréglementation interurbaine enclenchée en 1992 au Canada s'est produite un peu plus lentement sur notre territoire et les revenus de contributions et les revenus d'interurbains sont en décroissance très rapide depuis ces années-là ce qui fait en sorte que comme vous le savez, l'interfinancement naturel qui existait de l'interurbain n'existe plus.
660 Et à ce moment-là, il faut, en dépit des efforts qu'on fait pour rapprocher le service local de ces coûts, trouver un mécanisme qui assure que les infrastructures mises en place et au bénéfice de l'ensemble des citoyens canadiens qui ont à acheminer des appels téléphoniques sur notre territoire puissent continuer à évoluer aussi.
661 CONSEILLER DEMERS: Merci.
662 Je regrette d'avoir demandé ma question ce matin sur le fonds régional parce que je vous l'aurais posée. Maintenant, vous vous penchez ici du côté d'un fonds provincial, dans le fond, c'était au fond mon concept lorsque j'ai posé la question concernant la région.
663 Est-ce que les deux sont possibles, un fonds régional et un fonds nationale?
664 Me BIRON: Je pense que les critères devraient être établis sur la base nationale. Cependant, je pense qu'avec le temps on essaie aussi d'évoluer. Québec-Téléphone, depuis de nombreuses années, soutient la mise en place d'un fonds national.
665 Notre position c'est que les entreprises indépendantes ont certes plus besoin d'un régime, appelons-le de péréquation ou de subvention que certaines autres entreprises et les entreprises indépendantes ne se retrouvent pas dans toutes les provinces canadiennes.
666 Donc, la mise en place d'un programme par région ou par province où il n'y a pas d'entreprises indépendantes est peut-être inutile alors qu'on retrouve de façon majoritaire les entreprises indépendantes au Québec et en Ontario. Il y en a une je crois en Colombie-Britannique qui est une qui croise aussi l'Alberta ce qui fait en sorte est-ce qu'il est nécessaire de créer 11 fonds si on a simplement quatre provinces concernées par un programme de péréquation.
667 CONSEILLER DEMERS: Merci, Maître Biron. Merci Monsieur le président.
668 LE PRÉSIDENT: Merci.
669 Madame Biron, just following up on that issue, I guess it isn't clear to me why you would necessarily -- I mean I take your point about the independent companies. There are independent companies in Ontario, Quebec and one in British Columbia. There is actually a tiny, little one in Nova Scotia, too, now, but it's so small it would be almost indistinguishable.
670 But I know when we talk about independent companies these days, I don't even know what we are talking about independent from or independent of. I guess it's independent of Bell or TELUS now.
671 Me BIRON: Autonomous.
672 THE CHAIRPERSON: I guess the same kinds of issues that a company like QuebecTel might raise about the concerns that it has in serving its territory, the relative cost to serve its subscribers and so on, could probably equally be applied perhaps on a somewhat different scale, but equally applied, say, in Newfoundland.
673 If one was to take that case, it's not an independent company, clearly, but even some of the independents, using our term, too, aren't as independent from Bell as some might like them to be or not as integrated with Bell as some might like them to be.
674 Why would you be considering those kinds of issues? Why would you prefer, say, a provincial regime rather than a national one?
675 Me BIRON: Je répondrais simplement parce que nous avons demandé pendant des années la mise en place d'un fonds national et on n'a pas senti un écho à cette demande. Alors pourquoi pas essayer avec un fonds provincial?
676 Cependant, je vous dirais qu'après avoir entendu John Meldrum ce matin de Sask Tel, je peux vous dire que j'endosse la majorité de ce qu'il a exprimé à sa présentation de ce matin. Et je sais pas pour l'avoir visitée, mais pour connaître un peu la Saskatchewan, que les particularités du territoire de Sask Tel s'apparentent souvent aux particularités du territoire de Québec-Tel lorsqu'on compare, par exemple, la densité de population.
677 Alors évidemment, il est clair que dans les provinces de l'ouest, lorsqu'on exclut évidemment les deux plus importantes, qu'il y a une densité de population qui est plus faible et que, outre une capitale qu'on retrouve à l'intérieur de ces provinces, il y a très peu de centres urbains très peuplés, donc qui génèrent des revenus suffisants.
678 Alors écoutez, c'est peut-être un peu une boutade de ma part de vous dire que je préfère un fonds provincial à un fonds national. Je pense qu'il y a des besoins partout au Canada. Il y a des particularités différentes en fonction des contextes particuliers. Je me suis égoïstement concentrée sur mon sort ce matin.
679 THE CHAIRPERSON: That's helpful.
680 On another point, you are obviously favouring a revenue-based solution. We chatted this morning briefly about the question about if one used a revenue-based solution, whether the tax should appear on the consumer's bill as a separate line item to indicate what the tax is they are paying or whether it should be simply a tax that is perhaps borne by the company and may or may not get passed on through to the consumer in the rates that are charged. Do you have a view on that one way or another?
681 Me BIRON: Oui, j'ai une opinion. C'est que d'une part je ne suis pas favorable à la taxe appelée end-user parce que pour moi, ça constitue une augmentation de service local déguisée. Alors ce qu'on essaie de faire je pense dans le régime actuel, c'est de diminuer la contribution. La façon idéale de diminuer la contribution c'est d'augmenter le service local.
682 Alors si on dit le service local va incessamment atteindre un certain seuil, il faut trouver d'autres mécanismes. Donc, si nous refilons constamment le manque à gagner à l'utilisateur du service local de base, à ce moment-là, bien c'est une augmentation locale. Alors pour moi, la résultante est la même.
683 Si à contrario on taxe les revenus globaux de la compagnie, il est plus vrai à ce moment-ci que l'ensemble des payeurs de factures et les plus importants auront contribué davantage à cette taxe-là et elle m'apparaît moins pénalisante pour les clientèles à faible revenu.
684 Évidemment, Québec-Téléphone, à plusieurs reprises, nous avons souligné que la population sur le territoire avait 80 pour cent des revenus moyens de la province et 80 pour cent des revenus moyens du Canada. Donc, nous pouvons prétendre que nous avons une clientèle plus pauvre d'où notre effort à maintenir le service local le plus abordable possible dans notre perception.
685 Donc, dans cette logique-là, toute nouvelle taxe pour nous constitue une augmentation du service local.
686 THE CHAIRPERSON: Do you have a view, finally, as to when we might actually implement the new regime?
687 Me BIRON: Bien, tel que je l'ai très brièvement soulevé, je pense que ça prend quelque chose qui va s'appliquer de façon équitable et uniforme. Par rapport à ce qui a été aussi mentionné ce matin, je ne pense pas que le régime doit être conçu à court terme. Je ne pense pas non plus qu'il doit y en avoir deux. Je ne pense pas qu'on doit les additionner un par-dessus l'autre durant une même période.
688 Si on est pour mettre en place un nouveau régime, on devrait complètement nettoyer la place, commencer avec un nouveau régime. Ce régime-là doit être le même pour tous, facile à appliquer. Il ne faut pas créer un régime qui va créer une bureaucratie pour l'administrer. Il faut créer un régime dont les produits du régime vont servir à ce qu'ils doivent, c'est-à-dire permettre à l'industrie des télécommunications d'offrir des services abordables.
689 Donc, c'est pour ça que très simplement, encore une fois, nous avons dit bien, il existe présentement une taxe en vertu des droits de télécommunications qui est gérable facilement. Évidemment, le Conseil cette année a décidé de ne pas modifier cette application-là. Vous vous souviendrez qu'il y a eu une consultation où on s'est demandé si ça devait être élargi. Évidemment, moi, je vous dirais que je croyais que oui, ça devrait être élargi. Je le crois encore. Si ce régime-là éventuellement était remodelé, il pourrait probablement être combiné avec un nouveau mécanisme de contribution parce que, à mon avis, ce serait le plus simple.
690 LE PRÉSIDENT: C'est ça. Merci beaucoup, Madame Biron.
691 Me BIRON: Merci beaucoup.
692 THE CHAIRPERSON: The next party is ARC et al, a consumer organization. Mr. Janigan.
ARGUMENT / PLAIDOIRIE
693 MR. JANIGAN: Good afternoon, Mr. Chairman and Commissioners. Thank you very much for the opportunity to attend to present argument in this case.
694 With me today is Philippe Tousignant of Action Reseau Consommateur, who is representing one of the parties for whom we have made representations in this proceeding. Mr. Tousignant will be leading off with the oral argument and I will continue.
695 MR. TOUSIGNANT: Thank you, Michael.
696 Monsieur le Président, mesdames et messieurs les conseilleurs, comme la présentation qui s'est rendue à l'impression est en anglais, je vais donc poursuivre en anglais si ça ne vous dérange pas.
697 Consumer groups are here today because we are extremely concerned about the ongoing affordability of basic telephone service. We have seen the rates for basic access service double, triple, even quadruple, over the past few years as competition has been introduced into this industry.
698 Yes, long distance rates have fallen and high-spending consumers are better off as a result. However, many, possibly most, residential consumers are now paying more for local and long distance services together than they did before competition. Those who can't afford more than the essential service are most hard hit and are least able to absorb the bill increases. Their rates continue to rise.
699 This affordability problem is not something you can ignore. Under the Telecommunications Act, you are required to construct regulatory mechanisms to ensure that all Canadians enjoy affordable basic phone service, regardless of where they live and what their income level may be.
700 So not only must you devise a contribution collection mechanism that raises enough funds to do the job, you must design it in such a way that it minimizes the affordability impact on consumers. Adding a surcharge to end-user bills in order to subsidize some of those end-user bills may not defeat the purpose entirely, but it is effectively taking one step backward for every two forward, not a very efficient way of achieving your goal.
701 A much better approach is to spread the contribution burden over as wide a base of services and providers as possible, so that the burden of any one provider or any one service, especially a basic essential service, is minimal. In this way, not only will you achieve your purpose more efficiently, but you will also limit the burden on those who can least afford it.
703 MR. JANIGAN: Before getting into the details of how contribution is best collected, we would like to briefly address some preliminary arguments that have been raised in this proceeding.
704 First is the argument that you should get rid of the subsidy. Mr. Chairman, there is no indication that the need for this subsidy will go away in the future. It is possible that technology comes to the rescue eventually and lowers costs so much that companies can provide reliable, high-quality services to places like Moose Jaw, Deer Lake or Pelly Bay at costs of less than $30.00 per month, but this isn't the case yet. The high-cost area subsidy is going to be needed for the foreseeable future. It is, therefore, essential that whatever collection mechanism we adopt, it be sustainable in the long term.
705 Secondly, a number of parties have argued that this kind of subsidy should be left to direct government intervention. ARC et al does not disagree with direct government subsidies for this purpose, but as a result of our research we don't see this happening. The "leave it to the government" argument may be attractive, but it basically ignores reality. The reality is that the CRTC has a statutory obligation to deliver the goods in this case given what governments have failed to do directly. You must fill in the gaps that governments leave behind.
706 Third is the total subsidy requirement. Some people argue that you should take a minimalist approach to the total amount collected, that priority should be given to ongoing reductions in the overall amount collected, that you should only subsidize up to a rate level which is far above that currently paid by most Canadian subscribers.
707 ARC et al are extremely concerned that some parties are using this proceeding to advance the agendas of shifting the entire burden of contribution away from the services that they provide and onto basic access service. Such a result should not be permitted.
708 Not only should all services contribute to the subsidy, but the total subsidy requirement should be based on an objective determination of need which is not arbitrarily limited. Costs should be based on Phase II methodology and revenues should incorporate implicit contribution.
709 If rates are to be benchmarked, the Commission should hold a separate public proceeding to determine the affordable rate threshold, which, in ARC et al's submission, has already been surpassed in some areas. Any targeting of the subsidy -- for example, to high-cost areas only -- should proceed within the bounds of the price cap regime.
710 Mr. Chairman, a number of proposals have been put before you in this proceeding. They break down, essentially, into three types: a broad-based revenue tax, a tax on subscriber lines or basic access, and the existing tax on long distance services. Each must be assessed against the others on the basis of criteria which have been carefully identified and prioritized.
711 While there has been substantial agreement among the parties as to these criteria, some differences remain, especially in respect of how the criteria should be prioritized. In particular, some parties have over-emphasized the importance of administrative ease at the expense of fairness and end-user impacts.
712 While we agree entirely that the mechanism should be as simple to administer as possible, we do not agree that administrative simplicity should take precedence over more important criteria such as sustainability, equity or economic efficiency, nor do we think that equity among ratepayers is something that could be ignored while equity among service providers is given the highest priority.
713 Finally, we submit that you should compare the various alternatives before you with a view to the consequences to end-users, keeping in mind that it is for the benefit of end-users, as well as the industry generally, that this entire regime is being constructed. When you do this, it will become clear that all of the proposed replacement mechanisms involve some amount of local rate increase. This is a serious concern for ARC and NAPO, whose constituents have difficulty affording basic service even at current rates.
714 Before moving to a new mechanism which will involve further increases to basic local rates, we, therefore, submit that the problems with the current mechanisms should be carefully assessed and fairly compared to potential problems with the various replacement mechanisms. If, indeed, there are serious competitive inequities with the existing regime as some claim, are these inequities rooted in the toll contribution mechanism or are they in fact the result of vertically integrated incumbents?
715 To the extent that competitive problems run deeper than the contribution mechanism itself, ARC et al submit that their solution should be sought in regulatory approaches which involve more than contribution.
716 In any case, ARC would note that the current toll contribution mechanism has a number of advantages: It is well understood by the regulator and industry players, it has been fine-tuned over the years to minimize market distortions, and it focuses the burden on a non-basic service, thus relieving basic service of further affordability pressures. The industry is free to pass the costs of the "toll tax" through to customers as it sees fit.
717 It is easy to forget the advantages of the current regime and to focus on its problems, problems with which we are all too familiar, but the immediacy of the present should not obscure the realities of the future under a different regime. As the saying goes, "The grass is always greener on the other side", or when it comes to utility rate design, "The perfect is the enemy of the good."
718 Mr. Chairman, we should not move to a new mechanism without being sure that it will constitute a significant advantage over the existing mechanism and that the costs and challenges that it entails are outweighed by its relative advantages.
719 The only mechanism that possibly meets this criterion, in ARC et al's submission, is a revenue based tax. Subscriber line charge proposals would simply shift responsibility for contribution from the toll sector to the local sector without addressing the inherent difficulties that arise when contribution is based on a measure of quantity rather than value and is attributed to a narrow base of services.
720 The revenue tax approach, on the other hand, spreads the burden of contribution over a much wider range of services, taxes value rather than basic service and thereby maximizes equity, efficiency and sustainability. It is superior to any type of per line mechanism in respect of all major criteria, including long term sustainability, economic and administrative efficiency, competitive equity and ratepayer equity.
721 It would be a serious mistake, in ARC et al's submission, for the Commission to replace the existing mechanism with another that is similarly flawed. That would be the case if you choose to go with a subscriber line charge which places a disproportionate burden on the most basic service access.
722 Variations of the SLC which place a higher burden on business lines than residential lines, and/or which are combined with toll contribution via per minute charges or a new PICC, are preferable to a flat SLC, but still suffer from unfair averaging, which results in low users bearing a disproportionately high share of the burden.
723 Mr. Chairman, if you choose to go with a subscriber line charge you will not only be missing an opportunity to make a real improvement on the existing approach to contribution collection, but there will also be the risk of substantial subscriber backlash.
724 The reality is that any new surcharge on end users will be unwelcome, and understandably so. Why should subscribers have to start paying an extra charge for the same thing that was provided in the past without any extra charge? There will also be a backlash from those who object to the subsidization of rural and remote areas generally. You will have entered a political mine field.
725 But the good news is that you do not have to go this route. A revenue based tax is superior to a flat line charge even in respect of the criteria which we all agree upon. It is the most fair, efficient and sustainable option before you. And the existing toll contribution mechanism continues to function adequately with minimal impact on end users.
726 Mr. Chairman, it is not the time to create a new regulatory construct which further burdens basic ratepayers without any discernible benefit.
727 Should you nevertheless determine that the existing mechanism needs to be replaced, ARC et al urge you to adopt an approach to contribution collection that is broad based and that taxes value rather than basic access. The revenue tax, not the subscriber line charge, fulfils this criteria.
728 Thank you.
729 THE CHAIRPERSON: Thank you, Mr. Janigan. Commissioner Cram.
730 COMMISSIONER CRAM: Something I was not entirely sure of in your presentation is your objection to the pass on, if I can call it that, of the pass on to subscribers. Do you object to it being passed on specifically or do you object to it being passed on at all?
731 Specifically you are talking about the issue of victimization of the recipient of the subsidy. Is that your primary problem or is it the pass on in total?
732 MR. JANIGAN: I think that we acknowledge to the extent that our constituents are users of telecommunications services, they are going to have to be paying some part of this contribution charge through the services that they purchase. We just want to make sure that it is done in a collective way which recognizes the whole range of services and that when it is passed on it is done in a fashion which is fair all the subscribers for those particular services.
733 So we acknowledge the fact that it will likely have to be treated as a fact exongenous to the price cap line and that there will have to be a hearing or some kind of proceeding to determine the mechanics of the pass on.
734 We understand that it is going to have to be paid, it is just that we object to the idea of this payment being concentrated on one of those services, namely basic service, and in the form of a subscriber line charge.
735 COMMISSIONER CRAM: But let us say, if it were revenue charge, at the end of the day do you not think that subscribers are going to pay?
736 MR. JANIGAN: Yes, we acknowledge the fact that this will have an effect on rates in one form or another.
737 COMMISSIONER CRAM: And do you then have a problem with there being, not even if it is an SLC, but there being a specific line in the bill saying revenue charge for high cost service areas or low income earners or something?
738 MR. JANIGAN: Yes. First of all, we will not see the utility of it, apart from achieving transparency in the billing process, which I suppose is a desirable objective in and of itself. It is not something that the subscriber can choose to pay or not to pay.
739 Secondly, it is a bit late in the day for this kind of specificity as to the charges that a subscriber is going to pay. For example, when rebalancing was taking place we never saw something on the bill that was specific that said ``you are paying this rate rebalancing because we are going to a competitive regime". It was incorporated into the context of the bill and things went forward from that basis.
740 At this point in time, while we are generally in support of the issue of transparency, we just do not see the purpose segregating out that particular charge would have at this point in time and it would likely lead to some confusion among consumers in general, particularly insofar as they have not paid this charge before and there will be a great deal of problems understanding why they have to pay it now.
741 COMMISSIONER CRAM: Thank you. Thank you, Mr. Chairman.
742 THE CHAIRPERSON: Mr. Langford.
743 COMMISSIONER LANGFORD: On that point, it is not a difficult concept, though it was not done for rate rebalancing, could a simple public education... I know that everyone always goes back to public education but still it conceivably could work. Could simple public education, for example, using a single line as an example because it is so clear cut, you are paying an extra dollar so some people in Canada will not pay $10.00 or something like that? Is that feasible from your experience?
744 MR. JANIGAN: Well I suppose, Commissioner, that anything is feasible provided you put enough consumer education into the process. I guess the end result of the education process we would have to examine what we want to happen at the end of the day.
745 Effectively, the customer who gets this is not going to have an option to do something else other than pay it. He is now going to have to minimize his costs in any way or find out additional information that will enable him in some respects alter his patterns of consumption. It is a straight ahead charge. While it may be possible to explain it, in the long run I guess the bottom line is why do we wish to explain this particular charge as opposed to some of the other things that have been rolled into rates in the past that represent a different kind of policy or procedural tinkering with telecommunications rights in general.
746 COMMISSIONER LANGFORD: Well you got to start somewhere.
747 One of the things we heard this morning from the group from Bell was a different take. Without examining the merits of their particular suggestion, one of the things that was different about it was that it was a kind of mix and match. Instead of saying ``Well we are going to revenue, or we are going to do minutes, or we are going to do line charges", they chose two.
748 In your review and study of this did your group look at any other mix and match situations? The reason I put this question to you is that I have been waiting for someone to say that simplicity is not everything and you said it? I wondered whether your groups had looked at the notion of partial revenue, partial single line or any other of the permutations you could put together.
749 MR. JANIGAN: I think we have addressed in evidence or in oratories that I have reviewed is the other options that would be less palatable than the one we have put forward. In particular, I think we addressed the issue of whether or not, if a line charge was put in place, that correspondingly we would like to see a PICC put in place to cover at least 50 per cent of the revenue.
750 There are other options that I think have been canvassed in terms of least preferable alternatives. I am not familiar with all of them principally because I have not been the counsel record on this proceeding up to this point of time.
751 I have the Commission to thank for having the proceeding so far up north that it lured my co-counsel to stay in there for two or three weeks.
752 I think we have addressed in our evidence, several different --
753 COMMISSIONER LANGFORD: She doesn't have to hitchhike home, you know. We do have costs here we can award.
--- Laughter / Rires
754 MR. JANIGAN: And in particular ways to mitigate the problems associated with -- if you choose to go to an SLC as the method for contribution.
755 COMMISSIONER CRAM: Thank you.
756 I should ask you this since we have been putting this question to a lot of parties and as Ms Biron had indicated that some parties have been advocating this issue for quite some time and the Commission has been saying no for quite some time.
757 Do you have a view on this issue about whether the whatever mechanism it is, if it is a revenue tax, say the basis for the level of the tax should be on a company-specific basis for regional or national?
758 MR. JANIGAN: Yes. I think in our evidence we have emphasized that because this is a national commission that is administering national objectives, it should be done on an national basis and that the standards that are provided should apply across Canada and not be done on a company-specific basis.
759 THE CHAIRPERSON: One of the arguments that has been presented against that is that consumers in one part of the country who may already be paying a higher rate and may well argue that they have paid for the level of service that they have maybe throughout their territory or whatever, that they would now be subsidizing consumers of other companies who may not have bit the bullet so to speak.
760 How would you respond to that concern?
761 MR. JANIGAN: Well, once again, I think the purpose of the Telecommunications Act is to achieve national objectives and to the extent that there may be perceived unfairness in regions of the country which have contributed through their rates to a level which they would feel appropriate to ensure basic service in that jurisdiction.
762 Frankly, the objectives of the act is to ensure a national access to the basic service and while the complaints may be trenchant, I think in the circumstance, they are overcome by the pressing national need for ensuring basic access to telecommunications services across Canada.
763 THE CHAIRPERSON: If one takes that argument, does one extend --
--- Technical difficulties / Difficultés techniques
764 MR. JANIGAN: -- in terms of looking at, on a system-wide basis, appropriate rates and appropriate costs which possibly may be bench marked to ensure that there are not significant outliers that demand subsidization where none is warranted.
765 THE CHAIRPERSON: Okay, all right. Thank you very much.
766 MR. JANIGAN: Thank you.
767 THE CHAIRPERSON: So the next party will be Call-Net.
768 MR. Bowles, Mr. Koch, welcome.
ARGUMENT / PLAIDOIRIE
769 MR. BOWLES: Thank you. It is nice to be back although I think I get a better view this time.
770 I just want to mention that there are French versions of our presentation at the back of the room for anyone who is interested.
771 MR. BOWLES: Mr. Chairman, Commissioners, my name is Don Bowles and I am the Vice President of Regulatory Affairs for Call-Net Enterprises and with me is our counsel, Michael Koch from Goodman Pillips & Vineberg.
772 Through it subsidiaries, including Sprint Canada, Call-Net provides local and long distance services and data services, as well as internet access to over one million households and businesses across Canada.
773 We thank you for this opportunity to present to you, in person, our comments on how the Canadian contribution system can best be designed to ensure that it functions well, both today and into the future.
774 This is an issue of critical importance to Call-Net. It is also of critical importance to the Canadian telecommunications industry and to the Canadian public.
775 Call-Net has actively participated in this proceeding, as it has in the seemingly endless proceedings dealing with contribution over the years. In our written final argument, we have elaborated on the evidence that the existing per minute toll contribution mechanism must be changed.
776 We have also elaborated on our view that either of the two proposed alternatives to the existing mechanism, a revenue-based mechanism or a charge on access lines, would be a vast improvement over the existing mechanism.
777 Finally, we have argued that the access line charge is the better of the two alternatives.
778 In this presentation, we will only provide a brief summary of that position. Instead, we prefer to use the bulk of our time here today to impress upon you three key points.
779 First, there is an unprecedented, broad consensus for change to the existing contribution collection mechanism.
780 Second, this consensus has emerged because the current system is clearly inadequate and outdated.
781 Third, the Commission can and must act on the momentum and opportunity for change by implementing a new mechanism and it should do so as quickly as possible.
782 Let us turn then to the consensus for change to the existing mechanism.
783 As the Commission is painfully aware, the existing contribution regime has been a serious point of contention between new entrants and incumbents, as well as between consumer groups and the telecommunications industry.
784 Indeed, it is remarkable what regulatory resources have been consumed, both inside and out of the Commission, but the constant debate surrounding and tinkering with the existing regime. And to this, I can certainly personally attest.
785 This debate and tinkering has taken on a life of its own now supersedes the universal access policy itself. The current proceeding dealing with direct access lines is but the most recent example of this phenomenon.
786 At the final stage of this proceeding, however, a broad consensus is emerging that the existing mechanism must be replaced. Not everyone, of course, agrees that there should be a change at all, nor do all who propose change agree on which mechanism is the preferred replacement for the existing mechanism. However, it is very significant that a majority of participants advocate change, particularly because of the composition of that majority.
787 Participants to this proceeding who agree that the current contribution regime should be changed include consumer groups, competitive long distance providers, competitive local exchange carriers, incumbents, including their wireless affiliates, resellers, independent phone companies and government.
788 I am sure you will agree that it is unprecedented, and likely unanticipated by anyone in this room, that with respect to many of the basic issues, Call-Net, Bell Canada and the National Anti-Poverty Organization are all before you on the same side of any issue, and in particular, on the same side of the contentious issue of contribution.
789 At first blush, we may appear to make strange bedfellows. Clearly, however, this broad consensus reflects the fact that reforming the current mechanism is not just in the self interest of one or even a handful of parties. Rather, it is in the interest of a healthy industry, and more importantly, it is in the public interest.
790 Why has such a broad consensus emerged on this issue? Quite simply, because the existing mechanism has been overtaken by changes in the industry and is clearly out of touch with current realities. To demonstrate what we mean by this, we would like to provide you with some context.
791 The current system has its origins in the old monopoly environment. Incumbent phone companies chose to keep the price of local service below cost to encourage everyone to join the network, thereby increasing its value. This was done by subsidizing the cost of local service with profits from long distance services which were priced well above cost.
792 This system subsequently fit well with regulatory policy that all Canadians should have access to affordable basic telephone service.
793 So when the Commission opened the long distance market to full competition eight years ago, it felt compelled to extend to toll competitors the requirement to subsidize basic local service.
794 In the last few years, however, the telecommunications industry in Canada and around the world has undergone fundamental and sweeping changes.
795 Consider the following changes, all of which have eroded the financial and logical foundation for a mechanism that levies contribution on minutes of long-distance traffic.
796 When toll contribution was introduced in 1992, it was attractive to subsidized local services by means of a charge on toll services because toll services were priced well above cost and were extremely profitable.
797 Today, long distance rates have plummeted, and with them, the profit margins in the long distance business have all but disappeared.
798 Before toll contribution was introduced in 1992, the average long distance rate for calls within Canada was about 46 cents per minute. Today long distance rates for calls within Canada average around 10 cents a minute, a drop of about 80 per cent.
799 When toll contribution was introduced in 1992, long distance services were only charged by the minute. Today unlimited calling plans are as much the norm as per minute charges and customers demand flexibility and innovation in service pricing and delivery.
800 When toll contribution was introduced in 1992, the networks used to carry long distance traffic measured calls by the minute. Today they increasingly do not.
801 When toll contribution was introduced in 1992, the Internet did not exist as a commercial phenomenon. Today it has revolutionized both the telecommunications industry and the economy and is threatening to swallow the long distance industry whole.
802 When toll contribution was introduced in 1992, the toll segment was virtually the only segment of the telecommunications market open to competition. Today, as a result of the Commission's decisions, virtually every segment of the market is open to competition.
803 Finally, when toll contribution was introduced in 1992, the market for long distance services was a discrete market, separate from the market for local services. Today the lines between these markets -- indeed, between all markets -- have blurred. Competitors such as Call-Net must integrate their operations across the various segments of the industry in order to compete effectively with the ILECs and with each other.
804 In summary, the foundation for the current per minute charge on toll usage has irretrievably shifted, leaving the current mechanism teetering on its own. In both practical and theoretical terms, it is an historical anachronism.
805 The current mechanism does not meet the criteria of efficiency, sustainability or competitive equity. It is not efficient because it distorts the market, thereby affecting the competitiveness of Canadian industry. It is important to underline that this is not just the long distance market that is distorted by the current mechanism. The local market, too, is distorted because competitors are required to implement their networks in a manner dictated by the contribution mechanism.
806 The distortions caused by the current mechanism also render it less sustainable because service providers and users are encouraged to find ways to bypass it. The sustainability of the mechanism is also being challenged by the service and technological changes occurring in the industry. The move to flat-rate billing, the blurring of the distinction between local and long distance and, in particular, the move from a traditional circuit-switched environment to one where voice and data increasingly move via packets which cannot be measured in minutes all make the current mechanism increasingly unsustainable.
807 Significantly, the current mechanism is not equitable from a competitive standpoint. It may have made sense in 1992 to assess contribution only on long distance services. However, it does not make sense now that virtually every segment of the market is open to competition and technological changes are increasing the amount of competition among different services. By assessing the subsidy only against one segment, the regime handicaps the toll market relative to the other telecommunications markets, diminishing profitability and incentives for innovation.
808 The Commission is aware of the concerns of the competitive long distance industry regarding the impact of contribution on the competitive process. In a speech delivered last week, the Honourable John Manley, Minister of Industry, emphasized the importance of ensuring that competition, which has been good for Canadians, continues.
809 As he said, and I quote, "A return to monopolies is not an option. This is a time of intense competition and rapid technological change." The Minister urged the Commission to consider carefully every opportunity to foster competition through its regulatory decisions. We respectfully submit that this is just such an opportunity.
810 We would note that all of the parties who appose a change to the contribution mechanism acknowledge that the current system has problems. Many of these parties take the position that, rather than replacing the mechanism with a new system, the subsidy should, instead, be funded entirely out of government revenues or eliminated in its entirety.
811 Not a single participant in this proceeding has challenged the principle that the subsidy would best be funded by general government tax revenues. The vast majority of participants, including Call-Net, would also agree that the subsidy should be reduced or, if possible, eliminated. However, Call-Net does not believe that it is realistic to assume that the federal government is willing at this point in time to assume the responsibility for funding the universal service objective.
812 As well, on the assumption that the Commission does not do away with subsidies in their entirety, it is necessary to replace the existing contribution system with one that will reflect the rapid evolution of the telecommunications marketplace. The question is: What system?
813 We urge the Commission to avoid the temptation to continue "tinkering" with a broken system and, instead, seize the opportunity provided by the broad consensus for change which has emerged in this proceeding to fundamentally reform the contribution regime.
814 The current mechanism is untenable and must be changed. We believe the weight of evidence and the consensus for change demonstrates this very clearly. We appreciate that identifying the best replacement for the current mechanism is a more difficult task.
815 To this, I would ask Michael to discuss this task.
816 MR. KOCH: Thank you.
817 The two major alternatives proposed in this proceeding are a revenue-based system and an access-line charge. After reviewing the evidence, Call-Net considers that a charge on access lines remains the better mechanism, mainly for reasons of administrative efficiency and cost effectiveness. We have, therefore, put forth a proposal for an access line charge which would be assessed on all access by end-users to the public-switched telephone network, which we submit is the core of the telecommunications system in Canada.
818 Briefly, our proposal works like this. Original providers of network access services, or NAS, would report their total number of NAS monthly to the Central Fund Administrator. In most cases, this has already being done. With that report, they would remit money equal to their total NAS multiplied by the contribution rate. The rate would be calculated annually by dividing the amount of the total subsidy by the total NAS in Canada in the last month of the year.
819 The details of our proposal can be found in our written argument filed today. In our submission, none of the design issues associated with such a charge is insurmountable.
820 Once the design of the access line charge is finalized, the system would be very easy and cost effective to administer. NAS and working telephone numbers are both relatively easy to track and, in most cases, companies already do so. No complex exemptions or exceptions as exist with the current mechanism would be necessary, thereby reducing the opportunities for gaming.
821 We expect that other participants will criticize our access line charge proposal as a local rate hike in disguise. Worse still, we are concerned that the Commission will be reluctant to implement it for fear that it will be perceived as such by the public. In our submission, the access line charge is not a local rate hike.
822 We propose that the charge be explicitly stated on the end-user's bill. Transparency in the application of any charge is fundamental to the concern for competitive equity. As well, the simple fact is that it is not only good for the industry, but also in the public interest that service providers be capable of recovering their costs.
823 Failure of competition does not just hurt companies like Call-Net. Ultimately, it also hurts consumers. This point cannot be over-emphasized. Regardless of what subsidy system is chosen, it is unavoidable that end-users will pay for it. Most importantly, consumers will pay heavily if the unprofitable position of competitors, assisted by a hidden subsidy system, leads to a general failure of competition in Canada.
824 Moreover, it is good public policy that consumers see and understand what portion of their bill is funding universal access. For these reasons, Call-Net submits that whatever mechanism is chosen, it should be transparent; that is, consumers are able to see exactly what portion of their bill is funding universal access.
825 An access line charge as proposed by Call-Net also need not raise concerns regarding "rate shock". If implemented on a national basis, we estimate that it would result in an additional monthly charge of between $2.00 and $3.00. That is based on the current contribution requirement. It is reasonable to expect that it will be smaller, in all probability less than $2.00, once the total subsidy requirement has been recalculated.
826 While our proposal does not represent a perfect solution -- and we recognize that -- we think it is the mechanism which better ensures economic efficiency, sustainability and equity, while at the same time remaining simple and workable. Most importantly, we submit that either of the proposed alternatives -- a percentage of revenue mechanism or a per line charge -- would be vastly superior to the current regime.
827 Regardless of which alternative the Commission decides to be the preferable mechanism, Call-Net urges the Commission to decide on and implement it as quickly as possible.
828 In last week's speech which Mr. Bowles referred to, Minister Manley acknowledged that the Commission has undertaken this proceeding in order to deal with concerns regarding the contribution regime. The Minister made several points germane to the debate before you.
829 First, he emphasized the importance of ensuring that subsidies intended to maintain affordable local service are not a competitive advantage to the former monopoly telephone companies. To use the Minister's words, "There is no room for subsidies to tilt the playing field."
830 Second, the Minister recognized that it may no longer be possible for the long distance industry alone to support the explicit subsidy to
831 Finally, Minister Manley stressed that timely decision-making will go a long way to re-establishing confidence in the regulatory environment in Canada and, referred specifically to the Commission's opportunity to address competitors' concerns in this proceeding.
832 The competitive toll providers initially requested that the contribution system be replaced almost two years ago. Interested parties both within and outside the industry have had a full opportunity to comment. There is a large body of evidence which clearly shows that the current mechanism is broken and needs to be fixed and which sets out the benefits and disadvantages of the alternatives.
833 The majority of participants want a change. There is no need to delay the implementation of a new mechanism and, for the sake of competitiveness in the industry, it simply cannot be delayed, in our submission.
834 Call-Net proposed during this proceeding that changes to the contribution regime could be accomplished in two steps. In our opinion, a change in how the total subsidy requirement is determined is necessary. However, such a change does not have to be decided now and, in fact, would likely be easier to implement simultaneously with the new price cap regime which will commence in 2002.
835 A new mechanism, on the other hand, can -- and, for the reasons we have stated today, should -- be implemented quickly, using the current contribution amount as an interim subsidy requirement.
836 In our view, a transitional access line charge can be implemented in one of two ways. The first way is to use the new charge to recover the entire amount of the existing subsidy requirement. Alternatively, if the Commission is concerned about the amount of such a charge, or wishes to avoid a situation in which it establishes the charge at one level based on the current contribution requirement, and must subsequently reduce it by a large amount once the new total subsidy requirement is calculated, there is a second way of implementing a transitional regime.
837 A smooth transition could be achieved by implementing an access line charge in 2001 to collect part of the contribution requirement. The residual amount of the contribution requirement could then be funded by way of the existing per-minute mechanism. In turn, the per-minute rates necessary to fund the residual amount could be eliminated to the greatest extent possible by subjecting them to the price cap mechanism.
838 Finally, if the Commission determines that a nationally-uniform charge is in the public interest in the longer term, the transitional amount of the charge could be established on a regional basis or on a company basis.
839 To conclude, we note that the vast majority of participants in this proceeding agree that a new mechanism and a new total subsidy amount are separate issues which need not be implemented at the same time. Most parties, including Telus, Teleglobe, Bell Canada, Island Telecom, MTS, NBTel, Newtel, AT&T, Primus and RSL Com, also agree with Call-Net that a new mechanism can be implemented in 2001.
840 Mr. Vice-Chairman, Commissioners, we urge you to treat the broad consensus for change demonstrated in this proceeding as a call to action. We urge you to conclude from this consensus and from the evidence before you that the current mechanism must be reformed. We ask that you decide upon an alternative mechanism, preferably an access line charge as proposed by Call-Net and implement any changes required to CRTC, CFA or CPCC procedures quickly, so that a new mechanism can be implemented as early as possible in 2001.
841 We ask this not only in the interest of Call-Net, but also in the interest of the Canadian telecommunications industry and in the interest of the Canadian public.
842 We thank you for your time and look forward to your questions. Thank you.
843 THE CHAIRPERSON: Thank you, gentlemen.
844 Commissioner Cram?
845 COMMISSIONER CRAM: Mr. Koch, I wanted to talk to you about the access line charge not being a local rate hike.
846 Some people like my mother look at the bottom line and see that the price has gone up two or three dollars.
847 MR. KOCH: I agree with that.
848 I think obviously this is an issue which -- given that we addressed it in our statement -- we knew would be a concern to the Commission and we don't take that concern lightly.
849 I think for us it is very important, first of all, when I say it isn't a local rate hike, it's because that is the truth. It is not a local rate hike. Now, you deal with perception which I agree is sometimes a different issue than reality.
850 On the perception as well, though, I think -- and this issue came up I believe in some of the questioning this morning -- I think it is important, in our view, to take a step back and ask what is really in the public interest.
851 I agree that from a consumer perspective, the charge may be an additional rate hike. It is not that, however and I think that it is very important just as the contribution mechanism can't be solely in Call-Net's interest, it can't be solely in the interest of individual consumers. I think the Commission has to find a middle ground.
852 Commissioner McKendry quite fairly pointed out this morning the fact that long distance rates have come down quite a bit and I think then asked, as I recall, Mr. Farmer and his colleagues, whether we could expect a further rate decrease consequent upon an access line charge being implemented.
853 I think for us, it's important to recall how far the rates have fallen. We may have, in fact, gotten a little bit ahead of ourselves in terms of the competitive environment in Canada and it's really important, in our view -- and I think this is consistent with what the Minister said last week -- that we all keep our eye on the bigger picture which is the continuation of competition. We feel that that is seriously at risk in Canada. The continuation of competition is not something that is simply good for those who are competing. It's good, in our submission, for consumers in the long run.
854 Forgive me for the long answer to the question, but we are conscious that that is a concern. Mr. Bowles may have something to add to that.
855 MR. BOWLES: We can't get into semantics here. But is it a local rate increase or not, it obviously appears as a flat rate charge. But it will be identified not as a local rate increase. It's identified as -- well, I guess we are still working on the name, and I'm sure we can come up with something acceptable.
856 So right now, the --
857 COMMISSIONER CRAM: My point was at the end of the day and you are talking about perception and the reality. The reality to the low-income subscriber who only has so much to pay for a phone bill is that they are either going to have to stop having any optional services or stop having any other kind of telephone services or maybe not even subscribe at all if the cost goes higher, if their total bill goes higher. That is reality. That is not perception. That is reality. Isn't that correct?
858 MR. BOWLES: Well, this, of course, goes to the question of affordability and what is affordable. To the extent that this subsidy is, of course, used to keep rates in certain areas below what they otherwise would be, you know, it aids affordability.
859 COMMISSIONER CRAM: My next question is what will be the purpose? Other than showing it is not a local rate increase, what is the purpose for having it noted as a specific separate charge?
860 MR. BOWLES: There is one very specific competitive reason for doing that. One thing that can happen and as certainly happens with the long distance contribution charge, of course, is that, you know, large companies, they have to recover it from the contribution charge from some place and if you are a very big customer with services, you know, big breadth of services, you can choose to recover it from the least competitive area whereas people, for example, in our situation, of course, we only have one place to recover that contribution charge from.
861 Companies, like Bell Canada, can recover the charge from various places and choose the least competitive place to recover it from. It puts us at a competitive disadvantage. By making it explicit on the bill it makes it fair for everyone because everyone has to recover the exact same charge in exactly the same situation.
862 COMMISSIONER CRAM: So it is fair to the other competitors.
863 MR. BOWLES: It is certainly fair to the other competitors. I suppose, from a public policy point of view, it is also, as with things like GST and everything else, it seems to be a desirable thing. If there is a specific charge for a specific purpose consumers should see it rather than have it buried away.
864 COMMISSIONER CRAM: So it is fair in terms of the service provider also.
865 MR. BOWLES: Yes.
866 COMMISSIONER CRAM: Thank you. That is all I wish to say.
867 MR. KOCH: Perhaps I could just add to that. I think a concern with the existing regime, Mr. Bowles is quite right to point out the concern about a company like Bell Canada, which is truly involved in every segment and can potentially extract the subsidy in non-competitive segments. I think there is a real concern as well where we have a situation, regrettably, where there has been very little competitive inroad into the residential local market. And so you have one party, in the example of Ontario and Quebec, Bell Canada, which not only has the ability to recover the subsidy in all those areas, but also actually is the recipient of the subsidy. That is, in our view, also a major concern which is alleviated by the explicit statement on the bill.
868 THE CHAIRPERSON: Mr. Langford.
869 COMMISSIONER LANGFORD: Thank you. I just want to come back to something Mr. Koch said. You mentioned at the end of your remarks, just to make sure I understand it, it seems to me that it was very clear that you prefer an access charge but that you could live with the a revenue charge, that it would be better than what we have.
870 What part would your company play or your client's company play in contributing to this in the future? Would it be either one of these charges? Do you see yourself contributing in any way? You may feel you have done enough over the years already.
871 MR. BOWLES: Well I guess if it was a revenue tax it would be straightforward what we would be contributing. If it was an access line charge, as we develop our local services, we would be paying on the access lines.
872 COMMISSIONER LANGFORD: And during the transition period would it be something like the proposal that Bell Canada made this morning but only on a temporary basis? Is that what I am to understand?
873 MR. BOWLES: Very much similar to what Bell was suggesting. I guess it is just a matter of degree. I guess we would propose that our access line charge proposal go into effect more quickly than maybe Bell proposed and any transition would be shorter. But essentially it is the same idea.
874 COMMISSIONER LANGFORD: But you are not proposing to drop out entirely out of the plan under any of the schemes that are acceptable to you?
875 MR. BOWLES: No.
876 COMMISSIONER LANGFORD: Thank you very much.
877 THE CHAIRPERSON: Mr. McKendry.
878 COMMISSIONER McKENDRY: Thank you, Mr. Chair.
879 I just want to get your insight into the impact of your access line charge proposal on Call-Net's expenses. As I understand it, if we implemented your proposal the company's expenses would decline significantly.
880 MR. BOWLES: Yes. I do not know the actual number but certainly contribution is a significant portion of our expenses.
881 COMMISSIONER McKENDRY: And that expense in effect would be transferred to local telephone subscribers through the access line charge.
882 MR. BOWLES: Well to a certain extent, of course, contribution is extracted from different people in different degrees depending on the mechanism. At the end of the day of course it will always be the subscribers paying it. But to a certain extent, of course you are right, depending on the mechanism amounts do get shifted between various classes of subscribers.
883 COMMISSIONER McKENDRY: So what was an expense for Call-Net now becomes an expense for local subscribers whether they are residential or business.
884 MR. BOWLES: You can put it that way but, as I say, at the end of the day it is always going to be the same people paying the same amount. As a matter of fact, what happens right now--and I am sure you know Call-Net's financial position--as far as I am concerned we are not even passing along the existing contribution charges to subscribers.
885 However, at the end of the day, of course you are right, what will happen is that long distance providers may not pay as much contribution and the charge will be applied to the access line. But, as I say, to a large extent it is the same consumers paying a subsidy.
886 COMMISSIONER McKENDRY: What undertaking can you make that you will reduce your rates in order to reflect that reduction and expenses that the company will incur?
887 MR. BOWLES: I do not think we make any undertaking. I think Mr. Farmer alluded also to that this morning. I mean, the situation right now, as I say, with a company like Call-Net, is that we are not profitable. Long distance have gone down way too far. To a certain extent we have already competed away any long distance contribution rate reductions.
888 So if long distance contribution evaporates tomorrow and is replaced by another charge I do not think you are going to see a precipitous drop in long distance rates, and I think for a very good reason. They are too low and it has led to a very unhealthy industry.
889 COMMISSIONER McKENDRY: So if we did implement your proposal and we were trying to explain to local ratepayers, whether they be business or residential subscribers, the rationale for our decision it would not be that sure that you are going to be paying more each month as a fixed charge on your local service bill? But, on the other hand, those expenses that were previously being incurred by the long distance providers are no longer there and you will see rate reductions. We have to tell them that this is good for the state of competition in Canada, is that the rationale?
890 MR. BOWLES: This of course is nothing new. I think the last rate rebalancing was in 1991 when the local rates went up. There was a reduction in contribution but there was no direct reduction in rates to end users.
891 I think one thing we have to emphasize is that of course competition seems to be in the public interest. I think about the Commission and the government who have said this quite a bit. The actual charge to the end user is certainly one component of the public interest, but to the extent that the government and the commission feels that competition is in the public interest then getting rid of this kind of mechanism and putting it on a more rational basis is good for the industry and presumably that means it is good ultimately for the public interest as well.
892 Yes, there will be a charge on the end user's bill.
893 MR. KOCH: Perhaps, for fear of interjecting, I could add to that. I think the problem partly is a perception that one of the options is to continue along as we have been going. This is what my comment about getting ahead of ourselves in terms of what the rates went to. We have had a fierce competitive environment in Canada. Consumers have already seen the benefit. Perhaps they have even seen too much benefit.
894 Perhaps we are ahead of ourselves in that sense. I appreciate, in that context, your remark about how do you explain it. I do not think it is just an interest in competition for competition sake. Competition brings innovation. Competition does reduce prices.
895 However, the subsidy system, as it is currently constituted, I think what we are saying is that it is going to drive competitors out of the market and there is a fear about those results. I think it is a real fear. I do not think we are coming here just to scare the Commission. The concern is that the competitors will not be around and that will be a much more difficult thing to explain frankly.
896 COMMISSIONER McKENDRY: You say on page 5 that the profit margins in the long distance business have all but disappeared. I take from that that you still have profit margins.
897 MR. BOWLES: Does Call-Net have profit margins overall, no.
898 COMMISSIONER McKENDRY: So the profit margins have disappeared then?
899 MR. BOWLES: I think in most segments of the market, yes, they have; most segments of the long distance market.
900 COMMISSIONER McKENDRY: Have you filed as part of your evidence in this proceeding information with respect to profitability in the long distance market by segment for your company?
901 MR. BOWLES: I think all we have to do is file our annual report. No, we have filed no evidence to that extent, I don't think.
902 COMMISSIONER McKENDRY: Thanks. Those are my questions.
903 THE CHAIRPERSON: Thank you, Commissioner McKendry.
904 I have just a quick question. This morning we heard from -- I think it was Mr. Jackson, was it? Dr. Jackson, sorry.
905 MR. BOWLES: It took him a long time to get that degree. He went to MIT for years! You don't just throw it out the window.
906 THE CHAIRPERSON: I have been here 10 years and I still don't get it right.
907 It was about the difficulties with subscriber line charge in terms of identifying lines and he demonstrated a box that we are going to be dealing with presumably within a fairly short period of time where we will have as many as four phones plugged into a box that will run down over a single pipe. The subscriber line charge for those who are proposing it seems to have an inherent simplicity to it, but others are arguing that it's not as simple as it may first appear. I wonder what your comments might be on the ease with which one will be able to identify lines.
908 I ask that because you have spent a lot of time today telling us how flawed the existing system is, which is now eight years after we implemented it. I guess up until probably two, maybe three, years ago most people would have said it's probably okay. Now we are looking forward from here to -- I don't know how many years ahead you would argue that whatever you are proposing might be sustainable, but given the changes in technology, do you think it is going to be simple to identify these lines?
909 MR. BOWLES: First of all, I guess any of either the revenue tax or the access line charge -- there are obviously going to be difficulties. You can't get around that. As I guess TELUS was suggesting, revenues will be around forever. Certainly revenues will be around forever. We think it's also straightforward that access will be around forever in some form or another.
910 Some of the things you alluded to on how do you deal with multiple accesses over the single channels we have certainly addressed in our evidence. We think they can be adequately dealt with, but, you are right, they will cause problems. I don't think any of the problems are insurmountable and I don't think they are the kinds of problems that will sort of get overtaken by technological events. Some of them will be difficult, but they can all be handled.
911 THE CHAIRPERSON: Those are all our questions. Thank you very much.
912 I think we will take our afternoon break now and we will reconvene at 20 to 4:00. The next party, I understand, by agreement is AT&T.
--- Upon recessing at 3:35 p.m. / Suspension à 15 h 25
--- Upon resuming at 3:40 p.m. / Reprise à 15 h 40
913 THE CHAIRPERSON: We will return to our proceeding now. The next party is AT&T with agreement, with Axxent following AT&T.
914 Mr. Morrison, please.
ARGUMENT / PLAIDOIRIE
915 MR. MORRISON: Mr. Vice-Chairman and Commissioners, good afternoon. My name is Don Morrison. I am the Senior Vice-President of Government and External Affairs. With me today is Ed Antecol, Vice-President, Regulatory Matters at AT&T Canada.
916 I would like to thank you for the opportunity to speak with you this afternoon. Please allow me to get right to the point.
917 The current contribution regime constricts competition in our industry. Although well intentioned, it has outlived its usefulness given the evolution of the market and the telecommunications technology. Not only is the contribution system currently serving to distort competition in the Canadian marketplace, such as the consumer market, but it is also serving to suppress the government's goal of connectivity by discouraging investment. Its impact cannot be overstated.
918 AT&T Canada appreciates this opportunity to prepare for the Commission a comprehensive written submission which sets out a detailed plan for overhauling the contribution system in order to ensure that a sustainable, fair and efficient subsidy regime is put in place to the benefit of all Canadians.
919 The essence of our plan is simple. First, eliminate the current per minute contribution regime; second, minimize the total subsidy that the contribution scheme supports; and, third, apply a subscriber line charge as the contribution collection mechanism.
920 Before discussing the three parts of our proposal, I would suggest that there are three important principles that hopefully everyone in this room or at least nearly everyone can agree upon. First, support for subsidizing the cost of residential access and high-cost areas is a valuable and important societal goal. It is entirely consistent with the policy objective of affordable telecommunications services mandated by the Telecommunications Act.
921 Second, we can all agree that as important as this subsidy is, subsidies, by their nature, have negative impacts on the telecommunications market. These negative consequences include the subsidy's very difficult and costly administration and the fact that subsidies inevitably disrupt the marketplace in ways that were not intended, sending inappropriate signals to market participants and allowing inappropriate cross-subsidies from markets which are dominated by the incumbent carriers.
922 All of this creates a need for the Commission to constantly change the rules of the game and causes a great deal of uncertainty. This leads me to the third point that I submit we, hopefully, can all agree upon. If we are to have a subsidy, it should be designed so that the negative consequences I have just described are minimized.
923 I would like to turn now to the first part of our proposal. The current per minute contribution regime must be eliminated from our regulatory system. The record of this proceeding reveals that there is near consensus -- and I have heard others say the same today -- that the telecommunications industry cannot move forward without a radical change to the contribution regime. Tinkering with the existing system has proven difficult and ineffective. A creative new approach is required for the following reasons.
924 Firstly, contribution revenues currently now flow almost entirely to the incumbents. A significant portion of these revenues exceeds the subsidy required to provide for residential services at an affordable rate. For example, according to its responses to interrogatories, Bell collects far more in contribution revenues than it requires to maintain all residential rates at affordable levels. Incumbents such as Bell can then use these excess revenues to artificially lower the prices that they charge in the highly-competitive toll market to the detriment of competition in the telecommunications industry.
925 Secondly, contribution is currently collected on toll services which are relatively price elastic. Effectively, by collecting that subsidy from only a single relatively price elastic segment of the telecommunications services, the negative effects of the subsidy are magnified.
926 Collecting contribution only from toll services also affects the design of the network. For example, it causes new entrants to have to maintain separate trunk groups for the purposes of segregating traffic on some of its facilities.
927 Absent the current contribution system, there would be no reason to incur the extra expense associated with maintaining separate trunk groups. In addition, the current per minute contribution mechanism is incongruent with the growing trend for flat-rate calling plans. Because contribution is currently measured in minutes and flat-rate calling plans generate lots of minutes, there is considerable pressure on carriers not to provide innovative pricing arrangements, such as flat-rate calling plans.
928 This is detrimental to the general interest of consumers as it limits the pricing options carriers can make available to them. Importantly, the current contribution system is entirely inconsistent with the growth of Internet, data, packet-switched, voice-over IP and voice-over DSL traffic and the entry of telecom carriers into the broadcast distribution market. None of these services are measurable in minutes, nor can packets be accurately converted into minutes of use.
929 Thirdly, in AT&T Canada's submission, even in the early days of packet-switched networks for voice, the widespread acceptance of flat-rate pricing demonstrates that minute-based pricing is of decreasing importance to customers. Moveover, any preference by residential customers for minute-based pricing is likely to disappear as costs and toll prices continue to decline and with them the need for customers to limit or manage their use of telecommunications services.
930 Finally, the record indicates that the introduction of packet-switching technology has made the current per minute contribution regime unsustainable. It is not possible to distinguish between contribution-eligible packets and those which are not subject to contribution charges. As a result, of all of these factors, the current contribution regime is unsustainable and inequitable and, as we recommend, should be and must be replaced.
931 And now I would like to address the second portion of my comments with regard to the amount of the subsidy requirement.
932 We have proposed, and it is in our written submission, a number of measures that the Commission could take that would greatly reduce the subsidy amount without compromising the societal goal of maintaining a subsidy to guarantee affordable service.
933 Now, I have got some exhibits here and I would ask you if you would be kind enough to turn to Exhibit 1.
934 It is generally agreed that this simplified formula labelled Exhibit 1, which is this one here, is a reasonable way of calculating the amount of the total subsidy.
935 Of course, there is no consensus as to the elements of the formula. However, it is agreed that as the elements of the formula in blue increase, the total subsidy also increases, and conversely as red increases, the total subsidy would go down.
936 Keeping this formula in mind, I propose to use this table labelled Exhibit 2, which is this one, the next one, to demonstrate how the Commission's decisions in this proceeding concerning contribution affect the total amount of the subsidy that must be collected through one contribution mechanism or another.
937 The clear message from this table is that your decisions concerning the details of calculating the total subsidy have an enormous impact on the final subsidy figure and the magnitude of the potential harmful effects of the subsidy.
938 This table has been constructed using data supplied by Bell as part of the interrogatory process in this proceeding.
939 As an aside, AT&T Canada's final submission contains similar figures as you might expect for many of the other incumbents.
940 Column A represents the amount that Bell forecasts it will collect in contribution payments during the year 2000. In other words, under the current per minute contribution mechanism, Bell would effectively collect in excess of $242 million in subsidies.
941 Column B represents the amount of the subsidy Bell calculates it would collect using its Phase II-based cost formula.
942 This table brings into stark contrast the fact that Bell is currently collecting far more in contribution revenues than it requires to cover the costs of meeting the affordability subsidy objective and that the subsidy regime is operating completely contrary to the basic principle that the subsidy should be as small as possible as is necessary to meet its societal goal.
943 Bell made this calculation based on its own assessment of its Phase II costs, plus a 25 per cent mark up on those costs, less its current residential rates.
944 You will note that columns B, C, D and E were calculated on the basis of a fixed amount representing Bell's assessment of the implicit subsidy it receives from providing local service.
945 To digress for a moment, AT&T Canada has outlined in its written submissions, detailed reasons why we believe that the implicit subsidy included in the formula should be larger than that stated by Bell. However, for the purpose of simplifying this table, we accept the implicit subsidy figures proposed by Bell.
946 Column C involves exactly the same calculation as Column B except that instead of using Phase II costs chosen entirely by Bell, this figure represents costs that include capital costs for economic development calculated consistent with the Commission's ruling regarding equipment economic lives in Decision 98-2.
947 Column D is particularly enlightening. It is calculated on the same basis as Column C except that a 10 per cent mark up is included in Column D, while the traditional 25 per cent mark up is included in Column C.
948 As you can see from the table, reducing the mark up from 25 per cent to 10 per cent, reduces the amount of subsidy by almost one-third.
949 Let's pause for a moment here. The incumbents have maintained for many years not that a mark up of 25 per cent on Phase II costs accurately reflects their true costs.
950 For the past five years, the incumbents have been saying to you, "We can't support empirically this level of mark up but we know it's right." And the Commission has accepted them at their word.
951 In this proceeding, the incumbents could have chosen to do the studies and represent the figures that would have justified a 25 per cent mark up. Instead, they have presented nothing.
952 I submit that you should draw an adverse inference against the incumbents from the fact that they chose to withhold from you the data that you need to make the best decision.
953 In other words, we request that you conclude that the incumbents have not supported their claim to a 25 per cent mark up because such a figure is not justifiable. They have not backed up the 25 per cent figure because they cannot.
954 The Commission has the heavy responsibility of meeting the objectives set out in the Telecommunications Act in a principled manner.
955 Let us look at what evidence has been put before you to act as the foundation for your principle determination of the appropriate level of mark up.
956 On one hand, the incumbents have given you no evidence, no data and no principle argument why 25 per cent is the appropriate figure.
957 The incumbents bring you nothing of their own but have the audacity to criticize the evidence of others. Moreover, they base their criticism in part on the alleged incompleteness of our evidence when the incumbents are the only ones who could really complete the data. They have chosen not to do so. On the other hand, we have proposed a mark up of 10 per cent based on publicly available information.
958 AT&T has inferred from the fixed common cost factor provided by the incumbents in other proceedings that a mark up in the 10 per cent range would be sufficient to recover forward looking fixed common costs.
959 As I have already mentioned, Bell has taken the position that 10 per cent is not enough to cover the costs but has chosen not to provide you with any data to back up that claim.
960 Commissioners, you have a choice. Do you accept the incumbents' unsupported assurance that 25 per cent is the appropriate mark up despite the fact that for five years this mark up has been at issue and they have chosen to develop not a stitch of evidence to support it or do you favour AT&T Canada's proposed 10 per cent mark up which is based on empirical data, all this in the context of the very significant impact that the magnitude of the mark up has on the total subsidy.
961 In our submission, the Commission's legal obligation is clear. The only evidence on the record suggests a mark up in the 10 per cent range and we respectfully submit that that figure should be applied to the calculation of the total subsidy.
962 May I ask you to again take a look at Exhibit 2.
963 Column D illustrates the point that the subsidy is only meant to be applied to high cost areas. In other words, the subsidy is only meant to make services affordable. It is not to reduce the overall price of local telecommunications services paid by consumers.
964 This was recognized by the Commission in its Decision 99-16. In this context, it must be remembered that the vast majority of consumers pay for the subsidy that is directed toward the few who need it. Therefore, a subsidy scheme is only in conformance with the policy objectives of the Telecommunications Act if it is targeted at providing a subsidy to those who live in areas where the cost of providing telecom services is greater than a threshold affordable rate set by the Commission.
965 As it is clear from the formula, the higher the threshold, the affordable rate set by the Commission, the lower the total subsidy. In setting this threshold affordable rate, the Commission can exercise its discretion to raise or lower he bar over time and thus increase or decrease the pool of people who will receive the subsidy.
966 Where the Commission places this threshold bar has an important effect on the total amount of the subsidy and on its negative consequences. This can easily be seen by the difference between columns D and E.
967 Under column D, Bell calculated the amount of the subsidy on the assumption that the threshold affordability rate was the same as current residential rates.
968 Under column E, the affordability threshold rate was raised to $30.00. Thirty dollars reflects an affordability figure used by the Commission in a recent decision concerning the independent telephone companies.
969 Of course, setting the affordability threshold above current rates necessarily means that additional revenues will have to be generated by the incumbents to fill the gap.
970 In the event that the Commission decides to use an affordability rate threshold for purposes of the subsidy requirement, it would not be necessarily for the Commission to mandate prices to that level.
971 However, AT&T Canada proposes that in high cost areas, the telephone companies be given the flexibility through the price cap mechanism to raise rates no higher than the affordability threshold. Any such rate increases would be within the range of rates approved by the Commission.
972 Of course, reducing the total amount of the subsidy is not AT&T Canada's only request of the Commission.
973 The mechanism chosen to collect this subsidy is also very important and this then brings me to the third and final portion of my remarks, with regards to AT&T Canada's recommendation for the actual mechanism to be implemented.
974 AT&T Canada submits that a subscriber line charge mechanism is the best regime available to collect the subsidy funds.
975 Let me be clear. All of the collection mechanisms proposed in this proceeding are flawed in one way or the other and will have negative consequences. But on balance, and recognizing the need to collect the subsidy somehow, AT&T Canada believes that a subscriber line charge is the best methodology. This is the case essentially because of its relative administrative simplicity.
976 AT&T Canada believes that a subscriber line charge is the preferable contribution mechanism for a number of reasons.
977 First, the application of the subscriber line charge would largely be limited to facilities-based carriers. Therefore, the number of telecom service providers participating in the contribution mechanism would be fewer than, for example, a revenue-based collection mechanism.
978 Secondly, we can readily identify the items to which a subscriber line charge would apply and there would be no need for an exhaustive list or definition of all basic or contribution-eligible services.
979 Third, a subscriber line charge mechanism can easily accommodate the bundling of contribution eligible service elements with contribution-ineligible service elements.
980 Fourth, applying the contribution mechanism to access rather than usage of particular services will reduce the uneconomic barriers to the introduction of new services, thus promoting innovation.
981 Fifth, access is relatively price inelastic in nature and, therefore, any suppression in demand for access that results from the imposition of a subscriber line charge is unlikely to be significant.
982 Overall, AT&T Canada believes that a subscriber line charge is the best method of collecting funds to support the affordability subsidy on a sustainable and fair basis.
983 AT&T Canada's position can be summarized in three points.
984 Number one: the current per-minute mechanism is deeply flawed and has to go.
985 Number two: the total amount of the subsidy should be no more than is absolutely necessary to sustain the provision of residential service in high-cost areas at affordable rates. Reducing the mark-up from 25 per cent to 10 per cent is consistent with the evidence on the record and will go a long way towards squeezing the fat out of the subsidy.
986 Number three and finally: a collection mechanism based on a subscriber line charge is not perfect, but it is the best methodology available in the circumstances.
987 Thank you very much for listening and Ed and I are available for comments and questions.
988 THE CHAIRPERSON: Thank you, Mr. Morrison.
989 Commissioner Langford?
990 COMMISSIONER LANGFORD: Surely, you have put it down as undecided?
991 The one obvious question that people have talked about replacing it, there is no doubt that there seems to be a consensus as you accurately said that that is the way the wind is blowing in this room today if there is any air movement at all.
992 But it can't have failed to come to your attention that your choice leaves you in a somewhat different position than you are in today. You may feel you have just paid enough over the years and you have got a credit or something like that, but do you feel that companies such as yourself should simply be allowed to walk away from this scheme completely? Because you did speak rather eloquently about the purpose of subsidies and affordability and obviously, it's something you believe in.
993 MR. MORRISON: Yes.
994 COMMISSIONER LANGFORD: But at the same time, your company is exiting stage right. Is that fair?
995 MR. MORRISON: Well, first of all, I would say in total, I don't think we are exiting. I would say that I think what the Commission wants and what the government wants is different companies building out network infrastructure so that there is healthy competition.
996 What we have been sharing over the course of the last few months is what we consider to be a fair and equitable regime in order for us to be able to do that and then generate a reasonable and fair return.
997 So I don't think that we can make a statement that we are exiting at least the contribution regime. I suspect you can say that what we are trying to do is find a different mechanism so that we are not encumbered with the costs that we have been encumbered with over the course of the last few years.
998 I mean quite frankly and flatly, there is a shift here. There is a shift that is being recommended. I would offer that there is a direct causal link between the cost that is incurred today and our current financial position.
999 There is no nice way of dressing it up, but my sense is the Commission wants competition and I think our self-interest is consistent with the Commission's and the government's overall interest that you do want networks built out. You do want competition. I think we all participate to a certain extent in our obligations for connectivity.
1000 There are other ways, which I am not going to elaborate on just so that it's not a long winded response, for companies like AT&T Canada to help out other parts of Canada, particularly in high-cost serving areas rather than just some artificial subsidy mechanism.
1001 COMMISSIONER LANGFORD: What about a transitional step of the sort that the representatives from Bell Canada suggested this morning where you would have a mixture of the line charge you are advocating, but maintaining something of the per-minute system we have now so as to kind of lessen the blow? It seems to me that if you take the cumulative effect of what you have said here, there are people out there that are going to feel that. I don't want to sit here and play on some kind of violin, but it must be clear to you that people are going to notice those changes, the cumulative effect of them.
1002 MR. MORRISON: Yes, absolutely. Our arguments have been, first of all, based on this notion of simplicity. I have had the great benefit of being on both sides and I do think that the Commission has an obligation or responsibility to looking at how this is introduced in a way which is gradual.
1003 I would say from AT&T Canada's perspective we have a definitive interest around something which very simply moves us from the current system to this new one that we are recommending. You have broader interests, but what you can expect is complete authenticity from us. We very much are in a stage right now, from a financial perspective, where the existing regime is unbelievably onerous on us. It's a huge per cent of our total cost.
1004 I listened this morning to Bob and to Dennis talking about Bell Canada's proposal and I recollect from my days at Bell that, ultimately, what we wanted back then was something simple. I don't think that proposition has a measure of simplicity to it. There are elements in there that are the sustaining of the complexity that we have and the shifting to something new. So our recommendation would be to shift to something which is comparatively simpler and, obviously, that's helpful for us.
1005 Ed, I don't know if you want to comment at all, but feel free to do so.
1006 MR. ANTECOL: No, it's okay.
1007 COMMISSIONER LANGFORD: I guess we could go on all day, but that's clear. Thanks very much.
1008 THE CHAIRPERSON: Commissioner McKendry?
1009 COMMISSIONER McKENDRY: Thank you, Mr. Chair.
1010 I would like you to clarify something for me on page 8 of your oral comments where you talk about affordability. Am I correct in interpreting that for AT&T affordability is only an issue with respect to high-cost areas?
1011 MR. MORRISON: First of all, no. I think affordability is a national issue right across the country. So, no, I wouldn't say affordability is purely in high-cost serving areas. Where, Mr. McKendry, I have stated that or if I stated that --
1012 COMMISSIONER McKENDRY: I am not sure you have. I just want to make sure I understand it. You say in the first sentence, "Column D illustrates the point that the subsidy is only meant to be applied to high-cost areas." I just want to make sure that I understand what you mean by that because one could take it that you are only concerned about affordability in high-cost areas.
1013 MR. ANTECOL: I think there is two issues. There is a general issue of affordability for low-income Canadians and that's a problem. I am not sure that we are going to be able to solve that in this room. The problems run deeper than just the price of local telephone service.
1014 With respect to a subsidy to ensure that phone rates remain affordable in all areas of Canada, we are proposing a national affordability threshold. That would be necessary in order that there not be any discrimination or unjust preference in terms of Canadians receiving greater subsidies in one part of the country than others and that customers that are situated in areas with similar economic costs for telephone service receive the same amount of subsidy or, in the case of low-cost serving areas, pay the same amount of subsidy. I think there are really two issues in your question.
1015 COMMISSIONER McKENDRY: But you acknowledge that affordability could be an issue in downtown Toronto?
1016 MR. ANTECOL: Absolutely, but I don't think the Commission is going to be able to solve that problem through any kind of mechanism that it might attempt to implement.
1017 MR. MORRISON: If I can just finish, Mr. McKendry, my recollection is that when we switch from rate groups to the banding concept, the ones most significantly impacted -- because the whole notion of rate groups was based on the number of telephones and banding was based on costs, those that saw the highest changes were those that were comparatively in high-cost serving areas. So the issue for all of us has been that in the high-cost serving areas is where they have seen the most dramatic increase in rates. It doesn't carry then that affordability is only an issue in high-cost serving areas, though.
So the issue for all of us has been that in the high-cost serving areas that's where they have seen the most dramatic increase in rates. It doesn't carry, then, that affordability is only an issue in high-cost serving areas, though.
1018 COMMISSIONER McKENDRY: If we accepted your proposal to put in place a subscriber line charge, and thereby relieve AT&T -- I think as you pointed out of a significant amount of expense -- can you make any undertaking to your customers that these savings will be passed along to your customers?
--- Pause / Pause
1019 MR. MORRISON: Ed is saying that we would assure all participants that the level of investment in the network would increase. We would not make the assurance that prices would decline. The comment that I would make is that prices have declined to a point right now where they are right on top of our costs already. And that is -- I mean, we can talk about that, if you wish, but I think previous folks that have been up here have talked about the declining margin. Contribution is principally an issue because of the relationship of price to cost.
1020 COMMISSIONER McKENDRY: So the cash flow that would be generated by eliminating your contribution expense would be invested an equal amount in capital expenditures on your network. Is that correct?
1021 MR. MORRISON: Yes.
1022 COMMISSIONER McKENDRY: Thanks.
1023 THE CHAIRPERSON: Just a couple of questions on the chart that you showed, Exhibit 2 --
1024 MR. MORRISON: Yes.
1025 THE CHAIRPERSON: And I take it, too, from your presentation, as you were just discussing with Commissioner McKendry, you are not suggesting we should necessarily mandate a $30.00 rate across the country, but that would sort of the bench market? So you are looking at --
1026 MR. MORRISON: Right.
1027 THE CHAIRPERSON: -- kind of a national threshold, if I can use that term for --
1028 MR. MORRISON: Correct.
1029 THE CHAIRPERSON: -- residents' rates across all bands --
1030 MR. MORRISON: Correct.
1031 THE CHAIRPERSON: -- which would be the $30 rate?
1032 MR. MORRISON: Or in instances -- sorry to interject, but in instances where the costs, plus the mark-up, are being met by a rate and it may be below --
1033 THE CHAIRPERSON: Right, in bands A --
1034 MR. MORRISON: Right.
1035 THE CHAIRPERSON: -- or whatever. Yes.
1036 And I may have missed this in your presentation because I was thinking about other elements of it as you were going through -- you spent a lot of time on the 25 per cent mark-up, and that's fine -- but if we were using scenario E, if you will, the right-most one, where you have the Phase II costs resulting, I guess, from 98.2, with a 10 per cent mark-up in this $30.00 affordable rate, have you calculated what the subscriber line charge assay would be, because I don't know whether you said that in your presentation or not?
1037 MR. ANTECOL: We haven't said that in your presentation, but if you take an $11-million subsidy and an estimated 10 million lines that would be paying the subsidy, you have about a dollar a year, or in the order of 10 cents a month that we are talking about as a subscriber line charge.
1038 THE CHAIRPERSON: Now, there has been a lot of talk on both sides of this issue. It seems, as you have noted, there is a fair bit of consensus on the need to come up with some alternative, and essentially there is two models on the table, the revenue one and a subscriber line charge. And depending on your point of view, or where you come from, one seems a little more favourable than the other. It seems to me, after having read a lot of the material and having heard the presentations today, the argument -- those who advocate each one and argue that it is more simple than the other one --
1039 MR. MORRISON: Right.
1040 THE CHAIRPERSON: -- and I don't how and argue that it is going to be easily to administer -- and Mr. Bowles previously noted how difficult it has become. I don't know how difficult this one will be become once you start to peel away the different layers of the onion and we start to find out how do we measure what the line really is or how do we figure out which revenue we are really going to tax. Just to get a sense, though, from you, if we were on a scale from 1 to 10, and 1 was the existing regime which you want to get rid of and 10 was the most desirable, so for you subscriber line charge is a 10, where would the revenue tax be? Is that a 9 or is that a 2?
1041 MR. ANTECOL: I would put it, perhaps, as a 7. It is up there high, possibly even 9. In the early days of this proceeding, when we filed initial evidence, we were completely undecided. Both methods had their pros and cons --
1042 THE CHAIRPERSON: I noticed.
1043 MR. ANTECOL: -- and we really were an undecided and we asked a series of interrogs of parties and we thought long and hard about the different methods and we came down on the side of the subscriber line charge. But it was a difficult exercise for us.
1044 THE CHAIRPERSON: Now, one of the suggestions earlier today was that with a revenue tax that was passed on to subscribers, and showed up as a line item on the bill, if you had the revenue tax, which would be more like a revenue-based subscriber line charge -- if you can use that complicated term --
1045 MR. ANTECOL: Yes.
1046 THE CHAIRPERSON: -- if we are woken up for a name, it might reflect more the usage of the network, where those who use the network more would pay more, if you will, towards the contribution. Does that sort of notion have any merit for you?
1047 MR. ANTECOL: That is correct. But I guess the problems that we would run into is drawing lines about which revenues would be included in the tax and which ones would not and how you deal with the concept of a bundle, where the bundle contains some services that would be taxable and other service elements that aren't and how you do the pricing, and those were some of the problems that we really couldn't solve completely with respect to a revenue tax. Not to say that they can't be solved, but it may require an extensive code or revenue tax code, which would have to be updated constantly in order to properly apply the revenue tax.
1048 THE CHAIRPERSON: Would we not have similar problems, as Dr. Jackson was noting, with his box where you could plug the floor Internet telephones into --
1049 MR. ANTECOL: I don't think so. We have addressed that in our filing of comments today. We do acknowledge that a single access that comes from our data network today -- single port -- on that you can have multiple working telephone numbers and support multiple conversations at any time. And we have proposed a model in our comments to address that.
1050 Essentially, what we are saying is that consumers will still need telephone numbers, there will still be a public switch telephone network around for a while, where consumers on one network will still need to talk to consumers on the other network, and people will still need phone numbers if they want to be reached. And so you can apply the subscriber line charge, based on working telephone numbers associated with an IP port. And the problem there is that for very large companies that would have IP-PBXs, or other pieces of equipment that could support very large WTNs, it wouldn't be equitable to apply the charge per WTN. So we are proposing a threshold, much like a multi-line trunk situation, where, after a certain number of WTNs on a single data port, you apply a lesser charge so that you have parity between PBXs and IP-PBX-type devices and that threshold being 4 WTNs on a data port.
1051 So we have thought about it and we do have a solution for the problem that was talked about this morning.
1052 THE CHAIRPERSON: It occurs to me that -- I take it your position is the right-most column here, motion E, to calculate the subsidy requirement?
1053 MR. MORRISON: And recognizing there is a lot of work that would need to be done. But, yes, that is our proposition; in other words that getting to a $30.00 affordable rate isn't something that you flash cut to when the new regime is implemented.
1054 THE CHAIRPERSON: If you could go that far, why would you stop there and leave $11 million on the table? Why wouldn't you just get rid of it altogether, if we are talking 10 cents a month?
1055 MR. ANTECOL: Well, this analysis was done for Bell Canada. In fact, there may be greater subsidies still required. And I think the short answer was it would be nice to get rid of subsidies all together, but there is still going to be a need for subsidizing telephone service in high-cost areas.
And in the circumstances of Bell Canada, and our evidence has numbers and data for these telephone companies, as Mr. Farmer commented this morning, in his view that would be a different scenario on the table. A buck would do it for them. In our view, depending on how you define the subsidy, 10 cents would do it. But we do see a continuing need for a subsidy in high cost areas.
1056 THE CHAIRPERSON: Have you taken a look at what this would be if one approached it on a national basis then?
1057 MR. ANTECOL: No, we have not done the calculations but I can tell you for you specific companies which is at page 122 of our evidence presented today. For example, Manitoba Telephone would have a requirement of $26 million. So, depending on the company, it would be greater or smaller. So there is an example of a rural company with a greater subsidy requirement than Bell Canada's.
1058 THE CHAIRPERSON: Do you have an idea what the range of the subscriber line charge would be, 10 cents being the lowest?
1059 MR. ANTECOL: It would definitely be less than $1.00 but I do not have an exact number for you at this time.
1060 THE CHAIRPERSON: I guess I would still ask the question then, why would you not be proposing just to get of it if we are down to $1.00?
1061 MR. ANTECOL: Well, it would be very nice to just get rid of it but I do not think that--
1062 THE CHAIRPERSON: What I am really getting at is do you think it is sustainable?
1063 MR. ANTECOL: Yes, but I also think that there are areas in the country where the cost of local service could be as high as $60.00 a month and perhaps even higher than that. So there is still going to have to be some kind of subsidy incentive for a phone company to go out and provide local service to those subscribers. Either the subscribers are going to have to pay the full $60.00 or there is going to have to be a subsidy over and above, an affordable rate to support that local service.
1064 So in our view I do not think you can completely get rid of the subsidy, although it would be really nice to do so.
1065 THE CHAIRPERSON: Okay. I understand Commissioner Williams has a question.
1066 COMMISSIONER WILLIAMS: Sure. My question deals with the distribution of a study on either a national, regional or provincial basis. Other presenters have suggested a preference for one or the other. I am curious as to where AT&T stands on this issue.
1067 MR. ANTECOL: Ours is a national. We have recommended a national distribution.
1068 COMMISSIONER WILLIAMS: On the distribution side as well?
1069 MR. ANTECOL: Yes.
1070 COMMISSIONER WILLIAMS: Okay. Thank you.
1071 THE CHAIRPERSON: Okay. Thank you very much, gentlemen. I appreciate your help.
1072 The next party then will be Axxent Corp. Good afternoon, gentlemen.
ARGUMENT / PLAIDOIRIE
1073 MR. JARRETT: Mr. Chairman, commissioners, ladies and gentlemen. I am Dave Jarrett, Vice-President Regulatory Affairs and Carrier Relations for Axxent Corporation.
1074 Let me introduce the gentlemen with me. On my left is Norm Peacey who is Director of Regulatory Affairs for Axxent, and Kin Dillane who has been doing a good deal of regulatory consultating on behalf of Axxent, and both gentlemen played a large role in preparing our final comment which was submitted today.
1075 Let me take just a moment to introduce Axxent since it may not be familiar to all of you. We were formerly UPTEL Communications Corporation. As UPTEL in February of last year we became a Canadian carrier. In the summer of last year we became a competitive local exchange carrier and a IXC. Prior to that we operated for a number of years as a re-seller of both local and long distance services in Ontario and Quebec.
1076 Our discussion is in a different format than the others that have been presented today. Our presentation is in point form, slide format, rather than a narrative one. Among other reasons, this gave us more opportunity to be flexible in what we actually said as the proceedings unfolded today.
1077 I will emphasize four main themes during this presentation. They are in the slide entitled "Overview". There is a fifth main theme which perhaps overrides all of the others and I will discuss it as part of each of the other themes, and that is simplicity and ease of administration.
1078 Life was much, much easier as a reseller than it has been as a CLEC and IXC and since we became one we have spent a great deal of time struggling with the current regime. So we are now quite familiar with it and our presentation will emphasize something that is easier for the Commission, the industry and the CFA.
1079 The four themes that I will talk to today are: First, that the per minute contribution is unsuitable and inhibits sustainable competitive entry; that revenue base collection is the most appropriate to the Canadian environment; that all Canadian carriers and their eligible affiliates should make contribution payments; and that mechanisms should be put in place to reduce the subsidy payout on an annual basis.
1080 First, that the per minute contribution is unsuitable and inhibits sustainable competitive entry. I do not think I could say that more eloquently than two of the long distance competitors that preceded me here that the regime, as it has unfolded over the last years of long distance competition, if it continued that way, would make competitive entry very limited indeed.
1081 It is collected on a very narrow portion of the total telecommunications market and it is based on a market with either shrinking or non-existent margins. We believe it distorts the economically efficient functioning of that market.
1082 As the previous testifier said, it necessitates network arrangements that may not be optimum from a network and technical efficiency point of view just in order to be able to measure the contribution payments that are eligible.
1083 The way it has unfolded in the last years it has in effect been a tax on the poor to sustain the better off, the poor being the new entrants for the most part over the last few years, the better off being the incumbents.
1084 It is very complex an inefficient to administer. In my experience with it, it has been a field day for the auditors and the lawyers. And it has been a continual source of creating companies to find new and creative ways of avoiding it. I think whatever new regime the Commission puts in place should look at a mechanism that just does not allow for all this creativity or all this energy being spent on creatively avoiding a subsidy regime.
1085 We believe the current method is not compatible with evolving technology. And, like many others who spoke here today, we see a packet-based world evolving very quickly.
1086 We list some specific criteria that we would like to see in a new subsidy regime. I think at the very top of the list we would put administratively efficient. We would like it to be technology neutral and competitively neutral and certainly sustainable over time.
1087 As technology evolves and as competition evolves, as new networks evolve, as new services evolve, the regime should be one that can last through the next decade or as long as it's needed. It would hopefully be one that reduces over time. It must be one that maintains universality and we agree with the other participants here that affordability is an issue, high-cost serving areas are an issue.
1088 I will talk more about it later, but we support a national contribution regime and think it's important that as a national regulator and with most of the players, the incumbents and the new entrants, quickly becoming national carriers, regimes that are company-based or regionally-based are not in the best interest of the country, nor are they going to be the easiest to administer. They add unnecessary complications and I don't think meet the goals of the Commission and the government.
1089 We would like to, I think, return to what was once, I believe, a strong principle of contribution and that is that profitable market segments contribute and not unprofitable ones. We would like to see one in which avoidance opportunities are minimized.
1090 Why are we proposing a revenue-based calculation? On the scale of zero to 10, Mr. Chairman, that you proposed earlier, in our minds, revenue is clearly at the 10. In a past life, one of my tasks was to try to define what a network access service was as new services were brought in and new technologies emerged and that is very, very difficult and arguable, even with today's technology.
1091 As the new technologies emerge, the packet networks, the voice-over IP, I think we would get right back into an issue of avoidance through creative provision of services that were not necessarily the most economically efficient or most desired by consumers, but would attract the least contribution under whatever definition was used of a line-based charge.
1092 So on that scale, I would place the current system at a zero, a line-based charge at no more than 5 or 6, and a revenue-based charge at the top, especially a revenue-based charge of the type that we are proposing in our final submittal.
1093 I think it is very possible -- and I think we heard some examples of it today -- to devise a revenue-based scheme that would be an administrative nightmare. You will not find one such in our proposal. We are proposing one that is very broad-based, we believe very easy to administer, and one that will avoid most opportunities to avoid paying the charge through creative technologies or creative organization.
1094 The proposal that we are making is very simply to take the audited operating revenues of eligible companies, which I will get to in the next slide. We would take the audited operating revenues of the previous year, so there would be a lag, but at the start of the year for which the contribution would be payable, it would be based on those audited reports of the previous year.
1095 At the start of the year, the total eligible revenue base would be known, the subsidy requirements would be known, and each player would know with almost absolute precision what its contribution liability would be for the whole year. We would know that at the start of the year.
1096 The only true-up mechanism required with this proposal would be for contribution-eligible players that left the industry during the year before they had paid the full amount of the subsidy that was owed by them based on their audited revenues of the previous year and where such a player did exit the industry and there was a shortfall in the collection of subsidy because of that exiting the industry, that would be a true-up that would be calculated and added to the subsidy requirement of the following year.
1097 We would include all of the audited revenues of affiliated telecommunications service providers. This would require the Commission to go a little bit farther than the Act does in defining exactly what a telecommunications service provider is. Axxent can agree with some earlier comments that affiliates that provided directories or terminals or donuts would not have contribution-eligible revenue.
1098 However, if those services were provided by the eligible carrier, then those revenues, whether they be from donuts or directories, would be eligible for contribution. Eligible carriers would always have the option to spin off into separate portions of their company that were delivering non-TSP services. So that might be the toughest challenge, but it could be defined at the outset of the regime and the Commission would have to say a company that's in this business is an eligible TSP. A company that's not is not.
1099 Eligible TSPs -- and this would be no matter of definition; I believe it is already defined -- would be all TSPs who are classified as Canadian carriers. This is the group of companies that the Commission clearly has authority to extend contribution to. This would be the broadest possible base for contribution and would cause it to be least distorting of markets. So all TSPs who are Canadian carriers and all affiliated telecommunications services providers of those Canadian carriers should be contribution-payment eligible.
1100 As examples of types of companies in that class today -- and this line is blurring on an ongoing basis as companies in the industry become all of the ones below -- are local exchange carriers, whether ILECs or CLECs, wireless service providers -- and heaven knows the new varieties of those that will be coming into the market over the next few years -- -- competitive access providers and long distance service providers. The key part of this definition is Canadian carrier as the basic element of the contribution-eligible company and affiliated TSPs of Canadian carriers.
1101 We do propose a threshold for subsidy payment. We proposed this threshold to help meet the objectives of the Commission and the objectives of the government to establish sustainable competition in Canada across the whole spectrum of the telecommunications markets. We, thus, recommend that there be no contribution subsidy payments until a new TSP's fifth year of existence or its EDITDA turns positive, whichever occurs first.
1102 This is in effect a return to maybe one of the very original principles of contributions that positive profitable markets would subsidize more necessary, but less profitable markets that weren't carrying their own rate it was optional services and contribution to local services prior to 1992, and when the 9212 regime started out, and long distance was a profitable service that carried on. This proposal helps restore that, that it encourages new entrants it doesn't tax them until they have had a chance at least to start to have grown to the point where they can start to get full utilization of their large initial investments in this industry.
1103 EBITDA is a very common measure in the telecommunications industry, and all telecommunication service providers use it to help investors understand the company's operating results. When this measurement is in a positive position it is generally considered that a company has generated earnings from its operations, and it conversely when in a negative position the company has not generated such earnings.
1104 The total subsidy requirement in public notice 2000-27, which is the restructuring of the rate bands. One of the objectives of the Commission in that public notice was to more narrowly defined what was more narrowly defined bands that better identify high cost areas. We are fully in support of that. We are fully in support of the subsidy being better targeted to true high cost areas. We believe that a subsidy regime could well support an annual productivity offset. That the traditional servers of high cost areas will have continuing opportunities for implicit subsidies from such things as the optional services provided to basic, subscribe basic service subscribers in high cost areas. We would support a measure of further rate re-balancing done over time to help narrow the subsidy requirement, and perhaps to do away with it all together in a reasonable period of time.
1105 Again for Simplicity, for ease of administration for what we see as meeting a national goal Axxent would support a national base for the contribution regime.
1106 We would dearly love to get rid of the current mechanism as soon as possible, and move to something that would have a -- not be such a field day for the lawyers, and accountants, and financial types. We would love to see the revenue-based collection mechanism as we have described in place by January 1, 2001. Although we believe with others that have presented and discussed today that the new mechanism should, or the new calculation of subsidy requirement should best be done perhaps a year later when the PN2000-27 has run its course, and the new bands have been defined, and when the submissions have been heard in the new price cap proceeding during the next year.
1107 So to sum up, Mr. Chairman, it's our position that per minute contribution is unsuitable, and inhibits sustainable competitive entry. Certainly it hasn't inhibited competitive entry. There's a great deal of it, but we share the views of others that it may well be unsustainable with the current regime. That a revenue-based collection mechanism is the most appropriate to our environment, and perhaps most environments. That all Canadian carriers, and their eligible affiliates should pay contribution.
1108 The only things subtracted from those total audited revenues again for Simplicity would be payments those carriers, or eligible affiliates made to other carriers to avoid double counting. They would subtract contribution received, and GST and PST because if you don't subtract those you are taxing tax which I don't think a regime needs to do.
1109 So the opportunities for avoidance would be minimized. The base would be extremely broad, and we believe the methodology would not be totally without new definitions. Most companies today don't calculate, probably don't have audited inter-carrier payments. That would be a much simpler number for an audited statement to be made to the CFA than the process today of audited eligible minutes that must be submitted with the current mechanism.
1110 We would suggest that would be one new element. The other new element would be defining what an eligible TSP was if they were not a Canadian common carrier.
1111 Finally, that the total subsidy pay out should be reduced annually through a series of mechanisms. So that concludes our presentation. We would welcome any questions.
1112 THE CHAIRPERSON: Thank you, Mr. Jarrett. Before I turn questioning over to Commissioner Cram I should note that sitting up here with me are four lawyers and one accountant.
1113 COMMISSIONER CRAM: And, I'm one of the lawyer's, and I don't mind. I just wanted to get back to page 6 when you were talking about the revenues. What I was trying to understand was you wanted to include all of the revenues, including the revenues of the affiliated TSP, but if it was, if I understand it correctly, an optional type of service, like a directory or a terminal equipment it would be included in a revenue if it belonged to the company or the affiliate?
1114 MR. JARRETT: If it belonged to the Canadian carrier it would be included as a revenue. If it belonged to the Canadian carrier it would be included as revenue that was eligible.
1115 In other words if Axxent had a directory company that was part of Axxent that would be eligible revenue. If it was decided that companies in the directory business on a standalone basis were not eligible for contribution, and Axxent chose to spin-off its directory company then Axxent would have that option, and because that was determined by the Commission as not being a telecommunications service provider type of function those revenues would not be counted.
1116 COMMISSIONER CRAM: Okay. So what I guess I don't see is it would still be though essentially a subsidiary getting those revenues, and all you are really saying is just create another corporate entity and get it out of there. Is that the point?
1117 MR. JARRETT: That is the point. I guess that is an option that companies would have. I wouldn't see that as avoidance. I think one of the presentations earlier this morning said that one test would be if companies are in a particular business that had no need to be telecommunication service providers at all, like alternate directory companies that are springing up, and if they are in that business and we are in that business as a telephone company, or as a Canadian carrier and we think the contribution is onerous enough on the revenues that comes from that part of the business we could make things equal by spinning it off.
1118 I guess the other part of my argument, Commissioner, is that with the very broad based revenue that is in this proposal it just might not be significant enough on a particular dollar of revenue to make that a worthwhile thing to do. It might just not force re-organizations for the sake of avoiding contribution with the very broad base that we are proposing.
1119 COMMISSIONER CRAM: So you are really saying it's a type of income tax analogy avoidance as opposed to evasion by spinning off.
1120 Is that the concept when you are talking about those options?
1121 MR. JARRETT: No, I'm saying the option to spin-off, if the commission has determined that a particular set of service or set of services that's being provided would not be evasion, it would truly be avoidance.
1122 COMMISSIONER CRAM: So my point was we are still going to have to decide what revenues would be subject to contribution, or what--
1123 MR. JARRETT: You would have to decide what a TSP is, other than a basic service provider. But I would define all Canadian common carriers as TSPs. It would be the affiliate functions that would require some definition.
1124 COMMISSIONER CRAM: Thank you.
1125 THE CHAIRPERSON: Thank you, Commissioner Cram.
1126 This issue about the revenue tax and whether this is passed on to the consumers as an explicit line item on the bill, or whether the companies either pass it on through rates for various services or just eat it or whatever. Do you have a view on that?
1127 MR. JARRETT: In our view, Mr. Chairman, again with this proposal the revenue would be collected over such a broad base of so many services and so many companies compared to a per line charge or compared to today's permanent charge, that I believe it would be unnecessary to identify it on a customers bill. I think it would be unidentifiable to a particular service, so you couldn't put it on that aspect of the bill, and I think it would be a very small amount for a typical customer.
1128 THE CHAIRPERSON: One of the earlier parties today, I think it was Call-Net, Mr. Bowles was indicating that one of the problems with that is competitive equity and that some of the companies that may be in many more businesses than others could levy the fee against some of the less competitive services and not against some of the more competitive services and might create some competitive inequities as between players. Do you have a view on that?
1129 MR. JARRETT: With a very very broad based revenue based scheme, and I think that with all companies -- not all companies, most companies -- entering into many lines of business that were traditionally segmented before, I don't think there would be enough, if you like subsidy tax or contribution collectible that that would be a major issue. If it is with any players, it would be the incumbents, but if the tax were quite -- or if the contribution amount was calculated on the narrow or definition that the commission is attempting to move toward and if it is reducing over time, I think that would disappear as an issue or a problem very very quickly.
1130 THE CHAIRPERSON: Finally, the issue you raised on page 8 of your overhead or your presentation here today, this business of no contribution subsidy payment until the service providers fifth year of existence, or its EBITDA turns positive. I'm having trouble, as far as I know you are the only party in the proceeding who has advocated this sort of a proposal. Why would we have the current player in effect subsidizing the new entrant?
1131 MR. JARRETT: I think in our view this has a couple of bases in logic. One is that contribution until very very recent years was collected from profitable markets. I think we have moved away from that in the last few years. This would help in some small way to return to that because new entrants are not going to be profitable, have no hope of being profitable in their first years of existence in the marketplace.
1132 The more important reason I think is that if new entrants are allowed to avoid it for a five-year period or until they become positive, it gives a more sustainable basis of entry to the market. You are liable to get more entrants that are around for five years with this regime.
1133 I think if the commission were to accept a very very broad based regime like the one that Axxent has proposed, this may be an insignificant thing because it would spread the revenue over so many services and so many players that it might not be onerous on anyone. But the basic arguments are to help stimulate new entry, sustainable new entry and to in effect collect the contribution from profitable segments of the market which will not be new entrants.
1134 THE CHAIRPERSON: Well I guess going back to your principle though, you talked about the principle of contribution coming from profitable services, and I guess that was fine in a regulated monopoly environment. But in a competitive environment I suppose one could even argue that the whole notion of contribution isn't even sustainable when by the nature of competition you are driving prices to cost now. Obviously there will have to be some profit left in the business, otherwise companies won't survive.
1135 But if we accept that we can't go back to that regime where we are going to simply extract contribution out of profitable because we don't know where the profits are necessarily going to be.
1136 This I guess gets back to an earlier question of mine. It isn't clear to me why -- why wouldn't one just treat this as a cost of doing business? If you want to enter this business and this is part of the regime, why we shouldn't simply accept that?
1137 MR. JARRETT: If it was a broadly based enough charge from the players we have suggested, Axxent wouldn't have an objection to that, Mr. Chairman.
1138 MR. CHAIRPERSON: Okay, I think those are all our questions. Thank you very much, Mr. Jarrett, gentlemen.
1139 So we will turn to our last party for today then. That's RSL Com. And I'll just note that we will start again tomorrow morning at nine o'clock and the first party will be ClearNet.
ARGUMENT / PLAIDOIRIE
1140 MR. TACIT: Good afternoon.
1141 RSL Com Canada is grateful to the Commission for this opportunity to deliver an oral final argument in this proceeding.
1142 With me is Erin Smith of our office who has been of great assistance in preparing this argument and our written final argument.
1143 I don't intend to cover all of the points raised in RSL's written final argument. These oral comments are supplementary to that argument.
1144 In the balance of this presentation, I would really want to address two main areas. First of all, I want to address some issues raised by this proceeding from RSL's perspective as a regional carrier providing mostly interexchange services while operating under the current contribution regime. Second, I will briefly discuss the benefits of a subscriber line charge as a contribution collection mechanism.
1145 The starting point for the first topic is a very brief description of RSL's history. The company started out in the fifties as part of BC Rail, a Crown corporation of the Province of British Columbia, initially providing telecommunications services to BC Rail's railway operations. In the 1980s, operating as BC Rail Telecommunications, a division of BC Rail, it started providing non-interconnected private line services to customers in B.C. Then, in Decision 85-19, the Commission approved BC Rail's application to provide interconnected private line and data services in B.C. In 1990, BC Rail and Call-Net applied to the commission jointly for permission to provide public switch long distance services. The Commission approved that application along with a similar application by Unitel in Decision 92-12. Following that approval, BC Rail Telecommunications was spun off as Westel Telecommunications, and started providing public switched long distance services and other new telecommunications services to B.C. customers. In 1998, Westel was transformed into a resell when it was acquired by RSL Communications and renamed RSL COM Canada.
1146 Now the reason I have gone through this description is to illustrate that throughout the company's evolution it has focused its efforts on being an innovative niche player serving the needs of the population of British Columbia, primarily in the provision of interexchange services. However, during the last couple of years, it has become evident to RSL that due to the existing contribution regime, it cannot continue operating strictly as a regional provider of long distance services in B.C.
1147 Telephone company contribution rates have been modified most recently in Decision 99-20. In that decision, the Commission approved contribution rates for the former operating territory of BC Tel that are approximately 3.8 times the corresponding rates approved by the Commission for Bell Canada's operating territory in that same decision.
1148 Therefore, telecommunication service providers who carry a substantial portion of traffic in the operating territory of Bell Canada, which happens to contain the largest customer base in Canada and also operate in B.C., which contains the second largest customer base in Canada, set their rates for long distance services so as to recover an overall blended contribution rate that is significantly lower than the average contribution rate payable by a carrier operating solely in B.C.
1149 Since contribution often represents the most significant cost borne by a carrier for each minute of interexchange traffic carried, a regional carrier such as RSL cannot compete with national carriers under such circumstances. Such a carrier must therefor either exit the market or become a national carrier.
1150 For its part, RSL had long considered expanding its operations geographically to build its revenue base. However, over the last 18 months, it has become clear that this expansion is mandatory, not only so that RSL can grow its revenue base outside B.C., but more imperatively to preserve its existing revenue base in that province.
1151 In other words, RSL can only hope to remain competitive in the B.C. market by carrying lower cost eastern minutes, thereby lowering its average contribution costs as other national carriers do.
1152 However, even under this scenario, RSL faces severe disadvantages as a carrier that has traditionally been focused on the provision of interexchange services.
1153 There are two main reasons for this.
1154 First, only interexchange services currently bear the obligation to pay contribution, and since RSL operates predominantly in the provision of interexchange services, it is severely disadvantaged by the current regime.
1155 Second, as a result of marketplace developments, long distance services are increasingly being offered under flat rate pricing packages, yet contribution continues to be payable for every minute of traffic carried.
1156 Now, RSL understands that in order to compete effectively with the larger economies of scope and scale available to national carriers, it must focus on being more innovative and responsive to customer needs.
1157 Indeed, this is the role that properly belongs to niche players in a competitive environment and this is why such players can add considerable value as they fulfil customer requirements that larger and more diversified carriers cannot satisfy as well.
1158 However, it is not reasonable in RSLs view for its ability to operate as a niche geographic service provider of interexchange services to be curtailed by the presence of a contribution regime, which is, after all, a regulatory construct and not an inherent element of a competitive marketplace.
1159 The message here, Commissioners, is that the need for reform is urgent to reverse this trend, especially given the poor financial state of non incumbent interexchange carriers.
1160 Now, in RSLs view, there are three main aspects that require reform.
1161 One, reform is required in the quantification of the subsidy requirement recoverable through contribution payments. Historically, contribution has been defined as the "access shortfall" and was designed to keep the telephone companies whole in a competitive environment.
1162 On a going forward basis, contribution payments should be limited only to the collection of those funds that are required to support universal service objectives in high cost areas.
1163 The subsidy requirement must be quantified with greater accuracy and reviewed on an annual basis. Overpayments must be eliminated in the interests of economic efficiency and the equitable treatment of payors of the subsidy.
1164 Furthermore, as market prices move closer to costs and basic services extended to unserved and underserved areas of the country pursuant to service improvement plans, the subsidy requirement must be reduced and eliminated.
1165 The existing system featuring several contribution funds, each defined with reference to the boundaries of an incumbent telephone company, must be replaced by a single national fund.
1166 The second item for reform is a requirement to expand the base of subsidy payers. The continued reliance on interexchange markets which have some of the most elastic demand characteristics of any market for telecommunication services, for the recovery of the subsidy, is extremely inefficient from an economic perspective and harmful to competition. There is no logical rationale to preclude expanding the base of services on which contribution is assessed.
1167 The third area of reform is in the collection mechanism. Technological, as well as marketing innovations, are fundamentally changing the carrier environment. Long distance services are increasingly being offered on a flat rate basis, yet contribution continues to be levied for each minute of traffic carried.
1168 At the same time, as more and more traffic becomes packetized, it may not be possible for many transactions to be measured in minutes. The measurement of minutes and the collection of contribution on a per minute basis are not sustainable in this environment. RSL favours the wholesale replacement of the current mechanism with a subscriber line charge mechanism.
1169 Now, RSLs position on all of these matters is set out in greater detail in its written final argument.
1170 While all three aspects of reform just discussed are essential and should be completed as quickly as possible, the broadening of the contribution base through the implementation of a subscriber line charge can be implemented by January 1, 2001, even if the reform of the contribution requirement and the creation of a national fund are implemented at a later date.
1171 I will now turn to a brief discussion of the advantages of a subscriber line charge as a contribution collection mechanism.
1172 In its initial submission in this proceeding, RSL proposed six criteria that a contribution collection mechanism should fulfil. These criteria are efficiency of administration; sustainability; the achievement of universal service objectives; pricing flexibility for all market participants in all markets, regardless of the technology employed to deliver services; transparency; and clear authorization by the Telecommunications Act.
1173 A subscriber line charge meets all of these criteria. The current mechanism does not meet the criteria and neither does a PICC-charge based system. A revenue-based mechanism, while theoretically superior to the current mechanism, does not meet all of these criteria, as described in greater detail in RSL's written final argument.
1174 Three particular problems with such a regime are the legal uncertainty that may delay the urgently required reform of the contribution mechanism, the problem of netting out carrier revenues so as to avoid double counting where more than one carrier is involved in the carriage of the same traffic, and the issue of how to compute the revenues on which contribution is payable in the cases of bundled services that may contain some elements that are subject to contribution and some that are not. For these reasons, RSL is of the view that a subscriber line charge is the preferred method of collecting a contribution.
1175 Some parties to this proceeding have suggested that it would be too difficult to establish uniform definitions of NAS and NAS equivalent for the purpose of applying a subscriber line charge to a broad range of access services.
1176 RSL is confident that the Commission can establish the necessary uniform definitions and is convinced that this task is much simpler than the complex rules that have been developed to administer the current contribution mechanism.
1177 RSL commends the good work done by Call-Net in Appendix B to its initial submission in this proceeding as a useful starting point. A copy of that appendix has been provided as Attachment "A" to this document.
1178 If necessary, the Commission could hold a CISC-like workshop to address these issues and then make any required follow up rulings on an expedited basis.
1179 Another objection raised by some parties is that with the rapid increase in packetization of traffic, the application of a subscriber line charge will become impractical.
1180 RSL agrees that there is a rapid trend toward the packetization of traffic. In fact, this is a major factor that is making the existing regime unworkable even more than it already is.
1181 However, even packetized traffic must enter residential or business premises through some defined access point during the medium term, thereby providing a means of levying a subscriber line charge. Beyond the medium term, contribution charges should be eliminated in any event.
1182 Finally, RSL notes that the Commission still has considerable room to require further rate rebalancing to reduce the contribution requirement and to impose a subscriber line charge without impairing the affordability of local and access services.
1183 In Decision 99-5, the Commission found that independent carriers, many of which serve small rural communities whose monthly rates for basic service are equivalent to those of Bell for the same service, could increase those rates by at least $10.00 over the next two-year period without jeopardizing basic service objectives.
1184 In fact, it appears that the only reason that the Commission didn't allow an even greater increase was to encourage the independents to increase their revenues from other sources. There is no reason to believe that the same results would not hold true in all operating territories. In this context, the subscriber line charge, which RSL has estimated not to exceed $2.64 in Interrogatory Response RSL(AT&T)-3 is clearly affordable. And, again, a copy of that interrogatory response is provided as Attachment E-2, a copy of the oral argument.
1185 In fact, the actual amount of the subscriber line charge could be significantly lower than this amount. This is because the contribution requirements used in this calculation, which were taken from Decision 98-2, represent the access shortfall of the telephone company's utility segment and were determined using historical Phase III costs.
1186 In addition, the RSL calculation did not take into account all of the NAS and NAS equivalent over which a national contribution requirement could be spread, thereby reducing the subscriber line charge further because some of the required NAS and NAS equivalent information was not available. In fact, if the Commission adopts the degree of rate rebalancing that it has found to be reasonable in Decision 99-5 on a nationwide basis, any residual contribution to be either recovered through a subscriber line charge will be very minimal.
1187 In RSL's view, the proper contribution requirement of each telephone company should be calculated exclusively as the cost of providing residential services in high-cost areas above a predefined affordability threshold.
1188 The ILEC costs to be recovered in this fashion should be Phase II costs, plus a reasonable mark-up, and should be computed using the telephone company asset lives approved by the Commission in Decision 98-2. This explicit subsidy should then be reduced by the implicit contribution generated by the ILECs from optional local services, access services provided to alternate carriers and other services integral to the provision of access, such as Yellow Pages.
1189 The sum of all telephone company contribution requirements yielded by this calculation should then be divided by the national NAS and NAS equivalent to yield the applicable national subscriber line charge.
1190 In conclusion, the need for the reform of the contribution mechanism is urgent. In the absence of such reform, regional carriers such as RSL will be unable to continue operating in their present form. The reform of the contribution collection mechanism can be implemented by January 2, 2001 through the imposition of a subscriber line charge. The reform of the quantification of the contribution requirement and the creation of a national contribution fund can occur later, but should follow by January 1, 2002 at the latest.
1191 Once again, RSL wishes to thank the Commission for the opportunity of delivering an oral argument in this very important proceeding, the outcome of which will have significant consequences for the ongoing viability of competition in the provision of telecommunications services in Canada.
1192 And Ms Smith and I are now available for questioning.
1193 THE CHAIRPERSON: Commissioner Cram.
1194 COMMISSIONER CRAM: Thank you.
1195 So do I understand, to use Commissioner Langford's words from this morning, that this position is really just a transitional position, and, in the long run, every telephone subscriber, including those even in high-cost areas, should pay the full bore?
1196 MR. TACIT: Well, what we think will happen is that as technology advances, the whole issue of high-cost areas will become less urgent over time because the access technologies that will develop will be less costly and will be within whatever affordability threshold exists at that time.
1197 So, yes, we do see this as a transitional measure, and, in the interest of the health of the telecommunications' sector as a whole, we do see it as an objective to strive towards the elimination of the subsidy over a reasonable transitional period. And that is also the reason why we are less concerned with the kinds of problems that may come about in the evolution of the forms of access.
1198 The other aspect to this, of course, is that none of us can predict with certainty what will happen in this industry. And the things that have happened in the last few years, of course, were not even conceived of in 1992, when Decision 92-12 was rendered. So I think that to pretend that we can put in a contribution mechanism now that will be sustainable for all time is just not realistic. So the best thing that we can do is recognize that reality and pick the best alternative for some reasonable medium term.
1199 COMMISSIONER CRAM: So, then, do I take it that instead of us sort of saying -- if God were in her heaven, and exactly what you proposed would happen, instead of us saying a slick for the rest of your lives, everybody, until it gets down to zero, we said for four years, five years, and then we will see if technology has improved or reduced the costs? Because I think there has to be a plan B in this.
1200 MR. TACIT: Yes.
1201 COMMISSIONER CRAM: If your crystal ball doesn't work maybe -- because, clearly, ours haven't been in the past, there has to be sort of a plan B in this --
1202 MR. TACIT: Yes.
1203 COMMISSIONER CRAM: -- and so that's the kind of thing you are looking at, then?
1204 MR. TACIT: Yes, I agree with that. And it may be that if such a review takes place and we are found to be wrong, that, indeed, that hasn't happened, it may be that the option that is considered is to continue with the subscriber line charge, change maybe the amount, but continue with it for a period of time. Or, indeed, maybe it will have to evolve to something else if some of the problems with access that have been identified here do materialize.
1205 But I think it would be a mistake if we were to set a mechanism with a view to trying to make it work for all time when the clearest perspective that we have is of the medium term and there is something definite that we can do about that that will work reasonably well.
1206 COMMISSIONER CRAM: And you are not suggesting that in that period of time, four or five years, that we would rebalance rates, especially in the high-cost areas, up to cost? Youa are not suggesting that at all.
1207 MR. TACIT: No, what we are saying is that certainly rates should be rebalanced up to the maximum of the affordability threshold --
1208 COMMISSIONER CRAM: Yes.
1209 MR. TACIT: -- and then see where the subscriber line charge falls out of that. And we believe it will be a number that is substantially less than $2.64, as an upper limit.
1210 COMMISSIONER CRAM: Thank you.
1211 THE CHAIRPERSON: Thank you, Commissioner Cram.
1212 Just a couple of questions. Setting aside the problems that you see inherent in the current system on a going forward basis, with changes in technology and pricing plans and so on, is RSL's problem related to inherent problems with the contribution scheme itself, or more the fact of the disparity between the rate of contribution in British Columbia and the rate in, say, Bell's territory?
1213 MR. TACIT: It is both. I think as the presentation indicated, there is no question that the fact that the rate is much higher in the former territory of BCTel than it is in Bell Canada territory has been a very significant disadvantage for a regional carrier. But beyond that, the imposition of contribution on interexchange services, as a regulatory policy, has done significant damage to the company in and of itself. So I think both problems exist and one exacerbates the other.
1214 THE CHAIRPERSON: I apologize to the folks from Telus, and I guess I should have said Telus B.C., instead of BCTel.
1215 MR. TACIT: Yes.
1216 THE CHAIRPERSON: Some of us are slow to change.
1217 In your presentation -- and maybe I am getting in deep here surrounded by lawyers up here and one down here -- on page 5 -- and maybe you have explained this more in your written brief, but near the top of the page -- you talk about problems with a revenue-based mechanism and you talked about three particular problems of such a regime are the legal uncertainty that may delay the urgently required reform.
1218 MR. TACIT: Yes.
1219 THE CHAIRPERSON: That is the issue you are talking about here.
1220 MR. TACIT: And that is really probably one of the most significant reasons that we are much more in favour of a subscriber line charge, that we see it as a preferable mechanism, because the one thing that I think would be most harmful of all right now is any delay in the implementation of a viable alternative.
1221 And we see some legal problems with the operation of subsection 46.5, which is the section that authorizes the Commission to require telecommunication service providers to contribute to a fund for the support of access to basic telecommunications services. And the problem relates from the fact that the definition of "telecommunication service provider" is referrable to a provider of basic telecommunication services, and the section itself also talks about the objective being to support access by Canadians on an ongoing basis to basic telecommunications services.
1222 The problem is that the act does not define that. And the Commission, itself, over time -- what basic telecommunications services are, and the Commission, itself, has gone through evolution of changing the definitions. At one time, you know, it talked about "basic" versus "enhanced" and we went through that whole paradigm. And more recently, we have talked about basic services as being the kinds of basic service objectives that are defined in Decision 99-16.
1223 But the other part of the problem is that the Telecom Act, at the same time that these amendments were made, it was done concurrently with a bunch of other amendments that were designed to meet our international trade obligations, our WTO obligations, relating to trade obligations with respect to basic telecommunications services. And the same sets of definitions were used and yet the intent there is somewhat different from what it is here.
1224 So all we are saying is all of this adds up to a possible remedy for asking for appeals of those who may be aggrieved by a Commission decision that goes down the path of a revenue-based mechanism, as we try and sort this out. And while I think that probably such appeals would eventually fall by the wayside, the problem is that I don't think we can afford the delaying inherent of that. So there is an issue of legal risk here and managing that for the Commission, and I think that any decision that falls much clearly squarely within the Telecom Act and that cannot be impugned on that basis, would be much sounder because of the urgency of the reform.
1225 THE CHAIRPERSON: Is your concern that some people might argue that some of the tax might apply to some service that are not?
1226 MR. TACIT: That's right. That's right. People who don't want to pay might not consider themselves TSPs. People that are TSPs but provide services that are non-basic might claim that the Commission has no jurisdiction to order them to pay a percentage of revenues on that part, and then we get into the whole issue of how do you deal with unbundled services? There is also the practical issues, in addition to the legal problems, that flow from that.
1227 THE CHAIRPERSON: I just wanted to focus on the legal one.
1228 MR. TACIT: Yes.
1229 THE CHAIRPERSON: I understand your concern about the other ones. I suppose to the extent that's a problem, it already is.
1230 MR. TACIT: I'm sorry, which?
1231 THE CHAIRPERSON: To the extent that may be a problem, it already is.
1232 MR. TACIT: The legal problem?
1233 THE CHAIRPERSON: Yes.
1234 MR. TACIT: I'm sorry, I don't follow.
1235 THE CHAIRPERSON: Well, "long distance" is not defined as "basis service".
1236 MR. TACIT: No, that's true.
1237 THE CHAIRPERSON: On page 6, you talked about -- do I take from about three-quarters of the way down the page, where you referred to using historical Phase III --
1238 MR. TACIT: Actually, let me just back up on that because there is a crucial difference. When it comes to long distance carriers, they have to pay a rate, not a proportion of their revenues, and there is a legal distinction. Clearly, the Commission has statutory jurisdiction to order carriers to pay rates, but a sort of quasi-taxation power that requires a percentage of revenues needs explicit statutory authority, so there is a bit of a difference there.
1239 THE CHAIRPERSON: So you would have argued that if we had ordered, even under the current regime, that contribution be a percentage of --
1240 MR. TACIT: It would have been more likely subject to appeal. Fortunately, we did not have to find out.
1241 THE CHAIRPERSON: Switching to the other point, would I infer from your comment that you support the comments by others to use Phase II costs?
1242 MR. TACIT: Absolutely.
1243 THE CHAIRPERSON: You refer to Phase III here, but you do not actually say you support Phase II.
1244 MR. TACIT: No, we do support Phase II costs. Very much so. The obligation has to be based on the perspective economic choices that have to be made on the perspectives costs, not on embedded costs.
1245 THE CHAIRPERSON: Okay.
1246 All right, I think those are all our questions. Thank you very much, Mr. Tacit and Ms Smith.
1247 MR. TACIT: Thank you very much.
1248 THE CHAIRPERSON: And that concludes our work for today.
1249 So we will see you here tomorrow morning. And as I indicated, the first party will be ClearNet. Thank you very much. We will see you tomorrow.
--- Whereupon the hearing adjourned at 1725 to resume
on Wednesday, July 5, 2000 at 0900 / L'audience est
ajournée à 1725 pour reprendre le mercredi
5 juillet 2000 à 0900