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 5, 2000 le 5 juillet 2000
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and staff attending the public hearings, and the Table of
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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 5, 2000 le 5 juillet 2000
TABLE OF CONTENTS / TABLE DES MATIÈRES
ARGUMENTS / PLAIDOIRIES
Clearnet Communications Inc. 298
Microcell Telecommunications Inc. 329
Rogers Wireless Inc. 353
Vidéotron Communications Inc. 447
GT Group Telecom Services Corp. 473
Multi-Sync Communications 495
François D. Ménard 509
44 6 "BOB FARMER:" should read "MR. FARMER:
46 1 "BOB FARMER:" should read "MR. FARMER:"
73 9 "ARGUMENT / PLAIDOIRIE
MR. MELDRUM" should read
"ARGUMENT / PLAIDOIRIE
THE CHAIRPERSON: We will return now to our
proceeding. Our next party is SaskTel,
represented by Mr. John Meldrum.
MR. MELDRUM: Good morning. My name is ..."
93 4 "MEMBER LANGFORD" should read
188 6 "THE CHAIRPERSON: If one takes that argument,
does one extend --
MR. JANIGAN: -- in terms of looking at, on a
system-wide basis ..." should read
"THE CHAIRPERSON: If one takes that argument,
does one extend that to the level of the rates
MR. JANIGAN: Well, I think that that has to be
separately addressed and in terms of looking
at, on a system-wide basis ..."
217 12 Insert the following question and answer. "COMMISSIONER McKENDRY: You say that consumers
have had too much benefit. I guess I have a
little trouble understanding that comment
because any benefits consumers have got have
been as a result of actions taken by Call-Net
and the other providers of the service. It
wasn't something that consumers extracted in
any way from the industry. It seems to me the
industry came to consumers with these
Are you saying that there were some
misjudgments on the part of the companies as
MR. BOWLES: I mean it's a vigorously
competitive market and, I guess, companies like
us were doing everything we could do to gain
market share and revenues. Did we go too far?
Yes. But that's history and that is something
we have to live with."
243 4 Hard page return to be deleted. Nothing
missing in the text of the transcript.
273 8 "MR. CHAIRPERSON:" should read
Hull, Quebec / Hull (Québec)
--- Upon resuming on Wednesday, July 5, 2000 at 0900 /
L'audience reprend le mercredi 5 juillet 2000
THE CHAIRPERSON: Order, please.
Welcome back to our proceeding. We will continue on then with oral arguments and we will turn to the next party which is Clearnet, Mr. Davis.
ARGUMENT / PLAIDOIRIE
MR. SALZMAN: Thank you, Mr. Chairman.
My name is Lorne Salzman and I'm counsel to Clearnet Communications. With me is Parke Davis, Clearnet's Director of Inter-Carrier Relations.
On behalf of Clearnet, we wish to thank you for the opportunity to appear before you today.
We are going to begin this presentation by giving you some background on Clearnet. We will then discuss the threat to wireless operators of a poorly designed contribution regime. We will describe Industry Canada's requirements for universality that were imposed on the mobile wireless operators even before the Commission decided that those operators should pay contribution. We will explain the importance of eliminating mandated subsidies. If, however, there is to be a subsidy regime that is funded by the industry, we will explain Clearnet's position that the amount of the subsidy be minimized and the collection mechanism remain unchanged pending its elimination.
Clearnet is a national mobile wireless operator. It offers low priced, high quality digital services under the Clearnet PCS and Mike names. Clearnet first began to offer its services in 1996. Since then, its digital subscriber base has grown to more than 600,000 at the end of March of this year. We have grown from 350 employees in 1996 to more than 2,000 at the beginning of this year. That is a sevenfold increase in four years.
All of this growth has come at a price. Clearnet has raised more than $3.2 billion in capital to fund its growth. Yet, as is typical for a new mobile wireless operator making heavy investments in infrastructure, Clearnet's statement of operations shows substantial net losses: indeed, $582 million of net losses in 1999, $544 million of net losses in 1998 and $289 million of net losses in 1997. To put these figures in some perspective, Call-Net's net loss in 1999 came to $399 million and its corresponding loss in 1998 was $237 million, less than half of Clearnet's 1998 figure.
Although some participants in this proceeding assume that wireless operators have the capacity to bear all manner of additional taxes, these loss figures should inject a needed dose of reality to that thinking.
Now, Clearnet certainly expects that its losses will diminish. A key determinant will be the demand for its services. Anything that reduces demand will obviously have a negative impact on Clearnet, its growth and the reduction in its net losses. More to the point, an increase in contribution charge will increase the cost to consumers of wireless service and, by the laws of economics, reduce the demand for those same wireless services. I note in this regard that wireless access is relatively price elastic, as compared to wireline access which is relatively price inelastic.
Reduced demand is indeed a significant worry for Clearnet as it considers some of the proposals that have been advanced in this proceeding. This is so even if the contribution charge can be passed through to consumers, although Clearnet's concern will obviously be heightened if the contribution charges cannot be fully recovered.
Clearnet's access to capital is dependent on its continued growth and the market's acceptance that Clearnet will eventually improve its financial position.
You might question if growth can really be an issue to any Canadian wireless company given the healthy increases in Clearnet's subscriber base that I mentioned earlier. In response, we can tell you that Canada is at the bottom end of OECD countries when it comes to wireless penetration and, although overall penetration rate is growing, we are falling behind our peers every year.
An OECD study released May of this year showed that Canada's wireless penetration in June 1999 was 24th out of 29 OECD countries surveyed. We ranked just above Hungary, the Czech Republic, Turkey, Poland and Mexico. Moreover, our ranking has declined in recent years. What this signifies is that, despite some of the lowest wireless prices in the world, Canadians are taking up wireless services much more slowly than the rest of the OECD countries. A contribution regime that taxes wireless services can only contribute to our falling further behind.
Let me give you a more concrete example of the potential negative impact of contribution charges on the demand for wireless services.
Prepaid wireless is an attractive option for many consumers. They buy vouchers or use other means to load up their account in fixed dollar amounts, which then can be consumed over a predetermined time period. For instance, one of the wireless operators offers a plan price at $10 for 28 minutes and that is valid for two months. This type of low-cost plan appears to, among others, the infrequent user, perhaps someone who wishes a wireless phone for safety reasons.
One of the participants in this proceeding has proposed a subscriber line charge for wireless users that comes to $4.56 per month, or a $9.12 charge for two months. Think of the impact on the user that buys a $10 voucher. Suddenly, his overall cost has increased by 91 per cent to $19.12. When GST and provincial sales taxes are added on top of that, he will be paying more for taxes of all sorts than for the underlying service. You may well ask yourself how many of these infrequent users will continue to use wireless services when faced with such substantial increases in price.
There is another reason why wireless companies such as Clearnet are very concerned about this proceeding. Simply put, we have our own universality commitments that we must pay out of our own resources. Paying contribution on top of this means, in effect, that we are paying twice to achieve universality objectives. Let me explain.
When Industry Canada announced in 1995 the competitive process for licensing of PCS, it told applicants that one of the evaluation criteria would be the "impact on the competitive provision of local service and universal access". All applicants would have appreciated the importance of those words and all applicants would have made strong commitments to universality in their applications, commitments that were later enshrined as conditions of licence.
PSC operators such as Clearnet are working hard to fulfil those commitments, even though it means we must install digital infrastructure in locations which are not economically justifiable on their own in view of current costs in take-up rates.
Recognizing that we have our own universality obligations mandated by Industry Canada, it simply does not seem right to us that we must pay for the universality obligations of others which are mandated by the Commission.
The solution, in our view, is that the Commission's contribution regime should give some credits to wireless operators for their universality obligations that have been imposed for similar social policy purposes by another regulator.
Let me turn to two other topics of concern to Clearnet. The first concerns the need to minimize the overall amount of the subsidy to be funded through contribution charges. The second concerns the design of the contribution collection mechanism.
In Clearnet's view, mandated subsidies should be avoided if at all possible. Subsidies lead to economic distortions and they can be complex and costly to administer. They lead to a sense of entitlement that can become increasingly difficult to counter as time passes, even as the need for subsidies diminishes. They can also lead, as we have heard, to competitive imbalances if the design of the subsidy program favours certain operators and penalizes others.
You might wonder why we, Clearnet, are opposed to a subsidy program, given that Clearnet as a future CLEC may well benefit from the program in those areas where we are eligible for portable subsidies. The answer is that although there may indeed be some areas where we might be able to partake of the subsidy, this will be more by accident than by design.
Given the many questions marks about the design and tenure of the subsidies program, Clearnet would not design a business plan that was built on continuing access to subsidies to ensure its viability. This comes from Clearnet, a company that has applied to become a CLEC and is entirely serious about convincing residential consumers to replace their home wireline phone with a wireless alternative.
Now, in Decision 99-16, the high-cost service area decision, the Commission referred to the need to maintain subsidies to achieve a basic service objective in high-cost areas, that is to ensure that telephone service is available at an affordable rate.
The evidence in this proceeding suggests that $30 or higher should be an affordable level for base residential basic local rates. Whether $30 or some other figure is chosen, the Commission should require the ILECs to rebalance rates in high cost areas to that level as quickly as possible. There is simply no need, in our view, to tax some consumers so that other consumers can enjoy lower rates, where the subsidized consumers really do not need it.
To the extent that any group must be subsidized, the preferred approach, as others have said, is that government be the one to foot the bill not industry. Government is best equipped to administer social policy programs drawing on the taxation system currently in place.
Although we recognize that the Commission cannot direct the federal government to subsidize telephone service, Clearnet believes that the Commission's voice on this issue will nonetheless carry important moral authority that may well be influential on government thinking in the future.
If, however, industry funding must continue it is essential that the ILECs, the carriers that will largely provide service to subsidized consumers, not be overcompensated. Otherwise, the competitive balance will be upset as the ILECs will have access to funds in excess of their needs, funds that can be used to unfairly target competitors in more contestable markets.
Under the Decision 99-16 approach, the total subsidy requirement will become the amount of money needed to fund carriers to subsidize service to consumers in high cost areas and it will be based on ILEC cost and revenue figures.
As the Commission well knows, accounting exercises are always controversial, and there are clear incentives for the ILECs to inflate costs and diminish revenues if doing so will increase the subsidy to be paid.
With careful scrutiny of ILEC figures, Clearnet submits that costs can be reduced and revenues can be increased. With these changes to the ILEC figures, and a determined program of rate rebalancing, the Commission should be able to substantially diminish the total subsidy requirement and even eliminate it in some territories today.
For those areas where a subsidy requirement remains there is every reason to believe that advances in technology, which are reducing costs throughout the telecommunications system, will similarly impact the costs of serving high costs areas. As this occurs, mandated subsidies in the remaining territories can be abolished.
Now the TSR is composed of many sub-components, and we discuss a number of them in our written comments which were filed yesterday. For today's discussion I am going to focus on one in particular, namely the benefit that incumbent local exchange carrier receives from its role as the carrier with the continuing obligation to serve high cost areas.
In determining how much subsidy must be paid in a high cost area, the Commission must ask the question of how much money the ILEC really needs to provide the service. In the absence of a subsidy payment, the ILEC would calculate the entire package of costs and benefits and not just simply perform a narrow calculation of the costs and benefits of the unadorned local service.
For example, most participants in this proceeding, including the ILECs, accept that optional local services such as call display and the like should be taken into account in the subsidy calculation. Views differ when we get to other services such as call answering. And the views widen even further when one looks at various intangible benefits such as those that arise from the ILEC's ability to jointly market the services of its affiliates, for example, DTH satellite services or wireless services.
Clearnet urges the Commission to take into account all benefits that the ILEC can reasonable be expected to enjoy from serving consumers in high cost areas. Some of the calculations require a degree of effort, but other countries, such as the United Kingdom and Australia, have undertaken the required analyses and have developed numbers. Other countries, such as Peru, Chile and Colombia, have ascertained the value of these benefits through auctions. They auction the commitment to serve consumers in high cost areas. They have found that the bid prices are substantially lower than one would expect by looking at just raw subsidy numbers. Operators would only bid low amounts if they had confidence that they would be able to recover the losses from other benefits.
Let me turn to the contribution collection mechanism. Clearnet submits that such a mechanism should be competitively equitable, sustainable and efficient, efficient both administratively and economically. Changes to it should be a proportionate response to the problems being encountered.
When examined against these criteria it becomes clear that no contribution mechanism is ideal. They all suffer from flaws, many of which we heard about yesterday. However, Clearnet believes that the current mechanism, which collects contribution as a per minute charge on long distance traffic, as flawed as it is, is not overly problematic and it should therefore be maintained pending its elimination all together.
Let me explain. First, by targeting one category of traffic, that is long distance traffic, the current mechanism does achieve a degree of competitive equity among various carriers. The most pressing concern of long distance operators, namely that the ILECs use the subsidy funds to selectively target their services, can and should be addressed by diminishing the TSR so that the ILECs are not overcompensated by their competitors.
Second, the current regime is sustainable over at least the medium term during which the contribution should diminish and hopefully be eliminated. The chief threat to sustainability comes from the possible advent of voice over the Internet, but the evidence suggests that this is not in any way imminent and will face some formidable difficulties before becoming commonplace.
Third, the current mechanism does force carriers to incur administrative costs and efficiencies but, as we heard yesterday, so too will any replacement mechanism. The current mechanism also contributes to marketing efficiencies and that long distance calling is priced higher than it should, but these distortions have been declining as contribution rates have declined and they will decline further if the TSR is reduced. Other mechanisms also have their own market inefficiencies.
Fourth, given that the current mechanism reasonably satisfies these evaluation criteria, it would not, in our view, be a proportionate response to abandon the current mechanism in favour of an alternative, especially given the inevitable problems of switching to a whole new approach.
The percentage of revenue mechanism, which we have heard about, suffers from serious flaws and, in Clearnet's view, should not be adopted. It will be complicated to set up and to operate, requiring unachievably precise distinctions between classes of service to avoid prejudicing competing suppliers. Bundles of taxed and untaxed services will pose particularly serious problems and will lead to endless wrangling. Changing to a revenue based system would not, in our view, be a proportionate response to the problems of the current mechanism.
Similarly, the per line mechanism has its own flaws. A key problem is that there is own universally accepted definition of a line. Deeming and counting lines where none exist will lead to arbitrary distinctions and regulatory squabbles. A per line mechanism can be particularly burdensome to wireless services. Some users employ more than three numbers for a single telephone for use with voice, data and fax calls, each of which may be deemed to be a line. A per line charge for prepaid wireless services may lead to the perverse result that low usage wireless subscribers will have to give up safety in other services they want and need so that cottage-owners and other perhaps non-needy individuals in high cost areas can be subsidized.
To sum up, Clearnet urges the Commission to bear in mind the following points. First, participants in this proceeding ignore the financial realities of the wireless industry when they assume that all mobile wireless operators can bear substantially increased contribution charges.
Second, mobile operators have other universality obligations, and we urge the Commission to take those into account.
Third, and most important, mandated subsidies should be kept to the minimum level possible pending the objective of complete elimination. The TSR should be reduced by rebalancing to affordable rates, by reducing ILEC cost estimates and increasing ILEC revenue estimates.
Fourth, pending the elimination of the contribution mechanism all together, the current collection mechanism should be maintained as the least bad of undesirable alternatives.
Those are our comments, and we thank you.
THE CHAIRPERSON: Thank you, Mr. Salzman.
COMMISSIONER CRAM: Thank you.
Yesterday we heard -- and I'm quoting from Call-Net's oral comments at page 13 -- referring to Minister Manley, to use the Minister's words,
"...or he recognized it may no longer be possible for the long distance industry alone to support the explicit subsidy to local service."
Is that what you are proposing continue, that the long distance industry alone support the explicit subsidy?
MR. SALZMAN: Let me start by saying that it's not the long distance industry alone that supports it. For instance, right now wireless operators also make contribution payments based on their long distance traffic. So, wireless industry is paying some contribution at this point.
Going forward, our preference would be to see that all mandated subsidies are eliminated.
What we are proposing is that the current mechanism, which has a number of flaws which have been well articulated, should be maintained as the goal is sought to eliminate subsidies all together. That means that we shouldn't go through the trouble and anguish at this stage of changing to a different mechanism while we pursue what is, in our view, the greater goal of trying to eliminate subsidies all together.
During this interim period, indeed, long distance services from all suppliers would end up supporting the subsidy system.
COMMISSIONER CRAM: I just want to move to another issue.
If there were an SLC introduced, wouldn't that mean -- and if I understand you correctly, your position is that your wireless should replace wire line. Your competition would have an equal burden. If each had an SLC cost, how would that provide you with a competitive problem if each wire line and wireless had an SLC?
MR. SALZMAN: Let me answer by saying a lot depends on what is the level of the SLC. If we looked at an SLC that was of the order of, in your discussion yesterday with AT&T, as low as 10 cents per line, I don't think we would be having nearly the debate and the worry that we have on these issues.
On the other hand, if an SLC is priced at something like $4 or $5, as some have proposed in this proceeding, it has a much bigger impact.
In the case of wireless customers or wireless companies, it has an impact in terms of the overall cost, the bottom line that you referred to yesterday, Commissioner Cram. That will have an impact on demand, as I have tried to explain in our comments.
The other issue is that the SLC itself is used to fund operators to provide service in certain remote areas. Again, as I hope I explained, wireless has its own obligation to fund its own service in areas where it may not otherwise go.
If you are asking the question about wireless paying this amount of money and its impact on wireless, it really has those two effects to consider.
COMMISSIONER CRAM: My issue was what is the competitive inequity if everybody has an equal SLC? If I hear you, what you are saying is the size of the SLC is a problem, not necessarily an SLC in terms of creating competitive inequity. Have I got that right?
MR. SALZMAN: Certainly, yes, as far as it has gone.
Let me elaborate because maybe I haven't explained it very well.
If an SLC is imposed on wireless companies, then we are going to be subsidizing the provision of service into high-cost areas. We also have to subsidize the provision of our own service into high-cost areas, and that has been mandated by Industry Canada. In other words, wireless pays twice. It pays for its own mandated service into areas, and it pays for somebody else's. That is the inequity that we would point to.
COMMISSIONER CRAM: If we only worried about CRTC world, then there would be no competitive inequity if there were SLCs imposed?
MR. SALZMAN: I hope that you would take a broader view of the issue of companies having to fund universality obligations.
COMMISSIONER CRAM: I hear you. Thank you.
THE CHAIRPERSON: Commissioner McKendry.
COMMISSIONER McKENDRY: Thank you, Mr. Chair.
A couple of times in your presentation this morning you referred to prepaid wireless service, using that as an example of problems that could arise, the mere perspective with respect to contribution. What portion of your customers are prepaid customers?
MR. SALZMAN: Excuse me a moment.
--- Pause / Pause
MR. SALZMAN: In the case of Clearnet, its base of prepaid subscribers, at this point, is quite small, although Clearnet does have plans to launch new types of prepaid services in the not distant future.
In the case of other operators, they have a much greater base of prepaid services. Mr. Davis informs me that the number of subscribers viewed overall might be as high as 40 per cent.
COMMISSIONER McKENDRY: But in your case it is significantly less than that, I take it?
MR. SALZMAN: Oh yes. At this point it is for Clearnet, significantly less.
COMMISSIONER McKENDRY: You mentioned in your discussion with Commissioner Cram and in your presentation that you had universal service obligations, you were extending service into high-cost areas. Expand on that a little bit. Where are these high-cost areas that you are extending your service into?
MR. SALZMAN: Excuse me.
--- Pause / Pause
MR. DAVIS: Commissioner, I guess as an example, there are a number of different centres in our application that we listed. I believe there were 66 at the time back in 1995.
Just for example, Jonquière-Chicoutimi was on that list. It is not so much the downtown centre of Jonquière-Chicoutimi because really coverage of the centre core of any town is not the difficulty. It's that when you are covering an area, people expect coverage beyond the downtown core. So you start to cover suburban areas and rural areas around that, and you obviously do cover areas which are classed, I guess, in Band C in those areas.
That's one example.
COMMISSIONER McKENDRY: Do you have any other examples?
MR. DAVIS: There is the whole list of 66. I don't have them here in front of me, but I can provide those to you later.
COMMISSIONER McKENDRY: But essentially the high-cost area you are referring to is, in effect, the suburbs around urban areas. Is that correct?
MR. SALZMAN: Perhaps I can respond. It is a bit more than that.
There are certain cities and certain areas of the country where Clearnet would not invest to put up infrastructure at this point but for those particular commitments that were made and that Clearnet is working hard to substantiate.
Other wireless operators would have their own commitments to various places, and we can't speak for them. As Mr. Davis has pointed out, the individual examples unfortunately we don't have at our fingertips, but they do exist. It is more than just the suburbs or the rural areas around cities. There are certain cities that, in terms of timing or in terms of going at all, would be places that would not justify making the investment.
COMMISSIONER McKENDRY: Thanks.
THE CHAIRPERSON: I noted when you were reading the text at the bottom of page 4, you said:
"You said the solution, in our view, is that the Commission's contribution regime..."
And your written text says "give credit to wireless operators for their universality obligations." When you read it you actually said, "give some credit."
Putting together the answers that you had to Commissioner Cram and Commissioner McKendry, some of the comments that you made, do I take it that your view would be that if the Commission were to look at the cost, the magnitude of the subsidy requirement, taking your point about the $30.00 threshold perhaps looking at Phase II costing and if we came up with a number that, in your view, was relatively small, then Clearnet might not have a problem with sharing some of the burden to provide the subsidy to rural areas? Is it really just a question of the magnitude more than the principle?
MR. SALZMAN: The magnitude is clearly a fundamental problem. Again you can look at the examples that have been discussed in the past day. If the 10-cent SLC that was discussed yesterday was really the number, then it probably wouldn't be a concern to Clearnet.
On the other hand, the numbers are not looking at 10 cents. They are looking at $4.00 or $5.00. When you have a wireless bill that might be $20.00 or a prepaid bill that might be $10.00 for two months, suddenly a $4.00, $3.00, $6.00, whatever SLC becomes extremely serious.
As to sharing in the burden of the contribution regime, we do today. Obviously, like anyone, we would prefer to keep that down to a minimum level, but we do today and if the Commission decides that it is merited, we will continue to do so going forward.
We hope, though, to come back to the beginning of your point, sir, that you will recognize that the wireless industry does bear its own universality obligation and as you consider what you might impose on wireless players through this proceeding you will take into account and provide some credit for the fact that we do in fact have our own obligations imposed on us by Industry Canada, obligations which are an expense for us to bear.
THE CHAIRPERSON: Mr. Davis?
MR. DAVIS: Thank you, Commissioner.
I was going to mention that yesterday we spoke of a different phase of universality and that was universality with respect to the accessibility by all people for telecommunications products. Depending on the level of a line charge that you might contemplate, what we have discussed here, $3.00 or $4.00 a month, might make what is currently today a prepaid service of $10.00, covering basic needs to those individuals that have it, unobtainable.
Something like this which is much cheaper at a prepaid level becomes taken away from them. So you would lose universality, at least that phase of universality; not the universality aspects of distance and remoteness, but universality to a person.
THE CHAIRPERSON: I take your point on that.
Assuming the Commission were to, following the analysis of all the data, come up with a figure that may be considered reasonable, if I can use that term, would you have a preference as to which option would be the one to go with, the subscriber-line charge or the revenue charge, and whether or not that should flow through to the consumer and show up as a separate line item on their bill?
MR. SALZMAN: Our preference would be that we stay with the current system pending its elimination.
THE CHAIRPERSON: I am asking you assuming the current system is not an option.
MR. SALZMAN: If the current system is not an option, our preference would be for the revenue-based system as opposed to the subscriber-line system and our preference would be to have the amount of the tax shown on the subscriber bill and be explicitly mandated to be shown on the subscriber bill as a tax, whether it's referred to as the YAC or not; still to be decided.
THE CHAIRPERSON: Do you have a view as to the issue about whether this amount should be calculated on a company-specific or regional or national basis?
MR. SALZMAN: Our preference would be that it be calculated on a regional, as opposed to a national, basis.
THE CHAIRPERSON: By "regional", you mean region, not company-specific?
MR. SALZMAN: Using the same type of company-oriented regions that have been developed for the existing contribution regime would be our preference.
THE CHAIRPERSON: Which is company-specific then, not regional?
MR. SALZMAN: Yes. Well, in the case --
THE CHAIRPERSON: So, for example, by region within Bell territory, you would calculate it for Bell and not include all of the telephone companies that happen to be in Ontario or Ontario and Quebec?
MR. SALZMAN: Within Ontario and Quebec, we could contemplate one plan that would encompass that region. It would primarily relate to Bell Canada.
THE CHAIRPERSON: The reason I am asking that specific question is the issue is whether or not it includes the independents.
MR. SALZMAN: It would probably make sense to include the independents.
THE CHAIRPERSON: Thank you.
COMMISSIONER NOËL: Just one question, In paragraph 9 of your presentation this morning you made the hypothesis of a $4.56 per month subscriber-line charge that you have derived from some other presentation and you say that the overall cost increase over two months on a $10.00 voucher would be 91 per cent. Do you take into consideration in your overall cost the basic cost of the monthly fees for the use of the wireless telephone or is it only the voucher? If you have a plan for $10.00 for two months, I am going to sign right now.
MR. SALZMAN: Indeed, there are suppliers that do offer those types of plans, but it's only for a very limited amount of usage. You would be getting with that voucher 28 minutes' worth of usage to be used over a two-month period. So those types of plans do exist.
COMMISSIONER NOËL: Ten dollars a month and no other charges than that?
MR. SALZMAN: Other than having acquired the phone in the first place, those are the charges.
COMMISSIONER NOËL: Including the licence fee?
MR. SALZMAN: Maybe Mr. Davis can respond.
MR. DAVIS: That's all included. You have to come up with --
COMMISSIONER NOËL: I am going to switch right now!
MR. DAVIS: See me afterwards.
THE CHAIRPERSON: Trained operators are standing by, Andrée.
COMMISSIONER NOËL: How much do you envisage your loss will be next year?
THE CHAIRPERSON: Commissioner Demers?
COMMISSIONER DEMERS: Thank you, Mr. Chairman.
I am interested in paragraph 22 where you covered the five countries in just one paragraph. I imagine you have more to say on that. When you indicate that it would be reasonable that the ILECs -- it's the first time that I hear that an ILEC has an interest and enjoys the role of serving customers in high-cost areas.
Getting to your comment on the U.K. and Australia in which you indicate that they have undertaken analysis and have found numbers, could you relate it more closely to our discussion today? It's in paragraph 22, page 8. It may be something that you covered in the high-cost hearings. I was not part of the Panel and I don't want you to repeat it only for me.
MR. SALZMAN: Let me try to respond.
The purpose of this paragraph is to summarize something that appears in greater detail in our written comments which were filed yesterday. I hope this responds to your question.
The point is that when a telephone company serves a high-cost area, there is a number of benefits that it derives from performing that service that are above and beyond just the mere collection of money from the subscriber for his services. For instance, the fact that a telephone company serves a customer, it gives that telephone company the billing system, it gives him the knowledge of the credit status of the customer.
It allows the telephone company to advance other services that might be sold to that customer and which might be valuable. For instance, a wireless service, or perhaps a direct-to-home telephone service could be marketed to a customer in a high-cost area. That is a benefit that, as a telephone company is evaluating whether they would go in and service customers in an area, they would take into account.
Other countries, when they have looked at this particular category of benefits, they sometimes refer to it as intangible benefits. Efforts have been made to quantify the value of these. Two countries have done it through cost studies and other estimation mechanisms and those are Australia and the United Kingdom. Again, we provide further information. They evaluate things such as brand enhancement and corporate reputation, network effects, ubiquity effects. They attempt to value those.
Other countries have done it a bit differently, but they come to a similar conclusion. What they do is they go to a variety of telephone companies and say, we have to provide service in a high-cost area. We have calculated in our own mind what we think the subsidy needed to, in fact, serve in that area. We now invite bids from potential suppliers to do that.
Lo and behold, they find that the amount bid is less than the subsidy that the mathematics of it would dictate. What that suggests is that the bidders realize there is value in those customers above and beyond just straight serving them to provide local service.
We give some numbers as to how those formulas have unfolded.
It's hard to take those exact numbers from other countries and translate them into the Canadian context. I recognize that. Our point is that these intangible benefits though are real. They are recognized as such. They are valued as such and the evidence from around the world is that they have significant value and we hope the Commission takes those into account in this proceeding.
COMMISSIONER DEMERS: Thank you. I will read what you put in writing.
Thank you, Mr. Chairman.
THE CHAIRPERSON: Thank you very much. Thank you, gentlemen.
MR. SALZMAN: Thank you, sir.
THE CHAIRPERSON: The next party is Microcell.
Good morning, Ms. McDonald.
ARGUMENT / PLAIDOIRIE
MS. MacDONALD: Good morning, Mr. Chairman. Good morning, Commissioners.
I am Mairi MacDonald. I'm external counsel to Microcell and with me this morning is Bernie Lefebvre of Wall Communications Inc. who is an economist who also provides Microcell with a great deal of very helpful advice on regulatory matters.
Microcell appreciates the opportunity to appear before the Commission this morning to provide these oral comments on the issues raised in 99-6.
In summary, on the basis of the record developed in this proceeding, Microcell agrees with most parties that the current long distance per minute collection mechanism is not sustainable in the long run and, therefore, must ultimately be either eliminated or replaced.
Microcell also agrees with the majority of parties that government funding is preferable to any industry-funded contribution collection mechanism. Microcell believes that government funding is a feasible option once the subsidy requirement has been reduced through further rate rebalancing and other measures.
Whether it's funded by the government or by the industry, however, we believe that the Commission's overriding objective with respect to the subsidy should be to reduce the explicit local service subsidy to the greatest degree possible and, preferably, to eliminate it.
However, should the Commission conclude that the existing mechanism must be replaced by an intra-industry funding mechanism, Microcell submits that a revenue-based contribution tax is the best available alternative to fund any remaining subsidy requirement. To avoid inequity and undue hardship to any sector of the Canadian telecommunications industry, the introduction of such a mechanism should follow a transition plan. The need for a transition plan can be avoided, of course, if the subsidy requirement is sufficiently reduced prior to the introduction of the new regime.
Microcell is strongly opposed to the replacement of the current contribution collection mechanism with a per line mechanism or subscriber line charge. In Microcell's view, a per line contribution mechanism offers no advantages in terms of any of the five evaluation criteria which we urge the Commission to use in dealing with the difficult issues before it in this case.
When the Commission considers the merits of alternative intra-industry contribution collection mechanisms, we urge you to look at the following attributes of each proposal: first, its effectiveness; second, its economic efficiency concerns that it may raise; third, sustainability; fourth, its effect on the fundamental principles of technology and competitive neutrality; and, fifth, obviously, its administrative costs and complexity.
Looking at the first of these criteria, effectiveness, before the Commission considers any measures to reform or replace the current contribution collection mechanism, we believe that it's of primary importance that the Commission first carefully assess the current and longer term objectives of the subsidy regime. The amount of subsidy required under the regime should be well defined, accurately quantified and verifiable.
A long-term target for the subsidy requirement should also be established. Eliminating or reducing the subsidy will ensure that economic inefficiencies created by the subsidy are themselves reduced, allowing for an increased reliance on competition to provide Canadians with a choice of communications services that best meet their needs at competitive price levels.
Turning to the second criteria of economic efficiency, we would note that all intra-industry contribution collection mechanisms are inherently inefficient and distortionary.
It is widely acknowledged that the existing mechanism creates significant economic inefficiencies in the industry by distorting service prices relative to their underlying costs. Per minute contribution rates artificially inflate the price of toll services and, as a result, suppress demand for these services. The opposite pricing effect applies in the residential wireline line local access service market. Microcell believes that it is important that any new contribution collection mechanism further reduce rather than exacerbate the economic inefficiencies brought about by the current regime.
In our view, neither of the two alternative collection mechanisms being considered in this proceeding -- that is, the revenue-based tax or a subscriber line charge -- offers a distinct improvement over the existing mechanism in terms of economic efficiency. Importantly, there is no empirical evidence on the record of this proceeding demonstrating that either one of these mechanisms, as proposed, achieves this fundamental objective.
A revenue-based contribution tax shifts the contribution burden from one sector of the telecom industry to a broader base. However, the new revenue-based contribution tax simply ends up spreading the existing inefficiencies into new segments of the industry. The net efficiency effect is likely negative or ambiguous at best. The same is true of the subscriber line charge if it is applied to a broad range of access services.
If introduced and extended to the wireless sector, either one of the two alternative collection mechanisms could result in significant economic on inefficiencies. Raising contribution costs and, consequently, rates in this sector will dampen demand for and penetration of wireless services. It will reduce capital investment, slow expansion of network coverage, including into high-cost serving areas and it will slow the deployment of technologies, including third-generation wireless technology. This will result in significant technical, allocative and, eventually, dynamic efficiency losses in the wireless industry.
To illustrate, Microcell notes that wireless carriers paid roughly $12 million in contribution in 1998, accounting for approximately 1.5 per cent of the total contribution paid throughout the industry in that year. At the same time, wireless carriers accounted for about 15 per cent of industry revenues. So this is all wireless carriers.
Based on total operating revenues as a bench mark and, assuming the subsidy requirement was maintained at its 1998 level -- that is the overall requirement -- it is possible that the wireless sector could face up to a tenfold increase in their contribution payments under some parties' revenue-based mechanism proposals and even much higher increases under some parties' subscriber line charge proposals. Increased taxes in the wireless industry of this magnitude will have extremely damaging efficiency as well as other effects.
In Microcell's view, and that of many other parties to this proceeding, government funding is clearly the best method to subsidize local access service on a long term basis. It not only best meets the objective of economic efficiency but also best satisfies the four other evaluation criteria, we suggest. Moreover, if the magnitude of the subsidy requirement can be significantly reduced from current levels, government funding is feasible as a long term option. Indeed, if the subsidy requirement were significantly reduced it could largely be covered by the licence fees currently paid by wireless carriers in this country which are expected to surpass $200 million next year.
The third criterion we suggest to you is sustainability. Many parties to this proceeding have argued that the current per minute mechanism is unsustainable and unsuitable in the a converged network environment where packets are replacing minutes as the chief output. The telecommunications industry is undergoing rapid change, especially in terms of the development of packet and Internet technologies. In addition, with the distinction between local and long distance calling quickly becoming irrelevant, Microcell agrees that the current per minute mechanism is out of step with market developments.
Should the Commission choose to replace the existing collection mechanism with an alternative industry-funded mechanism, the new regime should be designed so as to ensure it is technologically and competitively neutral.
A sudden increase in the contribution burden borne by the wireless sector or, for that matter, any sector in the telecommunications service industry would, in our view, be unfair and disruptive. In Decision 97-8, the Commission concluded, consistent with historical practice, that long distance service would continue to be the only explicit source of contribution. Interexchange service providers have long been aware of this requirement and have adapted their investment and pricing strategies accordingly. Shifting the contribution burden to other sectors, as we illustrated with the earlier example, would be inappropriate without allowing for a proper transition period to allow affected service providers to adjust to new and potentially significant contribution-related cost increases.
As to administrative cost and complexity, in Microcell's view, there is no evidence on the record of this proceeding demonstrating that a revenue-based contribution tax or a subscriber line charge would necessarily provide any improvement over the existing regime in terms of administrative cost. It is also important to recognize that the costs of administration may be negligible relative to the costs associated with economic efficiency losses from a distortionary contribution collection mechanism.
If, however, the Commission decides to replace the existing contribution collection mechanism, Microcell believes that a revenue-based contribution tax is the best of the industry-funded approaches.
We have outlined the details of an acceptable revenue-based collection mechanism in our written comments which were filed yesterday. We will only provide a brief of these today.
Subject to the Commission's classification of what constitutes basic telecommunications service, a revenue-based collection mechanism should apply to as a broad a base as possible of such basic services, including local and long distance services.
Contribution eligible revenues should be determined based on the service provider's total operating revenues less revenues from non-contribution eligible services, such as enhanced services, terminal equipment and other non-telecommunications type revenues. It should also subtract inter-carrier payments, such as switching and aggregation charges, as well as subsidy revenues and costs associated with other contribution-like payments and obligations.
Microcell notes that the wireless carriers, alone among telecommunications service providers in Canada, are required to pay significant licence fees and to meet other social obligations. Microcell submits that the costs of such fees and obligations should be removed from each wireless carrier's total operating revenues for the purposes of determining contribution eligible revenues.
Wireless carriers are required to pay licence fees well in excess of the costs of administration of the associated spectrum. Other conditions of licence intended to ensure that wireless carriers meet service obligations, such as the timing and extent of network deployment, amount to a contribution that wireless carriers are required to make to the achievement of government objectives for service availability. Wireless carriers also face unique requirements, again, as conditions of their licences, to fund research and development. These requirements are also intended to ensure that wireless carriers make a significant contribution to the ongoing development and deployment of telecommunications in Canada.
Because these the requirements, which, as the previous speaker noted, are based on commitments willingly made in licence applications, because they are only demanded of wireless carriers that offer services that increasingly compete with those that are offered by wireline carriers, Microcell believes that competitive equity requires that the Commission exclude their cost from any calculation of contribution eligible revenues. The alternative would be to impose the burden of supporting social goals, including universal availability of telecommunications choices even in high cost serving areas, disproportionately on the wireless industry.
One important practical complication that arises under a revenue-based mechanism is the treatment of bundled contribution eligible and ineligible services. Microcell believes that the contribution eligible revenues could be determined on the basis of stand-alone rates for any basic services included in the bundle. Because, of course, of the difficulty of developing a simple rule that would treat all cases fairly, the Commission would likely need to consider some service bundles on a case-by-case basis.
Microcell also believes that under a revenue-based contribution collection mechanism, contribution tax should be explicitly shown on consumers' bills. This ensures that consumers are aware of the tax, unlike under the existing regime where contribution charges are hidden. Moreover, an explicit tax or subsidy line item on the customer<s bill would be more competitively neutral in that all telecommunications service providers would be required to recover contribution in a similar manner.
Microcell, as I said earlier, is strongly opposed to the replacement of the current per minute collection mechanism with the per line mechanism. In our view, compared to the current regime, a per line mechanism offers no advantages in terms of any of the five evaluation criteria set out earlier. Moreover, it amounts to a regressive tax on local access services.
First, no party advocating the adoption of a subscriber line charge has demonstrated that it would be a more effective means of collecting contribution than the current mechanism.
Second, shifting the burden of contribution funding from long distance services to local access services may appear to offer some efficiency advantages since the demand elasticity for toll services is generally considered to be higher than the elasticity for residential local wireline services.
However, under a subscriber line charge mechanism, the contribution funding burden would effectively fall on all local access services. This would have the effect of reversing many of the recent reductions in business access rates and, in doing so, reverse the recently achieved efficiency gains associated with moving those rates closer to cost. As illustrated earlier, by increasing costs to wireless carriers, a per line mechanism could have significant detrimental effects on both the economic efficiency and the competitiveness of the wireless industry in Canada.
Third, in terms of sustainability, there is no compelling evidence suggesting that a subscriber line charge would be any more or less sustainable in the long term than the current per minute mechanism. Consequently, if the commission determines that the existing usage base mechanism is unsustainable in the face of technological and market developments, then the same conclusion should apply to a subscriber line charge.
Fourth, a subscriber line charge offers no improvement over the existing mechanism in terms of competitive and technological equity. The shift in contribution burden proposed illustrates that the proponents of the subscriber line charge, primarily the interexchange carriers, are simply attempting to transfer their current contribution liability to other segments of the industry.
Finally, from an administrative perspective, a per line mechanism offers no immediate or long term benefits over the existing mechanism. There is no reason to believe that an ongoing process of refinement, similar to the industry's experience with the existing per minute mechanism, will not be necessary under a subscriber line charge regime also.
Just as technological and market developments are placing increased pressure on the ability to capture contribution eligible long distance minutes, so will it be increasingly difficult to identify and quantify access lines that should be subject to a subscriber line charge.
In conclusion, Microcell believes that the record of this proceeding demonstrates that the existing mechanism is both inefficient and unsustainable. To remedy the situation, the Commission should focus first on reducing or eliminating the subsidy requirement. Any remaining subsidy requirement would of course most efficiently be funded directly by government.
If the Commission elects to retain industry funding, Microcell believes that a revenue-based approach is preferable. However, the Commission should address the need for a transition plan to mitigate negative impacts on any sector of the industry.
Thank you very much.
THE CHAIRPERSON: Thank you, Ms McDonell.
COMMISSIONER CRAM: Thank you.
I want to take us to page 5 and your proposition that there should be a deduction from your gross income for the purposes of deciding any revenue-based contribution plan, not tax. You refer to a deduction for your service obligations.
Let's take an example. Let's say in order to get your cross-Canada licence or respective licence, you said you would serve Saskatoon and Regina -- I think that is the concept that everybody is thinking about -- and it may be uneconomic to do that. What would we deduct from your gross revenue? Would we deduct an acceleration of that expense, or would we deduct the loss, or would we deduct the sort of foregone uneconomic cost of putting capital in?
MS McDONELL: That's a fine question.
As Clearnet noted and as you perceive, Commissioner Cram, in thinking about this, we are thinking about extending service to places that might be uneconomic. Obviously, we would have to try to find some quantification for it.
At the moment, all the wireless service providers are required to provide Institute Canada with an annual report of their achievement of their conditions of licence, which includes quantification of other elements such as R&D. I am not aware that that report gives us a great deal to go on in terms of quantifying an acceleration or quantifying t he uneconomic costs of achieving that service coverage.
But I believe that if you were to accept the principle, it would be a relatively easy matter to come up with some form of quantification for that increment beyond what it would strike a wireless carrier as necessary to achieve its own coverage objectives from the point of view of running a business.
COMMISSIONER CRAM: Because then my next issue is what if all of a sudden seven million people decided to live in Regina and it then was economic, do we put that back into your revenues when the seven million people move to Regina? Conceptually, I am having a real serious problem with deducting it because how do we know when it is economic and how do we deal with it?
MS McDONELL: Again, I think it is a marvellous hypothesis, although I would have them move to Saskatoon because that's where I am from.
COMMISSIONER CRAM: It's all God's country. There's no question about that.
MS McDONELL: Fair enough. I think in principle it would be fair to do that. If you accept the principle of deducting this sort of cost, the wireless carriers would have to be under some obligation to point out when they reach some sort of positive return for serving these places. Again, that does, as you know, raise all sorts of issues of auditability and that sort of thing, but that is exactly the sort of business that the Commission has been in for all these years in dealing with this sort of question.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Thank you. Commissioner McKendry.
COMMISSIONER McKENDRY: Thank you, Mr. Chair.
I have a question in the same area that Commissioner Cram just discussed with you on page 5 of your comments this morning and in the third paragraph, I will just quote a sentence:
"Because these requirements are only demanded of wireless carriers offering services that increasingly compete with those made available or wire line carriers, Microcell believes that competitive equity requires that the Commission exclude their costs or many calculations to contribution to eligible revenues."
I want to make sure I understand what these requirements are. I will start first with the timing and extent of network deployment which you cite in the paragraph above and I think you just discussed with Commissioner Cram.
What do you mean by "extent of network deployment?" I'm just taking that at face value. I would assume you are suggesting that all your capital expenditures with respect to network deployment should be deducted. Is that what you are saying?
MS McDONELL: I don't think that anyone, including the wireless carriers, would advocate that, Commissioner McKendry.
By "timing and extent," what we meant was that under the conditions of the licence, we are required to provide service in a number of CMAs and other census areas during an initial period of the licence, and it was a period of five years. That means that even though if the business were to be run on a self-sustaining basis, it might take us longer to reach places like St. John's and -- I hate to go back to it -- Regina and Saskatoon, God's country. We are required by condition of licence to accelerate that deployment.
Where, for example, the incumbent carriers had the luxury of 125 years of monopoly to extend their networks throughout the service areas that they do serve, a wireless carrier is required to extend its network to the limits that it promised in its own licence application within a much shorter period of time. Because that timing forces the deployment of network in places which are not going to be sustainable certainly within that period and quite possibly for a long period of time after that, it places additional burdens in terms of raising financing on a wireless carrier that just simply may not be comparable to what a wire line carrier is required to provide.
Again, I have compared us to the ILECs, but look at the situation of a wireless competitive local exchange carrier, as Microcell hopes to become, compared to a wire line local exchange carrier.
I am not suggesting that wire line local exchange carriers necessarily have it easy or that they aren't getting into debt in order to extend local networks, but they have an absolute choice of where they decide to put in facilities. The only point we are making with this is that wireless carriers, by virtue of using the radio spectrum, don't necessarily have an unfettered choice.
COMMISSIONER McKENDRY: Yesterday, one of the parties that appeared before us argued or asked for a five-year exemption to contribution for new entrants, unless they became profitable before that time. As I recall, Commissioner Colville asked them why, in effect, other carriers should subsidize their entry by paying contribution that they, if there wasn't an exemption, would have to pay.
Is that situation analogous to what you have just told me, that you are looking for an exemption, in effect, from having to pay contribution, given that you are expanding and growing your network?
MS McDONELL: it is not directly analogous, Commissioner McKendry, because what we are saying is that, first of all, this isn't necessarily time limited with respect to the deployment period of our network.
The other thing is that what we are saying is that, although wireless carriers now pay a certain amount of contribution as a result of the surcharge on connecting trunks, the proposals that we see in the record of this proceeding for a new system appear to result in wireless carriers paying an awful lot more. That amounts to a new obligation on wireless carriers, in addition to its obligations to Industry Canada, which were undertaken when they made licence applications.
We are saying that if that kind of a new obligation is to be placed on wireless carriers, along with other participants in the industry, that some allowance, if you like, should be given to the fact that we are meeting other federal government-mandated social obligations.
COMMISSIONER McKENDRY: I guess what I am trying to understand is what you have to do that others don't, that your wire line competitors don't. You say you have to pay licence fees. Do your wire line competitors pay licence fees?
MS McDONELL: Not in the magnitude that wireless carriers pay licence fees. The licence fees that wire line carriers pay are simply the ones that are payable to the CRTC. Under certain proposals that are before you, those fees would, themselves, extend to wireless carriers, if they don't already.
The licence fees that we are talking about in this particular care are the ones paid to Industry Canada for the use of Spectrum. Those are not payable by wire line carriers.
COMMISSIONER McKENDRY: I understand that, but I take it the written argument you filed will compare the licence fees that are paid by wire carriers and wireless carriers, so we can understand that you are paying, I take it, significantly more in licence fees than the wire line competitors pay.
MS MacDONALD: It doesn't now. We certainly will address that in reply argument, if you would like.
COMMISSIONER McKENDRY: The timing and extent of network deployment we have talked about already, but I take it you would agree that your wire line competitors are extending their networks as well and upgrading their networks and so on. So it isn't as if you are the only player that's facing an obligation to upgrade and extend that. Wire line carriers are doing that, too, aren't they?
MS MacDONALD: Certainly they are, but, by and large, under the regulatory bargain that has existed over the course of the now 90-some-odd years since Bell and BCTel came under the federal regulation and subsequently the other carriers started to come under provincial regulation, those upgrades and extensions have, by and large, been explicitly compensated for by rates. Wireless carriers, as a new entrant, are in the position of having to fund network extensions and operations out of revenues gained in a highly-competitive market.
I certainly don't want to come before you and suggest that all we are talking about here is special pleading or suggest that wireless carriers resent taking on a proportion of -- or certainly that Microcell would resent taking on a proportion of the social obligations that you might choose to impose on the industry. I think it is worth noting that as competitors we are in a completely different situation in terms of funding that network upgrade and roll-out.
COMMISSIONER McKENDRY: The third and last thing you want a deduction for is R&D. What distinguishes you from the R&D expenditures or what distinguishes your expenditures from the R&D expenditures of the wire line competitors you face that would justify giving you an exemption and not giving them an exemption?
MS MacDONALD: Ours are conditions of licence, Commissioner McKendry. We are required by our licence to produce a certain amount of R&D every year and that is quantified in an annual report. The wire line carriers do it, to my understanding, largely as a matter of making sure that their networks continue to be attractive in a competitive environment.
While certainly that's a benefit that wireless carriers get from doing research and development -- and Microcell has been very active in doing research and development -- the fact that it's a condition of licence and that it's not an optional expenditure means that it needs to be put into budgets, including of companies that are not turning a profit.
COMMISSIONER McKENDRY: So the rationale isn't that you are both doing R&D, it's you have to do it by condition of licence. I guess you are saying they don't have to do it if they don't want to do it; therefore, you can get the deduction and they shouldn't.
MS MacDONALD: That's correct.
COMMISSIONER McKENDRY: They shouldn't get a deduction for their R&D?
MS MacDONALD: That's correct, yes.
COMMISSIONER McKENDRY: Thanks.
THE CHAIRPERSON: Thank you, Commissioner McKendry.
I think those are all our questions. Thank you, Ms MacDonald and Mr. Lefebvre?
The next party will be Rogers Wireless.
ARGUMENT / PLAIDOIRIE
MR. ENGELHART: Good morning, Commissioner. This chart is on the back page of the submission. For anyone in the audience who is wondering what is on it, it's the same chart.
My name is Ken Engelhart and I am the Vice-President, Regulatory, for Rogers Communications. I am here on behalf of our affiliate, Rogers Wireless Inc. With me today is Mary Coates, Manager, Economics, for Rogers Wireless.
Let me say at the outset how pleased Rogers Wireless Inc. is to have the opportunity to present its position in this proceeding to you orally and to respond to any questions that you may have.
As you are aware, RWI operates cellular and PCS networks across Canada. Since 1998, long distance traffic carried on these networks has been subject to contribution charges in accordance with Telecom Order 97-590, the Scope of Contribution proceeding. Because of this, we obviously have an interest in seeing contribution rates fall and we have supported the unfreezing of contribution rates in past proceedings in order to accommodate such reductions.
At the same time, the vast majority of traffic carried on our networks is local traffic. This traffic is originated or terminated on wireless networks that we have built at great expense with the benefit of subsidies from contribution payments generated by long distance traffic originating or terminating on our network.
In this regard, wireless carriers are somewhat unique. We pay contribution on our long distance traffic even when we originate or terminate it on local wireless networks that we have built ourselves and we do not receive any contribution payments, even when we terminate long distance traffic for ILECs or other long distance carriers.
While RWI is not happy with this situation, I am not here today arguing for a review of Telecom Order 97-590. Rather, I am here in the hope of persuading you not to make the situation worse by implementing the solution proposed by the alternative providers of long distance service.
We should really start by looking at what we are trying to achieve. What is the problem that brings us here to this room that has resulted in the initiation of this proceeding? The proceeding was started by a number of the long distance providers. In the central theme of their application, what they have said is that the contribution regime is threatening the viability of long distance competition and their ability to earn a profit.
By increasing the rates for long distance services above efficient levels and enforcing an artificial distinction between local and long distance services, the alternative providers of long distance services argue that the current system creates allocative and dynamic inefficiencies in the long distance market, harms consumers by artificially raising long distance rates, and inhibiting the emergence of a truly competitive communications environment.
There are three problems: efficiency, consumer impact and competition. Those are the three tests that we have on our chart. Those, I think, are the three criteria that we should use to measure any solution -- how well do they promote efficiency, are they consumer-friendly, do they promote competition -- because that's the problem that we are trying to solve.
Let's look at what has happened so far. It's important to recognize that the concerns raised by the long distance providers in respect of the current contribution collection mechanism are not new. We have always known that contribution raises long distance rates and, as a result, distorts the consumption of long distance services. The Commission has recognized these concerns on a number of occasions and has sought to minimize them while balancing other policy objectives such as affordability and accessibility of local telephone service.
New entrants in the long distance market have known about these distortions from the outset and that contribution requirements must be factored into their business plans and service prices. They have known since 1992 that the Commission's plan was to continue to charge contribution on long distance traffic and to gradually reduce contribution charges down to sustainable levels.
As we all know, the contribution regime has been extensively overhauled since it was first introduced in 1992 to adapt the new technological and competitive environment. These changes have included a change from a per trunk contribution rate to a per minute contribution rate, the establishment of a peak and an off-peak per minute rate, the expansion of the scope of contribution-paying services, the expansion of the contribution regime to "IP telephony", the modification of the regime to apply to competitors in the international market, an increase in the DAL surcharge, and a recent modification to permit "unfreezing" the contribution rate in certain limited circumstances.
So all of these changes have been designed to keep the contribution regime in step with the new regulatory regime, the convergence of technologies and the new competitive reality.
In addition, the Commission has reduced contribution rates considerably by raising local rates. In the case of Bell Canada, for example, the contribution rate has dropped from 8.12 cents per minute in 1992 to 0.49 cents per minute in 2000, a reduction of 94 per cent.
The industry and the Commission have invested substantial time and resources in designing and implementing the current contribution mechanism. This includes the relatively recent implementation of a portable contribution regime in 1998.
Recent initiatives by the Commission and industry have gone a long way towards minimizing the overall impact of the contribution subsidy. Should we fundamentally alter it now? Is it worth it? Clearly, only if the reforms unambiguously address the problem by improving efficiency, by being customer friendly and by promoting competition. If it satisfies all of the three criteria, then we should make a change. But we also have to weigh into that the implementation costs of designing a new system.
Obviously, the long distance providers are seeking to spread the contribution burden across more services and service providers. Two specific mechanisms that have been proposed are revenue tax and a subscriber line charge. We discuss both of those together, the subscriber line charge and the revenue tax, as spreading the burden on the bottom line of that chart.
Obviously, long distance providers have a huge self-interest in shifting as much of the contribution burden as possible onto other services and service providers. But will spreading the contribution, through the implementation of a revenue tax or a subscriber line charge adequately address the problems associated with the current regime? RWI believes that the answer is no. The proposed reforms will not solve these problems. Moreover, they will be administratively complex and expensive to implement.
First, let's consider the efficiency effects of spreading the contribution burden.
Spreading the contribution burden does not address the efficiency losses associated with the contribution burden. It simply extends these losses to other markets. Efficiency in the long distance market will increase, but the contribution burden in the new markets and services will introduce new allocative and new dynamic inefficiencies in these markets. There will not be any net efficiency gain. Consider, for example, the impact of a shift of a portion of the contribution obligation from IXCs to wireless service providers. A $3 a month subscribe line charge will shift $240 million of contribution payments to the wireless industry.
In addition to the allocative and dynamic efficiencies that, as discussed above, would result from the extension of contribution obligations to new services and markets, this proposal, the subscriber line charge proposal suffers from the additional difficulty that, for many services, there is no "line". For cellular and PCS, we have a lot of prepaid customers. They go into the convenience store and they buy a card. We don't send them a bill. So there is no way we could send them a subscriber line charge bill because they don't get a bill.
Some of these customers don't even have a Cantel number. They can use any old phone and just buy a card in a convenience store. Well, I suppose you could put the subscriber line charge on the card that they buy in the convenience store. But then if someone buys three cards in a month, they are obviously paying three subscriber line charges.
So the subscriber line charge is a problem for us.
Will consumers see lower prices for telecommunications services? Again, the answer is no. Long distance rates may decrease, but other rates will increase. As a group, consumers will not see an overall reduction in their telecommunications spending.
Will competition be enhanced? Once again, the answer is no. Spreading the contribution burden to new telecommunications markets will introduce new distortions and barriers to entry in these markets. Moreover, unlike alternative providers of long distance service who entered the market with full knowledge of their contribution burden, this proposed shift of the burden onto local service providers will result in unanticipated expenses. This is particularly true for wireless service providers.
A shifting of the contribution burden to wireless services would inevitably result in higher rates for consumers, greater losses for wireless service providers and reduced investments by wireless service providers. In other words, everyone will suffer: consumers will pay more, higher prices will reduce consumption and wireless service providers will lose more money, thereby limiting their ability to expand service.
The subscriber line charge proposed by Call-Net and others would require wireless service providers to pay in excess of $240 million in contribution charges and this amount would grow rapidly as the number of wireless subscribers increases. That is compared to the $14 million in contribution charges paid today by wireless service providers.
In the event that a subscriber line charge is imposed on wireless, it will have a very different impact than the imposition of a subscriber line charge on local wireline service. Local wireline service, at least in the residential market, is a monopoly. The incumbent will surely pass the subscriber line charge on to customers. Since demand is relatively inelastic, there will be no reduction in the amount of service demanded.
The impact on wireless will be completely different. Because the market is very competitive and given to price wars, it is unlikely that the SLC will be completely passed on to customers. To the extent that it is, demand will be reduced because wireless demand is very elastic.
As shown in the chart -- this is the chart showing the industry net income -- the wireless industry call ill-afford to sustain additional costs of this magnitude at this time. The wireless industry lost in excess of $1 billion in 1998, almost twice the losses sustained by the alternative providers of long distance services. In 1999, the wireless industry again absorbed losses in the $1 billion range.
These losses are largely attributable to the huge capital investments that are being made by wireless service providers as they roll out their networks across the country, as well as the requirement to satisfy Industry Canada licence conditions. Wireless service providers are already required to contribute financially and operationally to important social policy objectives pursuant to their radio licences.
For example, wireless service providers paid $130 million in radio licence fees alone in 1998 and substantial additional sums will need to be expended in order to acquire additional spectrum in the upcoming PCS spectrum auction. It is estimated that the upcoming PCS auction could generate in the area of $3-$5 billion. Full payment needs to be made by the winners in a mere 30 days after the close of the auction. Wireline carriers pay no such fees.
Wireless service providers must also contribute two per cent of gross adjusted telecommunications revenues to research and development activities. Again, wireline carriers are under no obligation to support research and development activities in Canada.
Finally, wireless service providers are required to meet specific roll-out obligations. Rogers Wireless today serves 93 per cent of the Canadian population with our service and that includes a lot of the band C and band D areas.
The new PCS spectrum that is being auctioned will also require firm roll-out commitments in the neighbourhood of 50 per cent of the population by year five. These are not simply targets, but rather are firm bench marks that must be met as a condition of licence. In addition, the $3-$5 billion figure does not include the capital costs to build the network to meet these roll-out requirements established by Industry Canada. These wireless networks have and continue to be built without the benefit of subsidies.
The application of additional contribution obligations on wireless service providers would divert spending by wireless service providers from the build-out of their networks in rural and remote areas paradoxically hurting the very customers that a contribution regime is designed to assist.
A requirement for wireless networks and for new access networks built by CLECs to subsidize legacy wireline networks would also be fundamentally at odds with competitive and technological neutrality and competitive efficiency. All of the new wireless or wireline networks trying to create a competitive alternative to the legacy wireline networks would be required to pay a tax to these legacy networks. Far from promoting competition, this would be a costly barrier to new facilities-based competition.
Spreading the contribution burden to new services such as wireless would, therefore, introduce costly new barriers to competition, would move the efficiency losses from the long distance market to other markets and would lower long distance contribution by raising rates in markets such as wireless. Moreover, a fundamental change to the contribution regime would require considerable administrative effort and expense.
There is a painless way to address the problems associated with the current contribution mechanism. Moreover, this can be done without implementing a whole new regime. The answer is rate rebalancing through price caps.
Efficiency and competition in Canadian telecommunications markets can be improved through a simple rate rebalancing exercise.
RWI believes that the local rate increases necessary to remove the current contribution requirement, which are, on average $3.50 per line per month, would not compromise affordability of local residential telephone service.
There is widespread support for rate rebalancing in this proceeding. Most parties recognize that moving local rates to cost would eliminate the need for a contribution mechanism and remove the economic distortions that are inherent in the current regime. The problem is that some customers would see a local rate increase, and that is a problem. The Commission may, therefore, not wish to mandate full rate rebalancing at this time.
It is for this reason that Rogers Wireless has proposed that rate rebalancing be achieved without mandated local rate increases by including contribution in the price cap regime.
Under this approach, contribution would be included within the price cap regime as a cap service, either as a separate service basket or as part of the Other Capped Services basket. The price cap mechanism would work as it currently does. All capped services, including contribution, would be subject to the price cap index on an annual basis.
Under this approach, ILECs could use productivity improvements to reduce contribution rates instead of reducing business local rates, as they do today. In this way, both residential and business customers will benefit from reduced contribution charges, while not experiencing higher telephone bills, resulting from a revenue tax or subscriber line charge. Business local rates would not continue to decline, but they are already very low.
Rogers Wireless estimates that the contribution requirement could be eliminated within less than four years under this approach, without requiring any increases in local rates. Instead of increasing local service rates, productivity improvements will be used to reduce contribution. For the first time, then, residential customers would benefit from the productivity improvements of the price cap system, which to date have been absorbed entirely by business service rates. The approach, therefore, proxies the incentives to reduce costs for all local services that would normally apply in a competitive market.
This approach is both painless and effective. It does not require an overhaul of the current contribution collection mechanism. It does not require increases in local residential rates. It does unambiguously improve efficiency and competition in telecommunications markets, and it would result in overall rate reductions for consumers.
As shown in the chart, only rate rebalancing through price caps addresses all of the problems associated with the current contribution collection mechanism. In contrast, spreading the burden through the implementation of either a revenue tax or a subscriber line charge addresses none of the problems with the current regime and would result in significant hardship for other industry sectors, including the wireless market.
Moreover, rate rebalancing through price caps does not require a fundamental overhaul of the existing contribution regime. The existing contribution framework, including the portable contribution regime, would continue to operate until it is no longer required.
We therefore urge you to seriously consider this approach in your deliberations.
THE CHAIRPERSON: Thank you, Mr. Engelhart.
COMMISSIONER CRAM: Maybe if I could ask you to file this in your reply, Mr. Engelhart, I am very interested in your definition of rural and remote areas. What I would like you to do, if you could, is provide us the most rural and remote area that you require by COL to service and when -- in other words, what year of your licence -- and if you would collate that with the 1996 census data showing the density of the population in that enumeration area.
I am certainly going to suggest that it is not as remote as Ile-à-la-Crosse in Saskatchewan that SaskTel has an obligation to serve. What I would like is some way that we can define this and look at it, collate the two together.
MR. ENGELHART: Certainly. In terms of our conditions of licence, we, of course, had conditions of licence back in 1983 that required our cellular service to expand to a number of markets. We have blown way past those conditions of licence.
Our network now covers, as I said, 93 per cent of the Canadian population. We are continuing to expand that network to rural and remote areas, but this is way beyond our licence requirements. We are way past that.
Ninety-three per cent of the Canadian population is covered by our analogue network. We got a PCS licence five years ago, and we have certain requirements to expand our PCS digital coverage because the people in the rural and remote areas want the fancy digital services too. Our digital footprint today is 80 per cent of the Canadian population.
If it would assist the Commission, we would be pleased, for example, to include in our reply argument coverage maps showing just where we are and some representative communities.
What you find a lot in our business is transportation corridors get covered, and they cover some very rural and remote areas as part of that. As I said before, there is a lot of Band C and Band D that is covered by our network.
COMMISSIONER CRAM: But, then, really it is done merely as a collateral issue to the obligation to serve, say, in Regina and Saskatoon; you serve the corridor that goes between the two. Is that really what it comes down to?
MR. ENGELHART: For us at this point, we are really beyond our licence requirements. We are in a competitive business and coverage counts. People buy cellular service in large part based on how big your footprint is. We want to have a big footprint.
There are good customers in rural and remote areas. We are expanding in rural and remote areas all the time. But it is very expensive. Each of those cell sites cost $1 million. When we expand in those rural and remote areas, without anybody giving us any subsidies, we are improving service to those areas. The point I am trying to make is that I have enough problems expanding my own network into rural and remote areas without subsidizing someone else's market networks in those same areas.
COMMISSIONER CRAM: I think I just heard you say that you are expanding for competitive reasons.
MR. ENGELHART: Yes.
COMMISSIONER CRAM: And not out of any obligation?
MR. ENGELHART: That is correct.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Thank you, Commissioner Cram.
In your presentation today, you didn't address the issue of the determination of the size of the required subsidy. Many of the other parties had addressed that. Perhaps you have done it in your more extensive written submission, or have you? Are you satisfied that the current method for calculating the magnitude of the requirement is appropriate, or do you have a view on that?
MR. ENGELHART: The current magnitude of the contribution was really developed as the local access shortfall. It was a Phase 3 methodology that said local and access do not fully recover all of their associated costs. Long distance recovers more of their costs.
The current mechanism said that it is not fair if the phone company's long distance network is covering some of their local and access shortfall. It is not fair if the competitive long distance carriers don't also cover it. Clearly, that is the system that we have today.
Obviously, we don't do annual revenue requirements or Phase 3 calculations any more, but when the price cap system was set up, the contribution amount was based on that shortfall. In implementing the portable contribution system, we started parcelling that money out to rural and remote areas based on Phase 2 calculations of what the costs are in different bands.
But the quantum itself is the local access shortfall. That suggests to me that that quantum is an amount that has to be solved -- that contribution problem has to be solved either by the long distance companies continuing to pay that amount, which I agree is probably not workable any more, or you have to eliminate that local access shortfall by raising local and access rates, either through rate rebalancing or through dumping the contribution into the price cap system, as we have suggested.
I think we are getting confused when we suggest that the current local access shortfall is the amount of money that is needed to subsidize rural and remote areas or needed to promote affordability. I think that if the Commission wants to solve the problem, they have to solve the problem by getting more revenues into the local access category and wiping out contribution. There is then going to be a kind of rate rationalization, as I think Mr. Farmer called it yesterday. In that rate rationalization process, there may or may not be an affordability problem that arises. If there is, the Commission may want to look at a more universal tax to support affordability. But I think we would be talking about a far, far, far lower order of magnitude than the current local access shortfall.
THE CHAIRPERSON: Okay. Thank you very much, Mr. Englehart and Ms. Coates.
We will take our morning now and reconvene at 11 o'clock. The next party will be CAIP.
--- Upon recessing at 1045 / Suspension à 1045
--- Upon resuming at 1100 / Reprise à 1100
THE CHAIRPERSON: We will return to our proceeding now. The next party is CAIP, the Canadian Association of Internet Providers.
ARGUMENT / PLAIDOIRIE
MR. BRAZEAU: Mr. Chairman, Commissioners.
Ça nous fait énormément plaisir de nous trouver ici dans l'Outaouais où la température aujourd'hui est tellement agréable.
My name is Phillip Brazeau, Vice-President with PSInet, and for the purposes of these proceedings, Chairman of the Association of Internet Providers. To my left is Kirsten Embree, a partner with the law firm of Osler and counsel to CAIP in these proceedings.
The Canadian Association of Internet Providers is Canada's national association of internet service providers with a membership in excess of 150 Internet providers and affiliate members located across Canada. This membership ranges in size from the smallest of the Internet provides to two to five employees, to some of Canada's largest providers, such as Bell, Telus, AOL Canada and PSInet. CAIP's members provide over 85% of the connections to the Internet in Canada for subscribers at work, home and in schools in conjunction with an expanding array of value-added services, including access to the World Wide Web, e-mail applications, online information services, news group services and, of course, facilitating the development of the e-commerce industry.
As an organization whose members could be seriously affected by the outcome of this proceeding, CAIP has taken a keen interest in the issues that are under your consideration today, particularly those which could result in the application of further contribution obligations on the Canadian Internet industry.
Mr. Chairman, it is the position of CAIP in this proceeding that Internet services are fundamentally different from other telecommunications services and that it would be contrary to law, policy, administrative efficiency and competitive equity to impose further contribution obligations on Internet providers.
Some of the parties to this proceeding have proposed that the current contribution burden be shifted in its entirety from interexchange service providers on the one hand to local telephone service subscribers and Internet providers on the other hand.
CAIP believes that it is neither in the public interest nor in the interest of the growth of a dynamic and vibrant Internet industry in Canada to shift the entire contribution obligation overnight from long distance service providers to customers of local telephone service and competitive service providers. Not only would such an approach lead to rate shock for residential and small business subscribers, it would seriously harm service providers that rely on the local exchange carriers for essential access facilities. I submit to you that any move in this direction will bode ill for Canada's Internet industry at this stage in its development.
Both the CRTC and the federal government have taken active steps to promote the growth of the Internet and Internet-related businesses in Canada. Needless to say, if new costs are imposed on Internet providers this will mean higher overall costs in the Internet sector which, in turn, will result in fewer service choices for customers, few competitors in the market and reduced levels of product and service innovation.
In the view of CAIP, the Commission can best promote the Internet and the federal government's connectedness agenda by ensuring that Internet providers are not saddled with additional contribution obligations and by continuing with its hands-off approach to regulation that the Commission has been so successful in implementing to date.
As a consequence, CAIP recommends that the Commission adopt a balanced approach to the design of a new contribution collection mechanism.
Mr. Chairman, it is the view of CAIP that taxing the Internet is contrary to government policy.
The Canadian government has placed connectedness high on its agenda. Why? Clearly, this is because maximizing the number of Canadians who have access to the Internet and creating an e-business friendly environment are some of the fundamental building blocks to ensuring that Canada can compete and win in the emerging global electronic marketplace. Not only does the electronic marketplace represent a new way of doing business, such as business-to-business or retail e-commerce, it is also a creative economic force. Indeed, the Internet is responsible for creating whole new sectors of economic activity.
Using the Internet can achieve important social policy goals, such as advancing the distribution and sharing of information between citizens, governments, schools, hospitals and businesses, and fostering the process of lifelong learning. We can only wonder at what new business, educational and informational applications and opportunities this new industry sector will create in Canada.
In building this new economy and in ensuring Canada's success in the global electronic marketplace, the government has identified universal access to the Internet by individual Canadians as an essential component to its strategy. In the words of the Minister of Industry, John Manley, in a recent speech at the NET 2000 Conference, "ensuring that all Canadians have access to the Internet is the single most important action that government can take to ensure success in the knowledge-based economy". The Commission's decision in this proceeding is fundamental to ensuring the success of the federal government's objective.
We at CAIP also believe that taxing Internet access will hurt individual Canadians as well as small and medium sized Internet providers. The market for retail Internet services, particularly in the low speed segment of the market, is thriving, notwithstanding the fact that it is a highly competitive market and the margins are razor thin. Indeed, the large number of participants in the market for retail Internet services attests to this fact.
We are of the view that the imposition of a new contribution obligation on Internet providers can threaten the delicate balance in this highly competitive marketplace. We also believe that any increases to the costs that are currently faced by Internet providers, such as additional contribution charges, will make Internet access services more expensive and will hurt lower income households.
We would note in this regard that statistical studies demonstrate that there is a strong relationship between income and Internet use, the highest income households being nearly five times more likely than those in lowest income households to regularly use computer communications in the workplace or at home. Needless to say, making Internet access more expensive by imposing further contribution obligations on Internet providers would run counter to the government's policy object of connecting as many Canadians as possible.
We would also like to point out that contrary to common perception Internet providers do contribute toward universal service objectives through the contribution rates that they pay on both local and interexchange voice over IP services that are interconnected to the PSTN.
In addition, and quite apart from the explicit contribution payments that they make, what is often forgotten is the instrumental role that the Internet providers have played in generating additional revenues for Canada's carriers.
Mr. Chairman, Internet providers are not telecommunications service providers, but they are significant users and purchasers of telecommunications services. Internet providers stimulate demand for other telecommunications services, such as leased lines, Internet backbone facilities and residential second lines, which, in turn, creates opportunities for the generation of additional contribution revenues.
In summary, Mr. Chairman, CAIP is firmly of the view that, as a matter of public policy, expanding or modifying the existing contribution regime in order to capture Internet services is counterproductive to the economic growth that is made possible by the Internet and is contrary to the government's connectedness policy.
Indeed, when viewed against this backdrop, CAIP is firmly of the view that the benefits of capturing Internet services within the contribution fold are far outweighed by the negative impacts on consumers, businesses, the Internet industry and the economy as a whole.
Mr. Chairman, it is also CAIP's position in this proceeding that it would be contrary to law to impose contribution obligations on Internet providers. Although the legal basis for this position is set out in detail in CAIP's final comments in this proceeding, essentially it is CAIP's view that because Internet providers do not offer or provide basic telecommunications services, Internet providers are not "telecommunications service providers" within the meanings of subsections 2(1) and 46.5(1) of the Telecommunications Act.
It is also CAIP's view that Internet providers should not be "required to contribute ... to a fund", as contemplated by subsection 46.5(1) of the Act, regardless of whether that requirement is imposed directly through the levying of contribution charges on their customers or indirectly by paying contribution charges such as an SLC. To suggest otherwise would mean that the Commission would be doing indirectly that which it could not do directly, which is to require Internet providers to "contribute to a fund".
The services offered by CAIP's Internet provider members and, in particular, Internet access service are not basic telecommunications services. Although this position is not without its detractors in this proceeding and may well require adjudication by other tribunals, CAIP submits that it is the correct view for the following reasons.
First, the additions to Canada's schedule of specific commitments resulting from the negotiation of the Fourth Protocol to the GATS on basic telecommunications services have been widely publicized and have been implemented in various legislative amendments and regulatory proceedings. However, what is often overlooked is the fact that "value-added" telecommunications services were included in the schedule of specific commitments of 50 governments, including that of Canada, as a result of the Uruguay Round of negotiations which were concluded in 1994.
Second, in Canada's schedule on specific commitments to the GATS, Canada assumed a number of commitments to open up its markets with respect to "enhanced" or "value-added telecommunications services", which, according to Canada's schedule, include the following services: "electronic mail", "on-line information and database retrieval", "electronic data interchange", "on-line information and/or data processing". These are services offered by Internet providers.
Third, Canada's schedule defines enhanced or value-added services as services "for the supply of which the underlying telecommunications transport facilities are leased from providers of public telecommunications transport networks."
Mr. Chairman, Canada's GATS commitments reinforce the fact that Internet providers are not providers of basic telecommunications services. Internet providers offer on-line, enhanced or value-added services that are delivered via "underlying telecommunications transport facilities ... leased from providers of public telecommunications transport networks."
In summary, Mr. Chairman, unlike carriers, Internet providers apply a significant amount of computer or processing intelligence to the information transmitted to them by their customers by storing, forwarding, caching and retrieving information on their customer's behalf. Carriers and resellers, by contrast, simply transport information from one location to another. As such, we do not believe at CAIP that Internet providers offer basic services or otherwise fall within the definition of a "telecommunications services provider" under Canada's Telecommunications Act.
Mr. Chairman, in light of the policy and jurisdictional considerations I have just outlined, the Commission needs to critically examine proposals for contribution reform that will have a negative impact on the cost structures of Internet providers, not to mention the costs to consumers and businesses to gain access to and make use of the Internet. This is especially true when you consider that the alternatives to the existing mechanism that have been proposed in this proceeding contain serious flaws.
For example, based on the record of this proceeding, it is clear to CAIP that the administrative costs will be particularly high with a per cent of revenue-based mechanism. These costs are likely to arise as a result of the following.
Firstly, the necessity of separating out contribution-eligible and non-contribution-eligible streams of revenue which would be particularly difficult for small and medium-sized Internet providers.
Secondly, the likelihood of applying that mechanism to a significantly larger number of contributors.
Thirdly, increased administrative costs. If a per cent of revenue mechanism were adopted, a significant increase in expenses related to compliance auditing would be required due to the increase in the number of reporting telecom service providers. It would be an administrative nightmare for many of the small and medium Internet providers.
Double taxation. As mentioned by other parties to this proceeding, some form of set-off will need to be implemented in order to avoid the problems that arise when services purchased by one telecom service provider from another telecom service provider are resold to end-users.
Bundling. As the Commission may be aware, most Internet providers offer bundles of services and may not account for revenues in a manner compatible with a per cent of revenue mechanism. The overwhelming majority of the parties to this proceeding agree that bundling is the single-most difficult problem associated with the per cent of revenue-based mechanism.
In our view, the only way to discourage this type of gaming is to establish "price lists" for each of the services within a bundle so that when a service bundle is evaluated, the price list can be used to impute revenues that would otherwise be "lost" in the service bundle. However, this approach has negative effects as well, such as the fact that it would discourage legitimate bundling opportunities, thereby reducing the benefit to the consumer. It would also introduce a further layer of administrative complexity to an already cumbersome mechanism.
In addition to these concerns, there is also the possibility of serious competitive inequities. For example, under the per cent of revenue mechanism where a telecom service provider is provided with the flexibility to recover its contribution obligations from any source of revenue that it chooses, the telecom service provider will likely seek to recover the obligation from revenue streams that are generated by services that are relatively inelastic in terms of demand, such as dial-up access facilities and residential telephone services.
The proposed subscriber line charge. The members of CAIP are also very concerned about the competitive inequities that would arise from the application of an SLC mechanism. Among those inequities are the following: Shifting the entire burden of contribution recovery to local wire line and wireless services; secondly, competitive inequity; thirdly, assigning a uniform SLC on "derived channels" discourages the use of more efficient facilities; fourthly, and not to be underscored, administrative difficulties.
Mr. Chairman, the massive migration to packetized networks that has been alluded to by some parties to this proceeding has been grossly exaggerated. Indeed, all of the ILECs in this proceeding have acknowledged that the amount of overall traffic in the next few years that is represented by voice-over IP is expected to be relatively small in comparison to the amount of switched voice traffic.
As evidence of this fact, none of the carriers that have participated in this proceeding is providing voice-over IP services at the present time. Thus, it is still quite sensible to look to the revenues that are generated by conventional long distance services as a source of subsidy. Yet, parties such as Call-Net are proposing that the CRTC shift to an extreme solution.
Mr. Chairman, we at CAIP believe that serious consideration should be given to the adoption of a mechanism which either preserves the existing contribution collection mechanism, perhaps in a modified form, or which adopts a hybrid approach which can incorporate aspects of the existing mechanism, as well as aspects of a new mechanism.
In the design of such a mechanism, it is CAIP's view that any replacement mechanism should be based on the following principles. Firstly, the new contribution mechanism should only be implemented after there has been reform of the existing mechanism in the form of further rate rebalancing and a thorough recalculation of the overall contribution requirement.
Secondly, the new mechanism must be phased in over a transition period that minimizes rate shock for customers, including customers of essential access facilities.
Thirdly, the new mechanism should minimize competitive inequities between different types of service providers.
Fourthly, contribution charges should be levied in a transparent manner and should be explicitly identified on customer bills. Contribution obligations should not be applied to any non-basic services, including all of the services that are offered by Internet providers and the new mechanisms should be simple to administer.
In conclusion, CAIP urges the Commission not to assess contribution charges obligations on Internet providers or their services. Assessing contribution obligations on Internet services would violate Canadian law and the objectives of the federal government's connectedness agenda. Moreover, a contribution regime requiring Internet providers to report and remit these subsidies will entail a manifold increase in the regulatory burden associated with administering the contribution system.
Given these considerations, CAIP seriously questions whether it is appropriate at this stage in the evolution of the telecommunications industry in Canada to devise a new contribution mechanism which would apply to a whole new set of services and service providers, particularly when there is no legal basis for including many of those service providers within the new regime and when there are many other mechanisms that can be relied upon to subsidize high-cost local telephone service without the need to tax one of the most critically vital engines to economic growth in the country at this time: the Internet.
Mr. Chairman and Commissioners, I thank you for having afforded to CAIP this opportunity to present our views on the issues raised in this important proceeding. Ms. Embree and I would now welcome any questions that you may have arising from our oral or written submissions.
THE CHAIRPERSON: Thank you, Mr. Brazeau.
COMMISSIONER LANGFORD: Thank you.
I think I'm going to leave the international stuff to the folks on Sussex and the legal stuff to the folks on Wellington and just ask you a little bit about your position on what you call the public policy concerns because I am a little confused by what you said this morning.
Just picking out some of the things you talk about, not wanting to hurt -- I think these were your exact words -- not wanting to hurt lower-income households and penalize them in some way, hard to argue against that. But I'm trying to assess in my own mind whether you feel, though, you don't want to pay -- and that has certainly been a constant theme here, so you are in good company, or at least you are in lots of company. I don't know whether it's good company or not. Nobody wants to pay. We have got that message loud and clear -- but do you feel that there is any aspect of the services that your members provide that should fall within that same goal, i.e. -- call it what you want, but implicitly what you said is -- let's help lower income households take advantage of our services for all of the eloquent reasons that you and Minister Manley and other people have said?
Don't you feel you have a part in there even if it's a tiny marginal part at this point, a part that may grow? But the subsidy here would go to that very goal, wouldn't it? So how do you square those two positions of yours?
MR. BRAZEAU: I would be pleased to respond to that, Mr. Commissioner.
When I address the issues that you raise from the membership who are basically small- and medium-sized business people who are out offering Internet services which, to our way of thinking, is critical to the development of the new economy, when they go out and acquire services from the telcos such as Bell, they pay for those. In order to make attractive services, they even have to wholesale some of the services offered by these telcos.
The margins that they are dealing with in addressing the market place are so small that to consider at this time imposing an additional charge in addition to everything else that they pay which is, in effect, a form of contribution, at this particular juncture, would, from my perspective, be totally erroneous to the development of the Internet industry.
MS. EMBREE: Just to add to that, something that a lot of people forget is that Internet providers do pay contribution today. They pay it on voice-over IP services. So they do actually make explicit contribution payments.
In addition to the explicit payments that they make -- and something that Phillip has talked about in his submissions to you today -- is that Internet providers are basically responsible for a lot of the growth that is taking place in Canadian carrier networks. They are ordering up extra lines. There are Internet backbone facilities that are being built. The incumbent phone companies are creating new services that are designed specifically for Internet service providers. And the increased demand that is being placed on networks by the customers of Internet service providers is resulting in manifold increases in the networks of all Canadian carriers.
COMMISSIONER LANGFORD: I don't want to gainsay anything that you have just listed. It's probably unquestionable. But it's not unlike the argument we heard this morning from Clearnet which has got the razor-thin margins, to use your term, which is employing 2,000 people this year instead of -- my numbers aren't exact -- but 240 or 400 a few years back, doing wonderful things for the economy, contributing. It's not unlike the position taken by AT&T yesterday, that is talking about razor-thin margins as well and why should we bear the whole burden.
Now, I'm hearing that you are bearing a bit of the burden. This morning, you have reminded us that you do bear some now. And yet, you have waived GATT around at us. You have waived the Supreme Court of Canada at us. That's fine, they are institutions, waive away.
But are you saying that there is no possible way your vibrant, wonderful, cutting-edge Canadian industry can't contribute to something? And if there is a way, what scheme would you prefer? What would you suggest even if it's in a limited way, even if it's only on the few lines you use?
I don't know if you were here for Dr. Jackson's discussions about how Internet is dividing one telephone line into four lines, raising problems. How could you contribute? Or are you basically saying we contribute a little now, we don't like it, we are not going to do it again and if you try to make us, we will take you to court?
MR. BRAZEAU: No.
COMMISSIONER LANGFORD: Good.
--- Laughter / Rires
MR. BRAZEAU: We may have to deal with our colleagues in a court setting.
I think, Mr. Commissioner, what the CRTC is faced with -- and as you have quite properly indicated -- is a number of parties have come in front of you and said, you know, our margins are so thin, you should do it some other way, you should look elsewhere.
What we are indicating to you -- obviously, you have a very significant decision to take as to who will step up to the table.
Some of the problems we have is to think that long distance providers under an SLC would no longer be at that table. I think what you are called upon is to weigh the benefit of having long distance service providers no longer contribute in the manner that they have done in the past and looking to Internet providers and saying, we know you contribute somewhat Internet providers, but guess what? We think you should more.
Our view is we really think you should not do away with a mechanism where long distance providers are stepping up to the table in some manner at this time.
COMMISSIONER LANGFORD: Well, what if we take away more and what if I say this to you: we are trying to make a fair decision and fair doesn't always mean equal, but it can? So let's take a really, really easy view of "fair". Everybody makes some kind of a just contribution, considering their circumstances.
I could argue -- and I am not advocating for anyone here, but just for the sake of argument -- I could easily argue that it isn't fair right now that one sector is taking a very large hit, while others are paying nothing. It may be fair in a more complicated view of equality, but just on the face of it, prima facie, that looks maybe not fair.
Could you suggest to us this morning some fair system whereby your sector would pay a share, despite the fact that we don't want to injure it. We are not trying to hurt it; we are not trying to hurt anybody here. But is there a way that we can stay out of the Supreme Court of Canada, not violate the Uruquay round, and get a fair contribution from your sector without putting anybody into Queer Street, as they used to say in London?
MR. BRAZEAU: I will give Ms Embree an opportunity to respond, but I would also like to make a few comments.
Leaving aside the policy reasons and legal reasons why we don't think we should be brought to the table, when we speak to fair, in our oral submission and in our written submission, we provide some guiding principles which we think address that very issue: What is fair? Some of those are that we make sure that the costs are transparent and they show up on the customers' bills, that we need a transition period.
There are some principles there which we suggest as guiding posts to you in your determination.
As between the various mechanisms that we have discussed over the past few days, I have not, within my own membership, had the opportunity to canvas them because an awful lot of the more substantive material has come out just in the last two days.
So, at this juncture, all we can urge you is to be guided by the principles we have given you to date. When comes the time to submit our final submissions, we will attempt to provide perhaps further guiding principles as to what we view as being fair to the Internet industry.
MS EMBREE: Just to add to what Philippe has said, again, I hate to repeat, but your question is: How can Internet service providers contribute? They do contribute today; they contribute in an explicit manner; they contribute in an implicit manner by generating demand for networks' components and services. That is an incredible contribution, not only to the Canadian economy, but it is also a source of revenues for incumbent carriers to generate contribution revenues.
The other thing I guess I would just add is that we have no indication, at least at this point in time, that the Commission would abandon its views on the contribution eligibility of voice over IP services.
As I said, we do pay explicitly today and, to the extent that the Commission maintains its view on voice over IP in the future, I guess you can draw your own conclusions in that regard.
COMMISSIONER LANGFORD: Help us a little. You are willing to pay in the future, in other words? It is not out of the question?
MS EMBREE: The Commission, as I said, has given no indication that it would abandon its view of the contribution eligibility of voice over IP services.
I don't know what the Commission is going to decide on this issue on a going forward basis. We certainly don't want to pay on voice over IP, but today, as I noted, we do.
COMMISSIONER LANGFORD: Thank you.
THE CHAIRPERSON: Thank you.
With respect to paragraph 23, would it be your view that a service provider who did provide basic telecommunication service using the Internet or Internet protocol would fall within the purview of the act?
MS EMBREE: I think it depends on the service that is being provided.
THE CHAIRPERSON: I said who did provide basic telecommunication service.
MS EMBREE: Using IP protocol?
THE CHAIRPERSON: Using IP protocol.
MS EMBREE: If it fell within the definition of a basic service, then arguably that service provider would be subject to the obligation to contribute to the fund.
THE CHAIRPERSON: Thank you.
Just on one other point. You have made a point this morning and just now in the discussion with Commissioner Langford the issue about this being an explicit charge on the consumer's bill. I don't recall whether you were here yesterday when the Coalition of Consumer Groups were here, but they were quite clear in that they did not support this charge explicitly showing up on the consumer's bill.
In light of that, I am curious to know what your comments might be.
MS EMBREE: The problem for Internet service providers, to the extent that they have services or offer services that are caught by the definition of a telecommunications service provider, to the extent that their services are caught or to the extent that they are subject to the contribution obligation, the entity that levies contribution charges on the Internet provider, if it is given the discretion as to how it wants to levy the charge and how it allocates its own contribution burden, what we are concerned with is that the Internet provider is going to be faced with a disproportionate amount of that burden.
To give you a practical example, under the revenue-based mechanism, if it is not explicit on a customer bill and it is left up to, say, an ILEC as to how it chooses to recover the contribution burden that is imposed on it, it may choose to, say, recover the burden from residential telephone service subscribers and, say, Internet providers. The reason why is because those kinds of subscribers are demand inelastic. In other words, they don't really have an alternative to the services that they subscribe to -- residential telephone services and essential service. Access services, like dial-up lines for Internet providers, are essential facilities.
So, ILEC has basically an incentive to recover a disproportionate amount of the contribution burden from those types of services. That is why we would prefer, if there is going to be a new mechanism, that it be a specific amount that is explicit on a customer bill.
THE CHAIRPERSON: Thank you.
Do you have a question, Commissioner Cram? Are you asking me the question?
COMMISSIONER CRAM: I am just asking if I can ask.
MR. BRAZEAU: Can we edit the answer?
COMMISSIONER CRAM: What I have heard is you want them to be explicit as to how these monies are recovered.
The question is: Why need it be explicit on the bill? ARC yesterday were talking about the fact that a consumer doesn't have the choice of changing their behaviour if it is SLC and if it on their bill. They can't say, well, I'll pick another service that doesn't have an SLC or I'll use it less and I'll have a lower SLC.
I understand your question about being explicit about recovery. What I don't understand is why it should then be explicit on the bill. To me, that was the issue that I didn't think you had followed.
MR. BRAZEAU: From our perspective, we thought that was the best check and balance to address the issues which Ms Embree indicated. If the Commission is of the view that it can ensure that inequities don't take place as to how the ILECs treat with the Internet providers, then we are certainly more than receptive to an alternate mechanism.
THE CHAIRPERSON: Thank you very much, Ms Embree and Mr. Brazeau.
The next party, then, is the Canadian Cable Television Association.
Good morning, Ms Yale.
ARGUMENT / PLAIDOIRIE
MS YALE: Good morning, Commissioners. My name is Janet Yale and I am President and CEO of the Canadian Cable Television Association. With me today is Michael Hennessy, CCTA's Senior Vice-President, Policy and Planning, and Suzanne Blackwell, CCTA's Vice-President, Economic Research.
We appreciate this opportunity to appear before the Commission to discuss updating the contribution regime in light of the dramatic changes in technology and market conditions. Some of our member companies, as you will no doubt be aware, are also parties to this proceeding and we will be providing you with detailed commentary from their individual company perspectives.
We have three key points that we want to address today: First, the overall subsidy requirement remains too large and should be reduced to more efficient levels; second, contribution can continue to be substantially reduced without jeopardizing affordability; and, third, the size of the subsidy will threaten the viability of competition until the subsidy requirement is substantially reduced.
In our view, changes to the current contribution mechanism should not be implemented until there have been changes to reduce the economic distortions caused by the subsidy regime. While these economic distortions are affected by the contribution collection mechanism, an over-arching determinant of the economic costs of a subsidy regime is the magnitude of the subsidy itself.
It's for this reason that subsidies should be capped at the level which is just sufficient to satisfy the objective of the subsidy regime and no more. We submit that the current amount of subsidy collected exceeds what is actually required to ensure universality of access.
Subsidy flows of the size of the current contribution requirement will continue to threaten the viability of competition in telecommunications market irrespective of the mechanism that is used to collect contribution until the subsidy requirement is significantly reduced. In our view, a first and vital step in the reform of the contribution mechanism is the implementation of steps to reduce the contribution requirement as much as possible without compromising universality of access.
Without these reductions, alternative network suppliers like wireless carriers and competitive local exchange carriers that are investing in expanding infrastructure and advanced networks, could be placed at a competitive disadvantage without any clear public benefits.
Ideally, the contribution requirement should be capped at an amount that is sufficient to ensure affordability of access and subsidy payments should be directed as closely as possible to consumers who would not otherwise be able to afford cost-based rates. This, in turn, requires that the contribution requirement be calculated by reference to the maximum affordable rate. While the definition of that rate is not clear-cut, this rate is at least as high as the maximum rate charged for local service in Canada.
Of course, as long as some level of contribution remains, a contribution collection mechanism will continue to be required. CCTA believes that any reform of the contribution collection mechanism must avoid extending contribution obligations and the distortions they create to alternative providers of new telecom services, most particularly, from our perspective, to cable-based Internet services. Our view is premised on the fundamental principle that changes in the contribution collection mechanism must unambiguously improve the competitive efficiency of telecommunications markets.
The application of contribution charges to cable-based Internet services would effectively require these services to subsidize the costs of the local loop on which competing PSTN-based Internet services depend, a result that is both unjust and fundamentally at odds with the promotion of a sustainable competitive marketplace. Competing dial-up and DSL-based services already are beneficiaries of the subsidy to PSTN-based access services which lower the price for telephone access lines below costs.
Cable companies, by contrast, have undertaken the investments necessary to upgrade their networks to support Internet services at considerable risk and without access to subsidies. A requirement to fund subsidies to the telephone facilities used by our competitors flies in the face of competitive market principles and would discourage further infrastructure investments, contrary to the Commission's policy of promoting facilities-based competition and Industry Canada's connectedness agenda.
CCTA also notes that stand-alone cable Internet services do not benefit from the universality of access provided by interconnection to the PSTN and these services do not qualify as basic telecommunications services under the jurisdiction of the Telecommunications Act. Therefore, these services should neither qualify for subsidies, nor be required to contribute to the extension or maintenance of universal access.
I will now expand on each of the three key points. First, the current size of subsidy requirement threatens sustainable competition. A fundamental truism of economics is that the introduction of any subsidy into the marketplace causes distortions. While the type of contribution collection mechanism used affects these economic distortions, the size of the subsidy is a major factor in determining their magnitude and impact.
That's why subsidies are generally used only when achieving a crucial public benefit is not possible through the normal play of market forces. It is also the reason why economic theory holds that subsidies should be capped at the minimum level needed to satisfy the public benefit objective.
In the case of the Commission's current contribution regime, the public benefit sought was summed up well in Telecom Decision 97-8, which states that the subsidy is intended, and I quote, "to ensure that residence rates in high cost areas continue to permit universality of access." That is an objective we fully support.
Where we have serious concerns is the size of the contribution requirement. This is a concern the Commission has also expressed in a number of decisions and in fact regulatory reforms over the past five years have substantially reduced the contribution requirement. Nevertheless, the total amount of contribution still sits at $900 million a year.
A subsidy this large exceeds the minimum amount actually needed to ensure residence rates in high-cost areas permit universality of access. At this inflated level, the subsidy threatens the viability of competition in telecommunications markets irrespective of the mechanism used and it causes distortions by increasing barriers to competition through higher costs and fewer opportunities for innovation.
That's why CCTA believes the first and vital step in reforming the contribution mechanism is reducing the contribution requirement as much as possible, again without threatening universal access. Unless substantial reductions are realized, alternative network suppliers such as wireless carriers and CLECs that are investing in extending infrastructure and advanced networks are likely to be placed at a competitive disadvantage without any clear public benefits arising from this income transfer.
From our perspective and in line with sound economic practice, the subsidy requirement should be capped at the minimum amount needed to ensure affordability of access. In theory, the subsidies also should be targeted to specific persons unable to afford cost-based rates and the subsidy should reflect the difference between the amount that each individual could afford to pay and the cost-based rate.
Of course, this type of income-based approach is outside the Commission's mandate. That being the case, the contribution requirement should be calculated based on the maximum affordable rate being charged in Canada.
Information filed on behalf of the major incumbent telephone companies show that for 1999 rates charged ranged from $13.75 in Churchill to $25.00 in Halifax and Canso, and $26.33 in Whitehorse, as well as in Snare Lake in the Northwest Territories. Common sense tells us that if a rate of $25.00 is affordable in Nova Scotia, it must similarly be affordable in the rest of the country.
Indeed, in some suburban communities with large local calling areas, the rates are already higher. For example, there are suburban areas in B.C. and Alberta where consumers pay more than $27.00 a month, while a recently approved rate increase means subscribers in Val d'Or will be paying more than $30.00 a month.
Putting aside markets where rate differentials can be justified based on quality of service differentials, a number of conclusions can be reached. First, local rates have not been established solely with affordability in mind. If that were the case, rates would have been rationalized to ensure that lower-income households, wherever they happen to be located across this country, would pay similar rates to receive a similar level of access.
Second, rates at or above the $25.00 a month range have proven affordable, even though rates in many areas remain lower. This means that the subsidy being collected is in excess, in some instances are in excess, of what is required to maintain affordability.
Third, telephone company rates could be further rationalized, thereby minimizing or avoiding altogether the need for non-dominant facilities-based carriers to subsidize the dominant incumbent local exchange carriers. In a competitive marketplace, it makes no sense to require non-dominant facilities-based providers of local services who are building their own networks to subsidize primarily the local services of the dominant service provider. This is particularly true when the amount of subsidy collected remains higher than what is needed to keep local rates affordable.
The point we would stress here is simply this. The first step is to reduce the contribution requirement to the minimum level required to ensure universality of access in high cost areas based on the actual difference between the maximum affordable rate and the cost of providing local service.
The challenge then is to decide how best to bring the subsidy into line with this objective.
MR. HENNESSY: So now if we can look at options to reducing the contribution requirement.
One of the problems inherent in the current method of calculating contribution is that it overstates the subsidy requirement wherever the rates charged by the telephone companies are below the maximum affordable rate. It also serves as a disincentive for reducing costs since contribution-based and embedded costs guarantees the telephone companies will remain whole.
That being said, there are approaches that could be taken to lowering the subsidy which would still leave the telephone companies whole while also minimizing or avoiding the extension of subsidies to local competitors.
These include rate restructuring and rate group compression, which we believe should be used to bring rates up toward the highest rate in effect in Canada.
As noted earlier, rates from residential local service range from below $15 to over $30 per month.
As to whether such an approach would put universal access at risk, we would point out that local service penetration has continued to remain high across the country; at least 97% in all provinces, even where the highest rates are in place or rate increases have been implemented. This suggests that further consolidation in residential rates would not undermine affordability objectives.
In addition to rate restructuring and rate group compression, the contribution requirement could be further reduced through the inclusion of contribution in the price cap regime. Under this approach, the telephone companies would be permitted to use reductions in contribution in order to offset their price cap obligations. This would reduce the contribution requirement without requiring increases in residential local rates. Again, affordability of access would not be compromised in any way.
This approach also has the added benefit of treating contribution as the amount of additional revenue that is needed to cover the cost of providing residential local service and allows for contribution revenues to decrease in line with any productivity improvements or reductions in the costs of providing residential service.
Allowing contribution reductions in the price cap regime would also have the added benefit of slowing pressure under the current regime to reduce local business rates. Business rates would no longer be forced below market-based prices in order to absorb the entire amount of the productivity adjustment.
This current situation has had the unintended effect of removing many of the market opportunities for new entrants. Imposing contribution on new local service providers without reducing the overall subsidy would only further limit their ability to compete.
Our third point is that contribution should not extend to new Telecom services. The CCTA strongly believes that in reaching its determination the Commission should adopt the fundamental principle that any changes must unambiguously improve the competitive efficiency of telecommunications markets. This requires that changes in the contribution collection mechanism must not result in extending contribution obligations to new telecommunications services. Specifically, this means that new services, such as Internet services, provided over stand-alone cable company networks should be excluded from the contribution regime.
A requirement for cable companies to fund subsidies to the telephony facilities used by their competitors flies in the face of competitive market principles and would penalize cable shareholders for their investment in stand-alone infrastructure. It would be contrary to the Commission's policy of promoting facilities-based competition and Industry Canada's connectedness agenda to implement a contribution regime that discourages rather than rewards investments in facilities.
Investments by cable companies to upgrade their networks to support the provision of Internet services have been undertaken at considerable cost and risk to cable companies and their shareholders and have already contributed to important social policy objectives by connecting more than half a million Canadians to the Internet and extending high speed access services to small communities across Canada.
The contribution regime already confers an important competitive advantage on PSTN-based Internet services. Dial-up and DSL-based Internet services already benefit from the subsidies available to the local exchange telephony service provider because contribution provides a subsidy for the local loop portion of the telephone company's networks, the same networks that are used to deliver dial-up and DSL-based Internet services.
The investments by cable companies, on the other hand, have not been nor are they expected to be supported by mandated subsidies collected for the purposes of providing basic telecommunications services even though cable companies are extending their own facilities across Canada.
The extension of contribution obligations to cable-based Internet services will compound the competitive disadvantage faced by cable-based Internet services by requiring these services to subsidize the infrastructure used by PSTN-based alternatives.
In effect, cable-based services would be doubly disadvantaged: first, by having to compete with services that benefit from the contribution subsidy; and second, by then having to contribute to that subsidy. This result would not only be unjust, it is fundamentally at odds with public policy goals of promoting sustainable competition and investment in competing telecommunications networks.
The increase in costs in reduced competitiveness of cable-based Internet services would reduce the returns generated by cable network upgrades and discourage further investments in these facilities.
In CCTA's view, services, such as stand-alone cable-based Internet offerings that are carried on networks that do not require interconnection to the PSTN should neither be subsidized nor be required to contribute to the extension or maintenance of universally accessible and affordable telecommunications services. Our investments in high speed interactive networks represents our contribution to increased accessibility and affordability. As Minister Manley noted in his speech last week, we do not want to go back to a system that relies more on subsidies.
CCTA notes that Call-Net's proposal for a subscriber line charge would not assess a charge on services that do not provide access to the PSTN. We agree with Call-Net that levying contribution on new services would be regressive and that it might depress demand for such services.
In addition, if the CRTC were to adopt a mechanism, like a subscriber line charge, it is important from the perspective of fairness to the end user that the charge should apply only once. The problem with a subscriber line charger being applied to new wireless or cable Internet services is that the consumer could be taxed three or four times, as a LEC customer, a PCS customer and as an at-home subscriber.
Apart from the issues of fairness and economic theory, there is also the question of whether Internet services are in fact basic telecommunications services.
To the best of our knowledge there are no interpretations of the term basic telecommunications services that would encompass the Internet. It follows then that Internet services should be neither required to contribute nor receive subsidies. I will not go through our points on this. I think CAIP made a fairly good argument both on the issue of trade and the issue of what constitutes basic service, and it is in our submission.
So, while some providers of the Internet services may also qualify as telecommunications service providers because they own telecommunications facilities and/or offer basic telecommunications services, competitive neutrality still demands that all Internet providers be treated equally and that therefore none should be subject to the contribution obligations.
To sum up the cable industry's general position there are three points we would emphasize. First, the overall subsidy requirement should be reduced to more efficient levels.
Second, contribution can continue to be substantially reduced through a combination of rate restructuring, rate group compression and the addition of contribution to the price cap regime without compromising the social policy objective of ensuring universality of access.
Finally, the viability of competition remains at risk until the size of the subsidy is substantially reduced.
Thank you, Mr. Chair and Commissioners. This concludes our oral remarks and we welcome any comments.
THE CHAIRPERSON: Thank you, Mr. Hennessy and Ms Yale.
COMMISSIONER MCKENDRY: Thank you, Mr. Chair.
I had a question that relates to your comments about affordable rates and, in particular, on page 8 of your submission. In the fourth paragraph you say "Second, rates at or above the $25 per month range have proven affordable, even though rates in many areas remain lower". When you say "proven affordable", what are you relying upon as your proof?
MS YALE: I guess the main proof would be that penetration levels have remained relatively constant.
I guess the main proof would be that penetration levels have remained relatively constant.
COMMISSIONER McKENDRY: Have you looked at the penetration levels for low-income Canadians?
MS BLACKWELL: Our final comments do have a table of telephone penetration rates that are aggregate. The breakdown within the local service pricing option and filings that that relies on I do believe looks at low income.
We do not have that breakdown in our comments.
COMMISSIONER McKENDRY: So you don't know whether or not those rates are affordable for low-income Canadians on the assumption that you are using penetration rates as a measure of affordability?
MS YALE: I guess the fact is that local rates haven't been moving in any kind of direction. What we are talking about is whether or not if a rate of $30 is affordable for certain low-income consumers, why isn't it affordable for other low-income consumers?
That is the simple we are making is that there are some low-income households that are paying rates at the $30 level. The point is simply that if they are able to do that, then there is no reason why rates can't be moved to that level for all households. That is the first point.
The second point that I would emphasize is that we are not saying that there aren't people for whom rate increases would be a hardship, and we are talking about a general direction around which rates should go. We recognize that above the level at which rates are, particularly in high-cost areas, that it would not be appropriate to increase rates that high.
We are not saying that rates should go up to the level of costs in all cases is the point that I would emphasize.
MR. HENNESSY: I think our point is that what we said is that rates should rise towards the highest levels that the Commission itself has deemed to be affordable because it is the Commission that set those rates.
COMMISSIONER McKENDRY: Are you saying that because some low-income households are paying $30 a month, they find that affordable?
MR. HENNESSY: I am saying that the Commission deemed the rates to be affordable. I assume the Commission sets its rates to be affordable. If the low-income customer is taking the service, then it is as affordable as many of the other services that it is taking.
COMMISSIONER McKENDRY: Thanks.
THE CHAIRPERSON: Commission Cram.
COMMISSIONER CRAM: I did have a question.
I wanted to talk about page 13 of your submission, at the bottom, where you talk about the double disadvantage of having to compete with services that benefit from the subsidy and having to contribute to that subsidy.
How is that different from Sprint today?
MR. HENNESSY: I think the main difference is that Sprint and the other IXCs, when they accepted the obligation to contribute when they entered the market, were not contributing to the telephone company's long distance service. They were contributing to the telephone company's local service, which at that time was a monopoly service.
What we are suggesting is that if you make new entrants into the local market contribute to what was and still remains, to all intents and purposes, a monopoly service, that that puts them at a disadvantage because you are allowing the dominant supplier to keep its prices below cost while forcing the new entrants into that very same market to make a contribution to the dominant supplier.
I think there is a difference between the first regime and the second.
COMMISSIONER CRAM: I wanted to talk also about page 12 at the bottom, where you talked about the risk that cable company shareholders had undertaken.
You agree with me that at least in the last decade, the Commission has pretty well guaranteed a rate of return for cable companies in terms of their rate of return. So there is not that much risk in terms of infrastructure?
MS YALE: We can have, I suppose, a debate on the Commission's regulatory regime for cable services, but we are not talking about cable television services. We are talking about the high-speed Internet market.
COMMISSIONER CRAM: So, a different infrastructure when you are referring to the risk here?
MS YALE: We are talking about the investments in infrastructure upgrades that were necessary to undertake and get into a completely new market, which is the high-speed Internet market.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Thank you, Commissioner Cram.
Just on the issue that Commissioner McKendry was raising with you and going back to the top of page 7 of your oral presentation this morning, you refer in the second paragraph:
"In theory, the subsidies should also be targeted to the specific persons who are unable to afford cost-based rates."
I guess you could accept that, regardless of whether the rate is $13.75 in Churchill or $25 in Halifax or $31 in parts of Télébec territory. There may well be some people in those areas who would not be able to afford that price, as I say, whether it's $13 or $31.
Are you suggesting that this same contribution scheme should fund those who would be unable to afford the rate, whatever it is, as well as provide this rural subsidy, if you will, essentially to Bands C and D and whatever other bands we come up with in the rebanding exercise as well?
MS YALE: No, we are not suggesting that. Our point is simply that we recognize that for some people, whatever the rate of telephone service is, it may be a hardship. What the Commission has done is made a series of decisions about what level of rates is affordable and appropriate for certain sets of customers. We are saying if it is appropriate for those people in those communities, then as we start to look at a new regime, why is it not that that rate is affordable for people in similar situations in other communities.
THE CHAIRPERSON: I guess it was the words "subsidies should also be targeted to specific persons who are unable to afford."
MS YALE: I think there we are getting at more the idea that we are accepting the idea that it may be longer be appropriate to think about having rates that are kept below cost for people in general, and that there may be some isolated cases where the Commission may decide that it is appropriate to have subsidies that are targeted at a more narrow subset.
These are obviously very difficult questions in terms of balancing competing objectives, if you will, between interests and ensuring affordability and the cost, if you will, of those subsidy schemes that exist today in terms of the impact on the various markets. I guess our simple point is that the costs of the schemes as they currently exist are starting to substantially outweigh the benefits. The idea of having rates kept low for the ordinary consumer doesn't really make sense any more.
MR. HENNESSY: Just a point on that. I think clearly there are Canadians who can't afford telephone service at rates that are in existence today.
The optimal system, from a subsidy perspective, would be one that targeted people that could not afford service rather than communities as defined by some Phase 2 cost band because affordability really, at the end of the day, should be about people, not places where people live.
THE CHAIRPERSON: Switching topics, do I take it your position is essentially the same as the Rogers Wireless one: Shrink the size of the subsidy requirement, continue to pay for it the way we have been, bring the contribution within the price cap regime, allow the productivity offset to bring that down over time?
MS YALE: I would say essentially that is correct. On the specific point of the mechanism piece, I think our view is that any mechanism you can come up with has advantages and disadvantages. We have one, for whatever disadvantages it may have, that is known and works.
Our first priority is getting it down to a level where it may be possible for some companies, for some telephone companies, at least, to eliminate it all together, in which case the mechanism becomes much less important.
THE CHAIRPERSON: So, putting that together, then, your proposal would be company specific?
MS. YALE: You mean as opposed to a national regime?
THE CHAIRPERSON: If it was on an individual company basis.
MS. YALE: Yes.
THE CHAIRPERSON: Okay. Those are our questions. Thank you very much.
So the next party and the last one before lunch then will be CWTA.
Mr. Barnes, Mr. Farns.
ARGUMENT / PLAIDOIRIE
MR. BARNES: Good morning, Mr. Chairman, Commissioners.
My name is Peter Barnes, President and Chief Executive Officer of the Canadian Wireless Telecommunications Association and with me today is David Farns who is the Vice-President of Regulatory Affairs with the Association.
Let me begin by thanking you for the opportunity to present our views and our submission in regards to the review of the contribution collection mechanism and related issues.
We represent the Canadian wireless industry on wireless issues, developments and trends in Canada. We represent cellular, PCS, paging, fixed broadband wireless, mobile radio and mobile satellite carriers as well as companies that develop and produce products and services for the industry. Our members offer an array of productivity-enabling services to Canadians.
Wireless communications is, in our view -- and I hope in your view -- an integral component of the new economy delivering real-time information anywhere, anytime. More and more Canadians are choosing wireless phones as a replacement to traditional telephone service. More than one in five or 7.2 million Canadians use mobile phones in their everyday lives. Canadians enjoy wireless Internet access and basic telecom services today. Other yet-to- be-created applications will be accessible through wireless devices in the near future. This wireless revolution will transform how we will work and how we will play in the years to come.
I expect and understand that you are all aware of Minister Manley's announcement of June 28th dealing with a number of appeals of CRTC decisions. One of his statements was a clear message against any return to monopolies. I want to underline the competitive importance of wireless services in the local market.
Little wireline local competition exists today and wireless has demonstrated its ability to offer customers a competitive local alternative. Accordingly, our comments today should be considered not only as they relate to today's wireless market, but indeed as they relate to an essential component of the local competition goal which I know we all share.
L'industrie offre déjà aux Canadiens le commerce mobile en fournissant un accès sécuritaire à Internet et continuera d'accroître les possibilités avec l'introduction de réseaux et services de troisième génération.
Cependant, le déploiement des solutions de communications sans fil ne se fait pas aussi rapidement que nous le souhaiterions. L'ACTS croit qu'il y a un nombre de politiques et de règlements qui viennent encombrer l'industrie des télécommunications sans fil. Ceux-ci nuisent à la capacité de développer et de déployer des services sans fil novateurs pour brancher les Canadiens.
The licensing regime of Industry Canada determines the fees paid by wireless carriers for the use of the radio spectrum. The CRTC already requires mobile phone operators to pay contribution on their long distance traffic and, in this proceeding, is examining whether more operators should be required to pay and what the magnitude of the charges will be going forward.
The CWTA estimates that in 1999, the wireless industry's contribution bill grew to over $14 million. In the same year, the publicly-traded cellular/PCS carriers lost nearly $1 billion. Accordingly, we have some suggestions as to how the current regime should be modified.
The Association recognizes the difficult challenge faced by the CRTC in balancing social objectives against the financial burden placed on carriers paying for social programs. However, the CWTA is of the view that such burdens serve as a tax that limits the development and deployment of new and innovative networks and services which, in turn, limits the technological development and roll-out of new services which, in turn, affects the market's ability to provide access. Moreover, subsidies like contribution are extremely difficult to administer, encourage regulatory gamesmanship and create market distortions.
The CWTA believes that the telecommunications industry, the Commission and Canadians in general should recognize that the era in which the regulator could maintain a subsidy mechanism like contribution has passed. In this regard, the CWTA strongly recommends that the Commission should engage a plan that would first identify the absolute minimum real amount of contribution that is required to maintain affordable access rates in rural and remote areas of the country.
Immediately thereafter, the Commission, in our view, should initiate steps to move rates towards costs, i.e. rebalance rates, such that there no longer remain geographic areas where access rates are below the affordability threshold and attracting a contribution subsidy.
Once the rates are more aligned with costs and the contribution subsidy minimized, the contribution mechanism should be abandoned in favour of a program administered by a federal department -- most likely Industry Canada -- and funded from the Consolidated Revenue Fund, a fund to which the wireless industry contributed last year approximately $150 million in the form of licence fees alone.
In this regard, it is worth noting that programs forming the Government of Canada's Connecting Canadians initiative, such as the Community Access Program, are already funded to a large extent from allocations in the federal budget. These allocations are derived from the CRF. The CAP is a government initiative, administered by Industry Canada which aims to provide Canadians with affordable public access to the Internet and the skill they need to use it effectively. The total program allocation is $100 million over three years, ending in 2000/01.
Requiring wireless carriers to pay contribution reduces capital otherwise available to extend the delivery of new and innovative services to more Canadians, especially those living in rural and remote parts of the country. Wireless carriers are continually challenged to expand their networks to unserved areas.
Increased contribution payments would make it even more difficult for wireless carriers to finance these network expansions. In this regard, the CWTA would emphasize that Industry Canada already requires wireless carriers to pay annual spectrum licence fees, as I mentioned above, when they expand their networks to new areas -- and more about this later. These licence fees already create a disincentive to build facilities in rural areas. Increasing the contribution burden would only compound the disincentives.
La contribution a été imposée à l'industrie des communications interurbaines dès l'ouverture à la concurrence. Les études de prix de revient du CRTC ont déterminé que les revenus des services interurbains étaient supérieurs aux coûts tandis que les revenus des services de communications locaux étaient inférieurs aux coûts. Par conséquent, la contribution a été intégrée aux tarifs historiques des communications interurbaines et la subvention permettait de maintenir au plus bas les tarifs locaux. A la lumière de cette subvention historique, il convenait tout à fait que les télécommunicateurs interurbains aient été tenus de verser le paiement de contribution imposé par le CRTC au moment d'introduire la concurrence dans l'interurbain.
Or, les tarifs historiques de communications interurbaines contenaient une subvention du service local, mais aucune subvention du genre n'a été intégrée aux tarifs du sans fil.
Les services de téléphonie cellulaire ou SCP continuent de perdre de l'argent chaque année et il est inquiétant pour l'industrie que le CRTC songe maintenant à étendre le régime de contribution aux télécommunicateurs sans fil et leur demander de payer encore davantage.
L'imposition d'une contribution importante à l'industrie serait très perturbatrice. La contribution envisagée pourrait avoir pour effet de limiter l'utilisation éventuelle de la technologie du sans fil pour améliorer ou fournir l'accès aux Canadiens.
As I indicated earlier, wireless carriers are subject to the regulatory oversight of both the CRTC and Industry Canada. This dual regulation of the wireless industry can be contrasted against the regulation of the wireline industry that is predominantly regulated by the CRTC and only, in our view, peripherally impacted by some of Industry Canada's broad telecom policy initiatives.
Moreover, both of these regulatory agencies administer programs that have a very real impact on the bottom lines of wireless carriers. The licensing regime of INdustry Canada determines the fees paid by wireless carriers for the use of the radio spectrum. Industry Canada, as you heard this morning, also typically imposes conditions such as roll-out requirements, on licensees. The CRTC's contribution regime is another example.
Under the existing CRTC contribution regime, cellular/PCS carriers pay contribution on their long distance traffic via a per circuit surcharge. However, some proposals being considered in this proceeding would require cellular/PCS carriers to pay contribution on both their local and long distance traffic. The potential impact of these proposals on the industry is well over $100 million annually. In fact, with a contribution subsidy of nearly $700 million -- and I heard $900 million a while ago -- and wireless industry revenues approaching 24 per cent of total telecom industry revenues, it is quite conceivable that under some scenarios the wireless industry share of the contribution requirement would grow to well over $100 million from the some $14 million paid today.
Moreover, there are other proposals being considered that would require paging companies and other wireless operators to also pay contribution, which would further hinder the ability to develop and deploy innovative wireless services to connect Canadians.
As noted above, wireless carriers can be differentiated from their wire line counterparts, in that they are regulated by both the CRTC and Industry Canada. The latter department imposes conditions of licence on wireless carriers.
Some of these conditions of licence require wireless carriers to provide service in areas of the country that do not generate sufficient revenue to cover the capital and operational costs of providing service to those areas. This is a fact that is not reflected, in our view, in the CRTC contribution regime.
The definitions of high-cost areas used by the Commission refer only to the wire line telephone company serving areas and their costs, not the wireless carrier's serving areas and costs. In this regard, wireless carriers are already providing services to some fairly rural regions of the country. We should not be required, in addition, to subsidize wire line service providers who serve the same areas.
By way of example, a PCS carrier with a 30 MHz licence to serve Cape Breton would be required to pay $27,000 in licence fees annually for every PCS site it builds. This fee is required in advance of turning the site on and is payable every year that the site remains in operation.
For an area such as Cape Breton, a PCS carrier would most likely require four sites to provide adequate coverage -- $100,000 a year -- to serve Cape Breton and satisfy the conditions of licence. Obviously, traffic generated in Cape Breton would barely cover the annual licence fees, not to mention the capital and operational costs to serve the area. The reality of the situation is that subscribers in more urban areas and wireless carrier shareholders are implicitly subsidizing the operation in the rural areas.
Pourquoi ces mêmes abonnés et ces même actionnaires devraient-ils appuyer la subvention par contribution? De toute évidence, ils ne devraient pas. Les droits de licence comportent déjà une contre-incitation inhérente à construire des installations dans des régions rurales et éloignées du pays. Le fardeau accru de la contribution accentue davantage la contre-incitation en retirant le capital qui pourrait autrement servir à étendre des réseaux à un plus grand nombre de régions du pays. En outre, dans la mesure ou les prix de vente plus élevés étouffent la croissance du service, une exigence de contribution accrue imposée aux entreprises du sans fil viendrait aussi sans doute ralentir la pénétration du marché par le sans fil même dans les régions ou le rayonnement du sans fil est bien établi.
You have, like I, probably read the estimates of the auction fees that will be generated this fall when 40 MHz of PCS spectrum is up for bidding. Estimates range as high as $5 billion. These amounts would be paid, in lieu of licence fees, to Industry Canada within 30 days of the auctions and before any capital construction costs are engaged. Accordingly, I think you can understand our concern with the suggestions that the wireless industry should pay out yet another $100 million per year.
Wireless carriers are continuously challenged to expand their networks to unserved areas. Increased contribution payments would make it even more difficult for wireless carriers to finance these network expansions. Paradoxically, then, payments of contribution by wireless carriers could diminish wireless service in rural and remote areas.
By way of another example, every $20 million in contribution paid by wireless carriers means they can build 50 fewer cell sites, which reduces coverage by 10,000 square kilometres. In our view, it is inappropriate to impose contribution on wireless carriers in order to extend telephone services because it causes a reduction in the coverage of wireless networks.
The ability of wireless carriers to extend their services to remote areas is not only important to the carriers, it is a condition of their licences. The contribution burden placed on wireless carriers must be minimized and should be determined with due recognition of the licence fees paid by wireless carriers to serve these areas.
In this regard, the Association submits that the contribution charges to be paid by wireless carriers, if any, should only apply to basic long distance services, as they do today. The Association submits that the Commission, if it is insistent on placing a greater contribution burden on wireless carriers, must take every step to ensure that the wireless industry's ability to extend services throughout Canada is not unduly impeded.
We believe that ensuring that the subsidy burden is kept to its absolute minimum would go a long way toward achieve this result. Moreover, explicitly identifying the contribution charge on customer bills would help make the access goal more explicit.
In conclusion, to further increase the financial obligations of wireless carriers would be highly inappropriate in light of the significant level of fees and obligations that are already imposed on an industry that has yet to turn a profit. Moreover, such an increased financial burden would have the very real and serious potential to damage the ability of the wireless industry to further Canada's connectedness and e-commerce objectives and retard the growth in wireless penetration overall.
Les politiques actuelles en matière de contribution devraient être examinées en fonction de tous les frais payés par les télécommunicateurs sans fil, notamment les droits de licence, les taux de contribution ainsi que les taxes et les impôts. Le régime de perception de la contribution doit être réexaminé dans le cadre d'une approche holistique en vue de créer un contexte financier convenable qui suscitera le développement technologique et la mise en oeuvre de services qui favoriseront l'accès sans fil aux services de télécommunications et à Internet dans toutes les régions du pays.
The CWTA believes that the contribution regime should eventually be abolished in favour of a specific access program administered by a federal department and funded from the consolidated revenue fund, to the extent that subsidies are still required. In order to facilitate this migration, the CWTA suggests that the first step for the Commission would be to identify the minimum amount of subsidy actually required in order to achieve Canada's local access objectives. To the extent that Canadians continue to require financial assistance in order to obtain access to telecom services, including access to the Internet, the industry believes that this objective should be explicitly identified in and funded from the federal budgetary process.
Should, however, the Commission decide to increase the contribution burden on the wireless industry, every step should be taken, in our view, to ensure that the industry's ability to extend services throughout Canada is not unduly impeded. It would be inappropriate for the contribution burden to limit the availability of innovative wireless services to connect Canadians. Ensuring that the subsidy burden is kept to its absolute minimum by allowing local service rates to move towards costs would be a meaningful step in this direction.
Finally, identifying the contribution charge on customer bills would also help make the access goal more explicit.
Thank you. We would be happy to answer any questions. Merci.
THE CHAIRPERSON: Thank you, Mr. Barnes.
COMMISSIONER CRAM: This is a statistical one, Mr. Barnes.
I have Microcell's comments, and at page 3 they talk about the wireless carriers accounting for 15 per cent of industry revenues, which I am assuming is telecom industry, and you say 24 per cent at page 4 of what you said?
MR. BARNES: Right.
COMMISSIONER CRAM: Is there some way I can reconcile those two numbers, Mr. Barnes?
MR. FARNES: I don't know what source Microcell used, but we used Statistics Canada's most recent quarterly publication. That is a Statistics Canada number.
COMMISSIONER CRAM: Thank you.
MR. BARNES: As Microcell is one of our members, I am sure they are right, but they just have a different base.
COMMISSIONER CRAM: I am sure you are both right, yes.
THE CHAIRPERSON: Commissioner Langford.
COMMISSIONER LANGFORD: Thank you for that presentation, Mr. Barnes.
There is some confusion in my mind, having listened to it, with regard to based on the assumption that some subsidies are going to be around for a while, who should get it, and you referred at one point to rural and remote areas, but then at other points in your presentation you talked about people with affordability problems.
I am just not clear where you think this should be targeted, assuming it exists.
MR. BARNES: Certainly to the extent that subsidies are appropriate, the targeting, in our view, should be aimed at an affordability component.
I think it is clear that our delivery of services to rural and remote areas is more expensive, and because services are inherently more expensive the affordability factor might be a bit more difficult to deal with. But certainly from a conceptual and policy perspective, affordability at an individual level is the target.
COMMISSIONER LANGFORD: This may be an incredibly difficult formula to come up with, and perhaps impossible, but the urban poor are not ruled out by your approach?
MR. BARNES: No, they are not.
COMMISSIONER LANGFORD: Just to move then to another area of your presentation. You talk about extending competitive services and what a benefit that is. One of the problems I see with that, and I do not disagree with it in theory, obviously, but I see that in a sense your services, at least at this point, are a duplicate of services, if I can put it that way, so that those who are connected to the traditional Bell area or Telus area are also connected through your new wireless services. In a sense, it is arguable, I would suggest, that those who are not connected are doubly unconnected, because if they cannot afford the basic phone on the kitchen wall they are certainly not going to duplicate that by having one in their back pocket when they walk around.
If that is the case, then I just wonder what your feeling is about how long the unconnected will be with us, how wide that disparity will grow as you are offering more and more services on both sides, the wireline, the wireless. Then we get to the words of Minister Manley and they are with us in this proceeding and in our thoughts at all times, and the government's stated desire to have as many Canadians as possible benefit from the information revolution.
Subsidies, I know, are not anyone's favourite tool but assuming that the government is not going to jump in, that it is going to use us, through section 46 of the act, to do the job for it, how do you suggest -- and I apologize for this long-winded question, I guess my blood sugar levels are low or something like this and I am having a little trouble sharpening it -- what role do you see for your sector in recognizing that disparity, recognizing the affordability problem and recognizing that if we rebalance rates, to use that level of euphemism, the disparity may just get worse? What kind of role do you see for your industry in that kind of situation?
MR. BARNES: I will try to cover the points, Mr. Langford, but I may miss some, so please tell me if I do.
COMMISSIONER LANGFORD: I did rattle on too long, and I apologize. But I think you get the kind of area that I am looking at.
MR. BARNES: The first point I would like to make is that while your initial assumption has traditionally been correct, it is rapidly changing, and that is that wireless services are less and less duplicate of wireline services. There are an increasing number of individuals who choose not to have a wireline phone and just have a wireless phone.
We do a survey of customers every year, and I do not remember the exact percentages, whereas the number was something like 4% I believe this year at present of people who have substituted a wireless for a wireline phone. When we asked the question: Do you think you will in the future, the number was something over 10% or 11%, if the numbers are in that range. I think that is more and more the case.
In addition, I think that we should not forget that wireless phones are an instrument of affordability and accessibility in the sense that, as Commissioner Noël pointed out this morning, the price bargains that are out there for people who can obtain service by buying a coupon for two months and the 28 cent a minute routine that we talked about. We are seeing in the marketplace customers who might be, I guess, to use the euphemism, credit challenged who instead of having a wireline phone and paying a deposit and the like are choosing to go the wireless route, paying for a phone and buying calling cards for $28 or whatever the amount is.
So there is actually an affordability gap that is being helped by the wireless services and the pricing competition in that market is quite vigorous as undoubtedly you have seen.
The other point I would like to make is that to the extent that we are dealing with subsidies over time, our sense is that we know the amounts we pay government for licence fees and other fees for which we pay government, wind up in the consolidated revenue fund. There are examples where government has used other programs. I mentioned the CAP program for either affordability or education to ensure connected Canadians. We think that is an appropriate route.
We think that a lot of the money that we are handing over in licence fees could well be used for that kind of a program
THE CHAIRPERSON: Thank you very much. I think those are all our questions, gentlemen.
With that we will take our lunch break and we will reconvene at 2 p.m.
--- Upon recessing at 1236 / Suspension à 1236
--- Upon resuming at 2:03 p.m. / Reprise à 2:03 p.m.
THE CHAIRPERSON: Good afternoon, ladies and gentlemen.
We will return to our proceeding now. The next party to present argument is Vidéotron.
ARGUMENT / PLAIDOIRIE
MR. GAGNON: Mr. Chairman, thank you very much. I am happy to see there are still hard core contribution fans in the room.
First of all, Mr. Chairman, Commissioners, members of the staff, we are pleased to address the Commission on this very important issue. My name is Pierre Gagnon. I am Vice-President, Public and Regulatory Affairs at Vidéotron Communications. I am accompanied today by Franz Vendendries, who is Director, Regulatory Affairs for the Telecom Sector in our company, and Michel Messier, who is Assistant Director on regulatory matters also.
Again, we are pleased to address the Commission on this very important issue. We have been discussing about revising the contribution mechanism for a number of years. We are now at the final stages of trying to cope with this very delicate issue.
We filed our final comments yesterday. Today we have a presentation. It is not a lengthy written statement that we prepared. We have some point forms that we would like to address and we would like to cover some of the aspects of our presentation which, in our view, are central to what we are saying.
First of all, just to position Vidéotron and the diverse entities that I am representing today, there are essentially two areas in our company which are involved in telecom activities. The first one is Vidéotron Telecom (1998). We will drop the 1998 for the moment. Vidéotron Telecom Limited was a CAP operation way back when, about ten years ago. It was then authorized to operate by the then Régie des télécommunications under the heading of Jean-Marc Demers. So, Vidéotron Telecom started about ten years ago as a CAP business and evolved gradually to offer long distance services. Once their local market was opened, it was one of the first CLECs to manifest itself and operate.
Vidéotron Telecom Limited has been a CLEC as of June 1998 and has been operating as such in that capacity for the last couple of years.
The focus of Vidéotron Telecom Limited is to be sort of a more traditional CLEC, using switched infrastructure, a facility-based carrier, facility-based access to the clients, and regular switching mode and interconnection with the incumbents and other CLECs in the area.
We also have a sort of second CLEC, which is a subsidiary of the cable company, which is called Vidéotron Limitée, Vidéotron (1998) Limitée in this particular case. This is the CLEC that has already interconnected. The tariffs have been filed. It has the statutes to operate. This is the CLEC that will be providing local telephone services or the equivalent of local telephone services for the residential market using IP protocols. So, using the coaxial network of the cable company and providing the equivalent telephone services transparent to the user, mainly focused on residential markets. So, using the coaxial infrastructure network to provide local téléphonie, using IP protocol to the residential markets.
Our comments today will sort of encompass the objectives and the perspective of those two sizable operations. We really look at it from a rather broad perspective of facility-based CLECs, as well as long distance service providers, operating for the moment in the market of the province of Quebec.
From our perspective, the current mechanism or the current contribution collection mechanism has to be replaced for a number of reasons. First, we have to look at this market as a new competitive market. The mechanism, as we see it, introduces some distortions which prevent newcomers in the market to propose to the marketplace some new and innovative services in terms of bundling and packaging, to work a little bit with the paradigm of local versus long distance services.
We had the ability in the 97-8 decision and the local regulatory environment to propose our own definition of what is local, what is long distance. This option, which is enshrined in the decision, is really difficult to apply because of this particular constraint that a contribution regime imposes in the decision. Also, there is a prerequisite that, independent of how you define your local or long distance services, you still have to pay a contribution in accordance with the ILEC definition of what is local and long distance. If we would like to move away from the traditional definition and propose some bundling services or some new local area services or services in local areas which are new and innovative, we are still constrained by this particular requirement.
It also imposes some difficulties in terms of network architecture. In the decision, as you all know, there is a requirement that you establish a point interconnection in each and every exchange and obtain NXSs for each and every exchange in which you operate.
This is contrary to network efficiencies which we could implement in our networks because of the new switching capabilities that we have and the new way of transporting telecommunications. But we still have to deploy our networks in a configuration which really dates back to the beginning of the former century. Because of that, there is certainly some requirements to revisit this contribution regime to accommodate the new environment in which we operate.
It is also vulnerable, the current regime, to the new technologies. We have seen it, as you all recall, when the Commission was faced with Internet services and the possibilities of long distance by-pass using Internet protocol. So, we had to craft some very complex rules as to what is voice over IP. There were three kinds of definitions of what is voice traffic over IP and what is subject to contribution and what is not subject to contribution.
This only shows that, as we move along with new technologies and new infrastructures in network, where distance becomes less and less of a factor, we will be faced with challenges. If we do not work on this regime, there will be ample occasions of contribution by-pass or evasion, however you want to quality it. That will introduce distortions in the marketplace. It is also pretty complex to administer.
I will pass on to Franz, who will cover a couple of topics, and I will come back later on to address other issues.
MR. VENDENDRIES: Thank you, Pierre.
Vidéotron is not the first company to come and tell you today that the explicit contribution requirement should be reduced, if not eliminated all together. As a general rule, subsidies should not exist in a competitive market.
All companies should charge rates that generate revenues that, taken as a whole, recover all of their own costs from all of their own subscribers, their own customers.
In this particular case, it means ILEC should be permitted to restructure and rebalance their rates so as to reduce or eliminate the subsidies required from competitors. There are a number of ways that this can be done.
The Commission can either mandate specific increases to specific rates or else can grant the ILECs the flexibility under the price cap regime to reduce their subsidy requirement, which would let the ILECs determine how to do this in the best way to respond to the needs of their own particular markets.
In particular, ILECs should be permitted to raise residential rates to the lowest of either a level that eliminates the subsidy requirement all together -- and this can be by rate band or all together -- or to the highest local rate approved by the Commission which, by definition, we believe is an affordable rate.
If the Commission should decide that at this time subsidies cannot be completely eliminated, the amount of the subsidy should be limited to what is strictly necessary, the minimum necessary to ensure affordable rates for residential customers in high-cost areas. The subsidy should not exceed the difference between the ILECs Phase 2 costs and the revenues collected based on the highest local rate approved by the Commission, as I mentioned earlier.
Vidéotron also believes that contribution rates at this time should remain based on ILEC territories. Vidéotron does not favour the creation of a single nationwide subsidy mechanism or contribution rate.
Today, we have separate funds that are based on ILEC territories. Merging these funds would create an inter-territory subsidization mechanism that we believe would create disincentives for some companies to restructure and rebalance their rates and otherwise rationalize their rate structures.
The contribution rate in Bell's territory today is the lowest in Canada largely because Bell subscribers have experienced significant rate restructuring and rebalancing over the last few years and to give credit to Bell Canada, also because Bell has been reasonably successful at increasing other revenues, for example, optional local revenues that have offset their phase three shortfall.
Creating a single nationwide subsidy mechanism would increase the contribution rate applicable in Bell's territory and reduce the rates applicable elsewhere. This would effectively penalize Bell and Bell subscribers by transferring the benefits of its efforts to the other ILECs and at the same time, reduce the incentive of those other ILECs to rebalance their own rates and find other new revenues because they know any shortfall or a portion of any shortfall will be made up from subscribers in other territories.
However, if the Commission should decide that a national fund is more appropriate than the ILEC territory specific funds we have today, the Commission should create with that national fund a national contribution charge that should be collected directly from customers through a separate line item on the customers' bills. This would ensure that all the companies in the market compete on the basis of their own costs because contribution would have been removed as a consideration by consumers in their choice of a company. In a way, this would reintroduce into the market place the incentive of ILECs to reduce and to control their own costs.
I will pass you back now to Pierre.
MR. GAGNON: Insofar as Internet services are concerned, what we argue is that it would be counterproductive to impose a contribution charge in a fully competitive market, largely forborne from regulation which is, in fact, the Internet service provider market.
Essentially, from our perspective, there is sort of a policy issue that is behind this positioning. Our view is that there is a government policy, a governmental objective which lies behind this reasoning to the effect that we should promote and make every effort to effect the connectedness of the Canadian market place on the Internet.
We have seen in the province of Quebec, for instance, some programs which are designed to induce families to connect to the Internet. An approach where the Internet market would impose an additional charge would sort of go contrary to this particular objective.
In addition and, as has been mentioned by the CAIPA representatives this morning -- we are not in total agreement with the CAIPA position, but in this particular case I think it is appropriate -- there is some contribution that is being paid by the companies that do provide Internet access services mainly because they are customers of local exchange carriers, either CLECs or ILECs.
You will see in a minute that our proposal is to introduce a subscriber line charge in terms of what is the appropriate mechanism that could be left in the case where the complete rebalancing of the rates is not accomplished.
In this particular instance, where there would be a subscriber line charge, our view is that it should be as broad as possible in terms of definition of what is a network access service and, therefore, the dial-up ISPs would, in effect, contribute by subscribing to switch services from the various local exchange carriers and, therefore, would provide a share of the contribution through that means by using the switch telephone network. It remains that cable companies do provide Internet access not using the switch telephone network and not making use of that particular network.
As has been mentioned earlier by other parties, it would be counterproductive and certainly not fair from a competitive perspective if ISPs that do provide service not using the switch telephone network in any way, would have to contribute to this network while, at the same time, competing against the providers of this particular network in the market place.
In addition to that, if we would include the Internet service providers into the regime, from our perspective, there would be some challenges from a compliance perspective given to large numbers of ISPs, some of which are not as educated in terms of regulatory issues than others and that would create in the market place and, from our perspective, some severe distortions as to who would comply with the regime and who would sort of escape from the regime just by the mere fact of the number of ISPs out there.
From our perspective, putting everything in context, our view is that Internet access services should remain excluded from the contribution requirement.
As I have mentioned, our proposal, first and foremost, is to work on the contribution requirement and really tackle this issue to make sure that it is reduced to its minimal level. Obviously, if there remains a contribution or a requirement to be funded, our preference would be to go for a subscriber line charge, more this than the current regime obviously for reasons that I have explained earlier and more this particular mechanism than the charge on the revenues or a certain percentage of revenues for various reasons.
First of all, a subscriber line charge would offer a high degree of neutrality in the collection of the contribution charge. It is more straightforward, less burdensome and less subject to regulatory gamesmanship than a revenue-based mechanism.
When we look at the new revenue-based mechanism, although our preference would be for a subscriber line charge, we would prefer a revenue-based mechanism rather than to stick with the current regime.
But when we look at the revenue-based mechanism, there are all kinds of issues that surface. Bundling will certainly be a challenge in and of itself. As a provider of both cable and residential telecom services, we certainly plan to introduce bundling offers in the market place and I think that would be one of the great advantages of our offering to the market place and if we are faced with trying to allocate various prices on a bundle of services -- which is retail, for instance, at $79.95, I pick a number, don't take that for granted necessarily -- what would be local services? What would be the cable services? What would be the high-speed Internet portion of that when it is a bundled package?
This would certainly create some difficulties.
Also, as has been mentioned earlier, there will be an issue of double taxation in the sense that some companies are essentially purchasing some services from other telecom providers. So we would have to get into a complex mechanism of determining what are really the revenues on which those charges would have to be applied. That would create some difficulties.
We view this mechanism, the revenue-based mechanism, as being fairly complex to administer, more open to regulatory gamesmanship. Essentially, when we look at the revenue-based mechanism, obviously, the more widespread it is, the less burdensome it will remain and then we look at the multiplicity of players that will render, once again, the supervision and monitoring of this regime more complex.
In both cases, both the subscriber line charge or the revenue-based mechanism, whether it's national in terms of rate, or whether or not it is determined on a company-specific basis, it is a pre-requisite in our view that there be a separate line charge on the customer invoice or the customer bill.
This is, in our view, very important. It would make the regime transparent from a competitive perspective.
We have to realize that if we leave the regime open or if we let the companies determine themselves if they will include it as a separate line charge or not, while the smaller companies, companies with less deep pockets than others, will be faced with the challenge -- and those companies are generally the new entrants -- of determining how to treat that specific line item, we fear that it will introduce some distortions from a competitive perspective that new entrants will have difficulty coping with.
It should apply to network access services and all NAS equivalents to make sure that it is widespread, that it is as minimal as possible. We mentioned in our submission more particularly that the Commission, I guess, has the discretion in looking at a subscriber line charge to determine whether or not it would be appropriate to have a higher subscriber line charge for business services versus residential services.
By saying that, I move away a bit from the concept that is behind the subscriber line charge, which is really to try to bring the contribution requirement or the cost of local services more in line with its costs. Obviously, the cost of providing a regular line to a business customer versus a residential customer could be defined as being the same, although, in order to minimize the impacts on the residential customers, it could be determined as appropriate by the Commission, from our perspective, that subscriber line charges be higher.
To what extent, I don't know specifically. I would rely on the Commission to try to determine what would be the appropriate difference between the two, but, from our perspective, it could be appropriate to work on the subscriber line charge in a way which minimizes the impact on residential customers.
We have heard some comments today and I just want to make a final comment on it. From our view, a hybrid regime where we would keep the current regime for a certain portion and implement a new regime would certainly not be a solution. We would sort of end up with the worst of both worlds; i.e., keep the current regime with all its faults and flaws and then add on the complexities and difficulties of another regime.
I agree that all regimes are not perfect. There is no perfect regime, otherwise everybody would have jumped on it, but, in our view, we have to get rid of the current regime and replace it with a regime which is more neutral from a competitive perspective and, from our analysis of the situation, the subscriber line charge meets those requirements.
We will be happy to answer questions you may have on our positioning on this particular issue.
THE CHAIRPERSON: Thank you, Mr. Gagnon.
CONSEILLÈRE NOËL: Monsieur Gagnon, est-ce que je peux vous poser une question en français?
M. GAGNON: Avec plaisir.
CONSEILLÈRE NOËL: Vous dites dans le tableau que vous nous avez donné que la contribution basée sur la contribution par minute établit des contraintes pour le développement de produits, d'assemblage de produits interurbains et locaux innovateurs. Et en même temps, vous nous dites aussi que ça pose des contraintes au niveau de l'interconnexion.
Dans un scénario où la téléphonie IP serait disponible demain matin sur une base commerciale, est-ce que votre intention serait de mettre en marché, par exemple, un produit sur une base mensuelle qui desservirait des zones beaucoup plus grandes et puis qui éviterait de recourir à des, en bon français, toll switch... moi aussi, je suis bilingue... qui éviterait l'utilisation de commutateurs qui mesurent l'utilisation? Est-ce que c'est ce que vous expliquez?
M. GAGNON: Oui, en grande partie. Premièrement, il est évident... et puis je ne révèle pas de grand secret de polichinelle parce que André Chagnon lui-même le mentionne à toutes les fois qu'il a l'occasion de le faire... qu'on examine la possibilité d'offrir à notre clientèle un service Québec-local, ou enfin, un service local très étendu à la province de Québec, ce qui est un attrait dans ce marché-là particulièrement compte tenu des spécificités linguistiques de la province de Québec. Ce marché-là est très particulier en termes de communautés d'intérêts et de pattern, pour employer une expression anglaise, le pattern de trafic dans le marché francophone.
Alors il est évident que c'est un des scénarios. En fait, on examine ces alternatives-là qui impliquent donc nécessairement que le service serait facturé sur une base mensuelle fixe. Le fait d'avoir un coût variable à l'intérieur d'une formule comme celle-là introduit des difficultés.
Call-Net, par exemple, l'a expérimenté, ou Sprint l'a expérimenté assez cruellement lorsqu'ils ont commencé à introduire des plans d'interurbains flat rate. Cette expérience-là, évidemment, nous enseigne que c'est extrêmement délicat de jouer avec des services alors que nos coûts sont toujours assujettis à des frais variables.
Alors il est certain que c'est une alternative qu'on examine.
Maintenant pour verser un petit peu plus dans l'aspect technique, il est certain que de pouvoir s'interconnecter de façon la plus efficiente possible compte tenu des nouvelles possibilités d'interconnexion, de la grande puissance des réseaux de routeurs... mais ce n'est pas des réseaux commutés traditionnels, on parle d'équipement de routing qui sont déployés... ces équipements-là qui sont maintenant extrêmement puissants pourraient nous permettre de s'interconnecter de façon beaucoup plus efficiente avec les entreprises de téléphonie traditionnelles.
Pour le moment, bien on le fait de la façon traditionnelle. On est comme, vous le savez, interconnecté dans plusieurs points d'interconnexion dans la région de Montréal puisqu'on est dans une phase d'essai avec nos employés de plusieurs usages, là, qui sont présentement en phase d'essai précédant le lancement commercial.
On l'a fait, là, de la façon traditionnelle, mais si on avait pu éviter de multiplier les trunks, de rationaliser le nombre de points où on aurait pu s'interconnecter avec les compagnies de téléphone traditionnelles, bien je pense que tous y auraient vu un avantage, tant les compagnies de téléphone traditionnelles parce qu'elles n'ont pas, en soi, d'intérêts à multiplier les facilités d'interconnexion lorsque ce n'est pas absolument requis, que nous, qui n'avons pas plus cet intérêt-là même si de notre point de vue, on est quand même moins pire que d'autres CLECs dans la mesure où on est quand même une entreprise qui a beaucoup de réseaux dans les régions où on prévoit desservir.
Quand je le dis, je le dis aussi du point de vue plus général de l'équité dans le marché concurrentiel tout en reconnaissant bien volontiers que notre entreprise est quand même moins mal pris comme CLEC qui doit déployer les infrastructures que d'autres entreprises qui ont moins d'historique de déploiement de réseaux, par exemple dans la province de Québec, que nous.
CONSEILLÈRE NOËL: Dans la province de Québec, vous desservez combien d'abonnés au câble à l'heure actuelle?
M. GAGNON: Nos réseaux couvrent à peu près 2,3 millions de foyers en terme de desserte géographique. On a 1,4, 1,5 millions de clients parce que le taux de pénétration n'est évidemment pas de 100 pour cent, mais le territoire de desserte de Vidéotron couvre 2,3 millions de foyers.
Donc, techniquement, à partir du moment où notre offre va être graduellement accessible dans le marché, on va être en mesure de rejoindre un potentiel de 2,3 millions de foyers.
CONSEILLÈRE NOËL: Je vous remercie, Monsieur Gagnon.
THE CHAIRPERSON: Commissioner Demers?
CONSEILLER DEMERS: Monsieur Gagnon, vous optez pour le fait que cette contribution soit écrite sur la facture de l'abonné ou de la personne qui s'en sert. Je me demandais si actuellement, par exemple, est-ce que vous faites des facturations d'abonnés au service local?
M. GAGNON: Présentement non. On ne fait pas de facturation pour le service local stricte. On fait de la facturation pour du service interurbain parce que Vidéotron Limitée revend le service interurbain de Vidéotron Télécom, mais il y a un certain pourcentage de clients du côté de Vidéotron Limitée qui sont abonnés strictement au service interurbain.
Du côté de Vidéotron Télécom, oui, il y a de la facturation du service local puisque Vidéotron Télécom, qui est le CLEC d'affaires, a une clientèle de service local et il y a de la facturation locale et interurbaine qui est faite présentement.
CONSEILLER DEMERS: Est-ce que cette facturation, vous incluez le 9-1-1, par exemple, sur une base particulière, les quelques sous, là, que vous devez remettre aux municipalités?
M. GAGNON: Oui.
CONSEILLER DEMERS: Ça apparaît sur la facture des clients?
M. GAGNON: Oui.
CONSEILLER DEMERS: Donc, vous avez une certaine pratique à identifier...
M. GAGNON: Oui, définitivement.
CONSEILLER DEMERS: ...vous faites la facturation.
Mais d'un autre côté, pourquoi y tenez-vous tant à cette facturation au détail alors que... comme mes collègues ont posé des questions aussi là-dessus justement ce matin et hier... le fait que quelqu'un pourrait ou une entreprise puisse décider de ne pas l'indiquer, elle, sur sa facturation?
M. GAGNON: Je pense qu'on est dans les premiers balbutiements littéralement d'une concurrence en matière de téléphonie locale. On ne conte pas d'histoires. On va se heurter à un concurrent qui est un concurrent extrêmement puissant.
COMMISSIONER CRAM: You were talking about affordability. It appears to me, and I just want your comment, that the SLC, in taxation terms, is really more regressive than a revenue-based contribution scheme in the sense that everybody pays $1, and I am using $1. So that means that the very poor people pay $1 the same as the millionaires, aside from myself, sitting at this table.
COMMISSIONER LANGFORD: I think you can ignore everything that comes after this point. Obviously lunch is setting in.
COMMISSIONER CRAM: My point is the regressivity of it and that what we are doing is that we, the Commission, may be hoisted on our own petard, because we are saying "here we have this lovely everybody pay $1" and at the end of the day we are faced, at the bottom income line, with affordability issues that we ourselves have imposed in order to avoid affordability issues in a high cost area.
So, would we not be better to go with something more progressive, like a revenue base?
MR. GAGNON: I don't envisage a revenue-based regime to be less regressive. A revenue based would result in a certain amount for the company. We may think that the company will absorb it or the shareholders of the company will absorb it without saying anything. My guess is that it will be passed on in terms of increases.
Therefore, if it is a $20 service, the increase will be the same for anyone who purchases that $20 service, if we are trying to recover that particular charge from the whole client base.
COMMISSIONER CRAM: If my long distance adds up to $60 versus somebody paying $20 without long distance, then if I pay $60 on my bill, I pay more. It is like an income tax as opposed to a sales tax in terms of progressivity. The more you earn, the more the rich should pay versus an SLC.
MR. GAGNON: I don't see the revenue base being linked to your ability to pay. It is going to be linked to the services you order, be it local or long distance. I don't see the correlation between what the company will be charged in terms of revenue tax and the ability of the customers to pay.
COMMISSIONER CRAM: Wouldn't you say, though, that an SLC is directly regressive because everybody pays $1, notwithstanding what they are earning?
MR. GAGNON: From our perspective, the revenue tax would be treated the same way. If we have to cough up a certain amount in terms of tax, it will be spread over our services, spread over our client base. In the end, I think it would equate to the same.
COMMISSIONER CRAM: Thanks.
THE CHAIRPERSON: Earlier today some of your friends ---
MR. GAGNON: Which friends? I have a lot of friends.
THE CHAIRPERSON: I am thinking in particular the ones at the cable association and Mr. Engelhart.
MR. GAGNON: He was speaking on behalf of the wireless, though.
THE CHAIRPERSON: They were talking about a somewhat different scheme that would have us take the approach that you have advocated in terms of dealing with the rate side of the equation, but then assuming there would be still some subsidy requirement left, leave the existing regime in place, bring the permanent rate under the price cap scheme and then let it fall, as the case may be, with the productivity offset.
What would your view be on that, in light of your comments about the network implications of the current regime, which you have probably stressed more than anybody else has, I think, over the last two days.
MR. GAGNON: From our perspective -- and I was half joking when I said that Ken was really seeing things from a wireless perspective this morning -- we don't see the world through a wireless window, in this particular instance. It is clear to us that the current regime needs to be reviewed.
We have advocated that for the last I don't know how many years. From our perspective, in light of our business plan and our business strategy, it is very important that we get into a regime or a contribution collection mechanism which is more mutual and which does not force technical solutions or prevent us from implanting some new service offerings that the new competitive environment is designed to achieve basically. There is no need for a competitive environment if all that is available in the marketplace is an exact duplicate of what was formerly provided by the incumbent.
From our perspective, we need to review this regime for those two aspects, which are very crucial to our business strategy. If there still is a subsidy requirement, we need to design a regime because, even if we tackle the issue of the subsidy requirement, the likelihood is that we will be faced, for a certain number of years, with some form of subsidy. There are some territories in our country which will probably, for the foreseeable future, require some subsidy requirements.
I don't think we can do away totally with subsidies within a very short time frame. We have to look at a solution, as long as we accept the fact that we will be faced with a subsidy requirement for a period of time, which at least creates less constraints than the one we have now. From our perspective, the one we have now creates some difficult challenges.
THE CHAIRPERSON: Thank you very much, Mr. Gagnon and gentlemen.
MR. GAGNON: Thank you for your time.
THE CHAIRPERSON: We will turn to the next party, then, which is Group Telecom.
ARGUMENT / PLAIDOIRIE
MR. WOLFE: Good afternoon, Mr. Chairman, members of the Commission and Commission staff.
My name is Bob Wolfe. I am the President and Chief Operating Officer of GT Group Telecom Services Corp. Joining me today is Robert Fabes, our Senior Vice-President and General Counsel, Fiona Gilfillan, our Vice-President, Regulatory Affairs, and Bob Noakes, our Director, Regulatory Affairs. I will be presenting the first part of the submission in English. Then I will turn it over to Robert Fabes, who will continue in French, and finally I will be presenting the last portion in English.
Group Telecom welcomes the opportunity Public Notice 99-6 provides to review the existing contribution collection mechanism and to examine alternative mechanisms.
Canada is one of the many countries in the world that has embraced competition in its telecommunications sector. The Commission has been instrumental in opening this sector to competition through a number of seminal decisions over the past two decades that have progressively dismantled the barriers of monopoly. In these decisions, the Commission has consistently found that increased competition brings economic and social benefits to Canadians and is, therefore, in the public interest.
At the same time, technological and economic developments in the industry over the past several years have required the Commission to revisit a number of its rules and policies from time to time to ensure that they continue to meet their original objectives in a manner that appropriately balances considerations of efficiency and of equity.
Group Telecom welcomes the opportunity to participate in this proceeding to review the contribution collection mechanism. While a relative newcomer to this sector, Group Telecom is directly impacted by the existing contribution collection mechanism. To date, in order to support our CLEC operations, Group Telecom has had to expend significant resources in order to implement the internal procedures necessary to track and collect contribution from long distance service providers and remit such contribution to the relevant central fund.
Currently, Group Telecom resells long distance services. However, as we evolve to a fully integrated telecommunications supplier and begin to provide long distance services from our own facilities, Group Telecom will be further required to implement the necessary internal procedures to track, collect and remit on its own long distance traffic. We, therefore, applaud the Commission for initiating this proceeding to review the mechanism.
We believe that the Commission has the opportunity to look back to the original goals of the subsidy and establish an appropriate mechanism with those same goals in mind, but eliminating the negative impacts that the current mechanism has on the Canadian telecommunications sector. We are confident that a mechanism can be established that ensures a subsidy to basic residential service in high-cost serving areas, but removes the economic inefficiencies, technological distortions and regulatory burdens created by the current mechanism.
Group Telecom currently participates predominantly in the local, Internet and data markets, and is not required to pay contribution directly. However, as the Commission implements a more sustainable mechanism, sectors of the industry, such as the newly competitive local sector, will be required to bear a portion of the subsidy where, to date, they have not been so required. Unlike the more mature wireless market, the local market is newly competitive and is fraught with a number of remaining impediments, including equitable and economic access to buildings and municipal rights-of-way. Accordingly, Group Telecom expresses concern that the subsidy collection mechanism does not artificially entrench the dominance of the incumbent carriers.
Our presentation is divided into three sections. First, since Group Telecom is a recent addition to this proceeding, we will briefly describe our company. Second, we will offer our assessment of the existing contribution mechanism in light of its objectives and implementation requirements, concluding that it requires changes to the current mechanism going forward. Third, we will discuss the merits of both the subscriber line charge and per cent of revenue mechanisms that have been proposed by various parties to this proceeding.
Robert Fabes will now continue this presentation in French.
M. FABES: Bonjour. Groupe Télécom, fondée en 1996, a comme objectif de fournir des services voix-données intégrés aux petites et moyennes entreprises ainsi qu'aux fournisseurs de services Internet, aux transporteurs interurbains, aux revendeurs de services de télécommunications et aux intégrateurs de technologies de l'information. En mars 1998, nous sommes devenus une entreprise de services locaux concurrentiels.
Groupe Télécom exploite à l'échelle du Canada un réseau de fibres optiques très large bande qui sert à fournir des services Internet, voix et données haute vitesse. Groupe Télécom a récemment acquis les actifs de télécommunications de Shaw FiberLink et de Moffat Communications. Notre réseau est déjà en service à Vancouver, Victoria, Edmonton, Winnipeg, Montréal, Calgary et Toronto et nous avons prévu de l'étendre aux marchés clés du pays. D'ici la fin de l'année 2000, le réseau de Groupe Télécom couvrira Ottawa-Hull, Québec, Hamilton, London et Kitchener-Waterloo. Notre réseau comprend présentement plus de 8 000 kilomètres de fibres optiques.
Les services de Groupe Télécom comprennent l'hébergement de sites Web et d'applications, l'hébergement d'équipement, le commerce électronique et d'autres services Internet à valeur ajoutée dispensés grâce aux fonctions d'infrastructure à clés publiques de l'entreprise. Nous offrons également des produits et des services de télécommunications traditionnels, tels l'extension de réseaux locaux et les services téléphoniques locaux et interurbains évolués.
La stratégie commerciale de Groupe Télécom consiste à être le chef de file en matière de services de télécommunications aux entreprises, aux établissements et aux autres fournisseurs de télécommunications du Canada. Nous avons actuellement plus de 3 000 clients et près de 1 300 immeubles sont raccordés à notre réseau de fibres optiques. Groupe Télécom emploie au-delà de 850 employés.
Groupe Télécom désire concentrer ses produits dans le domaine des services de données et d'applications Internet, segment du marché canadien de services de télécommunications qui aura, selon nous, la croissance la plus rapide. Notre gamme de services de donnés constitue un point d'entrée attrayant nous permettant de vendre aux clients un ensemble d'applications de données et de services téléphoniques.
Afin de respecter la politique du Conseil visant à promouvoir la concurrence livrée par les entreprises propriétaires de leurs lignes, Groupe Télécom a l'intention de détenir ou de contrôler les liaisons optiques qui composent son réseau.
Bien que le domaine d'activité prioritaire de notre entreprise, soit celui de données et des applications Internet, Groupe Télécom demeure un fournisseur de services de télécommunications intégrés complets. Servir de guichet unique en matière des services de données, d'applications Internet et de voix nous permet de mieux satisfaire les besoins de notre clientèle et d'en accroître la fidélisation.
Groupe Télécom, étant une nouvelle venue sur le marché des transporteurs locaux, nous croyons apporter une perspective particulièrement importante à la présente instance. Nous travaillons actuellement à élaborer notre architecture pour l'avenir. Nous avons l'intention de tirer profit des nouvelles technologies accessibles aux entreprises de télécommunications afin d'offrir aux Canadiens des services efficaces et novateurs.
MR. WOLFE: Thank you very much.
Group Telecom is fully supportive of the goal of universal service. To this end, the company recognizes that while revenues from local basic residential services can be expected to cover their costs in urban areas, a subsidy is likely to be necessary to achieve the objective of affordable access for residential customers in high-cost serving areas.
At the same time, we believe that this objective needs to be achieved in a manner that balances the benefits of universal access against the requirements of a competitive telecommunications system that facilitates economic growth, industrial development and business efficiency in Canada. Affordable basic telephone service is in many ways part of the social safety net in Canada. Access to basic telephone service is seen as part of our entitlement as Canadians and could be considered to be an element of the government's responsibility.
Most economists would argue that a direct identifiable government subsidy in addition to placing responsibility where it belongs avoids giving incorrect economic signals and incentives. Indeed, many participants in this proceeding, including the incumbent telephone companies, have proposed that the universal service subsidy be funded using revenues from general taxation. This would alleviate the distorting effects inherent in any industry-specific mechanism.
To the extent, however, that the required subsidy is not accepted as part of the government's mandate, but continues to be a responsibility placed upon the telecommunications industry, it should, in our view, at least do minimum harm in compromising the efficiency of the industry not only for the industry's sake but for the sake of the benefits that the Commission has found competition to carry with it.
Group Telecom submits that an appropriate contribution mechanism should be governed by four criteria. In our view, such a mechanism should: Number one, be sustainable; number two, technologically neutral; number three, minimize the subsidy amount; and, finally, achieve competitive equity.
I would like to turn first to the criterion of sustainability. The current usage-based contribution mechanism was established in Telecom Decision 92-12, which authorized facilities-based competitive entry into the public inter-exchange voice market. At that time, it was accepted that the revenues from long distance service, then offered on a monopoly basis, were subsidizing basic local telephone service.
Since new long distance competitors would be drawing away part of those revenues, including the contribution subsidy component, the new competitors were required to contribute the share of the local subsidy no longer available from the incumbents. Since that time, the Commission has modified the mechanism a number of times to respond to various issues related to internal inconsistencies and inequities in the application of the mechanism, including moving from a mechanism-based on interconnected lines to one based on minutes of usage. The essential logic of the mechanism as set out in 92-12, however, has remained intact.
Since that decision, however, and most particularly over the past few years, the industry has rapidly been moving from a circuit-switched environment to a competitive market employing network architecture that relies increasingly on packet networks and, more particularly, Internet Protocol. This was widely recognized by representatives from across the industry at the two-day workshop recently held by the Commission to discuss the architecture, interconnection and inter-operation of the Canadian telecommunications network.
Internet services are oblivious to distance and both circuit-switched and packet-switched services are increasingly being offered to Canadians on a flat rate or "postalized" basis, without distinctions being drawn between local and inter-exchange usage or, indeed, between voice and data. Yet the current contribution mechanism requires that these distinctions be maintained and that inter-exchange conversation minutes continue to be counted and reported.
This "disconnect" has a number of consequences. One is that emerging companies such as Group Telecom, which are simultaneously deploying both packet and circuit networks, will have to bear significant costs in order to measure minutes that there would otherwise be no need for measuring. Moreover, when changes to the mechanism were made by the Commission in response to perceived inconsistencies in its application, these invariably increase costs for new entrants, again without commensurate benefit. As the incumbents transform their telecommunications networks in Canada to an IP architecture, we expect that they will encounter similar problems.
A further and perhaps more serious consequence of the present situation from a Canadian policy perspective is that resources that could be devoted to technological and service innovation in a dynamic converging sector are diverted to the preservation of an outmoded contribution mechanism.
We believe that it is time to recognize that the existing mechanism itself is not sustainable, based as it is on measuring and reporting conversation minutes and that making further ad hoc changes to it will only compound its unsustainability. In our view, a primary criterion for a Canadian contribution collection mechanism is that it be sustainable, which, in turn, requires that it be based on the realities of the rapidly evolving Canadian telecommunications sector.
I will now address our second criterion, technological neutrality. In addition to maintaining a regime that is sustainable, it is important that the subsidy not inhibit technological development in Canada. Technological neutrality is necessary to ensure that the industry can evolve using the most efficient technologies without regard to the collection mechanism.
Today the Commission differentiates between PC voice and PSTN voice, with PC voice being contribution-exempt. This creates an incentive for deploying PC voice purely to avoid the imposition of the contribution regime.
Not only does this frustrate the purpose of the contribution regime by reducing the total potential funds available for contribution, but it inhibits the development of technologies and services which are not exempt from contribution.
We consider that a technologically neutral contribution collection mechanism will provide a predictable source of revenue. In addition, a technologically neutral contribution mechanism will not adversely impact the roleout of next generation technologies.
I would now like to discuss our third criterion, the quantum to be collected by the subsidy mechanism.
Group Telecom recognizes that the magnitude of the subsidy is not being determined by this proceeding. However, we believe that if the distortions on investment and demand inherent in an industry specific subsidy mechanism are to be avoided, the quantum collected should be restricted to no more than is required to maintain universal service at affordable rates.
Since subsidies raise prices to end users, they ultimately discourage customers from using the services that bear the subsidy obligation. As a result, investment in those services and in the infrastructure on which they depend is discouraged and investment and services and infrastructure, which are exempt from the subsidy obligation, is artificially encouraged. Without control on the amount of the subsidy, the Commission risks harming both Canadian consumers and the Canadian telecommunications industry.
We therefore believe that the subsidy should be restricted to what is necessary in order to maintain affordable basic service rates for residential customers in high cost serving areas.
While the Commission has yet to make a determination as to what is an affordable rate, both the magnitude of the subsidy and the line of demarcation between a high cost and low cost serving area are dependent on that finding. Group Telecom considers that the affordable rate should be set at a national level to ensure uniformity and consistent application.
I would like to next discuss our fourth criterion, competitive equity.
As the Commission is aware, the existing regime has been marked by ongoing disputes relating to the degree to which one set of industry participants are being disadvantaged relative to another. A subsidy collection mechanism should not give preference to one class of service or service provider over another.
In addition to ensuring that the broadest base possible of service providers bear the obligations of contribution, Group Telecom submits that the contribution mechanism should minimize the ability of the incumbents to shift the collection of their subsidy obligations away from services that face a high degree of competition and have low margins to less competitive high margin services. To allow for a truly equitable collection mechanism, such a practice can only be eliminated by the subsidy being collected directly from the end user. This would reduce the ILEC's ability, given the pricing flexibility within the price cap regime, to shift collection obligations away from the more competitive markets.
Also, since local competition is in its infancy, virtually all contribution collection accrues to the incumbents. Any over collection could be used by the incumbents to subsidize aggressive pricing in more competitive markets. New entrants do not have access to these revenues and therefore disadvantaged in competing with the pricing by the incumbents in competitive markets. Considerations of competitive equity thus lend further support to the previous criterion of minimizing the subsidy amount. They also Commission review of the subsidy amount on an annual basis and to the extent it is determined that excess revenues were collected in a given year, a reduction in the subsidy amount for the following year to reflect that excess collection.
Competitive equity considerations also dictate that the use of a national fund, which would place all service providers, as well as the communities they serve, on an equal footing. A particularly important feature of this national fund is that it would establish a vested interest on the part of the incumbents to ensure that the subsidy requirement is minimized.
Group Telecom considers that meeting all four criteria, sustainability, technological neutrality, a minimal subsidy amount and competitive equity, is essential for a Canadian collection mechanism. We also believe, as we hope we have shown, that the existing regime does not meet these criteria.
The Commission has a very aggressive agenda before it over the next year and a half which will culminate with the terms and conditions of the second price cap regime commencing January 1, 2002. With the introduction of the first cap regime in 1998, the Commission froze contribution rates. This eliminated the causal relationship between the amount of subsidy collected and the amount required and set in motion a series of Part VII applications, proceedings and appeals which Group Telecom submits were inevitable because of the rapidly changing Canadian telecommunications sector.
Group Telecom considers both the percent of revenue and subscriber line charge to be clearly superior to the existing regime. Both alternative methods could be implemented such that they explicitly appear as a separate line item on the end user's bill and are passed on to a national fund. Group Telecom considers these two criteria essential for the implementation of a competitively equitable, sustainable regime.
Both the percent of revenue and subscriber line charge mechanisms can be applied over a broader base of service providers than presently exists. As new services, service providers or technologies are developed they can be captured by either mechanism as appropriate. As such, both the percent of revenue and the subscriber line charge mechanisms increase the base over which contribution recovery can be realized and thus moderates the impact on any one market, minimizing the distortions inherent in an industry specific collection mechanism.
As well, both the percent of revenue and subscriber line charge mechanisms are more equitable. Neither regime will saddle new entrants with the competitive disadvantages that exist under the current regime. New entrants would no longer be required to make capital outlays to retrofit their architecture to calculate switched minutes. In addition, an annual review of the subsidy ensures that the quantum collected is no more than what is required to maintain universal residential service at affordable rates, thus eliminating any advantage that the incumbents may have by virtue of an over-collection of the subsidy.
In conclusion, Group Telecom submits that the current subsidy collection mechanism, which is based on measuring and reporting conversation minutes, is not sustainable going forward. As a relative newcomer to this proceeding and to these deliberations, Group Telecom does not have a particular preference between the alternate mechanisms.
However, as the Commission undergoes its deliberations regarding the appropriate mechanism, Group Telecom recommends to that the Commission adhere to the principles that Group Telecom has enunciated in this submission in order to compare the attributes of percent of revenue versus subscriber line charge. Developed on a national basis, reviewed annually and applied directly by means of a separate line item on customer bills, both the percent of revenue and subscriber line charge mechanisms are the most competitively equitable, technologically neutral and sustainable mechanisms available.
The implementation of either mechanism will be complicated. Accordingly, Group Telecom recommends that the Commission refer the details of implementing a new contribution collection mechanism to the CRTC Interconnection Steering Committee. Group Telecom would be pleased to participate in any such forum or proceeding necessary to establish the implementation of the next contribution collection mechanism.
We thank you for your consideration and are prepared to answer any questions you may have.
THE CHAIRPERSON: Thank you, Mr. Wolfe. Ms Noël.
COMMISSIONER NOËL: Mr. Wolfe, I have one question. You mentioned a national fund. Do you have any particular reasons why you would favour a national fund as opposed to a regional, territorial or provincial fund? We have heard all these words used. I think regional refers more to a Bell concept which is the Quebec and Ontario area that is served by Bell Canada. Territorial would be to the same effect. And provincial would be based on provincial boundaries.
MR. WOLFE: Our view is that a national fund would be the most equitable mechanism to distribute the proceeds of the collection. I think that essentially if you create a fixed amount there is a higher likelihood that people will seek the highest level of efficiency in productivity. We think that if you do it on a regional basis you may end up rewarding inefficiency. And we think that by making it a national fund that you can drive the benefits from those funds to the people who are most efficient.
COMMISSIONER NOËL: Thank you.
THE CHAIRPERSON: It seems that we have had a number of people who have advocated the revenue mechanism because to them it is simpler, and those who are advocating the subscriber line charge advocate it because it is simpler.
Since you do not seem to have a particular preference between the two, do you have a sense of which one or the other is simpler?
MR. WOLFE: I think they are both very complicated, to be honest. The reason is that there are so many different participants in this market, from cable companies to wireless companies to CLECs and incumbents. Everybody has a different type of offering that they are coming to the market with, with new technology and different pricing structures. Our view is that whichever direction you choose you need to be very careful in the application of that particular methodology.
So we debated it considerably and, frankly, we think it is more in the application of whichever route you choose to go that will be important rather than the actual route itself.
THE CHAIRPERSON: The issue of how to calculate the requirement, you haven't addressed it here today. You may well have in your more extended written submission. The current method is using essentially Phase 3. Most of the parties seem to be advocating the issue of taking a Phase 2 costing approach with anywhere from 10 per cent to 25 per cent mark-up. I am curious to know what your views might be on that.
MR. WOLFE: I will let Bob answer that. Go ahead, Bob.
MR. NOAKES: Mr. Chairman, we would agree with a Phase 2 approach. I think AT&T made a very good point yesterday with their appendix, where they demonstrated that even with a Phase 2 methodology, the end contribution collected could vary dramatically. We would agree completely that the fixed common cost factor should be reviewed. The economic life characteristics should be scrutinized extensively. The affordable rate also would play a very important role in the end result of the amount collected.
Phase 2 is definitely what we would recommend, but also, along those lines, what goes into the Phase 2 is also very important.
THE CHAIRPERSON: Thank you very much.
The next party, then, is Multi-Sync. It's Mr. Graham, is it?
ARGUMENT / PLAIDOIRIE
MR. GRAHAM: Yes, sir. Normally at the beginning of any presentation, it is customary for the speaker to thank his audience. However, I am having great difficulty conforming to that custom. Here are some of the reasons.
Briefly, several months ago I contacted your office, requesting I be placed on the list of speakers for this oral hearing. It was indicated to me at that time the order in which the presentations would take place would probably be alphabetically. This is not the case.
Recently, a few days before these presentations were to begin, I was contacted via fax and informed that my presentation would essentially be last. When I contacted your office, I was told the order was determined based on who had a vested interest in contribution charges. Furthermore, it was indicated to me that if I would like to move myself up in the order of these presentations, that I should contact one of the presenters and request that they exchange their position with mine.
Needless to say, that last comment was, in my opinion, idiotic at best. Who, in their right mind, would exchange their position with a last place presenter? I realize someone has to come last. However, that determination should be based on more neutral criteria, such as alphabetically.
I am not intending to make this presentation one that is based purely on the fact that I was placed last. My concern is your organization seems unable to promptly assess those who might be presenting and how important hearings like this are to small business, not just big business.
Need I remind you -- and you are well aware of the stats -- 80 per cent of Canada's work force works for small business. The majority do not work for big business and, more importantly, for monopolies. We are the very backbone of the Canadian economy in terms of employment, taxation and consumption. We do not have the capacity, like larger organizations, to hire expensive legal advice to deal with issues that could determine our very future.
Again, for this reason, it is critical we are given a fair and equitable chance to address an organization such as yours, which yields such bureaucratic control over the telecom sector in this economy.
Now I will address the very reason we are all here today: Contribution taxes. I am not going to regurgitate the decisions, orders, interrogatories, or the Telecommunications Act as part of my presentation. I find this practice is a phenomenal waste of time and resources. It is one that the legal representatives of the incumbent carriers seem to aspire to. In addition, I will not be discussing the varying formats of contribution taxes.
Specifically, my greater concern is that of the contribution tax as it pertains to resellers.
Today, with competition finally entering into all aspects of telecommunications, we see the landscape vastly different than a few years ago. Competition has been both good and bad for this industry. It has obviously resulted in price reductions for the consumer. Unfortunately, we have seen a reduction in service and an adoption of unsavoury tactics used to gain market share by even the largest telephone companies and long distance providers in Canada.
All said and done, it would be impossible to get a consensus from this industry that would even remotely suggest opening up the markets was a bad thing to do. Against this backdrop, we still have situations where telephone monopolies are thriving. Now added to this clearly unpalatable monopolistic environment, we have contribution charges, a tax on free enterprise. A tax on free enterprise that is paid to monopolies smacks against a logical person's common sense.
The very rationale for contribution taxes might -- and I hesitate when I use the word "might" -- have made sense some time ago. Today, under the shadow of monopolistic competition, I ask you: Does it really make sense for an independently owned and operated small business to pay a monopoly this contribution tax? If your organization firmly believes in competition, as it has publicly stated from time to time, then let market forces operate.
In those areas that are supposedly under serviced and require price adjustments to ensure local line costs are not exorbitant, I suspect incumbent Telco is inefficient in its ability to provide services to that area. They should not be subsidized.
Let us simply look at the smaller and truly independent telephone companies that are not only owned by the likes of Bell Canada to see how more efficient they are. Contribution taxes permit the Telcos to remain inefficient and merely reactive, as opposed to proactive. Consequently, this contribution tax is being used not only to prop up a monopoly, but an inefficient monopoly. I say this somewhat loosely, as I am not aware of a monopoly that operates efficiently.
So-called under serviced areas in most cases are adjacent to independents. Why are these organizations able to charge out their line costs to the consumer at rates considerably less than the likes of Bell Canada?
There is no secret formula to why this is occurring. It is simply because these small organizations are, in fact, more efficient. To add insult to injury, these monopolies have been able to obtain government funds to increase their penetration into the so-called under serviced areas, as well as upgrade their facilities, while at the same time collecting this contribution tax. This has been a common occurrence in northern Ontario, whereby the provincial and, in particular, the federal governments have set aside considerable sums of money to improve the telecommunications infrastructure. Unfortunately, it is very difficult not to be cynical when one sees this occurring.
In my opinion, the contribution tax should be paid back to the various resellers in those areas where government funding has been gained exclusively by the Telco. Please do not make the assumption that we are in a truly competitive environment and that small resellers have the ability to obtain this very same funding. We are not in the same league. We do not have the resources or ability to lobby government. Therefore, we have been excluded from any pre-qualification.
In addition, resellers are at the mercy of the Telco when it comes to calculating the contribution tax to be paid. What I mean by this is a reseller must rely upon a monopoly which does not wish it to exist to report the total of this contribution tax for remittance. Resellers are not permitted to question or audit this information. Resellers must rely on the honesty and integrity of a monopoly to provide this information.
I would like now to touch upon an issue earlier raised at the opening of my presentation.
My question is: Who really has a vested interest in this contribution tax? Comments made to me by one of your employees was that the order in which the presenters were to appear at this hearing was based upon his, and apparently others, perception of who had a vested interest in this contribution tax.
For a moment, let us pretend that the hard one by and financially strapped Telco was to actually get its way and yet convince the CRTC that contribution taxes should be imposed upon resellers that operate, let's say, a one-hop service. The end result would be catastrophic. Some of you might think I exaggerate when I use the word "catastrophic", however it is an understatement to the financial burden that would easily devastate most of these small businesses.
Many of these organizations employ less than ten people. They operate on volumes and low margins, which is somewhat contrary to how small business typically functions. A contribution tax would result in elimination of these businesses.
Therefore, we would have a situation whereby the CRTC and their friends at Bell Canada have effectively eliminated some of the competition. We have seen a prelude to this already by the creation of what is called "natural Calling Centres". The end result of their creation was increased line costs for the consumer, more money for Bell Canada and less money for their competition.
Coupled with this is the fact that long distance rates have literally plummeted over the last few years and you do not have an attractive environment in which a reseller operates. If your organization feels comfortable with the elimination of people's livelihoods, then go ahead, expand the contribution tax, such as is imposed upon one-hop resellers.
For the very reasons I have previously mentioned, this is why I take great offence and find the comments that the order in which presenters of this hearing was determined was based upon those organizations which supposedly have a vested interest in a contribution tax.
I am here today to tell you that to me this is a clear indication of your organization's inability to fully comprehend or appreciate what is happening in all aspects of this industry. To make the broad assumption that because an organization like Bell Canada collects a lot of money from private enterprise to prop up their monopoly and somehow they should be at the top of the list is ludicrous.
Here is another reality that your organization seems to have missed. If Bell Canada did not collect one cent of this contribution tax, the impact on their bottom line would be insignificant when compared to imposition of this same tax on small business. I ask you: Who really has a vested interest in this contribution tax?
You are absolutely right if you draw the conclusion that this contribution tax is in the telcos best interests because it inhibits competition, acts as a barrier to entry in the marketplace and any increase in our expansion of it would result in elimination of competition.
Many of you presuppose the reason why you do not hear from resellers is because of the famous Canadian syndrome: apathy. One of the reasons why you do not hear from many resellers is partly because of just that, apathy, mainly due to lack of trust in your organization.
In addition, resellers lack the resources and the time to fight the fight. Your organization through these oral hearings tries to resolve the problem. However, it is now clear that it is really only in your vested interest that you create barriers, such as small organizations, who are unable to deal with it. That's a sad reflection on your ability to gather consensus from the public. Many of us see your organization as a tool that is already manipulated by the telcos. This very hearing is evidence to that effect.
Finally, in summation, maintaining or broadening this contribution tax no longer makes common sense. Its original purpose might have appeared noble, but this is no longer the case. It is another ill-gotten source of revenue for the telcos. Moreover, it distorts and reduces competition. Without it, we would be able to better cast our eyes upon the face of real competition. However, with this contribution tax in place, along with the continued existence of monopolies, we do not have a clear picture of what competition really looks like.
As previously stated, it acts as a barrier to entry in the marketplace, therefore ensuring there is less competition than there could be. That is why it is in the vested interest of the consumer that competition be fostered.
Furthermore and lastly, the attempts by Bell Canada to introduce this contribution tax into the one-hop resellers market under the guise that they are acting in the best interests of CLECs adds a bit of nauseam to this whole experience. I think I have made it abundantly clear that this contribution tax demanded by the likes of Bell Canada and in the past given the blessing of the CRTC is hurtful and unnecessary in a truly modern, competitive environment.
THE CHAIRPERSON: Thank you, Mr. Graham.
I apologize for the confusion in terms of the order of appearance, in terms of whether perhaps it was indicated to you originally it was going to be alphabetical. We did change the order and I had a hand in that. It was not to disadvantage anyone who appeared near the end of the proceeding.
Indeed, it could be argued that those who come closer to the end are the ones that we remember the most, with no disrespect to Bell Canada coming first. Maybe it's hard to remember what you heard first thing two days ago.
Certainly it wasn't any attempt to disadvantage anyone who was coming near the end of the proceeding. Indeed, you are not last and Mr. Menard may be commenting similar to you as he is, indeed, the last person to appear this afternoon.
I guess our view is that everybody who has appeared here and, indeed, every Canadian has a vested interest in this proceeding that is going on because the decisions impact on this. As you noted, this contribution fund is very important. It has a huge impact on the competitive framework that we have tried to put in place in this country, it involves several hundreds of millions of dollars.
Regardless of the outcome of the proceeding, it will have a huge impact not just on big business but small business such as yours, which we want to see succeed as part of the competitive framework in this country, as well as every consumer in this country who uses telecommunications facilities and infrastructure. We certainly don't want to disadvantage you or anybody else in the proceeding. We wanted to hear what you had to say on this important issue and we have certainly had an opportunity to do that.
I take it your view is, essentially, that we should get rid of contribution as we know it. I take it your view is that we should just throw the switch and do away with it tomorrow.
MR. GRAHAM: If you believe in competition.
THE CHAIRPERSON: Is it your view -- you come from part of northern Ontario -- that we could just do away with contribution and that competition itself would manage to deal with telephone rates in rural parts of Canada and parts you are familiar with in northern Ontario, some of the smaller communities in the more northern regions?
MR. GRAHAM: I think so. I think if you look at the areas where GT Telecom and AT&T will never exist in northern Ontario because it's not in their best interests profit-wise, Bell Canada would more than suffice. Any attempts by Bell Canada to increase rates in these smaller communities would result in the typical uproar by the community, so let them react to services provided by the incumbent telco.
Many of these communities have done a very good job of communicating to Bell Canada their dissatisfaction in not just pricing but service and Bell Canada has reacted. If competitors don't want to move into that market because they don't see it as profitable, Bell Canada still has to deal with the residents and the businesses in that community and they, in essence, force Bell Canada to provide reasonably-priced services.
THE CHAIRPERSON: I take it it's your view then that it would be considerably less costly to provide the service in that territory than Bell claims it to be.
MR. GRAHAM: I think so. I think so. We have had discussions with organizations in different parts of the United States and Canada that provide work or do contract work to telcos. We have talked to some municipalities and PUCs that provide local line services and they provide it at costs that are considerably less than what Bell Canada provides. It's hard to fathom how they can manage to accomplish this.
We have considerably less resources, considerably less technological resources than a company like Bell Canada, which basically can buy anything they want or any technology that they want. So it's hard to imagine how some of these smaller independents manage to keep their prices so low and yet adjacent communities that are serviced by Bell Canada are paying higher prices. It seems to me there is a logic there that is missing.
THE CHAIRPERSON: Is it your understanding that these independent companies are not subsidized?
MR. GRAHAM: I don't know. I don't have the ability or the resources to gather all that type of information, so I simply don't know. I know that in our discussions with them, which they will not publicly state, they see no reason why, some of them, anyway, telephone line costs have to be as high as they are in adjacent communities.
THE CHAIRPERSON: Thank you very much. I appreciate your presentation here today. Again I apologize for the confusion over the order of appearance.
MR. GRAHAM: Thanks.
THE CHAIRPERSON: Now for the last presenter, Mr. Ménard.
ARGUMENT / PLAIDOIRIE
MR. MÉNARD: I would first like to thank the staff which considered my request to print the latest version of my presentation and has so kindly distributed it.
The reason for my presence is that I personally consider that the current contribution regime is being ran over by new Internet architectures. I find that the questions that were asked by the Commission to all the incumbents were not essentially proportional to the fact that the Internet is running over the existing networks. So, they are very focused on the costs of current public-switched telephone networks and why should they persist, but nobody is even questioning the very existence of a public-switched telephone network today.
I entitled my first slide "Contribution in an Internet Age." My position on this issue is that the main reason for contribution is to support the current cost structure of the public-switched telephone network. I would encourage that, in the process of coming up with a decision on this public notice, the Commission would pay attention to the numbers that have been crunched out by the incumbents and try to assess if the current contribution subsidies pay for the outside plant or actually pay for the clunky Class 5 switches and related apparatus.
In my view, recent developments in the Internet environment, as demonstrated mainly by the packet cable initiative of the cable carriers, clearly demonstrates that it is possible to implement public telephony services using a much lower cost structure.
The problem with the CLEC competition model is that it essentially forces everyone to buy into the existing cost structure of the public-switched telephone network. In my view, Internet-based interconnections between the service providers is the only way out of the current hole we are all in.
Unfortunately, the packet cable specification is way too proprietary. It also shifts interconnections at higher layers than the physical infrastructure. The danger with that is that discrimination, when you are not dealing with physical interconnections, is potentially much larger. There is also a danger that new entrants, which potentially may use this packet cable infrastructure, use under-specified technologies and force interfaces on competitors which simply cannot be dealt with adequately.
I call this self-preference because of interconnections at a higher layer. What I mean by "higher layer" is it is in reference to network design charts that we call the OSI seven layers of interconnection. It essentially describes the fact that the Internet protocol is not something that speaks resistance and voltage and is at the physical electrical layer. It is some software-based concept that spans over the physical infrastructure. So, it is at the higher layer than the physical infrastructure.
The next slide essentially maps out the reference architecture of packet cable. The slide after that is sort of a higher level view of the packet cable architecture. The slide after that is the network elements of the packet cable infrastructure. The slide after that demonstrates all the different links between all of those elements in the packet cable infrastructure. Believe it or not, despite all of this being way more complex than a public-switched telephone network, it is ten times cheaper.
The point behind all of this is that there is great need for the Commission to understand what is behind all of that before buying into the arguments of the incumbent telephone operators that current cost structures must be maintained.
My next slide is entitled "More Complex to Regulate the Current Environment." There is a lot of new interfaces to understand. It also means that the number of interfaces from which self-preference can be exercised has increased tremendously.
Packet cable might be the first, but it is not the last. The industry is moving faster than the Internet. Today there is a technology called multi-protocol label switching, which is being implemented by nation-wide Internet service providers to replace ATM, asynchronous transfer mode. Are we going to talk about public and PLS interconnections and are we going to have to redesign different points of interconnection between phone companies and incumbents using MPI's technology?
We need regulation which is reasonably abstracted from those physical software-based implementations of technology. Thus, it means that you need regulation which is higher layer proof; it can reasonably be disassociated with the physical infrastructure from which it is being implemented on. A phone call in an Internet environment is no different than accessing a web page. It is really high up above the physical infrastructure. There are many levels of direction in between what constitutes a phone call and the physical infrastructure which it runs on.
The only thing that the Commission can regulate is the physical infrastructure. There is a big gap between what can be done by the Commission and what is actually out there in the world.
Internet-based interconnections, the bottom line is that they are possible. They are preferable technically. They are less costly. They are more desirable to actually implement competition in the marketplace. To get to the point of today's hearing, they are prevented by the existing contribution regime. I am in full agreement with everybody else here that the current contribution regime is inadequate.
What is cool about the current contribution regime is that it builds interfaces from which you can actually make money. So PSCN to PSCN interfaces make money. Packet cable interfaces, because they are actually built out of PSCN interfaces, make money. People that will be implementing packet cable will not interconnect with the incumbent telephone companies using Internet. They will interconnect with the existing incumbents using plain old clunky classified switches, and they are allowed to make money out of these interfaces.
Is it just a ploy to sell more circuit switch equipment? Why do IP-based CLECs -- I mean Internet protocol-based competitive local exchange carriers -- that deploy packet cable do the exact same thing to the local exchange carriers that the local exchange carriers are doing to the IP-based CLECs, which is that everybody is forcing on each other circuit switch, contribution-enabled interconnections so as to actually benefit from the monies generated by contribution.
None of the incumbents seem to want to move towards IP-based interconnections, and for a good reason. Why would you replace money-making interfaces between incumbents and competitors with interfaces which make no money? Though, if it was not for the fact that contributions were flowing across those interfaces, people would choose the most technically viable interfaces, the cheapest form of interfaces, and, by all means, everybody knows that it is clearly Internet based interfaces that would be used.
So the current contribution regime is clearly standing the way. As a result of the current contribution regime, network architectures are designed to maximize the inbound flow of contributions and minimize the outbound flow of contributions, therefore creating situations where entrants get more money from the incumbents than incumbents get money from the entrants. It clearly shows in the network architectures.
The barriers to entry of the current regime are the following. We clearly see that they are not that high for everybody. For small business and for ISPs those barriers to entry are just impossible to deal with, but for competitive local exchange carriers and cable operators, talking SS7 and buying one piece of gear that speaks SS7 is not that big of a deal. The point is that we have to look beyond interconnection with SS7 and question the very existence of SS7 as the network upon which all of the public switched telephone network is built on and the so-called advanced intelligent network which is implemented by the SS7 network.
One key question that the Canadian society faces is how will the databases of the public switched telephone network ever be interconnected with the domain named system on the Internet so as to be able to go back and forth from a domain name to a telephone number and find out whether this person is on a certain IP address or is on a telephone number. This does not require the SS7 network. This just requires the Internet to be interconnected with the databases of the public switched telephone network by many other methods than an SS7 network.
In the same way, how will the advanced intelligent network be unbundled to give Internet service providers a chance to play a role in the web-PSTN integration game, so-called click to finally go on a website, you click on a phone number, it makes a phone call and you do not have to wait in line for a call agent to answer you. The call agent calls you back automatically when he is free. Things like that.
In my view, ISPs will never have SS7 point codes. On the Internet we are moving from IPV4, with 32 million IP addresses, to IPV6 with billions of IP addresses. In the SS7 network we are still dealing with a network which is like IP version IPV0.01. It does not have enough addresses to serve competitors adequately.
So, the competition is not strong. It is just more of the same with small discounts. My personal view is that whenever I make a phone call and I compare what I am paying for long distance today to what I was paying with Unitel with the black box that was required because there was no equal access, I am still paying something that is like 3 cents cheaper. Big deal, 10 years after. I am still paying 35 cents a minute to make a long distance call during the day because the price cap that Bell -- this is my personal experience -- but it is $20 a month, but if you choose that price cap during the day you cannot benefit from any other deal. You have to pay 35 cents a minute. So, in order to keep my girlfriend happy and so she can call her mother as often as she wants, I get nailed on 35 cents a minute long distance calls. This is nuts.
To get back to the point, getting rid of contribution based interfaces is just a necessary step in the right direction. I am going to make this more evident in the next slide.
In my view, the current regime is designed to augment demand for PSTN services. The current regime -- and this is a key point -- you have to remember this -- forces entrants like me to buy twice as many phone lines as necessary to implement services. Why? Because there is no way that I can be billed for contribution on a per call basis. I can only be billed for a contribution on a per trunk basis, which means that I have to have a trunk that is dedicated to dial-in PPPV.90 56K modem and I have to have a different trunk that I use for making voice-over IP calls on my network to talk to Bell Canada or local exchange carrier subscribers. I am actually using a piece of gear that can, like a network access server, automatically figure out if this call is voice, is data or is fax and route the call to the appropriate network or applications. But I have to buy twice as many phone lines as is necessary.
Now big companies do not care. Like the big CLECs and the big cable operators have different divisions. They have a CLEC division, an ISP division and six other divisions. The point is that each of the divisions cannot share resources. In a smaller business any competitor which seeks to optimize costs, why the heck would I have to buy twice as many phone lines as is necessary because the current contribution regime that. Cobalt programmers working for a big incumbent telephone company programming on a mainframe cannot figure out how to bill for contribution on a per call basis. Get the software updated.
So the revenues generated by the existing regime prevents evolution. Again, this is another key point. Self-preference in an Internet-based environment will materialize through the use of IP Internet protocol based interfaces between allies and circuit-switched interfaces between competitors.
People who are friendly to one another may say "Let's speak Internet here. It is simpler and cheaper. We will share cost easier and we will speak Internet, but I hate you. Talk to my classified switch, talk SS7, try to inter-operate with my service control point database". It just does not work.
I said earlier that packetcable is just way too proprietary. The reason it is too proprietary is that for years the governments of this world have not been participating in the standards bodies which have been creating these standards. This sentence can be a call to action upon governments of this world to actually consider participating in standards bodies which are shaping the future of networks, because those standards are vendor-driven. The only objective of a vendor-driven standard is to get a box sold to an incumbent monopoly carrier.
So the standards which exist today do not factor in at all logic or the end user's wishes in the system. They only factor in how to enable monopolies to make more money. Packetcable is the best example of that.
In my view, interfaces between competitors -- when I say interfaces I mean points of demarcation between the network of an incumbent and the network of a competitor and where they talk to one another. In the public switched telephone network this is a circuit on a trunk. The interfaces between competitors cannot be used to raise taxes intended for the good of the general population. You cannot simply use an interface between a network of an incumbent and the network of a competitor to collect a fee because this creates networks which have abnormal architectures and cost more than necessary.
I do have an opinion on subscriber line charges, although I think I am going to make the most controversial proposal to date. I am personally going to ask Mr. Chrétien to add an additional box on my income tax statement that says how much do I have to contribute to the Canadian universal service fund? Revenue Canada will take care, hopefully not through Human Resources Canada, but, actually, give the subsidy to Bell Canada directly.
I see no reason, despite not disliking any of the CRTC processes, but I see no reason for the CRTC to be involved in collecting income tax.
Assuming that is implementable in this marketplace, a subscriber line charge, in my view, is the only mechanism that correctly recognizes years of subsidy in this environment. How people will fear a subscriber line charge is only a function of how expensive that subscriber line charge will be.
As I said in my very first slide, when going through the current numbers of the phone companies, if you find out that all of this contribution money only serves in maintaining clunky classified switches, then it is probably going to be five cents on my phone bill for the subscriber line charge. If it is five cents, who cares? Second line, five cents. Goodbye, thank you. But if it is $2, I might worry that the subscriber line charge is a problem.
In my view, the current PSTN has been built. It serves 95 per cent of the population. It does not need to be built again. So, the only purpose of a subscriber line charge is just to maintain its existence. In my view, that does not cost a lot of money when distributed amongst millions of people. It is just pennies a month.
In conclusion, in my view, contributions have served their purpose. The PSTN has been built and basic service is available to almost all of the population. A tax regime for PSTN users, based on subscriber line charges, will be more than enough to cover the maintenance of the PSTN cost structure, providing that it is not there to entertain another 20 years of buying the clunky classified switches.
This is another key point. New regulations set forth by the Commission should force incumbents to buy the Internet gateways, not require entrants to buy equipment that inter-operates with the big clunky classified switches of the incumbent carriers. It is just not the way competition begins.
The day I start a new business, if I have to speak SS7, how will I do that, and if I have to buy expensive gear. It does not make sense. The software -- and I have seen it at Nortel -- exists today. Running inside a DMS switch, that speaks Internet. It is variable. It can be deployed. It does not require any new hardware from the incumbent carriers. Why isn't it being deployed?
I claim, in my humble opinion of one little guy out there in the world, that the current contribution regime is just one of the many things which adds up to the fact of why you would not replace existing revenue-making interfaces with Internet-based interfaces, because they make money. You have to get rid of contribution. It is just like the normal course of things that happens.
Until such time as you still make money, based on the fact that you have one type of interface rather than another, you are never going to scrap that revenue-making interface.
I think that the Commission should eliminate, if possible, all barriers to entry to IP-based interconnections between entrants and competitors and not require new entrants to massively invest in circuit-switched public-switched telephone network technology.
After my conclusion, I do have some humble recommendations. The Commission, from now on, in my view, has a fresh new role in telecommunications regulation, which is to worry about discriminatory IP-based interconnections between entrants and competitors. The Commission has a responsibility to enable true competition between new entrants, which clearly have a lesser amount of facilities than the incumbents. The Commission should not require new entrants to replicate the infrastructure of the incumbents, especially not public-switched telephone network infrastructure.
Unless I don't understand, I please myself in telling my friends that we are three years out of the five years of mandatory prices on the different bands. When this five years is gone, all of the CLECs will have to go back to the government and ask for an extension for another five years and another extension for another five years. We will still never have competition in the rural areas.
So, yes, our universal service fund has an importance. But should this fund be exclusively used to buy into inefficient and old cost structures for equipment? I don't believe so.
In my view, the market, unless the Commission recognizes this, will move at the speed of -- and you can quote me on that -- the development of IP interfaces for 911 municipal call centres. I had to go through that recently: How the heck am I going to do 911? What if I could put a routor into a 911 call centre and just have fine line IP network talking to a call centre and give IP phones to all of the agents of the call centre? It can be done tomorrow. The only way I can get to a 911 call centre is through the most simplest possible form of public-switched telephone network interfaces, and there is just no other way. The market will move at that speed.
Finally -- and this is just one for me -- the terminoloy "equal access to packets" has to be carefully considered in all telecom regulation in the future. You can ask me as many questions as you want on that topic.
THE CHAIRPERSON: Well, Commissioner Cram.
COMMISSIONER CRAM: Recognize that I am lucky that I knew what a computer was last year.
When you are talking about the purpose of a subsidy being to maintain the present PSTN, the concept being that in 20 years, 10 years, it should be gone. Is that what you mean when you say it doesn't need to be built again, it should be replaced?
MR. MÉNARD: The present PSTN serves basic service. The definition of basic service is built upon the capabilities of the existing PSTN. So, unless the Commission wants to look again at what is basic service, as far as I am concerned, the existing PSTN can serve the population for the next million years. I see no reason to flesh it; it works. It is a $20 a month 911 line. People are happy with that. It is a great source of electrical power.
COMMISSIONER CRAM: I am almost afraid to ask because your intelligence is clearly four times that of mine, but what is the distinction between what we are doing now in terms of what we build into the costing for the subsidy and what you are suggesting? When you say only maintain instead of rebuild, does that mean we should take out depreciation?
MR. MÉNARD: Oh, absolutely. It has been written down already. There is a lawsuit in the United States by the New Networks Institute, which is doing it on behalf of the IRS, going after all of the local income and carriers in the States saying that they have written off their investment in circuit-switched copper networks way too fast and that they are enjoying profits that they shouldn't be entitled to today because they have devaluated their networks too quickly.
In my view, the lifespan of copper cabling might be -- let's say it's 40 years that the copper cabling needs to be replaced. It's the incremental cost of maintaining the existing plant, not the cost of expanding into a new area and requiring the build-out of a new super node and requiring the build-out of a new class 5 switch. Those numbers shouldn't be part of the picture.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Mr. Langford, are you going to explain those charts?
COMMISSIONER LANGFORD: I don't have a question, but I am a little worried about the amount of time your girlfriend is spending on the phone with her mother and I thought maybe you might want to spend a little less time on the Internet. I see a causal connection there and I am a little worried.
I just wanted to thank you for your presentation. I have no questions.
THE CHAIRPERSON: Commissioner McKendry?
COMMISSIONER McKENDRY: I want to thank you for your presentation, too.
I don't know whether you were here when TELUS made their presentation to us, Mr. Grieve. As I recall -- and I hope I am recalling correctly -- what he told us was that he shared, I think, your view or TELUS shared your view that packet switching was the way of the future.
In fact I think he told us when I asked him a question that he felt in five years TELUS' network would be a packet-switched network, although he did say not everybody in the company necessarily agreed with that five-year projection. There we have a major incumbent telephone company that seems to be saying they are going to do this. I take it from what you are saying there is no incentive for the companies to do this. In fact the incentive is the opposite.
I am just wondering if you have had any opportunity to think about the TELUS position, that they would be moving in this direction in, presumably, the regulatory environment that exists, although obviously they were recommending changes to the contribution regime.
MR. MÉNARD: My personal note on the TELUS opinion is what I have seen lying out there on a piece of paper in the audience, that they were actually in favour of an end-user revenue-based contribution mechanism. I am all for that. It's the same thing that the little box in my income tax said, as far as I am concerned.
Considering the issue of the replacement of the existing public-switched telephone network with a packet-switched environment, in my view -- and this is the view from somebody who has spent the last four years of his life trying to figure out what new applications the mass population would want in an Internet-based telephony environment -- I have only to conclude that the mass population does not have the need for something which is substantially better than basic telecom service.
The plain reality is that the most optimal dumbest piece of gear you could build to make a telephone call is what exists today and the mass population is satisfied with that. If what you are telling me is that TELUS wants to replace its existing circuit-switched environment with some funkier IP-based packet-switched service, it's certainly not to go after basic telecom service. It's to go after those subscribers who, like me, are savvy for more functionality in their use of telephony applications.
I am very sceptical to believe anyone who is telling me that they are replacing the existing infrastructure, which has already been written off, on the basis that it no longer works. It works. It's there and it can last for the next million years.
Now what do we do? Do we consider the cost structure of this infrastructure as part of the subsidy requirement or do we just consider the maintenance of that infrastructure into the subsidy requirement? That's my question.
COMMISSIONER McKENDRY: Thanks very much.
THE CHAIRPERSON: Mr. Menard, in the discussion with Commission McKendry just now you used the term that a revenue-based tax would be acceptable. I take it your view is, as was expressed by Mr. Gagnon from Vidéotron, that in putting this all together, the current contribution regime inhibits the development of efficient network infrastructure whether they may be circuit-switched or packet-switched because even in a circuit-switched world the current regime drives you to certain architecture that is largely driven by the contribution scheme.
Your view is we should get rid of that and let an efficient network architecture be designed regardless of whether it's circuit-switched or packet-switched. Would it then be your view that if you get rid of the per minute, either the revenue-based or the subscriber line charge would be about equal or do you have a view that one might be better than the other?
MR. MÉNARD: I personally prefer an additional box on my income tax statement and the CRTC to manage that. It's just a subsidy determined by whoever is responsible for having a good idea as to how much it cost to keep this circuit-switched infrastructure alive and functioning.
My first reaction when you formulated your question was that there is many other things which are wrong with the existing circuit-switched telephony environment and a lot of it has to do with the SS7 network: local number portability, area code expansion, assignment to phone numbers, CISC processes, lack of involvement of Internet service providers in CISC, lack of accountability of CISC, lack of participation of government into an Internet standards body. Contribution is just one of the many things.
Is it my view that getting rid of contribution is a step in the right direction? Yes, absolutely. Is it my view that a subscriber line charge, in the event that Mr. Chrétien tells me that I can't have a little box on my income tax statement, is a good thing? I am totally for it.
Do I believe that it is something that will be acceptable to the mass market and the people that Action Réseau Consommateurs represents, which apparently are against a subscriber line charge on the basis that it's going to be way too expensive? My feeling is it's going to be pennies, we might as well add it.
THE CHAIRPERSON: I thank you very much. I think I am going to quit while I am behind.
Thank you very much, Mr. Menard. It was informative and entertaining and it was a good note to finish our proceeding on. Thanks again.
That concludes all the parties who had registered their intention to present oral argument.
We have the written argument from all those who appeared and the others who chose not to appear and we will be going over that material carefully as well as their reply, which will be forthcoming.
I want to take this opportunity to thank everybody who did appear. I think I can speak for all my colleagues to say that this was extremely helpful for us to better understand the various positions of the parties through our questions and get a better understanding of the issues themselves and the concerns that all the parties that brought to bear. It has been very helpful.
As I said, in Whitehorse, when we were there two weeks ago, it certainly demonstrates the value of this sort of oral process to be able to engage in a discussion with the parties to help in our understanding of the issues.
Again, I would like to thank all those who appeared and certainly the people who have helped support the hearing here today, the court reporter, the translators, the Commission staff and my colleagues.
With that, we will close this phase of the proceeding and we will now be going over the more lengthy written comments that you have all sent in. I am looking forward to the reply comments.
--- Whereupon the hearing adjourned at 1615 /
L'audience se termine à 1615