ARCHIVED - Transcript - Hull, QC - 2001/07/09
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TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
NEW REGULATORY FRAMEWORK FOR SMALL INDEPENDENT
TELEPHONE COMPANIES AND RELATED ISSUES /
NOUVEAU CADRE RÉGLEMENTAIRE POUR LES PETITES COMPAGNIES
DE TÉLÉPHONE INDÉPENDANTES ET QUESTIONS CONNEXES
|HELD AT:||TENUE À:|
Place du Portage
Place du Portage
Centre de conférences
|July 9, 2001||Le 9 juillet 2001|
Roundtable / Table ronde
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès-verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Conseil de la radiodiffusion et des
Transcript / Transcription
Roundtable / Table ronde
New Regulatory Framework for Small Independent
Telephone Companies and Related Issues /
Nouveau cadre réglementaire pour les petites compagnies
de téléphone indépendantes et questions connexes
BEFORE / DEVANT:
|David Colville||Chairperson / Président|
|Martha Wilson||Commissioner / Conseillère|
|Andrée Noël||Commissioner / Conseillère|
|David McKendry||Commissioner / Conseiller|
|Jean-Marc Demers||Commissioner / Conseiller|
ALSO PRESENT / AUSSI PRÉSENTS:
|Peter McCallum||Legal Counsel / Conseillerjuridique|
|Paul Godin||Director, Independent Carrier Relations / Directeur, Relations avec les compagnies indépendantes|
|Donna Malliff||Manager, Independent Telephones / Gestionnaire, Compagnies de téléphone indépendantes|
|HELD AT:||TENUE À:|
Place du Portage
Place du Portage
Centre de conférences
|July 9, 2001||Le 9 juillet 2001|
Roundtable / Rable ronde
TABLE OF CONTENTS / TABLE DES MATIÈRES
|PAGE / PARA|
|Presentation by / Présentation par:|
|Ontario Telecommunications Association||10 / 40|
|Société d'administration des tarifs d'accès des télécommunications||61 / 247|
|The Corporation of the City of Thunder Bay||103 / 411|
|Prince Rupert City Telephones||132 / 528|
|O.N.Telcom||146 / 619|
|Northern Telephone Limited||173 / 734|
Hull, Quebec / Hull (Québec)
--- Upon commencing on Monday, July 9, 2001 at 0900 / La table ronde débute le lundi 9 juillet 2001 à 0900
1 THE CHAIRPERSON: Good morning, ladies and gentlemen.
2 Bonjour à tous et bienvenue à cette table ronde.
3 My name is David Colville and I am Chairman of the CRTC and Vice-Chairman, Telecommunications. I will be the Chairman for this consultation meeting.
4 With me today are Commissioners Martha Wilson, who is the Regional Commissioner for Ontario; Andrée Noël, Regional Commissioner for Quebec; David McKendry and Jean-Marc Demers.
5 Some of the staff with us today are Paul Godin, who is Director of Independent Company Relations and Donna Malliff, who is kind of our financial expert with respect to the independents, and Peter McCallum our counsel to keep us on track -- or try to keep me on track anyway -- and Shirley Soehn, Executive Director of the Telecommunications Branch and more of the staff in the back and one or two are sprinkled through the crowd just to keep everybody on their toes.
6 As you know, this consultation has been initiated to discuss issues associated with establishing a new regulatory framework for the small independent telephone companies by January 1, 2002. In Public Notice 2001-61, which instituted the proceeding that has brought us together today, the Commission stated that it is of the preliminary view that the new regulatory regime should focus on prices rather than earnings.
7 As noted in that Public Notice, the Commission also wants to hear comments on its proposal, together with any other proposals by parties, to establish the small independents' subsidy requirements based on a) the new methodology to calculate the total subsidy requirement for the larger telephone companies using a Phase II costing approach, prescribed in Changes to the contribution regime, Decision 200-745, and b) a uniform approach to identify high-cost serving areas in the small independent telephone companies' territories that relies on a consistent set of costing methodologies to determine the costs for local loops and residential primary exchange services.
8 The proposal put forward by the Commission is designed to focus and facilitate discussion among the parties. The Commission invites the parties to comment on its proposal and propose changes to any component where they consider it necessary.
9 I also invite the participants to address all other issues raised in this proceeding or that you consider relevant to this proceeding. The Commission's intent at the end of this roundtable discussion is not to make a determination. This is not the goal of this meeting. In this roundtable discussion, we hope the parties will be able to better understand the concerns of all participants.
10 In addition, we are here to scope out and better understand potential alternatives and accessory issues being proposed by some parties.
11 Quite apart from those preoccupations, I personally hope this face-to-face consultation will result in an open and frank discussion and allow everyone to hear directly alternative outlooks and perhaps gain a better insight into those positions.
12 We have a full agenda and we ask your cooperation in focusing on the issues and responding constructively to ensure we make efficient and effective use of our time.
13 Just reviewing a few general matters. We are having a transcript of today's session so I would just remind you to turn your microphone on when speaking so we will have an accurate record. Anyone wishing to purchase copies of the transcript could see the court reporter and make appropriate arrangements.
14 We propose to sit from 9:00 until 12:30 and from 1:30 until all participants have had an opportunity to speak. We will break for coffee in mid-morning and mid-afternoon. We hope to have the meeting over by 5:00, but we do want to conclude today so we will go beyond 5:00 if necessary, but not too, too late.
15 By letter dated July 5th, participants were provided with an organization and conduct letter which sets out an agenda for the roundtable. As a preliminary matter, I will invite participants to introduce themselves and afterwards I propose that participants make their presentations in the order provided for in the agenda.
16 Each participant will be given a maximum of 30 minutes for their presentation, and afterwards we will open the floor to fellow commissioners for questions, and then to other participants in the same order as they were listed in the organization and conduct letter, and then finally to observers to pose questions for clarification on that presentation. We will then proceed in a similar manner to the next presenter and so on.
17 As a final note, I would just remind all those who are present to please turn off any cellphones and pagers when you are in the meeting room as they tend to be distracting.
18 I would just like to say we try to make this a little more informal than our usual hearing process. While it still perhaps seems a little formal with the microphones, we do want to try to have an open and frank discussion. While it isn't all that hot in here, it is a hot summer day, so if you want to make yourselves more comfortable by taking jackets off, or whatever, feel free to do so.
19 As I said, we do want to have a fairly candid discussion. I mentioned, I think, last year when I was at the OTA Convention that I thought that our approach to dealing with the independent companies had not been perhaps as successful as we might have hoped a number of years ago when the CRTC took over jurisdiction for the independent companies. I am not even sure, as I have said to our own folks recently, how appropriate the term "independent" is any more because I'm not sure what you are independent of.
20 Historically, I guess, the independent companies were independent of the settlement arrangement between former TransCanada Telephone System, Telecom Canada, Stentor-member companies, but now that that whole settlement has gone by the wayside I guess it's probably more appropriate to talk about these companies as simply smaller companies in Canada -- smaller than Telus, Bell, MTS, SaskTel and Aliant.
21 As I said, I mentioned a year ago that I thought it was worthwhile to make an effort to see if we couldn't come up with a new approach to regulating your enterprises that would be fair to you and your companies and allow you to operate flexibly, perhaps provide less regulatory burden on you and less onerous operations with respect to the Commission, and perhaps more importantly be fair to you or to your customers.
22 I said at the time that we had an open mind about this whole issue. We had no preconceived notion about how best to do that other than perhaps some form of price regulation might be appropriate, that I encouraged you folks to think about this issue, mindful at the time that we still had to get through the issues that we were dealing with in terms of contribution and the rebanding exercise and that once we had gone through that we would have a better sense of what the subsidy scheme was, at least for the larger companies.
23 So that brings us here today. We did put out a Public Notice scoping out an initial view on the issue from our perspective, really as much to help, we thought, focus discussion as anything. It wasn't certainly intended to be chiselled in stone.
24 So I welcome your presentations today -- we all do. We will perhaps have a number of questions to better understand the various proposals and whatnot, but hopefully we can come away today, as I said in my opening comments, with a better understanding of your concerns and hopefully begin down the road to come to a more effective approach to regulation of your smaller companies.
25 So with that I will turn it over to you for beginning the presentations.
26 The first party will be the Ontario Telecommunications Association.
27 MR. NILLSON: Good morning, Chairman Colville and Commissioners, Commission staff and fellow independent telephone companies.
28 My name is Hans Nillson and I am General Manager of Bruce Municipal Telephone System with our head office located in Tiverton, Ontario on the shore of Lake Huron.
29 My task this morning is to give you and the Commissioners an overview of what has happened within the Canadian independent telephone companies during the last nine months.
30 As a result of a number of telephone calls between various associations representing the Canadian independent telephone associations in Canada it was decided that these associations should meet and discuss what common concerns we have.
31 Our first meeting was held in Toronto at the Royal York Hotel on November the 20th, at which time we agreed to call our committee the Canadian Independent Telephone Company Joint Task Force.
32 The CITC Joint Task Force consisted of senior staff from all three associations. These associations included the Canadian Alliance of Publicly Owned Telephone Systems -- commonly referred to as CAPS; the Ontario Telecommunications Association -- commonly referred to as OTA; and Société d'administration des tarifs d'accès des télécommunications -- again referred to as SATAT.
33 Our members are located in three provinces in Canada: British Columbia, Ontario and Quebec. The objectives of the Canadian Independent Telecommunications Joint Task Force are as follows: to provide a unified voice in common issues and concerns to the CRTC Commission staff and other industry players, and two, to ensure the provision of affordable and high-quality telecommunication service to the customers in rural and remote regions in Canada served by independent telephone companies.
34 After a number of discussions with the Commission staff, we arranged a meeting between the CITC Joint Task Force and the Commission staff in Toronto on November the 21st, 2000. The Joint Task Force also met with Commission staff in Hull on December the 11th, 2000 to enable us to better understand Public Notice 2000-745 which was released on November the 30th. It also gave us the opportunity to discuss and get a better understanding of Phase II costing.
35 On May the 30th, 2001, Public Notice 2001-61 was released. This document addressed the new regulatory framework for small independent telephone companies and other related issues.
36 On May the 31st, 2001, the Joint Task Force met again in Hull at the Holiday Inn to discuss and start preparation for the roundtable discussion which takes us to where we are today.
37 Thank you very much.
38 At this time I would like to turn it over to Paul Downs, General Manager of Nexicom Telecommunications Incorporated to present the OTA's presentation.
39 Thank you.
PRESENTATION / PRÉSENTATION
40 MR. DOWNS: Thanks very much, Hans.
41 Good morning, Mr. Colville and Commissioners.
42 The Ontario Telecommunications Association wishes to thank the Commission for the opportunity to take part in this roundtable.
43 The OTA is hopeful that this roundtable will assist greatly in the establishment of a new regulatory framework for small independent telephone companies and the related issues identified in Public Notice 2001-61.
44 Six years ago when the independents came under CRTC regulation, we did not have the opportunity provided by this roundtable. OTA is hopeful that the roundtable will permit an open dialogue that will lead toward the establishment of a new framework which will not require the many adjustments that have been experienced since PN 95-15.
45 Today OTA will be represented by Tim DeWeerd and myself. We also have with us Mike Andrews, Steve Lynn and Keith Stevens who are all Directors of OTA and they will participate as required during the roundtable with questions.
46 I'm a Director of OTA. I'm also General Manager of Nexicom Telephones Inc. which serves 1,500 rural and cottage customers in a 120 square mile area on the north shore of Rice Lake.
47 Tim DeWeerd is a Director and Chair of the Regulatory Committee for the Ontario Telecommunications Association. Tim is also General Manager of Quadro Communications which serves 3,600 customers in an 800 square kilometre area north of London, Ontario.
48 With those introductions, we would now like to begin our presentation to you.
49 In the first part of our presentation we are going to cover a little bit about the Ontario Telecommunications Association itself, an overview of the OTA member companies, and then we will get into the comments we have, our overview of the PN 2001-61 and some comments in respect to that.
50 The Ontario Telecommunications Association is a non-profit corporation and it represents at the present time 20 ILECs which serve about 95,000 access lines.
51 The Association is managed by a board of seven Directors who actively represent the member companies on regulatory matters, carrier and industry relations matters and member relations and business development matters. With those seven Directors -- all of those Directors are very actively involved in each of those areas.
52 As an example, Tim, who is Chair of the Regulatory Committee, his responsibility includes reviewing of the public notices that come out, reviewing the decisions that come out from the Commission, and then bringing to the Committee, who are made up of a number of member companies' staff, what those issues are and what needs to be addressed. So the Directors are very actively involved in the operation of the Association. We also have in the office in Ottawa two full-time and one part-time staff.
53 The Association is there to provide leadership for the advancement and success of the Association's members, to assist the ILECs in dealing with technological, regulatory and other telephone industry changes, and to represent the ILECs at regulatory proceedings.
54 In terms of the OTA member companies, these companies are community-based small businesses. There are three types of structures within the membership. There are incorporated companies, cooperatives and public utilities. As the chart shows, there are eleven incorporated companies representing approximately 53,000 NAS; the cooperatives with approximately 23,000; and the public utilities with approximately 19,000.
55 We wanted to include this slide to show the geographic locations of where the companies operate. They are very separate in many cases. You will notice that there is a clustering of independents on the shoreline of Lake Huron, but once you leave that you get up into the Bruce Peninsula with the Taylor section and then over to Manitoulin Island. Off in the central part, I will call it, of Ontario you have fairly isolated independents with a fair distance, quite a distance, between them, one located in Coldwater and another in Cambray and then Millbrook and Keene. Then you move quite significantly to the east. Again, there are companies in Westport and Landsdowne, Moose Creek quite far to the east, and North Renfrew up in the Pembroke area.
56 We wanted to show this because I think when we talk a little bit later about the isolation and insular nature of the independents this map, I think, helps to show that and to show the different regions in which we are operating. As an example, the companies in the Westport area are in, of course, the Canadian Shield, rock country, and companies down in around the Woodstock area obviously are in a much more agricultural type of area.
57 This slide shows the sort of make up of the companies. Our smallest company is Roxborough which is out in Moose Creek and then we move into a grouping of four companies in that range of 1,000 to 2,000; five, 2,000 to 3,000. In fact, it is interesting with this slide to see that 10 of the 20 companies are with 3,000 NAS and less. So it, I think, highlights that point.
58 We would like now to move into the Public Notice 2001-61 and give our overview at this point.
59 First of all, what we tried to do here is parallel the Public Notice, the paragraphs that were identified in the Public Notice and to walk through and address them in that order. So that's the format that the presentation will take.
60 First of all, the OTA certainly endorses the move to a simplified regulatory framework. I think that will benefit all of us.
61 The OTA believes that the existing rate of return model with minor adjustments would continue to serve customers over the next five years. We within the OTA had quite a discussion, and I guess that leads us to this next bullet which is we would appreciate clarification from the Commission, if possible during this roundtable today, as to whether that is an appropriate form of regulation for us to continue to look at as a possibility. In everything we have done so far in looking at PN 2001-61, we have not explored that. It has been our assumption that that is not something that is possible, let's put it that way, but we would certainly like clarification because if it is, the feeling of the independents, the OTA members, is that that would be workable with adjustments over the next five years and if it was possible then certainly we would come back to the Commission with a proposal along those lines.
62 Paragraph 9 of PN 2001-61 talks about the appropriate price regulation regime. It says to provide the CITCs with incentives to be more efficient and innovative. OTA wishes to indicate they support that.
63 The companies have over the last five years been implementing procedures and processes to become more efficient and innovative and work together and certainly while that is possible we feel there are limited opportunities as we move forward. There still are some, but they are limited ones for the future.
64 Parts B and C address the reliable and affordable service and also the fact of providing the CITCs with a reasonable opportunity to earn a fair return. OTA supports and stresses the importance of earning a fair return without which investors and capital markets will withdraw their funding from the company.
65 The last point: reduce the regulatory burden. OTA supports a move to minimum reporting and filing requirements.
66 Paragraph 10 talks about tariffed services. The number of tariffed services should be kept to a minimum. Pricing constraints should not be complex and OTA in this area would suggest that prices may be adjusted by an inflation factor such as the changes in the GDP, and also exogenous factors which would be events or actions beyond the control of the independents, things such as the ice storm that we had a number of years ago or hydro poll attachment rate increases of which the independents have no control over.
67 The transition period that we would propose is a five-year transition period. We would propose that for 2002, as part of that transition, the independents be allowed to increase their residential rates to the $22.75 amount as outlined in the Public Notice.
68 OTA proposes for the years 2003 to 2006, as part of this transition, that annual increases to offset the reduction in the subsidy would be permitted with a maximum increase of $3.00 per month.
69 In terms of the current filing and reporting requirements, that issue was raised in the Public Notice and a comment was asked for. OTA would propose the elimination of all Phase III filings; the continued filing of annual audited financial statements; the filing of applications for tariffed services; the elimination of Phase I depreciation filings; and the extension of the quality of service complaints procedure to all independents with less than 30,000 NAS.
70 We feel that the complaints procedure that was set in place in 95-15 has worked well and that this adjustment really is one of, I guess, looking at just the growth in NAS that has occurred over the years since that time within companies and, therefore, suggesting that it could extended to a 30,000 NAS.
71 In terms of ancillary reporting requirements, OTA proposes that these be kept to a minimum. Should an independent encounter financial hardship in meeting the basic service objective, OTA proposes the independent be permitted to apply for increased subsidies or PES rates beyond the increases contemplated by the pricing constraints.
72 So here we are saying if there was a specific need that a company had, or it couldn't meet those service objectives, then it would be permitted to come in to either seek additional subsidy or additional increases to the rates.
73 In terms of the history of the subsidy with the OTA members, the subsidy amount that was paid in 1994 was $26 million and in the 2001 filing it's approximately $17 million. The reduction has been a 33 per cent reduction since 1994. These reductions have been achieved over that period through staff reductions, efficiencies and innovations between companies and groups of companies, local rate increases and, in some cases, lower realized rates of return.
74 The section now that we want to focus on is what was contained in paragraphs 11 through 16 which dealt with the subsidy requirement. OTA wants to point out that its companies serve only high-cost areas in the rural and remote parts of Ontario and as a result any model using non-company specific data must be adjusted to reflect the unique differences between companies. I think from the map that we had earlier, there are quite obviously different situations that the companies find themselves in.
75 The financial inputs and subsidy calculation as proposed in PN 2001-61 would bring financial harm to all but one of the OTA member companies. That represents 95 companies would be negatively affected.
76 The methodology and formula proposed, however, in the Public Notice with modifications would be appropriate.
77 Some of those modifications that we have tried to look at to this date would be adjustments to the average national cost component to reflect such things at the rural and remote serving areas that the company serve; the lack of the volume purchasing power that companies face; limited options in equipment sizing; and the financing costs.
78 One modification or recommendation that we thought so far is that perhaps using a more comparable subset of the ex-Stentor member companies, and that subset namely being MTS, SaskTel and Telus, would be more appropriate to establish the cost component on which adjustments could be made.
79 Some additional recommendations. The OTA companies should be able initially or during the five-year period to implement a full Phase II cost study. So this again is a recommendation that if they were in a situation where they felt the final model was not workable that they would at any time during the five-year period be able to implement a full Phase II cost study approach.
80 Another recommendation is to adjust the national weighted average monthly PES rate of $22.75 for the OTA company-specific issues such as seasonal customers, where a customer obviously leaves and they are gone for six months and so they are not providing that revenue each month to the company.
81 Another recommendation that we had is a review of the corporate income tax calculation for the tax exempt CITCs.
82 Additional recommendations. Increasing the proposed 15 per cent mark-up on PES cost to reflect the OTA companies fixed and common cost components, such as insurance, auditors, legal and financial management.
83 When we start to look at these -- this is a very rough overview. We have just begun this examination, but they are significantly different in such areas as insurance where each of our companies are faced with providing the liability and the coverage insurances and paying what works out on a per NAS basis to more than it would for let's say any of the ex-Stentor member companies where in those situations they sometimes self-insure so that the premiums for those things are not incurred by them, but they are for the independent.
84 Another modification would be to reduce the imputed fixed month amount of $5.00 as implicit contribution to more accurately reflect the demographics of the OTA member companies.
85 MR. DeWEERD: For a change of voice, I will pick up the rest of the presentation here.
86 The next item in the subsidy requirement which is very important is that we alter the high-cost serving area bands to reflect our situation as opposed to what was presented in the PN as the ex-Stentor companies. Specifically, we do wish to retain the band G for the remote company territories with no modification.
87 However, for the remaining high-cost serving areas of the independent we would like to establish one band for all the CITCs and that would include wire centres from zero to 10,000 network access service lines.
88 Within this band we would also like to establish a linear calculation for the determination of the subsidy as opposed to the two bands with a steep decline from one band to another.
89 This slide tries to demonstrate the impact of the use of a dual band and where the independents fit on this. First of all, I will draw your attention to what appears to be little blue tents or triangles. Those are the independent company wire centres. There are 59 wire centres in the OTA and of those 59, you can tell that 90 per cent of them have less than 3,000 access lines. There is a great clustering around the 1,500 network access line -- the line that is indicated in green.
90 So we have a high concentration below the 1,500 as well as around the 1,500 network access lines. If we were to adopt the structure of the ex-Stentors as presented in the Public Notice, the red line would indicate the monthly subsidy for each of those wire centres, and it's the monthly subsidy as a total, so multiplying the exchange size or the wire centre by the 1,385 and the 1,580 respectively. When we hit the 1,500 or 1,501 -- and actually that first independent is, I believe, 1,520 access lines -- the subsidy drops from 20,000 to less than 10,000 and this is not reflective of what is actually experienced by the independents as far as costs.
91 Amongst the ex-Stentor, the situation may be that within that homogenous band of 1,500 to 8,000, there is a consideration that there is as many 8,000 wire centres or NAS wire centres as there is 2,000. Clearly within the OTA membership we do not have that ability to average the larger wire centres within that band to the smaller wire centres amongst companies, and in fact even as an OTA aggregate there is hardly any at the 8,000 level.
92 The proposal that we talk about then when we talk about linear is simply a formula that can be quite easily implemented and it would consider still a fixed amount, up to 1,500 network access lines as a base. From that point on to the 10,000 it would decline on a pure linear basis.
93 The green line in this slide indicates the linear subsidy proposal and compares it to what the CRTC proposal in PN 2001-61 provides as a very steep drop off or a cliff for having that extra one working service line.
94 The further recommendations is that we establish a five-year transition period for the OTA member company and the five-year transition would provide for an annual percentage adjustment from the existing contribution subsidy to the proxy subsidy.
95 During that five years, we will have annual local rate increases as discussed earlier, top set them, and that anytime during that period a company may, if they have the resources, implement full use of Phase II costing subject, of course, to Commission approval.
96 Also we would like to provide a subsidy to high-cost serving areas single line business service where the PES costs plus the CITC proposed adjustments, exceeds the national average business line rate for band G.
97 As we leave the subsidy, I would like to now talk about the direct toll component that was also addressed in the public notice. To do that I would like to first discuss the nature of direct toll investment and the cost.
98 Direct toll consists of assets purchased and expenses incurred on behalf of the long distance carriers or the IXCs. It consists of switching and transmission plant and the facilities required to connect all the CITC customers to the toll network. This is part of the Canadian toll network.
99 In these situations, once connected, the IXC retains the profit of the CITC investment and we are proposing that they should also retain the risk of the CITC investments. Through decisions in the past and through our current framework the Commission does recognize that direct toll is for the benefit of the IXCs and we ask that that continue.
100 Further background is that the vertically integrated ILEC-IXCs, is what I will call them, incur costs similar to the independents to aggregate the toll traffic from all their exchanges in a region to that regional toll switch.
101 The competitive IXCs are then charged an average switching and aggregation rate by the vertically integrated ILEC-IXC.
102 The ILEC-IXC does not charge a surcharge for traffic from or to the vertically integrated IXC's high-cost service area exchanges. However, they do pass on an additional surcharge for traffic to and from our high-cost serving area operated exchanges.
103 Our recommendations then for the direct toll has three critical requirements. The cost or the determination of the direct toll should continue to be calculated using an imbedded cost model including a reasonable return on our investments.
104 The CITC should be guaranteed to recover 100 per cent of these costs through an annual true-up mechanism. We should not be at risk.
105 And finally the IXCs, including the vertically integrated ILEC-IXC, should not be able to permit or should not be permitted to levy any form of surcharge on toll traffic originated or terminated from a CITC.
106 The current vertically integrated practice of passing the direct toll charge plus 25 per cent to the competing IXCs in the form of a surcharge is anti-competitive and it discriminates against those Canadians served by the CITCs.
107 Our proposal then is to freeze the CITC specific annual direct toll revenue requirement at the 2001 forecast Phase III level.
108 We should adjust the annual frozen contribution requirement for inflation and exogenous events,including direct toll traffic growth which is greater than 5 per cent.
109 We should incorporate an annual true-up mechanism or an adjustment and replace the per minute recovery method with a per trunk or per DS-0 charge as a recovery method.
110 Finally, we should prohibit the vertically integrated ILEC-IXC from passing the CITC direct toll charge in any form of surcharge to the competing IXCs, rebillers, resellers, or even directly to the customer.
111 Network access is directly parallel to direct toll. In this situation network access again is the assets purchased and the expenses incurred on behalf of the network service providers, largely for regional or national data circuit connectivity to branches within CITC territories.
112 It consists of bandwidth management, equipment, channel bank and transmission plant and facilities required to connect all CITC network customers to the network service provider's network.
113 As it parallels in nature to direct toll proposal parallels, we would like to freeze the CITC specific network access revenue requirement at the 2000 Phase III actuals. Again adjust the annual frozen requirement for inflation and exogenous events. We feel that there should be no further modifications of settlement methodology currently in place between OTA and Bell since 1998. We have had a working model which includes the annual true-up mechanism and it allows us to recover the annual costs through a per trunk or per DS-0 tariff.
114 Finally, this does not happen yet, but we want to ensure that there is a mechanism or a statement that prohibits the network service provider from passing the CITC network access tariff in any form of surcharge again to the network customer.
115 Finally, the Commission invited us to discuss other items or other issues of concern. One specific or one very important issue to the independents is the five-year duration, or duration of this regulatory regime that will be left untouched.
116 OTA proposes that the Commission implements the new regulatory framework, including the price regulation regime for an initial period of five years. That would be January 2002 through December 2006. We request no modifications to the framework during the five-year period.
117 We suggest that a review of the framework and components prior to the end of the period could be done through a Public Notice process at that time.
118 The OTA supports the five-year period for these reasons. First, it permits a smooth transition from rate-of-return regulation to price regulation. It will give us the incentives during that time period, or the ability to use those incentives in place under the new form or regulation.
119 Second, it creates a stable and predictable environment for the CITCs to operate. In the past four years or five years since we have been under federal regulation, there has been many fine tunings to our regulatory framework. When compounded with our industry being in flux as far as technologies, it becomes very difficult to manage our companies as well as comply with the regulatory adjustments or even participate in regulatory proceedings during that time. Again, we are managers in many cases that must also run our small companies.
120 Finally, the future price regulation regime proceedings relating to the large ILECs will conclude prior to the proposed five-year review of our framework. This of course assumes that the proceedings going on right now at the price cap will set up another four-year period. This will put us one year beyond them.
121 As a conclusion, each of the elements in the proposed frameworks are independent -- the direct toll, the network and the subsidy requirements, as well as the filing requirements.
122 When reviewing proposals in the coming months, the financial impacts of all these components should be reviewed on an aggregated basis.
123 Again the five-year no adjustment period is necessary for the independents and the CRTC to fully experience the benefits of a simplified form of regulation.
124 That concludes our presentation. Thank you.
125 THE CHAIRPERSON: Thank you, Paul and Tim. I think perhaps we will have a few questions.
126 Commissioner McKendry.
127 COMMISSIONER McKENDRY: Good morning and thank you for your presentation.
128 I just had a couple of questions that I wanted to get some additional comments from you on and perhaps I could just turn you to page 9 of your presentation this morning.
129 I noticed in there you made the comment that there are limited opportunities for the independents to become more efficient and innovative.
130 I wonder if you could expand on that a little bit to help us understand why those opportunities are limited for you?
131 MR. DOWNS: I think over the past five years, as I mentioned, we have worked together in trying to find solutions for doing common activities together such as billing and a number of others and we have implemented through the member companies a number of those. I think one of the reasons is it many ways the isolation of the companies. In an ideal world if we were all clustered together we could very quickly look at methods of connecting and joining all of us together and look at even greater and greater efficiencies as we went forward in switching and everything else.
132 So one of the big ones is that because of the isolation of a number of companies that is not possible. There still are some efficiencies, as I mentioned, that remain and some of those are directly linked to the proximity of other companies. So there are some, but they are limited I think in nature as to what we could do.
133 COMMISSIONER McKENDRY: So the key factor is the isolation factor, the fact that you aren't linked to other companies. That's the hurdle for you in terms of gaining or making any more significant gains with respect to efficiencies.
134 MR. DOWNS: Certainly in terms of the significant factor, yes.
135 COMMISSIONER McKENDRY: Just let me then ask you about a comment, some of your comments, on the next page of your submission where you talk about inflation factor, changes in GDP, and so on. One thing you didn't talk about in a price cap approach, or a price regulation approach, is a productivity offset which is inherent in many price cap or price regulation regimes.
136 What are your views on the incorporation of a productivity offset?
137 MR. DeWEERD: For the introductory period or for the initial period of transition from the rate of return through to the price cap, we felt that at this time it would be more appropriate not to include the productivity offset but rather allow that to be part of the incentive to retain those incentives for the initial period. That would be, I guess, part of the package, adopting a simplified form of regulation but then permitting the CITCs to reap the benefits of that through incentives and not applying a productivity offset during that period.
138 Even the idea of quantifying a productivity offset for the independents may be difficult on the onset of the regulation period.
139 COMMISSIONER McKENDRY: So I take it the way you are saying you anticipate there would be productivity gains, but that that should accrue to the shareholders of the company, the owners.
140 MR. DeWEERD: Right. As we have indicated we believe they are limited. The possibility of productivity or synergies is limited already. So as an incentive that may be the best way to incite us to move in that direction.
141 COMMISSIONER McKENDRY: Okay, thanks.
142 Then I take it on page 13 though that you think that there should be a safety net left in place where you could seek local rate increases under a price regulation regime if I take it something unforseen occurred.
143 MR. DeWEERD: I think the danger always with going into a new form of framework is we are not sure how this will pan out during that five-year period. There should be the opportunity for certain companies, if they find that in meeting the basic service objective as currently in place, or even if the basic service objective is enhanced through another proceeding, that they be given the opportunity to come and say, "This isn't working. We do need more financial resources to make this work in order to ensure the quality of service for the customer".
144 So that opportunity or that window should always be open. Of course, it will require a full Commission approval of any of those increases and probably more scrutiny in the actual company.
145 COMMISSIONER McKENDRY: Thanks very much.
146 Thanks, Mr. Chairman.
147 THE CHAIRPERSON: Commissioner Wilson.
148 COMMISSIONER WILSON: Good morning. I am just going to follow up a little bit on some of the questions that Commissioner McKendry asked with respect to the limited opportunities that you talk about and the rate increases that you mention on page 11.
149 Have you explored -- I guess on page 11 you are suggesting that you are going to go to $22.75 in 2002 and then each year thereafter an additional $3.00 per month so that by the end of 2006 your monthly rate would be $34.75. Is that --
150 MR. DeWEERD: No. Actually that is only in certain situations. Probably the detailed overview in the final submission will give greater detail on that. That is only for the companies who receive less subsidy under the new regime than they would under the old regime. So if they are trying to replace their revenues that they can do it through local rate increases during that transition period subject to a cap of $3.00 per month per year.
151 COMMISSIONER WILSON: So that's the maximum increase.
152 MR. DeWEERD: Right.
153 COMMISSIONER WILSON: When you talked about the limited opportunities and the sort of limited productivity gains just a couple of minutes ago, what kinds of things do you do as a group of telephone companies in terms of searching for efficiencies and productivity gains? Are there opportunities that you can pursue as a group of companies and if there aren't maybe you could explain just a little bit more clearly to me why these opportunities are so limited on an individual company basis?
154 MR. DOWNS: First of all to answer your question on what has happened to date we, as a group of independents in order to address our local billing to customers, we formed a company that would do that on behalf of, I believe, it's 17 or 18 of the Ontario independents. That was done because those companies at that time were looking at what they had to do with their existing billing machinery, their equipment, their software and their hardware and upgrades were required.
155 So it was decided that the most economical to do it would be to form one company to do that and to put all the billing through it. That's an example of something that has been done, that has worked well, that has looked at reducing costs. Part of the trick in that, of course, is that once you do that you are back into the issue of all right, if we are going to have this be a true billing system and operate it effectively, we need to get connected to that system. And so you are into connecting all of those companies back to wherever that main software and hardware are so that when a customer comes in our office we are able to pull up right on the screen and talk to the customer about their information for their local bill and also their long distance bill. So we are able to do that in an active time, but it has resulted in efficiencies and savings.
156 The difficulty again becomes how many of those things are possible if you were to look and say let's examine doing that for a switch, as an example. Again you are into what is the cost of linking all of those companies in order to move forward with the concept of having one switch. For some it's an easier answer than for others because of their location.
157 COMMISSIONER WILSON: For the ones that are all grouped together, for example.
158 MR. DOWNS: That's correct.
159 COMMISSIONER WILSON: It could potentially run off the same switch.
160 MR. DOWNS: Yes.
161 MR. DeWEERD: Just one issue on the switch. That's obviously something that may evolve. The difficulty in the switch is once you have cleared the hurdle of proximity and connectivity -- and the technology now allows switching to be done over longer distances from a host switch -- the difficulty still rises and the legacy systems that each of the companies that are close to each other have and the communication between those switches, from a technical standpoint, does not come cheaply, the common language, for example, currently referred to as GR-303 is not an insignificant cost nor is the transition to one switch. That will not happen overnight. That would take the five-year period. That's part of the contemplation of if you give us a form of regulation or a framework for five years let us work unincumbered, untouched and hopefully we will see results at the end of that.
162 That's our goal as much as it is yours.
163 COMMISSIONER WILSON: That sort of brings me to my final question which is with respect to the five-year period. There are probably some that would argue that when you set the time period to make a transition, especially with the rate of change as it is now is too long. If you look at a price cap regime of four years, some would argue that four years was too long, that maybe two years would have been more appropriate.
164 So I am just wondering how firm do you really feel five years has to be or is there some way that there is an opportunity for some of the issues to be revisited during that time period depending on how things unfold?
165 MR. DeWEERD: I would say because of the nature of investments that are made by the independents and the sheer dollar value concerns that we are dealing with, five years is necessary to create that stable environment for us. We will already be struggling with the technology changes as we go to soft switching potentially.
166 So I think that giving us a five-year period is very important. I think on the other side as well, from the Commission standpoint, five years is necessary, I guess, for the staff to get used to this new form of regulation as well or to modify their attentions to the price framework as well. I don't think you will receive any benefits if we do a two-year period and we are sitting back at this table 18 months from now because the two-year period is up. There is no benefit.
167 COMMISSIONER WILSON: Thank you.
168 THE CHAIRPERSON: Commissioner Demers.
169 COMMISSIONER DEMERS: Thank you, Mr. Chairman.
170 Just maybe following on Mr. McKendry's question. I think I heard comments on whether all your companies or the customers you serve were in high-cost areas. Could you elaborate or comment more on that?
171 MR. DOWNS: I think, as we identified near the beginning of the presentation, that all of our customers are in high-cost serving areas.
172 COMMISSIONER DEMERS: Could you describe more? When looking at the map, it seems that some of your enterprises or companies are in areas that are less costly to serve.
173 MR. DeWEERD: Yes, there are obviously different variations. As indicated, some companies are located in the Canadian Shield Region which is problematic as far as laying plant facilities. That's one of the higher cost areas than the average. The other areas, even in Southwestern Ontario, which maybe you are alluding to that that is not as high cost, the difference there is the area served by the independent in those situations, if it's 800 square kilometres their customers are scattered throughout the 800 square kilometres. That is not on a band of a major highway that is located throughout that whole area. So you have to have facilities throughout the region even subject to the restrictions or the criteria for the high-cost serving areas of the ex-Stentors. All OTA exchanges or wire centres currently fall into that definition once the loop length issue is extracted or is excluded. Our concern of moving to a 10,000 in that situation, for example, is that we have exchanges that are very close to that and for no reason will they not be high cost if they grow to 8,000 access lines.
174 There are different variations of high cost. There are different components as to what determines them as high-cost areas.
175 COMMISSIONER DEMERS: So there was reference to -- maybe it was your company that is close to London. So it's not because it's close to London that it's not in a high-cost area. I think that is what I gather from what you say.
176 MR. DeWEERD: That's exactly correct. In fact, proximity to a large centre means that the quality of service that you have to provide far exceeds the basic service objective as established by the Commission. Your customer demands that.
177 The other issue is that in a territory such as the one that I manage we have no village, we have no corporate village let alone a town in our serving territory. We have no concentration of population beyond 150 people or households. So all the towns and villages are serviced by one of the large ILECs.
178 COMMISSIONER DEMERS: Maybe on that point, but from a different perspective, there was suggestion concerning the seasonal customers and maybe you could comment on why it has an important effect on your companies rather or in comparison to a larger serving company.
179 MR. DOWNS: For a number of our companies, that is true, the seasonal effect is fairly significant with a number of companies and the reason we bring that up is we believe it's a factor that has to be taken into account. We brought it up in our comments here in relation to the $22.75 per month. The reason is in those cases where you have a large seasonal base of customers -- and in some companies it represents about 40 per cent of their customers -- those customers leave in the fall and the revenue, therefore, the company receives during that period is a lot less than it would be if they remained. Most of them go on to what is called a seasonal rate. They pay a flat rate of $50.00 for the six months and then they come back and restore their service.
180 We are also beginning to see I guess the effect of cellular coverage where it is available and customers now coming back and not even wishing to restore service, but they are simply saying that they have their cellphone and that's fine. They will just use it while they are at the cottage. That poses further problems, of course, because we have to have services down into that cottage area to provide service for those customers that want it, and when the customer says they have elected not to, that they are going to stay with their cellular, then that just adds to the cost problem because we are still incurring the cost to serve that area.
181 COMMISSIONER DEMERS: Thank you.
182 Well, I am sure in the areas you describe there is not a gold rush on if there were, or if there is some competition. Is competition local competition I am thinking of, subject to the five-year -- what is it, I forget the word you call it -- before the new type of regulation would be put into force. There would be no competition in your areas.
183 MR. DeWEERD: No, we are requesting that there not be local competition during that duration. There already is, as Paul has indicated, through the wireless providers, through cellular, there is a form of competition already. As far as local competition, that's obviously a Commission agenda item whether they feel that there has been success yet in the urban areas to justify expanding that to our areas, but we are requesting that there be no local competition during that time period, that no proceeding be initiated.
184 COMMISSIONER DEMERS: You mentioned cellular. For example, on Lake Huron, or what I would refer to your systems in Western Ontario, any of your members provide cellular phones in that area?
185 MR. DeWEERD: No. Currently Mobility and Cantel are the only providers still of the cellular phone service itself. There is the resale arrangements, but not an actual carrier of per minute traffic.
186 COMMISSIONER DEMERS: Thank you.
187 You have also referred to the complaints and saying that we should make it what we follow as quality of service and rise it to 30,000 subscribers. How efficient or how effective -- you have referred to the fact that it serves your customers well, but on what basis or criteria should we evaluate the fact that maybe there are a few complaints. I would gather from what you say that it's because there are a few complaints that you don't feel some of your members should cross on the other side and have to report in more details, but could you give some indication as to the quality or the number of complaints? Give me a sense of what is the quality of service of your member companies.
188 MR. DeWEERD: I believe probably the best department to look at is internally at the Commission itself on the complaints group. I can speak for my company because I know the statistics and that in the last five-year period, I believe, there has been one complaint that the Commission has done a transfer of that situation and that really arose, to be honest, out of the former regulatory authority.
189 So I believe that the department that deals with that within the Commission would have the best statistics as to how much complaints you receive from independent telephone served areas or customers served by the independents. I believe that it's virtually non existent, that our customers are quite pleased. I am sure each company has their thorn customer or customers, but it's so few and far between that to invoke a more onerous process, one that is designed for the large companies, would be burdensome.
190 And again, this is one -- extending it to 30,000 was a housekeeping type of recommendation, that it's been successful, we believe from our perspective, because we don't hear too many complaints and just that a company will, over the next four years potentially -- they are not at 25 yet, they are still, I believe, at 21 or 22, but over time will grow beyond that threshold and we are just saying or suggesting that maybe we could move that threshold forward to avoid the additional reporting if we are trying to keep this simplified.
191 COMMISSIONER DEMERS: So if you take the example of the company you operate, you get the complaints.
192 Thank you.
193 MR. DeWEERD: Thank you.
194 COMMISSIONER DEMERS: Thank you, Mr. Chairman.
195 THE CHAIRPERSON: Commissioner Noël.
196 COMMISSIONER NOËL: Two short questions. On page 16 you say that you recommend modifications to the proposal to reflect, amongst others, the lack of volume purchasing power.
197 Have you envisaged bundling your purchases throughout the association either through a company like the one that does your billing or is it a possibility that you could bundle your purchases to obtain those savings?
198 MR. DOWNS: We have at times looked at doing that and at times, in fact, we have done that. In the case of when we were putting in equal access software we did exactly what you are saying. So as I say we have tried in the past where it's a possibility to do that kind of volume purchasing.
199 I think what we are saying here in addition though is that even with that the size of the purchase that we are looking at versus a Stentor member company is quite significantly less and, therefore, the discounts that we see, even though we do see some, are not at the same level that they would experience.
200 COMMISSIONER NOËL: What you mean is that being together you are still small.
201 MR. DOWNS: Yes, that's right.
202 COMMISSIONER NOËL: The other question -- I am coming back to what Commissioner Demers asked about the cellphones. I am a bit puzzled and I will do it from my example, or my standpoint. Of course, I am in the Bell serving territory and until last week I enjoyed a party line in Magog. Now, we are moving to a full private line with all the bells and whistles, but the cellphone never gets there. I mean, there is no way around a lake you can get a cellphone to work. It just doesn't work.
203 So do you have such a population that the cellphone operators put the towers in and make it work? It doesn't work in Magog.
204 MR. DOWNS: No, you are absolutely correct and it differs from company to company. There are companies where they have exactly the situation you are saying. They have seasonal customers and maybe at best there will only be one provider of cellular. It maybe Rogers AT&T and Bell Mobility will not cover that area or vice versa. But there are other areas, as was referred to earlier as an example, along Lake Huron shoreline or down along the St. Lawrence where cellular coverage is operational and in those cases where more and more cottagers are tending to just use that as their form of service.
205 COMMISSIONER NOËL: Thank you.
206 THE CHAIRPERSON: Thank you.
207 I just have a few questions. Some of the others ones have sort of picked up on some of the issues that I would have asked about.
208 Early on in your presentation you talked about rate of return and asked for a bit of a clarification on the rate of return issue and asked whether a rate of return is possible.
209 I am always hesitant to respond to that kind of question whether something is possible because I suppose anything is possible.
210 I guess from my own point of view -- and I am not sure how the others feel -- I am not sure I would characterize the current scheme as rate of return because it's kind of a quasi rate of return with a proxy sort of thing in terms of the contribution in the subsidy and, you know, the regime we put in place in terms of as long as the contribution didn't go up we weren't going to scrutinize this too much and I guess the problem we had is our fond hope was that it probably would be the rare case where expenses would go up driving the contribution up and it turned out to be more the rule than the exception.
211 So I am not sure I would even characterize the current scheme as rate of return in the classic sense. In fact, I think our view is that ideally we would like to get to some form of price regulation which we think would probably be more efficient for ourselves and for the companies.
212 So having said that, I guess a couple of questions that I have. Let me pick up by going to page 15, I guess, of your presentation. I guess I am picking up on the first bullet here. There are a couple of threads here that sort of go together, and bear with me for a second.
213 Number one point, you talk about: "Any model using non-company specific data must be adjusted to reflect the unique differences between companies".
214 I take your point on that. Now, if we flip over to 16, you talk about: "The adjustments to the average national cost component to reflect..." and then you list the points, "rural and remote serving areas", and so on.
215 And then on 18, you talk about the: "15 per cent mark-up in costs to reflect OTA companies fixed and common cost components such as insurance, auditors, legal", and so on.
216 It strikes me that all of these issues sort of go to the cost question of the operating costs of the companies. I don't know, it has always struck me that why should we necessarily assume that a bigger company is necessarily more efficient than a small one? Even if we take a look at the Stentor companies, or the ex-Stentor companies -- I am not sure what we are going to call these companies any more, the bigger telephone companies -- if we look at the numbers and our experience with the price cap regime that we have in place now, my sense of it always was that a company like New Brunswick, for example, was probably more efficient than Bell and a company considerably smaller than Bell.
217 I wonder whether or not we shouldn't -- we seem to be discussing this issue here with the independent companies. On the starting point the presumption that these companies must be less efficient than bigger companies -- and then you list a number of the issues here where the 15 per cent is probably not appropriate because you have insurance, auditors and legal, but on the other hand, there must be a number of components which you are operating with that the bigger companies don't carry.
218 You probably, for example, don't have a big human resources department, which I suspect Bell has and there is probably a lot of other operational aspects that Bell operates under that you don't have. It's true, you operate in smaller territories, but the map also shows that many of the companies are clustered and you have talked about some of the issues that you have been able to deal with in terms of doing and I expect there are probably more things you can do. Whether you are a regulated company in the telecommunications business or selling cookies, or whatever, you are going to have to continually get more efficient as days go on.
219 So I am struggling with how we can best come to grips with this whole question of the relative efficiency of these small companies in terms of dealing with an appropriate regulatory approach because I guess I am having difficulty accepting just as a matter of fact that because we are small, we are less efficient than Bell or Telus -- actually you list a bunch of companies and suggest that we compare them with a subset and I see everybody listed there but Bell really.
220 How can the Commission come to grips with this question of efficiency of these smaller companies to really come to grips with an appropriate benchmark to set this regulatory scheme in place?
221 MR. DeWEERD: That's probably the question of the day. I am not sure what the solution would be, but first of all -- and maybe it's in words -- we believe as independents that we are efficient, first of all, but that our costs are higher. Maybe it's that we don't have the efficiencies of scope is maybe what you are alluding to. As companies we feel that we are operating as efficiently as we possibly can within the areas that we serve.
222 However, subject because of the technologies or the limitations, our costs are higher in certain situations. You are right, there are other costs that we do not incur, as you have indicated, the human resources. However, we have a fixed cost of human resources. If we need one and three quarter persons, we may still have to have two people to do servicing instead of scaling down to one and three quarters where a larger company can right size much more aptly.
223 With the purchase of a switch, for example, the last time many of the companies purchased a switch the technology was not around to do the distance connectivities. The facilities weren't there to connect each other nor was the switch translation, the language that now communicates or translates between switches is only recently available in a cost effective manner.
224 So I guess to answer your question, how do we address that, or how does the Commission determine what is the right subsidy for each individual area? Yes, and less than a long shopping list of: Do you experience this situation or do experience, you know -- is your loop length between six and seven kilometres, your average loop length, or is between four and five? If there was a whole shopping list of all the criteria or all the parameters that each company operates within, I think we could determine what the efficiencies would be.
225 Short of that, I guess the proxy model is the only solution with the main ones highlighted, and that's what we have really tried to do here, is to indicate that the areas that we serve, for example, do pose high costs, whether it's operating in Shield Regions or heavy bedrock areas where 100 per cent of your customers require service through telephone polls that are constructed on bedrock at a huge cost per poll, or you have to sign agreements with the local power utility company for rental of their polls.
226 The other one is that the purchasing power is a tangible large ticket item. We feel that the majority of all costs, whether an ex-Stentor or small ILEC, deals with the equipment, the investment. It's a capital-intensive industry. Those costs for us are inherently higher. We do not have the liberty of having, up until a year and a half ago, a related company to purchase our equipment from, or the purchasing power of that.
227 Even as the Commissioner on the right, Ms Noël, indicated, even when we aggregate all our purchases, if we could aggregate them all at the time period which would be required for volume discount, we still only service 95,000 access lines as a group. That's smaller than a band B exchange.
228 So it's a matter of do we quantify the scope of each one of these parameters, what the financial impact is, and unless we have those details, to be honest, even on a comparison, even when developing a proxy, if we don't have the specific components in the PES costs when we propose mark-ups to a national average, or we propose, as we have indicated in here, maybe we should be using a subset of the ex-Stentors. Any change or modification is a subject of argument. Without those actual costs, it's going to be difficult for us to quantify. If after this proceeding we make our proposal on the 20th saying that our PES costs are "X" per cent higher than the national average for these reasons and the Commission turns around and says, "Okay, now why is it that percentage? Quantify it". Without doing a full Phase II, to be honest, we are not able, in many cases, to quantify it because we don't know what those components are for the ex-Stentors. We are trying to develop proxy that we can't see what we are comparing to, to be honest, other than a whole number.
229 THE CHAIRPERSON: Well, setting aside the Stentor, or ex-Stentor companies, I guess, just taking a look at the contribution or subsidy per NAS comparing the different companies existing under the current scheme, I am struck by a rather significant difference between -- and maybe this is an unfair question because you are the first presenter and we haven't talked about some of the companies in Quebec yet -- but I am struck by a rather marked difference between the average subsidy per NAS of the Quebec companies and the Ontario ones where the highest rate is about a little more than half what the highest rate for the Ontario companies is, and I guess the particular company being yours, Mr. DeWeerd.
230 In fact, all of the subsidies in Ontario tend to be significantly higher than the ones in Quebec and I guess intuitively I don't have a sense for why that would be. I mean, I am from Nova Scotia and I am not all that familiar with the Southwestern part of Ontario, but I have actually driven that area from Bayfield up to Port Elgin and been through that area so I am a little bit with it, and I don't know exactly how that would compare with the comparable communities but I am struck by a rather significant difference.
231 How would you explain that, that the companies that the OTA would be so significantly higher in terms of subsidy requirement here?
232 MR. DeWEERD: I think again it goes to two real main components, I think. One is the area that you serve will have a bearing. Quadro, for example -- using my company -- serves, as I have indicated, 800 square kilometres and 3,600 residential access lines. That's four people per square kilometre. Now envision that: four households for a grid of a square kilometre. That's a lot of copper to service those people. The switching investment may be the same, but the copper is huge. For the service people, the geographic area to cover to service on a regular basis is larger. So that's one issue.
233 The other is the timing of the investments. Under rate of return inherently it's made -- when you incur an investment and if your rate of return is 10 per cent, you are guaranteed on a million dollar investment $100,000 net income after tax. If you have made that investment recently and your base is un-depreciated, your requirement, your revenue requirement under the rate of return model is much higher than if your asset is ten years old and 50 per cent depreciated because that same quality of service served by an asset ten years old versus a brand new one results in a $50,000 difference, if it's a million dollar investment at 10 per cent rate of return. So it's the timing of when that investment was made.
234 I don't know the specifics of the Ontario companies versus the Quebec companies, but that potentially, if you were to review when the recent investments were made. Again, going down that shopping list of the different issues or scenarios or factors of the areas that you serve create a different subsidy requirement. I think you would see that the results come out as to why it's that way. Is it an issue of inefficiencies? I don't believe so. I believe the decisions the independents made historically have been the correct decisions, to serve their customers, to meet the service objectives even before the Commission laid those service objectives out.
235 So yes, it varies according again -- just as a wrap up -- to the timing of the investments, under rate of return, that's an inherent issue with it, or problem maybe with rate of return. It also deals with the geographic area that you serve, the entire demographics, not just the geography, but the population density, something not from a costing point, from a revenue, even your populations per capita income, to determine penetration rates of second lines or optional services. There are so many variations and to probe them to support why we are different, I am sure that they will support the different levels.
236 THE CHAIRPERSON: I guess I would have thought that there would probably be a few anomalies in the distinctions between the companies like perhaps yours, for the reasons that you have stated, but it surprised me that there was such a distinction in general between the Quebec companies and the Ontario ones, that the Ontario ones should be so significantly higher in terms of the subsidy requirement.
237 I would have expected just intuitively that there probably would have been many similarities because of serving relatively small areas and that we might have seen more similarities between the smaller towns in Ontario and comparable towns in Quebec, but it doesn't seem to be the case. Perhaps we can pursue that later on.
238 When I go over to page 20 of your presentation today, you have proposed, I guess, one band for the independent companies wire centres with zero to 10,000 NAS. I hadn't thought about this, frankly, until I looked at your chart on page 20, and I had a question going into this about what you meant by your linear subsidy proposal which you have graphically shown on page 21.
239 If one was going to look at an alternative here that would be perhaps be different than the model we established for the larger companies, your graph seems to suggest that maybe a 3,000 cutoff would be appropriate and treat the six companies that go beyond that as perhaps some sort of anomaly or -- I mean, I am struck by the fact that if you take your cutoff at 3,000 you include virtually all the companies.
240 Why have you made the proposal that you did based on capturing really all the companies, I guess?
241 MR. DeWEERD: Yes, I guess the starting up, the zero to 1,500, since we had a concentration of wire centres that probably represents the smallest to the large ones that that mirrored to some extent using a zero to 1,500 band much similar to the ex-Stentors, not from a cost perspective, but at least that grouping seemed appropriate.
242 We thought maybe the Commission would be pretty hard pressed, to be honest, to leave the ex-Stentor, the model presented of a zero to 1,500 and a 1,500 to 8,000. So we felt that a more palatable one for the Commission purposes would be a linear one that recognizes from 1,500 to 8,000, and as our proposal in the case to 10,000 that it would be more, as each additional or incremental line -- a wire centre as it grows that incrementally the costs are less and so that the subsidy should be less. So the subsidy dollar on a linear basis per customer, that extra customer results in a less subsidy than the previous one.
243 If you are proposing that we fix a band at 3,000, or that we should maybe consider that, yes, the demographics would show that, but we are also trying to recognize something that fits within the scope of the PN.
244 THE CHAIRPERSON: I think those are all our questions for now. We may want to come back and pursue some of these issues more generally once others have had a chance to have a presentation. There is always a danger being the first one when we focus all the questions on you and your proposal.
245 I think what we will do is go to the next presentation and then we will take our morning break.
246 So the next one is SATAT.
PRESENTATION / PRÉSENTATION
247 MR. LETARTE: First of all, I will introduce myself. My name is Hugo Letarte. I am working as a consultant for SATAT and to my right Stephen Bray. Hopefully my voice will be fine with you because this is the only voice you are going to hear, at least for the presentation part for SATAT.
--- Laughter / Rires
248 MR. LETARTE: As an introduction, first of all SATAT, in the name of its ten-member companies which are all independent telephone companies operating in rural Quebec, wishes to thank the Commission for this opportunity to express our views on the development and implementation of a new regulatory framework for the small independent telephone companies in Canada.
249 The roundtable will certainly help participants in the development of their respective proposals and it will certainly prove to be an efficient step in the process.
250 We recognize at this time that there are many parts of the current regulatory regime that need to be modified. However, SATAT submits that everybody must bear in mind the unique characteristics of the small Canadian independent telephone companies so that their subscribers are not taking as hostages of a new regulatory framework that would not meet their needs.
251 In order to maximize the use of the time that is being offered to us today, we will focus mainly our presentation on the most important aspects of -- I guess the most important issues for our members and the issues that will not be covered today, or that will be covered less deeply, will be so in our July 20th filing.
252 So to start with, we will provide you with our comments on general issues in the Public Notice.
253 First of all, SATAT members recognize the importance of efficiency, but note that they have limited opportunities to realize such efficiencies for some reasons that have already been discussed, but mainly the main size of the companies and the fact that they serve rural territories only.
254 SATAT members already offer reliable and affordable service to their subscribers and will be able to continue to do so only if regulation fits their needs.
255 SATAT supports a simplified form of regulation -- fully supports that -- that would reduce the regulatory burden for its members, but only if this new regime recognizes their unique characteristics again. The fact that we serve only small -- we are all small-sized companies, going from 260 NAS up to a maximum of 18,000 approximately. So globally the ten members in SATAT represent approximately 40,000 NAS.
256 The fact that we are serving rural territories only and the largest cities that a member is servicing is approximately 5,000 in population, total population. For 90 per cent of the companies, only one switch is in the company to serve the whole territory. So these are some characteristics of our members.
257 A new simplified regulation should mean minimum filing and reporting requirements. So we would support no more rate of return filings for subsidy requirements, no more depreciation filings also, but we would certainly support continuing filing, of course, our annual audited financial statements so that the Commission could, I guess, monitor the overall financial health of the companies. There would still be filings for the tariff services as will be detailed later.
258 To monitor the quality of service, SATAT would also support the continuation of the simplified method established in Decision 96-6 which is basically based on complaints procedures.
259 As for the transition period, we would support also a five-year transition period to move from the actual to the new regulatory regime. Why five years? I guess because the transition must be as smooth as possible in any aspects of the changes to be established for the independents.
260 Only basic local services should be subject to price regulations and each year these services could be increased, subject to the Commission's approval, by inflation and exogenous factors.
261 Our main comments for the subsidy requirement issues. SATAT is in general agreement with the use of a proxy methodology to calculate the subsidy requirement for its members. However, we note as a starting point to compare that using the CRTC proposed proxy, as was published in the PN, would imply that no SATAT member would realize a 12 per cent rate of return which is the actual mid-point of the authorized level.
262 Therefore, SATAT submits three fundamental principles that we will develop in the following slides, but which are the key principles underlying our proposition.
263 First of all, the proxy that is proposed in PN 2001-61 has to be customized because it is based on averages of the large ILECs, whether the cost component or the mark-up component and even the implicit contribution component. It has to reflect our true realities.
264 Second very important principle, a transition period has to be established if the new subsidy requirement generates less money than the contribution requirement entitled to be received under the current regulation. A third fundamental principle is that at any time during the transition period a parallel solution should always be available to the independent telephone companies -- and we will go more in depth in later slides on that principle.
265 So the first one, the proxy must be customized. If we start with the cost component, we strongly believe that the cost component of the CRTC proposed proxy has to be adjusted because it is based on the average cost of the large ILECs and thus incorporates variables such as volume discounts on the purchase of any materials or supplies, on services, equipment and copper and fibre. Also the fact that these average costs include implicitly the economies of scale that are available to these large companies, especially evident on a per NAS basis. By definition economies of scale are available to companies serving a large base of subscribers.
266 Also the larger the company, I guess, the more automated operations are available to these companies. So this also is another example of variables that are incorporated in the average cost.
267 Most importantly, I think, on these principles is the fact that with large ILECs both urban and rural subscribers benefit from these advantages. So I will take the Bell example for that matter, even if they are able to isolate high-cost serving areas to put them in specific bands, these bands still benefit from the overall economies of scale and the overall purchasing power of Bell Canada as a company. So even with that, when we compare high-cost areas in Bell territory and high-cost areas in our territory where we cannot benefit from these economies of scale, there is still a discrepancy in the comparison.
268 So not only small independent telephone companies cannot benefit from economies of scale and purchasing power, but their small size implies that every investment and expense is important, especially on a per NAS basis again. The switch example would be that -- I would take, for example, the DMS-10 switch which can serve up to 10,000 and even 12,000 NAS. The core cost of such an investment, which is a software, is almost invariable to the number of subscribers that are served by the switch.
269 So our company with 500 NAS has the same DMS-10 than the one with 3,000 NAS or the one with 6,000 NAS and the core costs of that switch is invariable to the number of served. So on a per NAS basis, of course, that major investment is more important the smaller the company, and if we extrapolate that example and compare the 6,000 NAS company with Bell, well then we just multiply the effect.
270 So because it is based on a national average, the CRTC proposed proxy underestimates the cost per NAS of providing basic residential local service in the CITCs territories.
271 We agree with OTA that the residential PES cost recently disclosed for band E by MTS, SaskTel and TelusBC which are all above the $45.00 and even $48.00 for one, indicate that the use of the national average for small tax paying CITCs, set at $35.85, might not be appropriate as a guideline.
272 So in our proposition on July 20th, we will recommend an adjusted cost component with supporting justification using the available information that will better reflect our members' realities and requirements.
273 The mark-up item. As for the cost component because it is based on a national level, it makes complete abstraction of the small CITCs particularities. Again, on a per NAS basis, when we look at overhead costs, whether they be administrative services, general insurance, audit fees, advertising or financial accounting, these are generally fixed and common costs that do not vary much with the size of the company and we still need a minimum requirement for such a cost. That minimum requirement may represent a greater per NAS amount for small companies. There is a minimum structure that you need to have to run the company and that minimum structure may be well over what the company could afford, but that's what it needs to run the company.
274 So again, in our proposition on July 29th, we will recommend an adjusted mark-up with the supporting justification using the available information that we are going to have at that time that will better reflect our members' realities and requirements.
275 For both the cost component and the mark-up, SATAT wished it had the comparative detailed information of the large ILECs in order to fully argue and precisely quantify the proposed increases. Again, as was mentioned earlier, if we propose a 10 per cent increase on the average cost, the national average, if we don't have the breakdown of what is included in these costs, it's hard to precisely quantify what 10 per cent means exactly. So because it is not the case at the moment, we don't have that information, we need further investigation before suggesting any such precise increases.
276 Another component of the proposed proxy -- the average residential rate. SATAT agrees with the use of the $22.75 national average residential rate in the proxy calculation and SATAT members will assume the use of that local rate starting on January 1, 2002. However, companies charging less than that amount should have the opportunity to increase their rate to that level without reducing the proposed proxy.
277 The implicit contribution in the detailed overviews that were filed on June 29th -- CAPTS, OTA, O.N.Tel and Northern and SATAT -- submitted that the CRTC proposed level of implicit contribution should be lowered to more appropriately reflect the reality of our members for two reasons mainly.
278 First of all, the actual revenues generated by such services in the SATAT members territory represent an average of approximately $2.000 per residential NAS per month, with a low of $1.00 and a high of approximately $3.00.
279 Secondly, even if SATAT understands the will to create an incentive to increase penetration of such services, despite the efforts that were being made and are still being made to increase that penetration level, the actual level is characteristic of the areas served by our members.
280 So based on these arguments, we would propose the following for 2002: set the deemed implicit contribution in the proxy calculation as a level that would better reflect the actual revenues generated by such services, and then gradually increase the implicit contribution over the transition period to account for that incentive to increase penetration level, but still to consider that even during the last year of the transition period that the characteristics of the area served do not generate an average of $5.00 per month per residential NAS.
281 As for the banding structure, we are of the initial view that the following banding structure should be established for the Canadian independent telephone companies. As we discussed earlier, first of all, the proxy for all the proposed bands should be adjusted to more appropriately reflect our realities, whether it be the cost, the mark-up or the implicit contribution. Then for the 1,500 to 8,000 NAS band, the proxy should start at or very near the zero to 1,500 NAS band proxy and then show a gradual decrease as the number of NAS increases.
282 We will use the following few slides to explain in more detail why we need a decreasing type proxy for that 1,500 to 8,000 band.
283 First of all, it's important to note that 100 per cent of our members at SATAT fall into the high-cost criteria, so that 100 per cent of our subscribers are located in high-cost serving areas, compared to 15 per cent approximately for the larger ILECs. So subsidies by definition are of greater need as a proportion of our total revenue base for us than for the large ILECs.
284 While SATAT may agree that wire centres serving between zero and 1,500 NAS may have homogenous costs, this is clearly not the case for wire centres serving between 1,500 and 8,000 NAS.
285 We even submit that there is probably less difference between two wire centres of let's say 1,505 and 1,495 in terms of cost than there could be between 1,505 and 7,000 NAS, but under the proposed banding structure, there would be no difference in subsidy requirements for a wire centre serving 1,505 NAS and one serving 7,000 while there is huge difference for a wire centre serving 1,495 versus 1,505
286 We also have to consider that most of our members have one wire centre. So the company is one wire centre. So from one day to another, because of a growth NAS of two NAS at the limit, their subsidy requirement could drop by 60 per cent from one year to another and that would certainly not reflect the true cost of serving two more NAS. I wouldn't suspect that their cost would drop 60 per cent at the same time and because the company is one wire centre, all NAS would receive 60 per cent less in subsidy from one year to another.
287 So clearly when we take into consideration all these characteristics, it would be our initial opinion that a decreasing type proxy for the 1,500 and 8,000 band, starting at the 0-1,500 band adjusted proxy, would best reflect the CITCs realities and best meet our needs. This would avoid subsidies of greater importance in comparison with our total revenue requirement. This would ensure that we don't have steep declines in subsidies over time so that the transition is as smooth as possible.
288 In our proposition on July 20th, we will propose a complete proxy and banding structure with supporting figures and justification.
289 So for an implementation on January 1, 2002, SATAT will propose that each CITC chooses one of the following options:
290 First path, it could choose a proxy. So that company would apply the adjusted proxy structure as proposed by SATAT January 1, 2002. Then over the transition period, over the five years, the proxy would be adjusted on a yearly basis to account for inflation and exogenous factors. That would be the simpler form of regulation for that company.
291 Or they could elect to go on Path B which would be the transition. So if the adjusted proxy structure proposed by SATAT was to generate less subsidy than what the company would be entitled to receive in contribution in 2002 under the current regulation, then a transition plan could be presented by the company to the Commission for approval using the following parameters:
292 In 2002, we would set the subsidy requirement at the level of contribution entitled to be received by a company under the current regulation and divide that number by the number of residential NAS in high-cost serving areas for that company, basically 100 per cent of its residential NAS. Then during the transition period, in a transition plan the company would present a schedule to gradually decrease the subsidy requirement for NAS over that five-year period in order to reach the adjusted proxy structure proposed for Path A during the last year of the transition period. So we will need the full five years to gradually go from the actual contribution down to the proposed adjusted proxy level in year five.
293 The transition plan would also propose a series of local rate increases to compensate for the loss of revenues caused by the gradual reduction in subsidies.
294 The third path that could be used by the independent telephone companies would be the alternative approach where we submit that the company could develop a full Phase II cost study and file for approval a company-specific subsidy requirement per residential NAS.
295 This company-specific subsidy requirement would be effective January 1, 2003. Why? Because all small companies -- and I am going to talk for SATAT here -- there is no Phase II cost studies that are taking place right now. So that company-specific subsidy could take place on January 1, 2003, and meanwhile in 2002 the company would use its actual contribution per residential NAS for that year.
296 Another important aspect of our presentation is no matter what path is chosen for January 1, 2002, and we strongly feel that at any time during the five years of the new regulatory framework, an independent should have the opportunity to perform a full Phase II cost study and present for approval a company-specific subsidy requirement for NAS if they feel the path chosen at first does not meet their needs any more in terms of, as we said earlier, the basic service objectives.
297 Subsidies for the business subscribers, independents should have the opportunity to fully recover their costs through proposed rate increases if they want to. Now, if the company proposes a business rate increase and the Commission was to refuse that increase then, and only then, should the company have access to a subsidy for its business subscribers.
298 For the direct toll and network issues, I would start by saying that we strongly believe that the CITCs are entitled to fully recover their embedded costs and their costs to supply these services. The independents' direct toll and network facilities are required by toll carriers to offer their services to the end-users and thus realize a profit out of it. While we are not toll carriers, we are not able to realize any profits offering the services to the end-users and because the independents must continue to maintain and invest in these assets, an embedded cost model would allow them to realize an appropriate rate of return while limiting the risk associated with these activities.
299 Direct toll and network is not a subsidy issue. It's an issue concerning the full recovery of the costs incurred to offer these services to toll carriers.
300 Our proposition for 2002 would be for both direct toll and network costs to freeze these levels at the 2001 approved level and then for 2003 and on, SATAT would suggest that a more precise embedded cost model be developed in order to identify the true direct toll and network cost of the company. An annual true-up mechanism should also be established to make sure that we recover 100 per cent of our costs in the offer of these services to the toll carriers.
301 As far as the recovery method is concerned, SATAT strongly suggests that a true-up mechanism be established on the originating and terminating minutes for the direct toll component and on the circuit quarter miles for the network so that the CITCs are not at risk at year end either because of a misleading forecast or because of a bypass. Basically, the recovery method should only serve to distribute the right percentage of our total direct toll and network costs to the right carriers to make sure that we recover all of our costs.
302 We strongly suggests also that the Commission prevents the toll carriers from passing on the CITCs' direct toll or network charges to the resellers, to the rebillers, or other toll carriers, in order to avoid discrimination against the customers in the independents' territories by limiting their access to toll or network competition.
303 For our closing remarks, we want to emphasize a few points -- five points.
304 Canadian independent telephone companies are different from the ex-Stentor members. The independent telephone companies have an overall cost structure that is higher than the larger companies because of the things we discussed earlier -- the small size, the fact that we serve rural territories only, that we don't have access to these economies of scale and purchasing power, and that even if we get together to do things, the critical mass is still well below what is available to large companies like Bell Canada.
305 SATAT members are 100 per cent high cost, as defined by the criteria set forth by the Commission so that subsidy revenues are of greater importance to our members than for large ILECs. This being considered, dramatic changes in subsidies over time has to be avoided through a smoother than smooth transition period and through the decreasing slope mechanism for wire centres over 1,500 NAS.
306 Finally, the independents must be entitled to fully recover their direct toll and network costs because it is not subsidy -- it is true costs incurred for the toll carriers -- and should not bear the financial or operational risk of such activities.
307 We will be available to answer your questions.
308 LE PRÉSIDENT: Merci, Monsieur Letarte.
309 In my enthusiasm to hear SATAT's presentation, I neglected to provide an opportunity for anybody else to question OTA, either the other presenters or the observers.
310 We will take our break now and then perhaps what we will do is have the members pose questions that we may have to SATAT and then if there are others who have questions for either OTA or SATAT we will do that.
311 We will take a 15-minute break and reconvene at 11:15.
--- Upon recessing at 1100 / Suspension à 1100
--- Upon resuming at 1120 / Reprise à 1120
312 THE CHAIRPERSON: We will return to our discussion now. I think we have a few questions for SATAT.
313 I will turn first to Commissioner Noël.
314 CONSEILLÈRE NOËL: Alors en plus de commencer à ce bout-ci on va commencer en français.
315 Aux pages 11, 12 et 13 de votre présentation de ce matin -- et je fais référence aux fenêtres 21, 22, 23, 24 et 25 -- vous parlez de trois alternatives -- vous parlez disons des pistes en français. Peut-être qu'on pourrait traduire vos "paths" par des "pistes". Ce ne sont certainement pas des avenues étant donné qu'on est en milieu rural.
316 Alors vous parlez de "Path A - The proxy", "Path B - The transition", "Path C - The alternative", et ce que vous dites au tableau 25 c'est que quelle que soit la piste retenue en tout temps durant les cinq années du nouveau régime réglementaire, les compagnies de téléphone indépendantes devraient avoir la possibilité de faire une étude de coûts Phase II et de la faire approuver pour une "company-specific subsidy requirement per NAS". Je ne veux pas me lancer dans la traduction maintenant.
317 Est-ce que le fait de pouvoir changer de sentier, de piste comme ça, ça ne crée pas de l'incertitude ou un problème d'uniformité? Est-ce qu'une solution globale pour toutes les entreprises qui soit la même pour chacune des entreprises ne serait pas préférable?
318 M. LETARTE: Je crois que c'est un mécanisme qui permet de faire une évaluation du rendement de ce nouveau modèle de réglementation et que, par exemple, les paramètres qui servent à déterminer aujourd'hui le besoin de subventions peuvent très bien changer dans le futur. On a juste à penser notamment à la modernisation de certains équipements, et parce que les compagnies sont d'une taille petite, la modernisation d'un équipement -- par exemple un commutateur -- va représenter la modernisation de 100 pour cent des commutateurs de l'entreprise du même coup.
319 Donc les dépenses encourues parallèlement à ça vont être évidement d'une très grande importance pour l'entreprise. Alors si l'entreprise, par exemple, a déterminé qu'aujourd'hui elle avait besoin de tel besoin de subvention peut-être que dans trois ans, parce que les choses évoluent, peut-être que ce montant-là ne sera plus adéquat pour s'assurer que l'entreprise respecte, par exemple, les critères du service de base au niveau de l'offre du service résidentiel dans son territoire.
320 La piste C, "l'alternative", comme on l'appelle, permettrait à chaque entreprise d'avoir au moins l'opportunité de dire, "Ça ne fonctionne pas tout à fait parce que telle chose, tel événement est arrivé. Voici maintenant les vrais coûts que je devrais prendre en considération dans mon calcul de subvention".
321 CONSEILLÈRE NOËL: Alors ce que vous voulez c'est la flexibilité de changer de méthode de changer de méthode pendant la période de cinq ans. C'est ça?
322 M. LETARTE: C'est d'avoir l'opportunité et la flexibilité de pouvoir changer pour refléter vraiment les besoins.
323 CONSEILLÈRE NOËL: C'était ma question.
324 THE CHAIRPERSON: Commissioner Demers.
325 CONSEILLER DEMERS: Merci, Monsieur le Président.
326 Deux questions. Vous m'avez entendu sans doute tout à l'heure parler des régions qui sont desservies par les entreprises de l'Ontario, et vous avez entendu les réponses de votre collègue.
327 Quand vous comparez les territoires de vos entreprises avec ceux de l'Ontario, faites-vous des différences, arrivez-vous aux mêmes conclusions? Je sais que vous avez dit dans votre document -- et c'est sûrement la réalité -- que vos entreprises sont à 100 pour cent dans le territoire à coût élevé, tel que défini, mais pouvez-vous nous situer sur le territoire en comparant les entreprises dans les deux provinces?
328 M. LETARTE: En terme de comparaison des territoires, je ne peux pas parler avec grande précision, malheureusement, des caractéristiques propres à la desserte des compagnies de l'Ontario.
329 Je sais pour avoir eu des discussions quand même que, par exemple, la moitié -- je crois, si ma mémoire est bonne -- près de la moitié des entreprises opèrent dans ce qu'ils appelaient le "rocky environment", dans le "Southwestern" Ontario, mais ce qui n'est pas nécessairement le cas au Québec.
330 De faire des comparaisons précises entre les territoires de desserte, toutes les entreprises sont de tailles très petites en général, beaucoup plus que les grandes entreprises intégrées. La plupart des entreprises de petites tailles n'ont aucun centre de commutation, mais en terme de caractéristiques géographiques, démographiques, je ne pourrais pas, par exemple, comparer les deux territoires.
331 CONSEILLER DEMERS: Alors quand vous pensez aux entreprises de l'Ontario vous considérez, de votre point de vue, qu'elles ressemblent aux vôtres. C'est ce que je dois conclure.
332 Parlez-moi alors de vos entreprises en deux, trois mots. Quels territoires elles desservent et elles se situent où par rapport aux grandes villes par exemple du Québec?
333 M. BRAY: Les territoires desservis par les petites compagnies de téléphone indépendantes du Québec sont assez disparates. Il y en a qui peuvent être proches de centres plus urbains, tels que par exemple St-Hyacinthe ou Nicolet, alors que d'autres, si je prends le cas de la compagnie de téléphone de Nantes qui a environ 260 SAR, sont en milieux relativement éloignés.
334 Comme mon collègue l'a mentionné précédemment, le problème du sol chez nous ne semble pas un problème qui est dominant, du moins qui n'a pas été identifié chez nous comme étant une variable dominante.
335 Alors c'est assez difficile de mettre tout le monde dans le même ensemble. Comparer le Québec et l'Ontario nécessiterait encore une fois plus d'information de la part de l'Ontario. Ils procèdent à des études de Phase III, tout comme les nôtres, et il y a eu des observations tantôt à savoir -- écoutez, l'Ontario au niveau des besoins de subvention c'est nettement que celui du Québec sauf que ce que je tiens à mentionner, par contre, c'est qu'en ce qui concerne, par exemple, le "direct toll", au Québec par minute on est plus hauts, de temps à autre, que certaines compagnies de l'Ontario et ça peut s'expliquer, par exemple, juste par le fait du nombre de minutes par SAR à l'intérieur de chacune des compagnies.
336 Alors il est très difficile de faire des comparables d'une compagnie à l'autre. Si dans le modèle mathématique on a le malheur d'oublier des variables qu'on n'a pas identifiées à ce jour, on peut être amenés à faire une conclusion qui est erronée.
337 CONSEILLER DEMERS: Merci.
338 Une question générale. Dans votre proposition pour la période de cinq ans, vous expliquez comment il pourrait y avoir possiblement des augmentations. Etes-vous en mesure de dire durant cette période-là quel pourrait être le maximum d'augmentation qu'une entreprise serait capable -- capable dans le style est-ce que les règles que vous avez proposées lui permettraient quel serait le maximum -- et je suppose que le minimum c'est une entreprise qui ne demanderait pas d'augmentation de
339 Pouvez-vous commenter là-dessus?
340 M. LETARTE: Je pense qu'en terme d'augmentation maximale on a souvent porté le concept de la neutralité territoriale dans le sens où fondamentalement on pense que pour des territoires similaires, peu importe les entreprises qui desservent ces territoires-là, il ne devrait pas y avoir d'écarts importants au niveau des tarifs chargés aux abonnés, surtout si on parle des territoires adjacents ou des territoires similaires -- peu importe la définition de territoires similaires.
341 Donc en terme d'augmentation maximale, si on parle, par exemple, de suivre les tarifs locaux chargés pour des territoires similaires dans un territoire qui est desservi, par exemple, par Bell Canada, à ce moment-là on pourrait suivre cette évolution-là.
342 Donc présentement, si on parle, par exemple, que dans un territoire similaire Bell Canada pourrait charger 22,00 $ ou 23,00 $ présentement l'augmentation maximale irait dans ces alentours-là. Si dans le futur les territoires similaires chez Bell, par exemple, allaient augmenter, à ce moment-là on considère qu'on pourrait suivre également la tendance.
343 CONSEILLER DEMERS: Et dans votre proposition, ça ne dépasserait pas. La proposition que vous faites ferait en sorte que ça ne dépasserait pas les chiffres que vous venez de me donner.
344 M. BRAY: Les chiffres étant des exemples, si par exemple le tarif de référence pour un territoire similaire était augmenté à 25,00 $ bien là le 23 deviendrait 25,00 $. Donc c'est difficile de mettre des chiffres précis, mais le concept de la neutralité territoriale est un concept qui a été avancé à plusieurs reprises et qui est un concept qui est encore adéquat dans notre cas en terme de validité du concept.
345 CONSEILLER DEMERS: Merci.
346 Merci, Monsieur le Président.
347 LE PRÉSIDENT: Merci.
348 Commissioner Wilson.
349 COMMISSIONER WILSON: Just a short question which sort of goes back to one of the questions that I posed to OTA with respect to the five-year time period.
350 You have proposed considerable flexibility for your companies in terms of changing paths if whichever path you choose first doesn't work. I guess I am just wondering if you are of the same view as OTA with respect to the notion that the Commission shouldn't have any flexibility, but it's okay for you to have flexibility to address changes that might arise within that five-year time period.
351 MR. LETARTE: I think that the question here is that we are all of the same view that we need a regulatory regime that will meet our needs so that if, at some point in time, we consider that this is not the case, we want a simpler form of regulation, yes. The companies want to be able to manage their businesses and to maybe set aside the regulatory burden for a period of time, but not at the expense of having a regulatory regime that does not fit our needs.
352 COMMISSIONER WILSON: So you don't really envisage any reason from the Commission's perspective that we might sort of look at what is happening in the environment and say, "Well, this is not working so we would like to initiate change". It just seems to me that there is lots of flexibility on your side and very little flexibility on ours in terms of making adjustments to see how things work over a five-year time period which is a considerable length of time in this environment.
353 MR. LETARTE: I would answer saying that that's why probably the going in rates for the new regime would be very important to be set in a manner that it can be workable for the five years, and there are still some -- we have the concepts of exogenous factors that can be used to adjust certain aspects of the new regime over this five-year period. So then it becomes to how we define exogenous factors, I guess.
354 COMMISSIONER WILSON: Thank you.
355 THE CHAIRPERSON: Commissioner McKendry.
356 COMMISSIONER McKENDRY: Thank you, Mr. Chair.
357 I would like to ask you a question that I also asked OTA and that relates to the use of a productivity offset and a price regulation regime. You are proposing that there should be increases for inflation and for exogenous factors. Typically price regulation regimes also have a productivity factor which reduces other increases or rates over time.
358 What is your reason for not including your productivity factor?
359 MR. LETARTE: If we are talking about, for example, the fact that there is still a NAS, and even if we use the proxy methodology, a proxy by definition will not be completely tied to the true needs of the company. So already implicitly the productivity factor is built in that model.
360 If we talk about a transition period, well from our proposition to go from the actual current contribution that we receive gradually down to the proposed proxy at year five, when we do that we propose a transition plan with associated increases in local rates to offset the loss in revenues.
361 This plan is still out for the Commission's approval and so implicitly in that process also there are places to consider the productivity factor offset without explicitly having an item built in the model.
362 COMMISSIONER McKENDRY: Thank you.
363 I am looking at page 8 of your presentation this morning, and you were dealing with the average cost of the ILECs in relation to your costs and you noted that the ILECs have many automated operations and that was one of the reasons that your costs could be higher. Now intuitively I would have thought that it would be open to a smaller company to automate its operations as well.
364 So perhaps you could just explain for me why there aren't as many possibilities to automate operations in a smaller company as there is in a larger company, particularly in an era where much of the software and related hardware is become scalable.
365 MR. LETARTE: Intuitively I would say that because of the core costs of implementing fully automated systems you need a least a minimum base for that system to be workable and at least to be profitable. You need that minimum base to start having the system being efficient. So for many, I guess, operations, it's even more efficient to be less automated because the operation that is being made is not as recurrent as it would be with a large company.
366 It's the same thing as the -- it's very tied to the economies of scale: the broader the NAS base, the more economies of scale. Well, the broader the NAS base, the more efficient are automated systems.
367 COMMISSIONER McKENDRY: Let me ask you a question that deals with page 11 of your presentation this morning. I suppose it's in the same area in terms of comparing to larger companies, and that deals with the fact that you cited several overhead costs that do not vary very much with the size of the company. I would have thought, again institutively, that some of the things you cite would, in fact, vary, for example, audit fees. Before I joined the Commission I worked for Pricewaterhouse, a major auditing firm, and certainly audit fees varied with the size of the companies that I dealt with, at least. I would have thought some of these other expenses such as advertising would vary with the size of the market, and so on.
368 Could you just comment a little bit on that, please?
369 MR. BRAY: I do agree with you regarding that some fees might be variable to the size, but they are not necessarily in proportion because of the small size of a company. For example, again if I take Nantes and I compare their auditors' fees with let's say Courcelles, which is twice the size, I am sure that those fees might be quite similar. Normally, we should expect a relationship between the size and some expenses, but they are not necessarily linear. It's all the problem.
370 Like we did say also in another question, it's a problem of having a minimum level. Under that it's very hard to decrease those costs. Again for Nantes there is one employee. She can't go lower than that. So for her, for productivity, a lot of things -- she just told us, "Well, tell me where I can down size my expenses. Just tell me". We are having some problems with that, that's true, but I know that many people might think that our expenses should be related to our size. But that is not necessarily always the case. It's the problems, like we said earlier, with the software, with the switch and everything.
371 A lot of our investment is also the reflection of our past. Like OTA said, many years ago all the independents had bought some DMS-10, for example. Today I would presume that they wouldn't do so because the technology has evolved, the transmission is there, but it wasn't at that time. So we are trapped with fixed costs which we believe that might be higher for our companies, but we do agree, we do recognize that to some extent some costs might be in relation to the size of the company but not all of them.
372 MR. LETARTE: Just a simple example for the advertising part, a simple example with business cards. When you are printing business cards, printing for 500 cards or for 10,000 cards, it's not 20 times the price. It's not linear in proportion.
373 COMMISSIONER McKENDRY: Thanks very much.
374 Thank you, Mr. Chair.
375 THE CHAIRPERSON: Thank you, Commissioner McKendry.
376 Just going back to the productivity issue that Commissioner McKendry was asking about. I am not sure I understood your answer. When you talked -- I guess it's slide 5 and the other one that was dealing with the same issue -- about allowing for increases to compensate for inflation and exogenous factors.
377 Using that principle, is that assuming that -- given all the issues around costs that we talked about with OTA and now with you -- there is in fact little or no opportunity for productivity gains with these small companies, and that virtually all of the costs that you have are going to be driven by inflation or exogenous factors.
378 MR. LETARTE: I wouldn't say that there is no opportunities for productivity gains, but certainly that there is little opportunity.
379 MR. BRAY: I will take over.
380 Like Hugo said, the opportunity is there. We cannot say that it's irrelevant, but it's limited again to their size, and moreover those productivities might be offset by other factors. For example, as you might be aware, in Quebec we did have to face a huge amount for Hydro-Québec polls which, for example, we do not control. We do not control the price of Nortel.
381 Another question that was asked this morning: Did you try to get together to have a more powerful power when you buy? Yes, we do indeed, but still then the volume we represent is almost not there. It's irrelevant. So yes, there are some productivity, and we are quite aware of that and we are looking all the time for that, but there are a lot of elements there that we don't control and we think that they might more than offset the productivity that someone might think should be applicable to us. But there are some, yes.
382 THE CHAIRPERSON: On the issue of options and features, this notion about a $5.00 benchmark in your proposal which was -- I forget what the base was, but then allowing it to increase by 50 cents per year up to a maximum of $3.50 at the end of the transition period.
383 I guess I am curious to know why one would inherently expect, which I guess fundamentally is what you are both saying, if I am not mistaken you, is that the opportunity to sell to people and for people to take these options and features is less in the territories that you serve than one might expect elsewhere in the country. Is that true, and if so, why is that?
384 Before you answer, I often thought -- I used to be served where our summer cottage in Nova Scotia by a system that actually had an operator, a real person, and I have often thought that these options and features were kind of an electronic version of what the operator used to do, to tell you that farmer Brown had just gone down the road to somebody else's house. So it was kind of a version of remote call forwarding, or whatever.
--- Laughter / Rires
385 THE CHAIRPERSON: And the operator would tell you who was calling you so it was sort of a form of caller I.D., or whatever, and that people who were used to those kinds of services in rural areas might in fact be more inclined to take them. In the case of New Brunswick, I know that initially at least they had considerable success in selling these services in rural parts of New Brunswick.
386 MR. LETARTE: My answer to that would be maybe partly because there are some efforts that are being made to increase that penetration, but of course, small companies don't have the full marketing team to be able to go deeply and market these options as well as they would like to.
387 This being said, promotional campaigns for such services again, we are facing the first part of the costs of these kinds of campaigns that is fixed, that is not variable to the number of subscribers you may reach with that campaign. So when you get back and you break that cost, promotional cost down per NAS, well it may not be as inviting to do so.
388 So there are some, yes, but with the limited resources and with the forecasted available revenues coming out of these kinds of campaigns. So these campaigns are done, but taking into consideration the possible revenues generated by these campaigns.
389 MR. BRAY: Can I make another comment on that, please?
390 Regarding that, first of all, as we can see on slide 14, there range goes from $1.00 to $3.00. No one is close to $5.00. So can we be all wrong? When I see all the people, our members, and even at the OTA, which we are all quite far from $5.00, it rings a bell. It says there must be an explanation. If I would have 50 per cent of the companies that would reach $5.00 and the other half at $2.00 I would say that there might be something wrong there. But all of us are under, I would say, $3.00.
391 So I think that there might be -- and we didn't identify those reasons. The company would have to hire some consultants, and again it would increase our costs. Is it a positive approach? We don't know, but we still observe a revenue much lower than $5.00 for all our members and it might be related also to the income per household, I don't know.
392 THE CHAIRPERSON: Well, I take your point, Stephen. I mean, that's really why we are here today is to try and help understand what some of these differences are, and I take your point about the distinction of what the revenues actually are and that's really at the root of my question because I wouldn't expect you to hire consultants.
393 I expect that, given the size of the companies, you are probably much closer to your customers and the real world that exists there than any consultant coming from Toronto or Montreal or Quebec City could tell you about the classic -- I better watch that I don't upset people like Roger Choquette, but --
--- Laughter / Rires
394 THE CHAIRPERSON: -- classic borrow your watch to tell you the time sort of thing and that's really why I ask the question. Is there something inherently different in the smaller communities, do you think, to explain the difference from the reality of $2.00, or $2.00 and change, and $5.00, what seems to be the case in larger areas of the country? So I guess what you are saying is beyond the reality of the difference, you really don't have an explanation for it.
395 MR. BRAY: We did ask our members and unfortunately they didn't have any real answer. They said, "Well, we are doing our best. It's to our advantage to sell options as often as we can, but if we are not successful, it's a fact of life". So there might be some variable there that we haven't identified yet.
396 THE CHAIRPERSON: Your proposal anticipates there is some potential to move in that direction with the 50 cents per year over five years.
397 MR. BRAY: We see it as an incentive that companies should realize an increase on an annual basis of 50 cents. It's an incentive. It has to be seen like that. It's not the potential, but our companies are willing to live with that. If they don't reach it, and they are not saying, "Well, we will reach it". They say, "Okay, we are willing to live with it and to risk it".
398 THE CHAIRPERSON: Right.
399 MR. BRAY: We are speaking about productivity. Well, that's one place they say, "We will try to do better than what we are doing right now", even if it's the best they can do at this moment.
400 THE CHAIRPERSON: The last question I had then is on your alternatives, I guess I am struck by the fact you represent about ten companies. So we have three alternatives. Could we see sort of three companies taking one path, three another, and then four another?
401 You mention about Path C alternative. Do you have a sense -- and I appreciate that July 20th you are going to firm up some of the details in what you talked about here today -- of the companies that you represent how many would opt for Path C?
402 MR. BRAY: At this time we cannot because we don't have the figures, and I don't think that -- we are speaking about Path C, right? That's the Phase II costing approach. I don't think that we will be able to have a number of companies that will elect Path C. I don't think so because we won't get the number for that date. We have to make our study and how can we ask our members, for example, to make a choice without giving them the figures? They will say, "Well, give me the figures first and I will choose the path which represents more my reality".
403 THE CHAIRPERSON: And that's why I asked about Path C because that is the Phase II costing. Is that because the companies inherently will have a difficulty setting aside the jargon around Phase II of specifically identifying their cost structure?
404 MR. BRAY: The main goal of that path is -- you know, the ideal situation for everyone is probably to compete -- not to compete, but to compile a Phase II costing. But we are still looking for a simplified approach for the small ones. But even then, if the simplified approach is not good for a company, it should have the flexibility to get closer to its own reality. That's why Path C is there, if they think that the proxy is not good at all. So okay. Take the best model you can have, which is Phase II, but it's more complicated. If they are willing to invest their time and money in Phase II, that's good. It will be the best answer they will have, Phase II results. But they have to monopolize all their resources to do so.
405 THE CHAIRPERSON: But Stephen, is the issue there then the case of our definition of Phase II, that being the costs that we have defined around that or simply the problem of them being able to identify their own cost structure?
406 MR. BRAY: I think that the best answer would be that they calculate their own Phase II because the proxy as we see it today might not reflect the reality. Like we said before, the proxy we think is not high enough. We have made some simulation, like Hugo said, with the actual proxy, not enough of our companies would make their mid-point rate of return with the actual proxy. So based on that, without making any other calculations, we think that the proxy might -- it should increase.
407 THE CHAIRPERSON: All right. Well, those are my questions. As I said, I wasn't exactly following our own rules earlier. We were going to provide an opportunity for other parties to ask questions of those who had made a presentation and then an opportunity indeed for any of the observers if they wished to pose any questions.
408 So were there any questions for OTA from the others around the table then? No? Any of the observers? Any questions for SATAT? No? Okay.
409 Well, we will move on then to the next presentation which is the Corporation of the City of Thunder Bay.
410 It's interesting to see that we are gaining efficiencies here this morning by sharing in the hardware connections or the transmission costs here for this.
PRESENTATION / PRÉSENTATION
411 MS HACIO: Good morning, Chairman Colville, members of the Commission, Commission staff, members of the independent telephone industry and interested parties.
412 My name is Sharon Hacio and I am the General Manager of Thunder Bay Telephone, one of the Northwestern Ontario public utilities.
413 With me today, to my immediate right, is Ivan Probizanski. Mr. Probizanski is acting General Manager of the Dryden Municipal Telephone, and immediately behind him is Mr. Dennis McCaffrey, General Manager of the Kenora Municipal Telephone System, also in Northwestern Ontario.
414 First of all, the public utilities of Northwestern Ontario thank the Commission for this opportunity. We also support a simplified regulatory framework, and certainly look forward to this opportunity to comment.
415 I think it's important that we give the Commission some historical background and identify exactly who we are.
416 First of all, Thunder Bay Telephone is a municipally owned telephone system, as you know. We were founded in 1902. We happen to be the largest independent telephone company left in Canada. We provide a full range of telecommunications services within the City of Thunder Bay and to 21 rural municipalities.
417 We have a service area of over 1,340 square miles and 90,000 access lines. Currently, we have equal access with Bell and AT&T and are presently negotiating with other carriers.
418 The Kenora Municipal Telephone, again municipally owned since 1892 and it's owned and operated by the Corporation of the City of Kenora. They provide a wide range of service to over 10,000 access lines and with the advent of the Bell Nexia calling centres, there is free calling available to a number of surrounding municipalities as well as First Nation reserves.
419 I might just mention -- and certainly as we go to the maps -- the fact that Kenora is located 500 kilometres to the West of Thunder Bay when we are talking about geography.
420 The Dryden Municipal Telephone System is again municipally owned by the Corporation of the New City of Dryden. The service was established in the early 1900s with 6,500 lines and digital switching served by one DMS-100 and some remotes. They also have extended area of service to a number of adjacent communities. Dryden happens to be 350 kilometres West of Thunder Bay.
421 When we look at Ontario as a whole, one of things that we think is important, as we go through some of these maps, is that the Northwestern Ontario public utilities provide local services to wide-reaching large geographic areas with very low population densities and it's certainly much more costly to provide that type of service than within urban areas.
422 Northern Ontario, as you know, is huge and encompasses a large portion of the province as a whole. Important of note from a statistics standpoint -- and this was taken from the 1996 census -- that the average household income in the Province of Ontario is approximately $54,300 when in Thunder Bay it's $50,480. Principally we rely on a resource sector and certainly our labour and everything relies on the health of that resource sector.
423 Northwestern Ontario. The land mass of Northwestern Ontario is 523,252 square kilometres, stretching to the East about 500 kilometres from Thunder Bay and to the Manitoba border, close to where Kenora Telephone operates, 500 kilometres to the West. This is somewhat larger than the entire four Maritime provinces which are 504,000 square kilometres. Again, the District of Thunder Bay -- and this is the entire district -- has a population of 163,000 and we are starting to see some real population shifts -- outward migration, specifically of our youth -- because of the fact that there is no new business development, no manufacturing and the resource sector has certainly introduced new technology which calls for lesser resources.
424 Our proximity to other markets, to put it in an appropriate context, 680 kilometres to Winnipeg, Manitoba; 750 kilometres to the East of Sault Ste. Marie; 1,500 kilometres to Toronto, and I guess our community of interest, to be quite frank, is the State of Minnesota which is 360 kilometres to the nearest large centre which is about our size and that's Duluth, Minnesota, and 563 kilometres to Minneapolis. The distance for Northwestern Ontario is huge, but we like to drive.
--- Laughter / Rires
425 MS HACIO: Again, to look at serving areas, the population, as I indicated, is 250,000 and if you look at it in context where Thunder Bay is, Dryden and Kenora and sparsly populated, there are a few communities which are principally served by Bell Canada.
426 Our goals for this proceeding is to ensure that the Northwestern Ontario CAPTS customers continue to have access to reliable and affordable service in concert with the implementation of the new national high-cost serving area subsidy plan, and the elimination of contribution revenues.
427 We want to be able to assist the Commission in the development of an appropriate price regulation regime which will provide our members with the incentives to be more efficient and innovative, with the opportunity to earn a fair return and at the same time reduce the regulatory burden.
428 In respect to the high cost subsidy plan, the subsidy requirement and the new regulatory regime are certainly closely related. The use of proxy costs based upon national averages developed from ex-Stentor companies, in our opinion, are not appropriate. The Commission-defined high-cost serving area bands do not adequately capture the HCSA characteristics of the CAPTS members and the other independents' operating areas.
429 The proxies based upon the ex-Stentor companies may, in fact, underestimate the level of costs in the CAPTS members' operating territories.
430 Decision 99-16 states, which was issued October 19, 1999, basically stated that a high cost serving area was:
"... a clearly defined geographical area where the incumbent local exchange carrier's monthly costs to provide basic service are greater than the associated revenues generated by an affordable rate as approved by the Commission. Costs are estimated using Phase II, or Phase II-like costs, plus an appropriate mark-up. The Phase II costs are the long-run, incremental costs calculated in accordance with directives established by the Commission (paragraph 17)".
431 Consistent with the above definition of an high-cost serving area, Thunder Bay operates in a clearly defined geographical area encompassing the City of Thunder Bay and surrounding areas. Thunder Bay Telephone is currently in the process of calculating our costs to provide basic residential service in our operating area using Phase II-like costs and an appropriate mark-up.
432 Accordingly, once these costs are calculated a high-cost serving area subsidy determination could then rely on whether the calculated costs are greater than the affordable rate as approved by the Commission.
433 The proposed national average residential local rate is to be fixed at $22.75 for HCSA areas. This rate could accordingly be viewed as an affordable rate for purposes of a CITC subsidy calculation.
434 Our concern from the public utility standpoint is how does this affect our customers who have always had lower rates than what the national average has been. What is affordable from their perspective and what is affordable from the perspective of our owners, the municipalities and our city councils?
435 If you look at the proposed methodology for subsidy calculation using Thunder Bay Telephone, again information. We are in fact looking at taking the average cost of all of our NAS and comparing it to the ex-Stentor rate of $22.75. We do not believe that the bands reflect the reality of our situation.
436 If we compare the CITCs average PES residential rate for all of the NAS to the ex-Stentor national weighted average residential price to determine the extent to which a subsidy is needed, we will at the end of the day have qualitative information. This will avoid definitional distortions related to wire centre sizes and architectures. This may provide an incentive to move local rates closer to the national weighted average. It will recognize the relatively higher cost to provide service in a small independent telephone company and it will provide the basis to move to price regulation.
437 The proposed methodology for subsidy calculation is that again Thunder Bay will look at our costs to provide the residential service in our operating territory using Phase II methods and the mark-up, less the proposed national average residential rate, less the deemed the revenue from other services.
438 Concerns with the proposed HCSA banding structure. We believe that this banding structure will include CITC HCSA residential NAS simply on the basis of wire centre definition. The PES costs not only include local loops, but also other plant and service-related costs. The independents are small, therefore, economies of scale and scope are not equal to ex-Stentor members. Certainly we have heard the other associations attest to the fact of things like material costs, equipment, vehicles, remoteness, the low exchange density -- and one of the things that we experienced in Northwestern Ontario obviously is the weather.
439 The weather situation from mid-May to the end of October, that's our construction season. Obviously it drives the costs significantly because additional resources have to be hired during that construction period. I just may add that on July 4th Dryden had frost.
--- Laughter / Rires
440 MS HACIO: Wire centre definition. We note that the network architecture of an independent determines the extent to which the NAS qualify as HCSA per the Public Notice, not the actual costs.
441 The architecture in the small serving areas -- deployment of the wire centre is significantly different in an independent than in an ex-Stentor company. Accordingly, a large wire centre in the territory of an independent is more than likely to include a larger proportion of the NAS served by remotes as opposed to direct connections to the host with increased service costs as a result.
442 Again, this is a typical wire centre definition in Thunder Bay serving area. Certainly one of the things that Thunder Bay embarked on in the early '90s was a very active ILS program to all of our customers in the 21 rural townships. Over and above that, included in our capital programs was dollars on an annual basis to expand into unserved areas. We consulted with our suppliers and the industry and looked at cost-effective methods in order to achieve this particular objective.
443 Our Current River exchange is located in the urban area. It happens to be a remote, off one of our large DMS-100s. From there we extended fibre, approximately 20 kilometres to a rural exchange in an adjacent rural township. Again, we constructed a building and we provide service to approximately 987 NAS. The dotted line reflects the fact that at that particular point in time that is when the subsidy is finished. We do not get subsidy for the next exchange. We have extended fibre 11 kilometres to a small remote and because of the fact that the remote is on a highway, part of the TransCanada highway, we were able to acquire right-of-way access from the municipality and we located the small DMS-1U on a road right of way without a building.
444 We were able to upgrade over 225 residential customers to a single line service. These are both permanent and seasonal customers, and we were also able to provide customers that were within our serving area that did not have service with single lines. Again, we extend out to the customers. This is our concern in relationship to a wire centre definition as per the proceeding.
445 The national average Phase II costs including the 15 per cent mark-up. On the matter of the 15 per cent to be applied to the Phase II costs, our companies note that the 15 per cent was explained in Decision 2000-745 to recover fixed common costs and not intended to recover differences between the Phase III embedded costs and the Phase II current costs.
446 We note that in that decision, the Commission explained that a limited amount of quantitative evidence was provided to support an appropriate mark-up.
447 CAPTS agrees that the level of the mark-up should not be set to recover differences between the Phase III and the Phase II costs. Accordingly, we do not object to the defined 15 per cent mark-up subject to us being able to confirm that the fixed costs as a percentage of our Phase II costs fall within this percent range.
448 On the deemed revenue, certainly we believe that any downward adjustments to the monthly $5.00 implicit contribution amount per residential NAS generated by other local services is appropriate. We also note that the monthly amount generated by the other local services in our operating territory is significantly below the $5.00 implicit contribution amount.
449 Considering a move of local rates towards the national average of $22.75 this may in fact negatively affect the penetration level of these services that we currently have, and we do have some concern relative to that. However, we would suggest that the contribution amount be initially set at a CITC's actual amount in the first year with an incremental phase-in of 50 cents per year per residence NAS over a three-year period, or the period in which the approved threshold is reached.
450 Again, we say to the Commission that the consumer only has a certain amount of disposable income. How that disposable income is spent is entirely within their power.
451 On the matter of subsidized HCSA business NAS, CAPTS is of the view that such a subsidy is not appropriate or required if the residential subsidy is calculated as we in fact are proposing.
452 On the transition period, the issue of the requirement for a transition period we note that to the extent that company-specific Phase II costs plus an appropriate mark-up are used, such shortfalls would by definition be related to the difference between Phase III and Phase II costs.
453 Further nothing that the former Phase III costs have been capped by the Commission, CAPTS would, therefore, suggests that the calculated shortfall be minimized under the proposed approach.
454 CAPTS notes, however, that a transition period may be required for a number of reasons and accordingly supports a transition approach for those companies that require it.
455 On the direct toll, the Commission noted that the current mechanism may not be appropriate. Certainly, the issues are the calculation of the costs and the apportionment of the costs among interconnected toll carriers. We would like to work with the Commission to arrive at a better mechanism for the independents to recover those costs, but certainly our cursory look at the issue is that with respect to the apportionment among the costs, among the interconnected carriers, we do not see a better way other than the causal relationship between the costs borne by the company in providing the service and the service provided to a long distance service provider other than the originating and terminating minutes.
456 We are certainly not privy to the issues that some of the other companies may be facing relative to bypass.
457 We further maintain that the recovery method for both direct toll and network should not create barriers for toll entrance to our markets, but they must in fact recover costs.
458 On the network access side, the Commission noted that the network access rates are calculated differently for Ontario and Quebec ITCs. The Commission further noted that the current mechanism may not be appropriate. Again, we certainly are prepared to provide some additional information to the Commission, but there should be a mechanism that definitely recovers the ITCs' costs.
459 In summation, we again thank the Commission and staff for this opportunity to present the position of Thunder Bay, Dryden and Kenora Telephone Systems, the public utilities of Northwestern Ontario. We have provided the Commission with information in relationship to our sparsely populated serving areas, and the geographic size of those areas.
460 We are experiencing negative population growth. Our urban areas are from a population density standpoint much less than most locations throughout Canada. Our purchasing power is significantly less than any ex-Stentor company which drives out the overall national average costs, as we have indicated.
461 The proposed national average rates will involve significant increases for our customers: for Dryden, 37 per cent; Thunder Bay, 46 per cent; and Kenora, 108 per cent. Will increases to basic rates create loss revenue in the additional deemed revenue category? We don't know. The independent telephone industry in Canada is unique. We know our customers, they are our neighbours, our investors, and in the case of the public utilities, our owners.
462 Collectively, the public utilities have provided world-class telecommunications services to our customers: digital switching, fibre optic deployment, single-line service, wireless technology and Internet. Our customers, the municipal taxpayers, subsidized our working capital for many years. Today, they have been afforded the benefit of lower local rates due to the fact that we do not pay income tax.
463 Numerous municipalities now recognize that the divestiture of their municipally owned telephone systems was a mistake. Sudbury, Sault Ste. Marie, Mississauga, to name a few, have now through their hydro utilities commenced huge fibre optic bills and are actively pursuing telecommunications businesses and alliances.
464 Our municipal elected officials deal with public policy related to the evolution of telecommunications. They approve all of the budgets. They advocate lower local rates. They focus on technology deployment to ensure our customers have access to current technology as well as utilizing telecommunications as a community economic development tool. The survivability of the public utilities may be impacted by this proceeding. Increases in local telephone rates of this magnitude are not politically popular.
465 We respectfully request that the Commission assure that the issues raised today be considered in the context of all the independents, their sizes, their issues, and the fact that there is no quantitative information to compare us with the ex-Stentor companies.
466 Thank you.
467 THE CHAIRPERSON: Thank you for your presentation.
468 Commissioner McKendry.
469 COMMISSIONER McKENDRY: With respect to the local rates, I think in your concluding remarks you referred to the percentage increases. What is the existing local rate today in Thunder Bay, Kenora and Dryden?
470 MS HACIO: The existing local rate in Kenora, I believe is $10.40 and in Thunder Bay it's $15.55, and in Dryden, I believe it's $16.50.
471 COMMISSIONER McKENDRY: Thank you.
472 I would like to ask you a question about the wire centre definition on page 18 of your presentation.
473 MS HACIO: I am familiar with it.
474 COMMISSIONER McKENDRY: Could you just explain to me again the problem that you are trying to demonstrate with this chart? What is at the heart of the problem that this chart demonstrates?
475 MS HACIO: Mr. Choquette will probably put it in the appropriate terms.
476 MR. CHOQUETTE: Thank you.
477 The Public Notice, as you know, defined certain bands on the basis of wire centre size and if you look at the territory of Thunder Bay Telephone, you find that there are a number of wire centres. If you follow the definitions and clarifications provided by the Commission in terms of which ones fall into which band -- which ones have to be analyzed, there is roughly 13.
478 However, what happens is that because of the larger ones, which are excluded -- in other words, if a wire centre has more than 8,000 NAS per the proposed Public Notice, it is excluded from high-cost subsidy. However, if you actually look at the architecture of Thunder Bay Telephone you find that those wire centres that actually have more than 8,000 actually include a number of high-cost elements which are put aside simply because of the definition in the Public Notice, and so the only purpose of this particular slide is to highlight the fact that, for example, Current River, which is located to a larger host, is actually going to be -- if you look at that larger host configuration, you have three remotes actually involved with that particular wire centre.
479 It's simply to point out that the average cost as compared to the definition that the Commission provided in the Public Notice would inherently simply be higher because of the architecture. Of course, it's explained because the City of Thunder Bay has a boundary and, of course, if you have a boundary and you already have a large office in the middle of the city, the most cost-effective way is probably to put remotes out. But those remotes are, in some cases, you are talking over 30 kilometres which would be unusual. However, if your wire centre still doesn't fit into the 1,500 to 8,000, it's eliminated for consideration and I think that's the point.
480 COMMISSIONER McKENDRY: Thank you for that, Mr. Choquette.
481 There has been some discussion this morning about the difficulties that small systems face in terms of switching technology, and as I understood the discussion, part of the problem was that with switches small systems are confronted in particular with software costs that don't vary very much from the software costs that are faced by a large telephone company.
482 Is there anything happening in the technology side of the business that is addressing that problem?
483 MS HACIO: Depending on the architecture of the switching technology that you are using and who the manufacturer is, obviously there is a couple of key components. Number one is when you are looking at remotes you have to keep the software current. Number two, suppliers, unfortunately, are notorious for introducing a switch. It may be in the market two to three years and its manufacturing discontinued depending on the market penetration of that particular switch.
484 I can tell you that there are independent companies that are sitting in this room that have been caught in that particular trap. You go forth, it's fits your particular serving area, it provides the necessary components. You make a decision based on the best engineering and cost calculations and deploy the technology and tomorrow the manufacturer ends or you have to go through some significant costs for software upgrades. So that's basically what is happening out there.
485 COMMISSIONER McKENDRY: And there is nothing on the horizon that would indicate that there will be any, I suppose, advantages to the small systems from new approaches to network architecture.
486 MS HACIO: Certainly, one of the things that are being advocated by I guess the major companies, when you look at Nortel and the evolution or the convergence between telephony and IP switching, many of us are going to be faced with the determination as to whether or not we incur major costs to switch out some of the current technology and/or to change front to end and add software. I think you will be seeing within the next two to five years virtually every phone company having to go through some horrendous capital investments again, similar to what we did in the '80s when we switched to digital technology.
487 COMMISSIONER McKENDRY: Thanks very much. Thanks, Mr. Chairman.
488 THE CHAIRPERSON: Commissioner Demers.
489 COMMISSIONER DEMERS: Thank you.
490 Since it's the first time I see you, although I have used your phone going through your area --
491 Well, let me say first that you have indicated what your local rates were. At this moment, there is competition in long distance in your area in the three -- how do you call them -- utilities that are being served, that are served?
492 MS HACIO: Just let me qualify. In Thunder Bay, there is currently equal access. There is no toll competition in the areas of the Kenora and Dryden telephone companies. I would suspect that there are major carriers that transit through those two particular municipalities that will be looking at establishing at least a point of presence.
493 COMMISSIONER DEMERS: Thank you.
494 Since you have indicated that you know most of your owners, is there anything in the minds of your owners that would indicate that local competition is something of value in your area?
495 MS HACIO: I guess that's an interesting question. First of all, as you know, our customers are in fact our owners. It's almost like saying the customer owns the market, however, let's introduce someone else into the marketplace to take away portions of that particular market and saying that, I guess, my comment is with an appropriate transition period, we are not adverse to competition, be it on the local competition level, and we are saying we would like a transition period in order to ensure that we get our house in order, that the appropriate rates are put in place and we will compete in due course, subject to consultation with the Commission.
496 COMMISSIONER DEMERS: Thank you very much.
497 Thank you, Mr. Chairman.
498 THE CHAIRPERSON: Thank you.
499 Just a couple of questions. You made a fair bit of the point about not being appropriate -- I suppose is the best word to compare the CAPTS in particular, and I guess all of the independents with the Stentor companies.
500 I am wondering, given your rather unique position with the utility companies, these three companies that you are representing here today, what your view is in terms of I guess the proper approach to dealing with these companies, setting aside the ex-Stentor ones, relative to the other companies that we are talking about here today, and even within the three.
501 I mean, it strikes me there is marked difference between Thunder Bay itself, and the other two, and even between the other two. I talked earlier today about the amount of subsidy per NAS that the various companies get and, in fact, Kenora is probably the highest in the country while it has the lowest rate, and conversely Dryden gets one of the lower subsidies and then Thunder Bay is sort of in the middle.
502 I am wondering really -- I guess it's a general question -- about what are you advocating in terms of approach to dealing with the utilities companies, as I say noting the distinction between those three companies and the others and even within the three there are some significant differences.
503 MS HACIO: I guess what we are advocating at this particular time is that certainly we have a responsibility to our owner as well as to our customers to go through the Phase II process to ensure that we get the actual costs associated with providing the service and be able to provide that to the Commission.
504 For the purposes of Dryden and Kenora at this particular point in time, I guess dependent on the adjustments to the proposed costing that has been put out, certainly the national average costing, et cetera, as well as the residential rate, they will in all probability be going with the proxy.
505 Certainly I guess our comment is that it can't be a one size fits all solution. There is uniqueness with the SATAT or the ACTQ companies. There is uniqueness with the OTA companies and there is uniqueness with the public utilities. Maybe at this particular juncture in time there is no company in Canada that can be compared, even Thunder Bay.
506 When we look at benchmarks, et cetera, we have to go to the U.S. There is not a comparable company, I mean, aside from the tax issue. When you look at size, when you look at method of operation, when you look at geography, it becomes very, very difficult, and I know the huge issue before the Commission, trying to deal with this group of companies -- and I mean, this goes back to 1994 when we talked about a lesser form of regulation. Chairman Colville sat at the table with all of the independents. I mean, seven years later we are still talking about that particular issue.
507 We probably are a thorn in everybody's side, but we have around for a hundred years, most of us. We want to continue to exist. We are passionate about our industry. I think we provide good service to our customers. So again, we are saying look at the alternatives available. I know it doesn't simply your life, but it certainly simplifies ours if you take into consideration some of the things that were recommended.
508 THE CHAIRPERSON: Sharon, you certainly don't look like you have been around for a hundred years.
509 MS HACIO: Almost!
--- Laughter / Rires
510 THE CHAIRPERSON: Well, when you talked about, for example on page 20, the Phase II cost including the 15 per cent and you went on to mention that you don't object to the defined mark-up subject to the company being able to confirm that its fixed costs as a percentage fall within the range.
511 So are you able to do that -- all three, Thunder Bay?
512 MS HACIO: We will certainly be able to do Thunder Bay. I don't believe we will be in a position to do Dryden and Kenora. So they are going to go with the flow and, hopefully, there will be some adjustment based on what the other associations are recommending to more reflect what that particular mark-up should be.
513 THE CHAIRPERSON: Now, I take your point. You mentioned in your closing comments, I guess it was, and perhaps also in reference to earlier questions, about the political acceptability of rate increases.
514 I mean, we are not politicians here, but I don't know that anybody gets enthused about rate increases, whether they are motivated by a politician or a regulatory body, or whatever. We certainly don't get praise for rate increases either, but I guess I am wondering, taking a look at the disparity in the subsidy, relative to the cost of operation whether bearing that in mind, one shouldn't be at least dealing with that issue for some of these companies.
515 I know you are not going to advocate rate increases here, but --
516 MS HACIO: I guess, we have always argued the philosophy, certainly with our former regulator, and up to this particular time the Commission has accepted the fact that our customers should be afforded the benefit of the fact that we do not pay taxes.
517 What that benefit should be, or what that percentage -- and I know it's a difficult situation to deal with. But when you look at the fact that municipalities have taken risks over a hundred years, they made the investment. No one else wanted to provide service to those respective areas. Now that the systems are operational and they are showing a positive bottom line, of course, the municipal companies or the public utilities look good, but whether or not that variation in those local rates should be 25 per cent -- I mean, we threw out the figure of 25 per cent because certainly that is less than what the income tax would in fact be.
518 Politically and from a customer standpoint, the owners, it seemed to be acceptable, and certainly we have used that figure in former proceedings with the Commission. To make those adjustments up to that figure, we would be prepared to do it. We would even be prepared to go higher -- $22.75, politically, again the Commission is sitting in Ottawa. These are locally elected politicians. The taxpayer, the customer is in their face daily, as you well know, and I don't have talk about the downloading in the province to municipalities. Again, this is just viewed as a whole other issue.
519 So I take my political hat off for the moment.
520 MS HACIO: You got that right!
521 THE CHAIRPERSON: Well, that's why sometimes it's convenient to have a regulator like the Commission to blame it on, right? And we are quite happy to accept that.
522 COMMISSIONER McKENDRY: Speak for yourself.
523 THE CHAIRPERSON: Commissioner McKendry is saying to speak for myself.
524 I think those are all our questions for now. Does anybody else have any questions at this point?
525 We are running a little bit behind. We will take out lunch break then now for an hour and a bit and reconvene at a quarter to two.
--- Upon recessing at 1245 / Suspension à 1245
--- Upon resuming at 1355 / Reprise à 1355
526 THE CHAIRPERSON: Good afternoon, everyone. We will return to the order of presentations now.
527 The next one is Prince Rupert City Telephones. I guess we have the presentation working now.
PRESENTATION / PRÉSENTATION
528 MR. KERR: Yes, we do.
529 Good afternoon, Chairman, Commissioners, CRTC staff, fellow independent participants and interested parties.
530 The introduction of our delegation today: we have Rob Brown here directly behind me. He is our Operations Manager; Corrine Speaker to my right is the Chief Financial Officer of the City of Prince Rupert, and myself, I am the General Manager, Bruce Kerr.
531 Thank you for the opportunity to participate today, and we will go through our overview presentation at this time.
532 Prince Rupert City Telephone is located in Prince Rupert and is a local exchange carrier for the City of Prince Rupert. Prince Rupert City Telephone, CityTel, has been in existence since 1910 and we are the only independent incumbent LEC West of Kenora.
--- Laughter / Rires
533 MR. KERR: We got a geography lesson this morning.
--- Laughter / Rires
534 MR. KERR: What does CityTel offer? We have a full range of exchange services, analog and digital cell service and a broad range of Internet offerings including dial-up, one-Meg modems, ADSL service. ADSL service is available to 98 per cent of our subscriber base.
535 MS SPEAKER: And just so you can appreciate where the City of Prince Rupert is coming from, we are going to give you a geography lesson as well.
536 Prince Rupert is located on the North Coast of B.C., one of the furthest most western cities in Canada. We are rather remote. Our population is approximately 16,000 people, although it was recently reported at being about 14,500. It is located about 60 kilometres south of Alaska.
537 Vancouver which could be considered to be our largest service centre is 1,500 kilometres by road and 575 kilometres by air.
538 As you can see, this is a picture of Prince Rupert. We are very remote. We are on the edge of the coastal mountain range. Our nearest community of comparable size is the city of Terrace at 140 kilometres away. This is the highway to Terrace. It's not a straight highway. It's through the coastal mountain range. Again, we are 750 kilometres from Prince George which is the largest service centre for the northern half of B.C. It has a service area of about 100,000 people.
539 Because of our remote location, the cost of living in Prince Rupert is extremely high, and it's higher than most comparably sized communities, for not only Northern B.C. but Southern B.C. as well.
540 Goods and services are significantly more costly, if they are even available. Quite often we find we have to travel that eight-hour drive to Prince George to even get basic services.
541 Because of this isolation it creates significant challenges for the community, as well as our climate. I am not sure if you are aware of the records Prince Rupert holds in the weather department for Canada and North America. We are the wettest city in Canada with an average rainfall of eight feet a year. In 1991 we reached the North American record at 155 inches of rainfall. We have over 6,000 hours of cloud cover per year.
542 Our wages are high. This weather and the climate and the remoteness mean that if we want residents to come to our community we have to offer them services and wages to bring them there. They don't generally come voluntarily. But the wages alone do not satisfy the residents of Prince Rupert.
543 We as a municipality tend to offer services to our residents that exceed those of comparably sized municipalities.
544 Our recreation and cultural services are comparable to municipalities that are about a population of 40,000 and we are starting to slide in that area, but we are still significantly larger than any other municipality around 15,000.
545 The municipal ownership of CityTel enables City Council to meet the challenges of providing exceptional communication services for the residents.
546 We have tried to be a leader in that area in our region. We were one of the first companies in the area to offer cellular services, basically forced cellular activity in the Northwest region of B.C.
547 I am going to turn it over to Bruce for a little bit now.
548 MR. KERR: The suggested timeline does not provide enough time to manage the change of revenue flow for this regulatory change and will have a significant impact on the residents of Prince Rupert.
549 The three bands defined by the high-cost serving area is an attempt to broadly define the high-cost serving area without considering all elements of high-cost service.
550 MS SPEAKER: Sorry. We skipped a couple of slides there on you.
551 When we are talking about the high-cost service area in Prince Rupert, we go back to where we are. It's not just our telecommunication services that have high costs. It's the city as a whole.
552 I know there were some comments earlier about trying to define what those high costs are. I know for a fact that our engineering department has done those studies. We are at lest 25 per cent higher for our costs for any engineering structure that we do in the municipality and we have been for at least the last ten years. That's even 140 kilometres away. We are still 25 per cent higher than their costs are.
553 MR. KERR: We feel that the residential average PES may be based incorrectly on the average monthly revenue by band of the ex-Stentor companies. The high-cost revenue tax of CityTel's total revenue $10 million today. CityTel would be required to remit the high-cost serving tax to the high-cost serving tax fund once we reach that $10 million which shouldn't be too far way.
554 CityTel would no longer receive a subsidy. CityTel would now subsidize other areas and larger companies.
555 MS SPEAKER: This is one area that we feel has a significant impact on the residents of Prince Rupert. Because of our location and the service areas in our community, we are sitting -- I wouldn't say precarious, but we monitor closely the economic activity in the community. The changes that are proposed here would take about one million dollars out of our revenue base in the community. That's a concern to us. Not only would we lose the subsidy, but we would also be turning around and putting money out of our community to support these higher costs service areas.
556 We have been defined as a high-cost serving area for the last number of years, and overnight that definition is changing for us. We argue that that assumption is incorrect.
557 Although we don't have the numbers in front of us at the moment to prove to you it is a high-cost service area, we can get that information for you.
558 With that in mind, we understand the need for regulatory change. We understand the reasons for trying to go to a price cap regulation system. It will simplify things for the city and we reduce our administrative costs and financial burden.
559 However, we feel that the change for it to happen overnight would significantly harm the city and the residents in Prince Rupert. So we are asking that you at least consider putting an implementation period in rather than January 1, 2002.
560 We would like to see at least a three-year period. The suggestion has been five years. We recognize that there is a need for a transition period.
561 We also want to ensure that when you define your high-cost service areas, that you recognize the high cost of operating in some of these remote locations. That definition is not clearly defined by the broadbands that have been specified.
562 In addition, because we are all new to the regulatory process, or relatively new within the last five or six years, the changes to the regulations have an impact to the small utilities. We are going from not having to report to reporting on an annual basis. The cost for us is in the range of about $300,000 a year. For a small town, that can be significant.
563 We want you to consider that the impact of these regulatory changes can be significant on many of these small telephone utilities and that you carefully consider the regulations that you make so that we are not back here in three years redefining the process again.
564 MR. KERR: Thank you. That's the end of our submission.
565 THE CHAIRPERSON: Thank you for that.
566 Commissioner McKendry.
567 COMMISSIONER McKENDRY: Thank you.
568 I just want to make sure I understand your comments about the contribution and what you feel you may lose and have to give up.
569 What are local rates now in Prince Rupert?
570 MR. KERR: Local rates for residential are $15.16.
571 COMMISSIONER McKENDRY: And we are discussing raising those rates to $22.75. If that was done, that would increase your revenues. Does that in any way compensate for the contribution you feel you may --
572 MR. KERR: That would basically recover our contribution we get today. We are also very concerned though that it might have some people drawing back on other services -- second lines, custom features, and things like that. So it might not be a dollar for dollar trade. There could be some impact there.
573 COMMISSIONER McKENDRY: Have you done any studies or conducted any research to try and get a handle on the impact of raising the local rates?
574 MR. KERR: Just by putting out feelers, asking different people and businesses, and that, what the reaction might be. No formal studies at this point.
575 COMMISSIONER McKENDRY: Thanks. Those are my questions.
576 THE CHAIRPERSON: On that issue with the high cost. Perhaps I missed -- I know I missed it, but you used the words "the assumption is incorrect", I believe when you were discussing that issue.
577 Could you explain to me what assumption it is you believe we are making that is incorrect?
578 MS SPEAKER: When we look at the recent definition of a high-cost service area, you are defining it by the NAS in the community. We exceed that NAS by about 1,600, therefore, we would not be eligible for a subsidy. Yet, we can clearly argue financially that we are a high-cost area. The community 140 kilometres away does not have the services that we have. Their rates are higher and we can't even get the long distance service that they get.
579 So for us to raise our rates comparable to those other municipalities, we are increasing our costs further on our community. We are already 25 per cent higher than our closest neighbour. We look at the definition as excluding us because of the size of our NAS.
580 MR. KERR: An example of some of our higher costs is that the independent companies back East here pay -- I don't know it's $200 to $500 a month for their SS7 links. We are paying $6,700 a month for these same links and it's ongoing, forever. We haven't been able to strike a deal with the company we connect with and so we pay that. We are also paying $4,600 a month for operator services as well and those are all costs that are much higher than the other independents pay, I am quite sure.
581 THE CHAIRPERSON: Those are both payable to Telus?
582 MR. KERR: That's correct.
583 THE CHAIRPERSON: I am still just missing the point about what is the assumption we are making that is incorrect on the high cost issue.
584 MR. KERR: I guess it was we are not defined or we don't fall under the guidelines of the high-cost serving area that the Commission has laid out. We have 9,600 access lines, but we are saying that we are high cost because of our remoteness. We buy a cellular switch or central office switch for a population of 16,000 people where Telus will operate in an area 140 kilometres away and they go to different communities with remotes and one switch will service probably 30,000 people, or more.
585 THE CHAIRPERSON: So you don't fit within our definition of high cost, but you are high cost.
586 MR. KERR: That's what we were saying, yes.
587 THE CHAIRPERSON: But the studies that your engineers have done and other issues.
588 MR. KERR: Right.
589 THE CHAIRPERSON: Okay.
590 You were talking about implementing the move to price regulation over a three-year period, that you wouldn't want to go there right away as of January 1, 2002. Could you explain a little more why the move is a problem for you and in your particular case, what would need to be done over the three-year period?
591 MR. KERR: Well, we feel that the impact, both politically and financially, financially on our residents, would be a real sticker shock and we would have probably a falling out of features and second lines and revenue would go down as well. So we feel we need at least three years to introduce these increased rates that we will have to implement.
592 THE CHAIRPERSON: So it isn't so much the move to price regulation as the increasing of the local rate.
593 MR. KERR: That's correct.
594 THE CHAIRPERSON: That increase you would want it phased over a longer period of time.
595 MR. KERR: Yes, that's correct.
596 THE CHAIRPERSON: Because in your view it's too traumatic an increase from the $15.00 rate that exists there now?
597 MR. KERR: Right, that's correct. It's the price increase that we are the most concerned about.
598 THE CHAIRPERSON: Would I be correct in interpreting you to be saying -- by the way, I noticed almost all the pictures had the sun shining in spite of your comment --
--- Laughter / Rires
599 THE CHAIRPERSON: -- except the one that talked about the amount of rain you get. In all the other pictures the sun is shining just like this one right here.
600 MR. KERR: We stick to indoor activities when it's raining.
601 COMMISSIONER WILSON: So the population should be growing.
--- Laughter / Rires
602 THE CHAIRPERSON: I take it your point is you don't have a problem with getting to that rate level. You think the shock of increasing to that level at one time would be inappropriate, but you could see yourselves moving to that level over a period of time.
603 MR. KERR: Over a period of time we believe we could do that. We have been kind of educating the people there that prices will have to go up to recover costs, and over time we feel we can do that. But that again would get us to the $10 million and paying into the high-cost serving fund as well. So it's a double whammy for us.
604 THE CHAIRPERSON: Right. I mean, as you may appreciate, most of us just about this time last year were in Whitehorse dealing with an issue with respect to NorthwestTel and, of course, they had many of the cost issues that you talked about in spades in terms of cost of services, cost of goods, and the rate base, I guess, over which to spread those costs. So I guess we are familiar with some of those issues.
605 Well, thank you for your presentation.
606 Does anybody else have any questions for the folks from rainy Prince Rupert?
607 Commission McKendry.
608 COMMISSIONER McKENDRY: I just want to follow up on your comments so I understand that your CCS7 charges and your operator service charges you say are significantly higher than they are for the other independent companies.
609 What is the history that led to that situation?
610 MR. KERR: Just not being able to negotiate with Telus the same set up that there is back East here. CCS7 they would never move on that at all. I think the companies back here paid $45,000 over three years and then are paying a tariffed rate of about $200 to $500 per month and Telus won't recognize that at all. We have even passed on the agreement that the independents back East here have to Telus and they haven't responded.
611 COMMISSIONER McKENDRY: So it's a negotiating situation with Telus I take it then.
612 MR. KERR: Yes, it is.
613 COMMISSIONER McKENDRY: Thanks.
614 No other questions?
615 Thank you very much.
616 MR. KERR: Thank you.
617 THE CHAIRPERSON: We had rain for three weeks in a row, I think, 24 days in a row in Halifax last October, I guess, or maybe it was November, and I thought that was bad.
618 So we will move to the next presentation and that's O.N.Telcom.
PRESENTATION / PRÉSENTATION
619 MR. CUSHING: Thank you, Mr. Chairman. I would also like to thank you as well in the Commission for allowing us this opportunity to appear in person before you at this roundtable and present our views in this important matter.
620 My name is Richard Cushing and I am the Director of Business Development and Regulatory Matters with O.N.Telcom, the Telecommunication Division of the Ontario and Northland Transportation Commission.
621 With me today is our Regulatory Counsel Stephanie Traynor from the firm Nelligan O'Brien Payne in Ottawa. Also present is Richard Peters, Manager of Rates and Regulatory Matters with O.N.Telcom and Roger Choquette, President of Comgate Consulting.
622 THE CHAIRPERSON: I hope we have enough chairs here for Mr. Choquette.
--- Laughter / Rires
623 MR. CHOQUETTE: Am I the only consultant in the room?
--- Laughter / Rires
624 MR. CUSHING: My presentation to you today is intended to provide an overview of the significant effort and commitment that O.N.Telcom has made and continues to make to ensure that its subscribers, regardless of the location, receive quality and affordable local telephone service consistent with that offered throughout this country and to frame this view within the context of the new regulatory framework that the Commission has proposed for the Canadian independent telephone companies.
625 O.N.Telcom's operating territory encompasses some 200,000 square kilometres and within that area O.N.Telcom operates six local exchanges.
626 This slide shows that those exchanges are grouped together into three distinct clusters and they are separated from each other by significant distances. The upper most cluster on this map shows the location of the Moosonee and Moose Factory local exchanges that are situated on the coast of James Bay, and I guess perhaps, as an aside, I can say that this is at least one area which we can draw a parallel with the services that are provided by Prince Rupert. Our exchange is one that is bounded on waters that are affected by tidal flow.
627 In any event --
628 THE CHAIRPERSON: I hope it doesn't rain as much.
629 MR. CUSHING: No, it certainly doesn't. More snow though.
630 The second cluster that is approximately 375 kilometres South of Moosonee shows the relative location of our Iroquois Falls exchange and then approximately 200 kilometres further South, the third cluster closest to the bottom of the map, represents a combined area of significant proportion that encompasses Temagami, Lake Temagami and the Marten River exchanges.
631 Within these six communities, O.N.Telcom serves a total of 5,102 NAS, none of which have more than 1,500 NAS. O.N.Telcom began providing telephone service to the communities of Moosonee and Moose Factory coincident with the construction of the rail line to Moosonee in the early 1930s. Moosonee itself is located 652 kilometres from O.N.Telcom's head office in North Bay and is only accessible by rail or by air.
632 The community of Moose Factory is one of Canada's oldest settlements, rich in historical significance and was originally established in 1673 as a trading centre by the Hudson's Bay company. It is located on an island in the estuary where Moose River meets James Bay and it is only accessible from Moosonee by boat, winter road and helicopter.
633 Interestingly, although the communities of Moosonee and Moose Factory are separated by only two kilometres, the challenging nature of the environment with respect to the lowness of the land -- approximately 20 to 25 feet above sea level -- the shifting tides and the extreme effects that seasonal change brings, particularly during break up as the ice flows out to James Bay, has in the past made it difficult to maintain an underwater link between the communities. O.N.Telcom, in order to provide reliable uninterrupted service, was required to construct a 26-kilometre facility to interconnect the two local exchanges.
634 Both communities are of equivalent size and collectively they have approximately 2,400 NAS which are equally distributed between them.
635 This slide provides a topographic view of the two communities and the relative position within the James Bay lowlands. As you can see, the estuary is characterized by a number of islands that were created in part by retracting glaciers and then by the shifting tides.
636 As I have indicated previously, in order to provide a reliable service between the two local communities, it was necessary to route the fibre optic facilities well South of both Moosonee and Moose Factory to reach where a portion of the river could be successfully spanned. Even at that point it required a significant effort to engineer and construct the structures necessary to support the 750-meter span that was needed.
637 These aerial views of Moosonee and Moose Factory provide an indication of the flatness of this lowland region. Moosonee is on the left and the long straight line extending down to the lower left corner is the rail line which terminates at Moosonee. To the South the nearest town is Cochrane, Ontario, at a distance of more than 300 kilometres.
638 The aerial view on the right shows the main boat landing area of the southern tip of Moose Factory Island and the H-shaped structure on the right side is Moose Factory General Hospital which services both communities and the villages to the North.
639 This final slide of this particular region shows a new central office being transported across the river over the ice bridge that is built each winter to link the communities.
640 We were talking about frost just previously. I was going to say that this took place last week, but I won't push it.
--- Laughter / Rires
641 MR. CUSHING: Near the southern limit of the serving territory, roughly 500 kilometres South of Moosonee and 110 kilometres from O.N.Telcom's head office in North Bay, local telephone service is extended from the Temagami wire centre to a group of customers that are distributed within a 384 square kilometre region that contains approximately 1,600 islands. Delivery of telephone service in this are is particularly challenging given the vastness of this lake and the fact that the subscribers' location can only be reached by boat, snowmobile and again possibly by air.
642 This particular map of Lake Temagami provides an indication again to the vastness of this local exchange area. It's particularly evident that when you consider that from top to bottom this lake is approximately 60 miles long. The service delivery model is complex and significant engineering and design efforts have been required to ensure service reliability.
643 Local loops are extended distances from 28 to 45 kilometres using a variety of technologies. This is accomplished in several steps, by first of all extending service out 22 kilometres from the wire centre which is located at the spot indicated by the red star at Temagami North. From there it's extended to a central point on the lake. From there service is further extended to six strategically located out stations that reach out as far as 18 kilometres in various directions. Then from there, those six out stations, submarine cables fan out to reach subscribers on the various and neighbouring islands. And again, the average length of the underwater loops is approximately six kilometres.
644 So as you can see, aside from the obvious logistical challenges of deploying this complex local network, this region also provides unique challenges when it comes to performing even normal installation or repairs as well as general maintenance.
645 The geological characteristics of the area make it difficult to obtain adequate ground protection for the equipment and it's necessary to go to some fairly extreme measures to provide even the most basic of protection. This is particularly troublesome given that this area is also highly susceptible to electrical storms and power interruptions.
646 It's not usual to have to replace one or more power supplies located at one of those out stations or to receive 20 or more trouble reports following a lightening storm.
647 As well, delivery of the local loop to a home or year-round cottage on these islands as well provides another set of challenges. Customers' expectations are high. Great care has gone to building their home in such a way as to be least disruptive to the scenic beauty of the area and they demand the same from others.
648 Customers expect and demand that local telephone service be delivered to them which is appropriate. However, they do not want to see any evidence in this pristine wilderness that such services are being provided. As well, simply getting around on the lake can be particularly challenging. Navigation is difficult, there are many uncharted shoals, myriads of islands and channels. It's not a place for a novice.
649 During the summer, O.N.Telcom services customers using its own watercraft which consists of an 18-foot steel boat with a 70 horsepower outboard motor. Even with this it can take easily an hour just to travel one way to a single customer or to one of the out stations. In the winter, travel is by snowmobile. Again, customers' expectations are high. They expect that if they can get to their home or their cottage, the local phone company should be able to do as well.
650 In fact, I can recount a situation that occurred during the spring before all of the ice was off the lake. A customer was so adamant that we go out and install a new service that he suggested to our lineman that he travel by snowmobile to a specific location on the lake and then he would meet him at that point with his boat and take the rest of the way. Needless to say the service was not installed until it was safe to travel the entire distance by boat.
651 Recently, however, one of the residents in the area has purchased an air boat and on those occasions now when necessary to travel on the lake during freeze up or break up it's actually possible to charter the service. So that facilitates that aspect of some of the service delivery.
652 With this particular slide here, we just wanted to show a typical out station building that was being loaded onto a barge and then being off loaded at one of the islands where it was to become an integral part of the local distribution network. Even in the view showing of the barge you can see cottages in the background on at leats one of the islands.
653 O.N.Telcom's three remaining exchanges, Temagami, Marten River and Iroquois Falls also fall into the zero to 1,500 NAS category with NAS counts of 761, 3554 and 1,183 respectively. Although for the most part the subscribers in these exchanges are accessible by road, each has their own unusual characteristics. The community of Temagami is divided into two segments, one being the original village that the highway passes through and the other is the new town site which was established approximately eight kilometres further North and that had been created in anticipation that the original town site would be abandoned at one point.
654 The exchange itself is located in the town site, serving about a third of the total NAS and a remote has been deployed in the village to serve the majority of the customers who remain there. As well, from the Temagami wire centre, that one is extended some 27 kilometres Southeast to serve some 80 customers in outlining areas.
655 With respect to the Marten River exchange, which is approximately 50 kilometres North of North Bay, this too is served by a star hub configuration off the Temagami wire centre. Less than half the NAS are located within a seven-kilometre radius on Marten River. The remaining NAS are found in the outlying areas of Otterkirk, Bassie Lake, McConnell Lake and Tomiko.
656 Although customers, for the most part, are accessible by road, when you reach out into the outlining areas such Otterkirk, that I just mentioned, where you see a DMS-1 hut, the roads quite often dwindling down to it might not be better than a path. Certainly, many of these are not ploughed during the winter, and those who choose to remain there over the winter months, you know, park their vehicles at an access point and travel between their home and vehicle by snowmobile.
657 In the Public Notice to this proceeding, the CRTC has suggested that a Phase II proxy may be determined based on the use of the national average monthly residential primary exchange service costs of the ex-Stentor high-cost serving areas. Given the challenging nature of providing local telephone service to regions I have just described, I believe it is not much of a stretch to surmise that the Phase II cost per NAS in O.N.Telcom's zero to 1,500 band exceeds the national average, and this is in no small part due to the influences of having subscribers that are remote even when the wire centre is not, exchanges with large serving areas and very few, and as well the historical demographic and technological development of the exchanges.
658 O.N.Telcom general supports the development of a simplified regulatory framework and transition to price regulation. O.N.Telcom's specific circumstances are that it is currently regulated under a split-based regime. Our Phase II costs analysis is now under way and O.N.Telcom expects it will be in a position to use actual Phase II costs commencing January 2002.
659 From our preliminary assessment, I can advise that O.N.Telcom is not opposed in principle to a proxy-based approach, however, the proposed national average-based proxy cost may not be appropriate, and certainly we view that the proposed proxy for the zero to 1,500 NAS band appears to significantly underestimate O.N.Telcom's average cost per NAS.
660 The issues that we see with respect to applying the national average are that independents do not have the same economies of scope and scale as ex-Stentor companies and there is very limited ability for independents to average cost.
661 O.N.Telcom's view is that the national average-based proxy is too low, particularly for exchanges in the zero to 1,500 NAS band.
662 With respect to the proposed mark-up, it is not clear at this time that a 15 per cent mark-up is sufficient, and if that is the case the mark-up should be set at levels that provide opportunity to recover a reasonable portion of the costs.
663 When it comes to optional services, it's our view that the proposed implicit contribution of $5.00 per residential NAS is too high. O.N.Telcom's average monthly optional service revenues are approximately $2.50 per residential NAS and it can be expected that as local rate increases occur this will negatively impact on optional service subscription levels in the future.
664 Insofar as the price regulation regime O.N.Telcom views that a reasonable transition period is required, certainly going in target price levels for price constraint services raise rate shock concerns and only the utility segment services need to be subject to pricing constraints.
665 Again, it's O.N.Telcom's preliminary view that pricing constraints should be related to some national average associated with the equivalent of local exchange service, that reporting requirements should only apply to the utility segment, and that a simple approach that provides for inflation and exogenous factor adjustments may be appropriate.
666 With respect to direct toll it is O.N.Telcom's view that appropriate costs should be recovered on the basis of Phase II costs plus a mark-up for long distance service providers and that this be done on the basis of originating and terminating minutes.
667 Again, here is a view of our serving area and the distribution of the local exchanges within that sector.
668 Mr. Chairman, this concludes O.N.Telcom's presentation. I certainly wish to thank you and your fellow Commissioners for affording O.N.Telcom this opportunity before you and we hope that the views we have shared here today will be of assistance to the Commission and to the other parties in this proceeding.
669 Thank you.
670 THE CHAIRPERSON: Thank you, Mr. Cushing.
671 Commissioner McKendry.
672 COMMISSIONER McKENDRY: I have a question about a proxy for costs, proxy-based costs. It seems to me one of the advantages of using a proxy is simplicity, all other things being equal. It presumably places less of a burden on the companies, and so on. But I notice that you have told us that you are now doing your Phase II costs and I think other companies that have appeared in front of us have said the same thing.
673 How much of a challenge is it for you to do your Phase II costs? Is that a major assignment or is that a manageable thing that would perhaps be better for you than a proxy-based approach?
674 MR. CUSHING: I guess from the outset of this proceeding and in the context of previous proceedings that O.N.Telcom has been involved in, it was viewed, at least by O.N.Telcom and its management, that it was important that O.N.Telcom be able to satisfy itself for its own sake, its owners', and as well for potential future acquires of O.N.Telcom, that the appropriate steps be taken to ensure that the appropriate outcome with respect to the contribution could be arrived at.
675 O.N.Telcom has recently, and in the recent past, put a fair amount of effort into doing Phase III. We are going down the path of Phase II and given that this work is under way, indications are that the Phase II costs methodology would be appropriate and we view that this can be accomplished and be put into effect for January 2002.
676 COMMISSIONER McKENDRY: If the companies can calculate their Phase II costs and do the appropriate studies, and so on, is that a better option than -- why do you say you favour the proxy-based approach, which I think you did say. You said you are not opposed in principle to a proxy-based approach. Why would you favour the proxy-based approach if you are going to go through the trouble of actually doing your Phase II costs and knowing what they are?
677 MR. CUSHING: At the end of the day, having viewed with the proxy that has been proposed within the scope of this proceeding, and given that we have undertaken to do, at least in part, and go down the path of Phase II, our view is that the proxy as proposed is too low and that it's probably appropriate that either one of two things happen. We either need to carry on with the Phase II costs and use that approach, or through these discussions here today and throughout the remaining of this proceeding, work together and arrive at a proxy that more appropriately reflects maybe perhaps what even the Phase II calculations would.
678 Certainly I agree that a proxy approach does offer probably a simpler approach, and could be less burdensome going forward.
679 MS TRAYNOR: Perhaps I can add to that. I think our position is that we are not opposed to a proxy approach. We recognize that we are well ahead of a number of independents that are in the room and we are not quite far enough along in our own analysis to be able to assess where are actual costs are going to stand with the ultimate proxy.
680 So at the moment we are undergoing our assessment and we are not quite at the point of being able to say definitively for ourselves whether utilizing the proxy would be a problem vis-à-vis our own costs.
681 COMMISSIONER McKENDRY: So the purpose of your exercise is really to test the usefulness of the proxy that has been proposed here in relation to your actual experience. That's why you are doing the work.
682 MS TRAYNOR: I don't think I would say that we have necessarily come to that conclusion. As Mr. Cushing said, the company felt that it was necessary to do the Phase II analysis in any event. We recognize that this proceeding has to go ahead and it just didn't seem to be appropriate to be saying that everyone should be going to Phase II costs on January 1, 2002.
683 Whether or not ultimately we suggest that that is appropriate for us, that decision has not finally been made.
684 COMMISSIONER McKENDRY: Thanks.
685 With respect to the transition period, you say a reasonable transition period is required. Do you have any thoughts about what that period is, the length of time?
686 MR. CUSHING: I guess from our perspective we feel that it may be required for some of the companies to have a reasonable and by reasonable I would think something in the order of one to one and a half year time frame in order to, should it become necessary for them, do their Phase II costing.
687 COMMISSIONER McKENDRY: On page 21 of your presentation in the last bullet, you say that your preliminary view is "a simple approach that provides for inflation and exogenous factor adjustments". This is a question I have asked some of the other parties as well. In a price regulation system, what is it that has led you to exclude a productivity factor from your approach?
688 MR. CHOQUETTE: When the approach was discussed, we kept in mind the fact that the Commission when it defined the subsidy calculations indicated that it was going to review these numbers annually and it requested specifically that the ex-Stentor companies remove the effects of inflation and productivity from their studies so that the Commission could take it into consideration when the Commission did it's annual review.
689 We discussed that and came to the conclusion that to the extent that the Commission was going to do an annual subsidy review, it may not be appropriate with respect to price caps to actually include the productivity. However, it is not -- I mean that was a preliminary assessment of what we thought was happening, but the Commission may have a better indication of what their intention is in that.
690 COMMISSIONER McKENDRY: So your view is that we should take productivity into account, it's just whether we do it in the annual review or whether it's built into a formal way --
691 MR. CHOQUETTE: Yes, that's right.
692 COMMISSIONER McKENDRY: Thanks.
693 Those are my questions, Mr. Chairman.
694 THE CHAIRPERSON: Thank you, Commissioner McKendry.
695 Commissioner Demers.
696 COMMISSIONER DEMERS: Thank you.
697 Just one question, and it concerns the seasonal customers. Probably at the Timmins hearing in which I did not participate maybe it was discussed, but so that I could understand because with reference to Temagami and so on this is great hunting territory and from your description people have nice cottages on nice islands in that area.
698 Is the cost to serve a seasonal area, seasonal customers, taken into account and is that extra cost to serve these cottages not borne by the general body of subscribers of your company?
699 MR. CUSHING: O.N.Telcom in this particular serving area of Lake Temagami has gone through several varieties of technologies over time.
We have now, as of 1988-1989, deployed a good portion of what is there now. When we did so we factored in additional components in that service delivery model. There was extra exchange distance for which customers were charged. As well the -- I guess with respect to the seasonal nature of some of the customers, we are starting to find that they aren't so seasonal after all. They enjoy the use of their properties in the summer, the spring, the fall and the winter, and the impact of disconnects and reconnects, the incidences aren't occurring as they used to.
700 With respect to rates and charges, I should point out that O.N.Telcom's rates are still quite low, in the range of $9.40, I believe, for a residential line. We are currently involved in a process before the CRTC where we propose to raise those rates to approximately $18.85, I believe, and as well remove the inter-exchange component of the service in this area.
701 So I don't know if that answers your question.
702 COMMISSIONER DEMERS: Well, in this "process" we don't have to worry, or is it your view that we don't have to worry about the extra costs that sometimes few or many subscribers make you incur because they decide to have nice residences far away from your main network and that this is recovered by you, by your company one way or another and that it would not be subsidized through formulas or other things like that. That's really my concern.
703 MS TRAYNOR: I think while we do have some seasonal residents it's not true of the territory that there are only seasonal residents in any particular area. So there is a reserve that's included in the Lake Temagami exchange and a number of residents in that area have difficulty currently paying the individual line service rate. So it's difficult to ascertain whether the costs of serving a territory are really for those cottagers because we would be there serving the full-time residents in any event.
704 COMMISSIONER DEMERS: Thank you.
705 Thank you, Mr. Chairman.
706 THE CHAIRPERSON: Commissioner Noël.
707 COMMISSIONER NOËL: Just one question. At the beginning of your presentation, it was on page 3, Mr. Cushing, you mentioned that there are about two kilometres between Moosonee and Moose Factory Island and that because of undercurrents and tide activities you had to build a fibre link that totals 26 kilometres to link the two locations.
708 Is there any other type of facility that you could have built instead of a fibre link of 26 kilometres? I am think microwave, for instance.
709 MR. CUSHING: Over the years again a number of technologies have been put in place to interconnect Moosonee and Moose Factory together, from submarine cables to microwave radio. Ultimately in today's environment the technology of choice is fibre and when the opportunity presented itself, when the power line was extended up into this region and across it afforded us the opportunity to follow that route and build the appropriate structures to do so.
710 It was probably the economical choice at the time.
711 COMMISSIONER NOËL: Thank you very much.
712 THE CHAIRPERSON: Just following up on Commissioner McKendry's question about the Phase II costs issue. With respect to the issue of the mark-up then when you talked on page 18 of your presentation, "it's not clear at this time that 15 per cent is sufficient". Would I presume that the cost analysis that you are doing would arrive at what you at least think would be a figure that provides an opportunity to recover a reasonable portion of the costs which you indicate in the second bullet on that page?
713 MR. TRAYNOR: Yes, that's true.
714 THE CHAIRPERSON: Then just to confirm, several people have talked about a transition here today in terms of a rate increase to avoid rate shock and move prices closer to costs presumably over a period of time.
715 When you talked about transition, it was more transition to allow the company the time to in fact complete the Phase II costs. Is that correct?
716 MR. CHOQUETTE: I think the transition period that the company is referring to relates to the fact of the rate increases before the Commission right now to $18.95 or $19.95 with respect to this previous proceeding, so any other increase to say $22.75 would be viewed in the context of a recent rate increase possibly, if the Commission came to that determination this fall. So there was a price issue.
717 I think the other issue related to not necessarily constraining other small independents to a situation. I believe the company's position is that it will have its own Phase II costing in place by January 2002.
718 THE CHAIRPERSON: So then help me better understand your answer to Commissioner McKendry's question when you talked about a year or a year and a half transition because I understood you were talking largely about completing Phase II costing.
719 MR. CHOQUETTE: I think the reference there was related to other smaller companies that may not have the capacity to do it right now.
720 THE CHAIRPERSON: So given your experience with doing this as a small company -- I am not trying to pin you down on precise timeframes here, but I mean, the whole issue about picking a proxy here, as Commissioner McKendry outlined in introduction to his question, was that it was presumed on our part to present an element of simplicity here and I guess we have been operating on the presumption that Phase II costing was somewhat onerous and it has been indicated to us over the years for a number of the smaller companies to undertake.
721 Would it be your view -- and I am not trying to get you into a situation where everybody else in the room gangs up on you for having committed them to do something -- that, at leat in your experience, that a year and a half or so would be reasonable time for a company to undertake Phase II costing, at least at a level that would provide a reasonably accurate picture of the cost and perhaps be significantly better than the proxy that has been suggested.
722 MR. CUSHING: Perhaps I can answer at least part of that question. I guess the presumption that -- I mean, we shouldn't presume that Phase II costing is not onerous. If it wasn't onerous I might be able to do it myself without the assistance of Mr. Choquette.
723 THE CHAIRPERSON: Well, we wouldn't want to put him out of a job.
724 MR. CUSHING: However, given O.N.Telcom's situation, where it is, where it finds itself having done Phase III costs and where we have gone in our recent proceeding, the next logical step to carry on and calculate the Phase II costs seems appropriate for us.
725 I guess, with respect to the other companies, given their situation and where they are now, it's probably difficult for me to say with a great degree of certainty what might be appropriate for them.
726 THE CHAIRPERSON: You mentioned that the price regulation should be on the utility segment. In your particular case, what all would that encompass, do you believe? I mean, we have been talking about how we shouldn't be doing what we, the Commission, have done with the Stentor companies for almost everything we have done here with respect to the companies present here today.
727 When you talk about the utility segment, are you defining that pretty much the way we have defined it for the ex-Stentor companies or are we talking about a narrower group of services here?
728 MR. CUSHING: The answer is yes and it's with respect to local exchange services.
729 THE CHAIRPERSON: All right.
730 Well, thank you for your presentation.
731 Does anybody else have any questions for the folks from O.N.Telcom now that they have committed to do Phase II costing in a year and a half?
--- Laughter / Rires
732 THE CHAIRPERSON: Okay.
733 We will move now to Northern Telephone.
PRESENTATION / PRÉSENTATION
734 MR. DuBERGER: Good afternoon, Mr. Chairman, Commissioners, participants.
735 My name is Jacques DuBerger, I am the Chief Legal Counsel & Regulatory Officer for Northern Telephone Limited.
736 Here with me today are Mr. Michel Gilbert, General Manager, Regulatory Matters, for Northern Telephone, Ms Molly Slywchuk, Director, Regulatory Matters and Mr. Dennis McCarty, consultant for Northern.
737 I note that Mr. Choquette is not on my list, but --
--- Laughter / Rires
738 MR. DuBERGER: -- I guess that he may join whenever he wants.
739 MR. CHOQUETTE: Thank you for that.
740 MR. DuBERGER: So don't be too far away anyhow because there are some questions sometimes we may need your help with.
741 THE CHAIRPERSON: Well, you better watch out. Mr. McCarty is taking notes here.
--- Laughter / Rires
742 MR. DuBERGER: Yes, I know, I know.
743 I personally want to thank the Commission for the opportunity it gives to the interested parties to participate in this roundtable as part of the proceeding arising from Public
Notice CRTC 2001-61.
744 The Telecommunications Act establishes the basis of the Canadian telecommunications policy. Among the various objectives included in the law, I will quote the following, which are more closely related to the matter we are discussing today:
745 One of these objectives is to facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions.
746 Also you have to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada.
747 To enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications.
748 To foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective.
749 And finally, to respond to the economic and social requirements of users of telecommunications services.
750 It is with these objectives in mind that Northern prepared the submission filed before the Commission on June 29th.
751 Northern provides services to about 66,000 network access services, or NAS, in a territory that spans 83,000 square kilometres. This results in a density of .8 NAS per square kilometre. In comparison, in Thunder Bay, the density is significantly higher at about 25 NAS per square kilometre. As a matter of comparison, in the case of Télébec, the density is .25 NAS per square kilometre.
752 In all of Northern Telephone, only one exchange, Timmins, has more than 10,000 NAS and one of them, Opishing Lake, with only 27 NAS. When I hear names like Gowganda, 117 NAS, or Detour Lake, 109 NAS, or Abitibi Canyon, 63 NAS, this reminds me of my early years in the industry as I heard, while I was representing Télébec, names like Oujébougoumou, Rivière Héva or Ste-Rose-de-Poularies.
753 Facing the challenge of providing modern telecommunications services in remote and low density areas, Northern has managed, over the years, to meet the needs of its customers and develop an infrastructure that helps the population of Northern Ontario to access the world through an efficient network.
754 Northern submits that customers, wherever they are located, should have access to the quality of service afforded by modern telecommunications and we strive to accomplish this
goal in the most efficient manner.
755 Accomplishing this objective is a balancing act between costs, service, tariffs and incentives for shareholders to continue to invest to meet increasing demands from customers that have grown to expect access to what has become the Information Highway.
756 We agree with the Commission that the reliance on market forces and effective regulation is a key element of telecommunications development in this day and age.
757 As we progress toward a more open market, there are still many issues to resolve that mandate utmost attention by the Commission and this proceeding is at the very heart of the matter.
758 Concerning the contribution collection mechanism, in its Decision 2000-745, the Commission indicated, at paragraph 141, that:
"The Commission will, during the transition year of 2001, initiate processes to address the necessary modifications to include the independent telcos under the revenue-based [collection] mechanism in 2002".
759 The Commission also added at paragraph 145 that:
"The Commission will initiate meetings with the independent telcos to ensure accuracy and timeliness in implementing a Phase II costing methodology on the 1st of January 2002".
760 By applying the calculation methods suggested by the Commission to establish its total subsidy requirement, Northern experiences a decrease of 69 per cent, or $6.1 million, in the amount of subsidy it receives today. When we add to this the cost Northern must assume for its contribution towards the new Central Fund and the shortfall arising from the use of a Phase II calculation in the direct roll assessment, another $3 million is added to the shortfall faced by the Company.
761 All in all, when we consider everything, Northern faces an estimated variance of $9.1 million in its revenues through the
implementation of the new subsidy/contribution mechanism. This is a considerable amount.
762 Northern fully supports a price-based regulation regime, however, before this is introduced, there needs to be a transition period through which the Company must maintain its financial integrity.
763 In its June 29 submission, Northern has expressed its thoughts on the various matters put forward by the Commission in its Public Notice.
764 Today, we come before you to explain our position and to help you better understand the importance of the issues, their possible solutions and our willingness to work with the Commission in defining a framework that will assist Northern and the other independents to continue to serve their customers and meet their growing needs.
765 We respectfully submit that the national model suggested by the Commission has significant impacts on our organization
and that this proceeding should help you define an
appropriate approach to address the issues that Northern and the other independents are facing.
766 I want to thank you for your attention and I will now ask Mr. Michel Gilbert to continue the presentation.
767 MR. GILBERT: Thank you, Jacques.
768 Good afternoon, bonjour, Mr. Chairman, Commissioners and participants.
769 As Mr. DuBerger said earlier, Northern thanks the Commission for providing the opportunity for us to participate in this roundtable. We hope that this process will help the Commission have a better appreciation of each participant's situation and thus make the appropriate decision in this proceeding.
770 In my comments I will briefly summarize Northern's submission and suggest a possible approach the Commission could take in this proceeding.
771 The proceeding launched by the Commission in PN 2001-61 is far reaching and it has profound implications for the independents, including Northern and the stakeholders involved, namely the customers and the shareholders and the employees of our companies.
772 This proceeding will redefine, for the second time in less than 8 years, the regulatory framework applicable to the smaller Independent telecommunications companies in Canada.
773 Our industry is evolving at a very rapid pace and the independents must continue to provide service for their customers while investing in future services.
774 In making its determination concerning the various issues mentioned in the Public Notice, the Commission will have the challenge of a balancing act, making sure that the interest of customers, operating companies and the public in general are all taken into account.
775 As Mr. DuBerger mentioned previously, Northern telephone is operating in a low-density territory. If you look at the list that appears on the screen now of our exchanges, the company has 31 of them of which 30 are below the 7,000 NAS. Only Timmins, as a matter of fact, is above 7,000 NAS. This territory is remote from large metropolitan centres as well.
776 On a lighter note, just to comment further on Sharon's statement earlier, on July 4th is snowed in Hearts as well. Unfortunately, we have no pictures because it was snowing too much.
--- Laughter / Rires
777 MR. GILBERT: In its Public Notice, the Commission seeks comment on three main issues:
Priced-based regulation; implementation of the new contribution regime within the independents; and the transition period.
778 Northern is of the view that the new regulatory regime should include more emphasis on the marketplace to determine direction and pricing; balance between the rates and the costs of providing
services; incentives to favour investments in new services; and incentives to promote customer satisfaction but not at the expense of efficiency.
779 Price-based regulation might be successfully implemented for the independents, however, this should not be done at the expense of the quality of service to the customer or the financial integrity of the corporations.
780 Northern submits that before moving to a price-based regulation for the independents, rates have to move closer to the cost of providing service. For this reason, as we have explained in our submission, the company suggests a four-year transition period.
781 The Price cap regime for the larger companies in the country is presently either being reviewed or in the process of being implemented, the latter being the case for Télébec and Telus-Québec. Northern is of the opinion that before the smaller companies define their price-based regulation regime, they should know what will be applied in other territories and how it could be done, albeit on a smaller scale and with less complicated methods, in their own situation.
782 Moreover, since there are many different corporate models within the independents, the Commission might want to consider, in due course, specific departures from a basic/generic price-based regime to allow for a more tailored approach.
783 The scale at which the smaller independents such as Northern operate must be taken into account in the establishment of the new regime, as was discussed earlier today.
784 The Commission tends to standardize the regulatory approach and the different tools that are put in place, to ensure that its regulation applies uniformly across the country and to different companies.
785 However, this standardization should not be a goal that supersedes the essence of the Canadian Telecommunications Policy nor the need for a strong industry with healthy players, active in all the markets for the benefit of the customer.
786 Northern believes that the initial price-cap regime established for the ex-Stentor members has been a learning experience for everyone. As an industry we should build on this experience.
787 The second major issue that the Commission is addressing in its Public Notice is the implementation of the new contribution/subsidy regime.
788 In the Public Notice, the Commission has put forward a proposal that would result in the implementation of the revenue-based collection mechanism in 2002 for the independents.
789 This would also imply a simultaneous implementation of a new method to evaluate the total subsidy requirement for the independents, a method that involves various things: a) only residence NAS are eligible for subsidy; b) only those NAS that are located in exchanges deemed as HCSAs would receive subsidy; c) and the total subsidy requirement calculation would be based on the difference between the revenues arising from local basic service revenues including an implicit subsidy contribution and the Phase II costs along with a 15 per cent mark-up.
790 In its Public Notice, and also in its Decision 2000-745, the Commission has recognized that the independents might have some difficulty to perform the required Phase II studies -- we might think otherwise now -- and it suggests the use of proxies, namely the national averages, is appropriate.
791 Northern has performed calculations using the suggested proxies and evaluated the total impact of the new regime on its financials. As Mr. DuBerger stated before, the table below entitled "Financial Impact, New Contribution/Subsidy Regime" illustrates the effects of the Commission's proposal on Northern's financials.
792 As you can see, based on 2001 data, Northern estimates that its contribution/subsidy would fall from $8.9 million to $2.8 million under the proposed rules. This makes for an estimated shortfall of $6.1 million, or if we translated this into a dollar per NAS figure, the equivalent of an $8.00 per month increase in local rates.
793 In the current regime, Northern does not pay contribution. With the revenue-based mechanism, it will have to pay an estimated $1.5 million to the Central Fund. This is equivalent to another $2.00 per month rate increase.
794 Since there is a difference in the direct toll calculation between Phase II costing and Phase III costing methodology, there is another $1.5 million in the residual amount that is lost in the process. This is equivalent to another $2.00 rate increase.
795 In summary, the variance between the present situation and the proposed regime results in a $9.1 million annual shortfall for Northern .
796 This difference is considerable and, should we need to fully compensate its effect through a single basic local service rate increase, this would equal to $12.00 per month on average.
797 I think that we all understand that such an impact cannot be addressed solely through rates or subsidies in isolation.
798 The sheer magnitude of this difference in revenues illustrates that the use of "national average" proxies may not be appropriate under the circumstances.
799 Northern does not believe that the answer to the financial dilemma stated above resides in a single approach. There must be a tailored methodology applied to find an acceptable solution that meets the needs of the customers, the Commission's objectives and those of the companies as well.
800 It might be reassuring to apply the same recipe to all the players in the industry. However, the far-reaching impacts must not be forgotten and Northern submits there must be stronger reliance on the marketplace as time goes by, as we said earlier. But in the meantime, we need a smooth transition for the benefit of all.
801 In its deliberations, the Commission should consider the regional economic impact that the independents have within the communities they serve. The importance of a company like Northern for a regional economy is crucial. When a nation-wide analysis is made, we tend to forget what appears to be minor within the scope of a continent-size country.
802 The people in our communities have a strong bond with each of our companies and they fully realize the important role played by them in the development and sustenance of the regional economic landscape.
803 If we look at it in another way, we can say that between 1996 and 2000, Northern has reduced its subsidy requirement by approximately $4 million. What the Commission is now proposing is another $6.1 million decrease resulting from the use of national averages and the costing methodology, including the $5.00 per month implicit optional services subsidy.
804 This is not a change that can occur overnight and Northern is of the opinion that some consideration should be given by the Commission to the very basic subsidy and eligibility calculation method as they apply to Northern and the others.
805 For example, Northern has indicated, in its submission that the $5.00 per month implicit optional services subsidy is not appropriate in its case. On average, in year 2000, Northern has raised $1.21 a month from its Call Management Services and another $1.06 from its Custom Calling Features for a total of $2.27 a month, an average that is not that much different from the one of other independents.
806 If we exclude Timmins which is a larger centre this calculation now comes to $2.05 a month. So this probably tells us a little bit more about the situation of rural communities when we talk about optional services. By using the $5.00 per month figure, the Commission is asking Northern to more than double its revenues arising from optional services.
807 Some might conclude that we have not done a good job at promoting these services. We have a different opinion. There might be room for improvement in the revenue base accruing from these services, but not to the 100 per cent or more level. Northern has strongly marketed its local optional services, linking its sales campaigns to those of Bell Canada, for example, taking advantage of the national media campaigns.
808 Northern thus submits that the Commission strongly reconsider the $5.00 per month average and establish a level that is more in line with the market served by the company, and I could add the other independents.
809 On the cost side, Northern has done some, I wouldn't say preliminary, but proxy-based initial Phase II cost calculations. We used Northern's loop lengths and Bell Canada loop unit costs as a proxy, financial and capital parameters. This preliminary work indicates that there is a significant difference in the total subsidy requirement between this calculation and the CRTC proxy method. And if we use our method, the TSR grows from $2.8 million to approximately $7 million. So that is significant for the $2 million variance here, an amount equivalent to a $5.00 per month rate impact across all the NAS.
810 In its submission, the Company also indicated that a 15 per cent mark-up is not sufficient to allow for the recuperation of all fixed common costs that Northern must bear. Considering the economies of scale as well as economies of scope, a 25 per cent mark-up might better reflect Northern's situation. This change alone could have an impact of approximately another million dollar on the shortfall calculation.
811 Finally, the Commission might want to consider applying only a single band to eligible NAS in smaller companies like Northern. The rationale behind this proposal would be similarities of costs and this would simplify the pricing process as well as the subsidy requirement calculation.
812 As we have seen, the Commission could use different approaches to better suit the total subsidy requirement calculation to the reality of Northern and other independents.
813 As far as solutions are concerned, Northern submits that, considering the magnitude of the amounts involved and the need to bring local rates closer to costs before implementing the price-based regulatory regime, a transition period of three to four years could be appropriate.
814 During this period, the company would propose a series of rate increases aimed at progressively reducing the subsidy requirement by a combination of measures.
815 The Company will continue to search for ways to improve its efficiencies.
816 Northern will make a proposal concerning possible rate increases in its July 20 submission. One possibility could be the following:
A $4.00 per month basic local service rate increase in 2002 to alleviate the effect of the national fund contribution and the residual amount from direct toll, $3 million total for both. A $2.00 per month basic local service rate increase in 2003, 2004 and 2005 aimed at reducing the shortfall.
817 If we were to implement such a proposal, the shortfall would be $4.4 million in 2005 based on an initial calculation of $8.9 million. At that level the subsidy would represent approximately 10 per cent of our utility revenues.
818 Northern would support a continuation of the per-minute contribution payment for the direct toll component, at least in the initial phase of the transition period.
819 In conclusion, Northern does not support change for the sake of change. If the one shoe fits all approach is detrimental to a company, there should be room for accommodation, especially when costs and other factors indicate a significant departure from national averages as calculated by the Commission in its proposals and also when the total impact of the proposal places the financial integrity of the company in jeopardy, thus directly impacting on its capacity to provide a level of service as required by the Law and maintain or foster employment in the new economy, especially in rural and more remote areas of Canada.
820 The Commission should use a flexible approach within certain parameters that would allow for a progressive reduction on subsidy payments on the part of the independents, this being consistent with the objectives set out by the Commission.
821 A price-based regulation regime could be put in place after a four-year transition period. This regime would mean that a lighter regulatory burden could be imposed on the companies while, simultaneously, ensuring that public interest is preserved.
822 Northern submits that the regional impact of independent companies in their area must not be forgotten in the analysis leading to the decision in this proceeding. This is something that has a direct impact on the consumers since local telecommunications companies are key players in the regional economic development, especially in this day and age, and I would add especially in Northern Ontario, in our case.
823 Northern wants to thank the Commission for this roundtable meeting and we would welcome questions.
824 Thank you very much.
825 LE PRÉSIDENT: Merci, Monsieur Gilbert.
826 Commissioner McKendry.
827 COMMISSIONER McKENDRY: Just a quick question to begin with. I was wondering what your existing local rate was, but I take it from page 12 that it's $27.35.
828 MR. GILBERT: Yes, including touchtone.
829 COMMISSIONER McKENDRY: Including touchtone.
830 Just to go back to page 3 of your comments where you set out four matters that -- where you say "Northern is of the view that the new regulatory regime should include..." and you cite four things that it should include. I just wanted to relate them to what you were proposing. The first one, more emphasis on the marketplace to determine direction and pricing. Forgive me if I am misinterpreting what you are proposing, but it seems to me what you are proposing is a four-year delay in a sense to a new regime while you raise rates to better reflect costs.
831 I am just wondering how that relates to the more emphasis on the marketplace to determine direction and pricing.
832 MR. GILBERT: Well, as we know, in a competitive environment, or if we want to have a competitive environment, prices have to be closer to costs. So in order to allow for more emphasis on the marketplace, namely eventually competition, there must be a closer relation between costs and tariffs.
833 COMMISSIONER McKENDRY: So the new regime really would kick in for four years until you had achieved this goal of raising your rates to reflect the costs. Is that right?
834 MR. GILBERT: Well, that's essentially what we are saying here.
835 COMMISSIONER McKENDRY: So that takes care of point B as well, the balance between the rates and costs, that would be the first step really to get your rates and costs in balance.
836 MR. GILBERT: Yes.
837 COMMISSIONER McKENDRY: "Incentives to favour investments in new services". How does your proposal relate to that, "incentives to favour investments in new services"?
838 MR. GILBERT: Well, as we said, any regime that the Commission wants to put in place is a balancing act and it should take into consideration the need for the sustenance and future investments in the industry so that we make sure that regional areas, or more remote areas, are not left out in the dark as technology moves on.
839 So really in any new regime that would be put in place, there has to be an incentive for the investors to come and invest in those territories, to make sure that all customers have access to the kind of quality of service in the services they are demanding today, which are not much different than what is available elsewhere, namely metropolitan areas.
840 COMMISSIONER McKENDRY: Lastly, the incentives to promote customer satisfaction. Now, if I understand this correctly, in 2005 your local rate would be $37.35. You are certainly close to your customers. How are they going to react to a local rate of $37.35 and how do you relate that to incentives to promote customer satisfaction? I presume it's a local rate that they may have some discomfort with, but are you saying there are other elements of customer satisfaction that would come into play?
841 MR. GILBERT: Indeed. I think that customer satisfaction does not relate only to rates. It relates to the quality of service you are providing. It relates to the type of service you are providing, and I can testify, having been in the industry for a little while, working for a sister corporation of Northern, I remember times when the customers were not happy with our rates and they were totally disgruntled by the quality of service. There is one person sitting on the board today that probably remembers that era.
842 Things have changed a lot and Télébec, to mention it, and other companies have invested in better equipment, digitalization of their network. We have come to see that yes, rates matter, but the quality of service matters a lot and, as I said, we have, as an industry -- not only the company, but as an industry -- to perform a balancing act, making sure that all these components are taken into account. That's what we need.
843 COMMISSIONER McKENDRY: So in return for the $37.35 the customer satisfaction element would be better quality of service than you provide today. Is that what you are saying?
844 MR. GILBERT: Well, I don't think that I can say it's going to be necessarily better than what we provide today. I think that generally speaking we have to continue to invest. We have to continue to offer very good quality of service, and in the case or Northern I think that the surveys that are performed reveal that the quality of service is very well perceived by the customers. So we want to continue to be able to deliver that.
845 COMMISSIONER McKENDRY: Thanks.
846 Thanks, Mr. Chairman.
847 THE CHAIRPERSON: I was actually going to pursue the same four points. At the bottom of the same page in paragraph 14, we have heard a lot today about not equating the companies represented here today with the Bell, Telus, MTS, the other larger telephone companies. I am kind of curious to know why you would want to have the new price cap regime for those companies in place before we dealt with that issue with respect to the smaller companies. I mean, it seems to me if we just looked at these companies as a group it might be easier to come up with a simple effective price cap regime without necessarily following what we do with the bigger companies.
848 MR. GILBERT: I agree with you that we must find a way to have a simpler form of regulation for the small independents, including Northern. This statement here relates to the fact that since, as other players in the industry will know, what will come out of this revision and implementation of the regime and other companies, we might learn from that and get a sense, or I would say an orientation from the Commission as to where it sees the evolution of the industries going and then probably tailor our approach in our price-based regulation regime to what will come out of those hearings. This is really what that means.
849 THE CHAIRPERSON: Looking at that from a different perspective, you have talked about not moving the price regulation until we essentially deal with if not the total elimination, largely eliminating the subsidy by bringing rates closer to cost over a four-year timeframe which still won't be that cost, I presume judging by the proposal that you have made today.
850 So I guess my question then is how important -- I don't know how to phrase this -- how best do we decide how much of the subsidy to get rid of before you decide you are going to go in the price regulation? I mean, why couldn't we do that sooner?
851 MR. GILBERT: Well, the Commission might make the decision to go into a price cap sooner. I think it is its decision to make essentially. What we have here is one possible solution to the present situation we are facing, but if we want to move closer to costs then we feel, considering the magnitude of the shortfall that we have, that a four-year transition period is good. However, should the Commission decide to maintain let's say a larger amount of subsidy then things could be arranged differently.
852 I think that there is flexibility in our proposal and we, as an organization, are open to consider other avenues. There are many issues that we have to deal with in this proceeding and the implementation of price regulation, essentially what we are saying here is that implementation of price regulation should not supersede everything else at the expense of either the customers or the companies.
853 As I said, this has to be a smooth transition and whatever goal is set it's going to be easier for us to implement, but as a general possibility this is what we had to put in place.
854 THE CHAIRPERSON: Are you suggesting that because you think it -- is it your view that you overly complicate the price regulation if you superimpose on top of that significant rate increases to address the subsidy question? That you should get that out of the way and get that behind you before you deal with price regulation and that you shouldn't be trying to do both at the same time.
855 MR. GILBERT: Not necessarily in that sense. I think that price regulation has to come into effect when there is in the opinion of the Commission a good balance between rates and costs, and once this is achieved then we could implement the price-based regime.
856 THE CHAIRPERSON: Maybe it's not a fair question to put to you, but at paragraph 23 you talked about -- well you refer to "the Commission has recognized that the independents might have some difficulty to perform the required Phase II studies", and we have had some discussion about this this afternoon already and if other parties wish to we can discuss some more.
857 Essentially we are advocating the use of proxies and national averages to sort of recognize that problem and perhaps get around it. I take your point about using national averages and perhaps those aren't appropriate. We have heard a lot of discussion today about how the cost structures are different for these companies.
858 I am wondering, in light of the discussion today, at least in your view -- and I am quite happy to hear the response of others -- would it be more appropriate for us just to go to Phase II costing and take the year or year and a half, or whatever it would be, to arrive at that? Is it really that difficult? Have we perhaps made an incorrect assumption with respect to that?
859 MR. GILBERT: Well, I think that when we look at the various opinions that were expressed today, that are included in the submissions before the Commission, they all clearly show that there is a large discrepancy between the national averages and the probable actual situation if we were to perform a distinct Phase II costing studies for the independents.
860 So in that sense I think that what we have -- at least from Northern's standpoint -- to arrive at is the best estimate of what the actual costs are. In my own opinion it could be proxy-based, but we need to further investigate.
861 As you suggested, as an industry or as a group of players within the industry, it might be a good idea to take some more time to perform those studies. Actually we are going to going to look very deeply into it and consider seriously doing a full-fledged Phase II study or at least we need to ascertain better our costs because what we have found with the work done so far is that there is a discrepancy that needs to be reconciled and as such I think that we should take the time to do it because we are not talking here small differences. We are talking about big, big numbers, numbers that will have a significant impact on the players involved. So that's what I think.
862 THE CHAIRPERSON: Okay.
863 I wrote down your words, that we need "the best estimate of what the actual costs are". It may be the proxy we have chosen isn't the right one, and I would be happy to entertain comments from others about whether getting the Phase II done, but on our side of it if every company is doing Phase II then we have to go through and sort of check all that and be satisfied that those costs are indeed correct. So there is quite a bit of work on both sides that would need to be done with respect to that.
864 So the proxy was intended to help out both sides in that hearing.
865 MR. GILBERT: If I may comment, I think it has proved to be helpful, at least to allow us to ascertain or to focus on the very core of the matter and we see, as a group, I think, that there we need to do work on it.
866 THE CHAIRPERSON: Right.
867 MR. GILBERT: I agree with you that doing a full-fledged Phase II study would impose a lot of work for the Commission as well so there might be a middle road approach that we could take. Nothing comes to my mind right away, but I will go ask Jacques about it.
--- Laughter / Rires
868 THE CHAIRPERSON: I am sure Jacques will come up with something.
869 Just one last area. On this issue --and we talked about this with the others -- of the optional services, and you have noted your numbers and your numbers seem to be comparable with those of the others who have spoken to this issue today, in the $2.00 rage roughly, a little more, a little less depending on the company or companies.
870 Is it your view that this is largely due to the fact that the people in these more rural areas perceive at least that they have less need for these, or is an affordability issue?
871 MR. GILBERT: In a sense it's an amusing question because at lunch time we were talking about it and Dennis commented that, "Gee whiz, in some ares they don't need those services because they just look out the door and they see who is calling". But there is another thing that we might want to consider.
872 When we look at the actual penetration of these services and we compare rural areas, at least those that we serve, with the national average, one thing that comes to mind is the fact that these services are probably tailored to urban communities where, for example, someone might not want to answer the phone unless they know who is calling. Well, I think that in Deiter Lake you know who is calling. There is not enough people. In smaller communities it's probably the case. So I think the penetration has to do with the demographics and the economics of the territory we serve, as exemplified by what we have seen.
873 I tend to agree with what SATAT mentioned when they said that the smaller independents don't have the tools to market as efficiently as the bigger companies. Well, Northern is not a very big company, but neither is it a very small company. We have done considerable efforts to market our services. As a matter of fact, Northern won an award from Lucent Technology -- pardon me, Nortel.
--- Laughter / Rires
874 MR. GILBERT: Okay, we won't talk about the shares today.
875 Actually, we won a prize from Lucent for marketing our voicemail service. So it told us that -- and not everyone else got it, by the way, so I think that we do a fairly good job at marketing the services. Not to say that there can't be improvement, but I think there are some inherent limitations in the territories we serve that probably have to do with demographics and geography and just the way people communicate.
876 I haven't looked at the figures to compare between Quebec and Ontario or English Canada, for example, but I am sure that even culture might play a little role in there eventually. But going from $2.00 to $5.00 is a huge difference. There is definitely something there. It would have made for a good masters degree thesis.
877 MR. DuBERGER: Perhaps to add --
878 THE CHAIRPERSON: Sure.
879 MR. DuBERGER: Because the difference is so huge, $2.00 versus $5.00. Perhaps that is something we may ask our marketing people how come the difference is so important between the revenues in both organizations.
880 Je dis qu'on devrait peut-être demander à nos gens de marketing de nous expliquer pour le 20 juillet prochain pourquoi la différence est si importante entre 2,00 $ et 5,00 $ dans les revenus de ces services-là.
881 THE CHAIRPERSON: Yes, I don't know about the cultural differences, but as I indicated earlier today -- and I don't know what the revenue figures were, but I do recall that NBTel initially had significant success in marketing these services in the northern parts of New Brunswick which, as you know, is a largely francophone community and largely rural.
882 MR. GILBERT: And I would agree with something else that was mentioned by other participants today, that there is cross-elasticity probably as well between basic local rate and optional services.
883 THE CHAIRPERSON: Yes, I would agree with that although it probably goes back to the days of the coloured phones. Whenever you raised your rate everybody threatened to turn back in their coloured phones because they wanted to save 25 cents and then a few months later they all got the coloured phones back again. But a short-term elasticity problem probably.
884 MR. GILBERT: I would agree.
885 THE CHAIRPERSON: Thank you.
886 Any other questions for Michel or Jacques? According to Michel, Jacques has all the answers anyway.
887 No? Okay.
888 Well, I think those are all our questions related directly to the presentations.
889 Does anybody have any comments they want to make on anything or any observers? I am just wondering from each of the others perhaps, going through the order that we had today -- OTA, since you were first, and haven't had a chance -- well, I have opened the floor to comments, but you may have wanted to kind of let the other presentations and the discussion go on -- whether you have any thoughts now, having heard the other presentations and having heard our questions, whether there is any particular comments you want to make with respect to a number of issues that we have discussed here through the day.
890 Mr. DeWeerd.
891 MR. DeWEERD: Yes, thanks very much for that opportunity. I actually do have some comments.
892 Specifically more towards the end we were talking about the use of a full Phase II and how that may or may not be onerous. Our understanding is, yes, that is an onerous process, both from the independents' standpoint as well as the Commission's standpoint to review 40 Phase II applications. We would propose that, yes, the Public Notice fell short in expectations as far as what we had in coming to a conclusion rapidly on this issue and has caused some of the independents to look at Phase II simply because that proxy is well short of what is required.
893 If that was adjusted in a short order to be a subset, and specifically the Western provinces of the national average, or in replacement of the national average, then I am sure we would go forward on the proxy basis. It is not our desire -- and I speak I guess for myself especially, but also for the majority of our companies -- to do a full Phase II. That requires the hiring of consultants -- and I apologize. It is not our purpose to hire consultants. We are to run independent telephone companies serving our members and -- sorry as well.
--- Laughter / Rires
894 MR. DeWEERD: So no, we do not desire to do a Phase II costing in the sort term or the long term. So I hope that addressed that issue. I will put that to rest.
895 Also one of the common themes that Commissioner McKendry has come up with is a productivity offset and I just want to reiterate one more time that the simplified form of regulation has to have incentives in it as well to move us forward, and we largely perceive the productivity offset, or the exclusion of a productivity offset, to accommodate that issue, to provide that incentive.
896 Finally, one other point is that there is also a theme of comparing the independents against each other. Why are some provinces on average higher? Why are some individual companies higher? And there are reasons, as I tried to discuss earlier, there are potential reasons, but I don't think we have to look that far that even under a Phase II model we can look at the published PES costs of the ex-Stentors and we can scratch our head and wonder why the Western provinces are higher than the Eastern or the Maritime provinces. They are not offsetting situations that would not say that NewTel, serving the Province of Newfoundland and Labrador, that their cost would be higher as opposed to lower.
897 I think what we are looking at -- you know, it's difficult to compare with the ex-Stentors as it is with ourselves on that issue.
898 THE CHAIRPERSON: If I can interrupt you there because that seems to me hit on a real problem that we have to try and struggle with here. I don't want to sound critical here when I say this, and please don't take it that way, but I don't think we can sit around the table and try and sort of pick the highest costs company or companies and say, "Well, let's pick those because they are higher costs and maybe they are closer to where we might be, given we don't know really where we are".
899 I come from that other end of the country and I suspect there is a lot of territories there, areas there. Whether it's NewTel in Newfoundland, I mean, there is a lot of high-cost areas. I mean, the only low-cost area in Newfoundland really is St. John's and the rest of it are the island in the Mainland and Labrador. It's a pretty high-cost territory.
900 I mean, it strikes me, why wouldn't we include, for example, the Atlantic provinces in that calculation now? You have situations in New Brunswick too where you have largely three small cities -- Fredericton, St. John and Moncton. The rest of New Brunswick is largely trees and very small towns and villages some of which presumably would be comparable to some of the territories, some of the serving areas of the companies that you represent.
901 So I don't know why we wouldn't include some of those. It is true that New Brunswick has done quite an efficient job of providing telephone service and that might tend to bring it down, but if we are going to try and find that kind of a proxy, I find it difficult intuitively just to say, "Well, we will pick the Western ones because they are higher".
902 MR. DeWEERD: Right. I think that my response to that would be does the Western province probably more accurately represent isolated areas that have to have their own switch? They cannot, outside of say Winnipeg or Brandon -- switches are probably required in those remote exchanges which is more similar to our situation as opposed to New Brunswick where several switches can switch all of those remote locations across their province.
903 So under those criteria alone, you are looking at the economies of scale again of having to have at least one switch for your exchange if you are a one-exchange company and that you are not able to spread that cost over an entire province. In the case of New Brunswick I don't know how many switches they have, but conceivably with I believe five zones, they have five switches serving the entire province.
904 So they operate and receive those benefits, the same with IslandTel, of that nature where the Western provinces are more like our territories, that they would have exchanges in outlying areas that require their own switch, that require their own facilities, their own building to receive payments or for administration, for central dispatch, for service trucks or vans. So in that nature they are more like us.
905 Again, we could develop a whole dialogue to support that. What I am saying is the national average is purely not acceptable for the independents as it would not be accepted for SaskTel or Telus or MTS, or even some of the Maritime companies. No more is it appropriate for us, but rather the Western province subset may be a better starting point and then we can even make downward adjustments as well as upward adjustments, recognizing their loop length likely is longer than ours. So there should be a cost savings.
906 However, they still have the purchasing power. So trade off and instead of doing all of those subjective arguments, which lack quantitative backing, let's just peg a subset. If we want to come to a true proxy that is going to save time and yield a reasonable result, that to me seems like a more palatable route than taking the national average and arguing every increase on the way up, on a subjective basis and not a qualitative basis which is, to be honest, very difficult for us to envision how we will do that on a tangible dollar basis without doing the Phase II again.
907 So we almost come full circle. We are trying to make it simple to avoid Phase II and yet Phase II may be the only support on the record that will substantiate why we need more than the national average. So we are in a catch. That's why I am saying, again, the subset may have been an easier solution.
908 Those are the comments that I have. I recognize that Mr. Downs has something that he would like to comment on as well.
909 MR. DOWNS: Just a brief comment in regards to the implicit contribution. I think there has been a lot of discussion about the $2.00 amount and I think for the OTA member companies that is the number that we have seen.
910 I think it has been mentioned throughout the day, but from the companies we have looked at there definitely is a difference based on the demographics and the population, the type of customer in the service area. If it tends to be more agricultural or more cottage oriented it is less likely, even with a very extensive marketing campaign, for those customers to take it. I don't know whether it's just the nature of customers -- they want to get away when they get to the cottage. They don't want voicemail, they don't want call display, but that seems to be the situation that we see. Where if you get customers coming into a serving area which is closer to an urban area, and they are coming there and commuting back to the urban area for work, then they are more likely to take those services.
911 So it's sort of a confirmation of what I think has been said during today's presentations.
912 Thank you.
913 THE CHAIRPERSON: Thanks.
914 Hugo or Stephen, is there anything you wanted to add?
915 MR. BRAY: I would like to say that, as we said earlier, what is very important that we keep that in mind through the process is that our members, regarding the actual definition of high costs, it seems that they do qualify as all high cost and if there is any shortfall regarding the high-cost criteria, they won't be able to offset -- well, it will be difficult for us to offset any shortfall. So for example, they won't be able to offset a shortfall with non-high cost areas.
916 Moreover, we have spoken about the proxy. We do know -- and I think we agree on that -- that Phase II is the true thing to be done. We all agree on that, but we want to avoid the complexity of doing that. So we are trying to find a solution with a proxy.
917 I heard earlier this morning that we are asking for flexibility. No. We are trying to find out a simple way of doing things. Of course, there is price for that. We won't agree with a proxy that will give us huge shortfalls. So we have to work to find out how can we justify -- because it seems obvious that the proxy is too low -- the increase in the proxy. But since we don't have the mathematics of all the components of the proxy. We don't have the input so it's very hard for us to make any simulation beside making a true Phase II. But in either case, in our filing, we will try to support our saying with different rationales, but maybe you will find some lacks of justification. But we will work with the tools we will have and moreover we are speaking about an amount of money.
918 Another thing that might be very interesting it's how the proxy will apply. We have proposed to the Commission a decreasing slope. How can a subsidy decrease by 60 per cent only because of a few NAS. For us it's very hard to sell to our members. They don't understand the mathematics, the logic behind it. So it's not only the amount of subsidy per NAS, it's the way you apply it also to our members. Will there be any decreasing slope? We hope so. And by doing that maybe the subsidy per NAS could be lower.
919 That is the comment I had.
920 Thank you.
921 THE CHAIRPERSON: Hugo.
922 MR. LETARTE: Just one final comment. I think that everything will have to be taken into account when we look at the new regime. So we are talking a lot about the subsidy side and I think that things on the direct toll and network will have to be addressed also.
923 At the end of the day I think that the global picture has to be taken into account when we talk about smooth transitions, when we talk about dramatic changes in the subsidies and the monies generated by the regulatory regime, at the end of the day we have to take a look at the global picture.
924 MS HACIO: I certainly think the Commission has heard a common theme in relationship to this procedure. The bottom line is from the public utilities' standpoint is that Thunder Bay will be going ahead with the Phase II. I think our owners would feel that that is a mandatory process from our perspective.
925 The issue as far as it goes with the national average costing, there is I guess no question that we can't be compared to the ex-Stentor companies. Our costs are higher. Our purchasing power is less.
926 In respect to the deemed revenues, I guess I would look at Thunder Bay as probably a company that earns a little bit more than $3.00 per NAS. We run a lot of incentive programs and do a fair amount of marketing from our customers' perspective and I have to agree with the groups.
927 First of all, you have to look at the disposable income that your customer has. The second issue is the whole issue of customer demographics by age. That is extremely important. You have people that are used to using technology, whereas others of a certain age category get concerned about it, et cetera.
928 I guess the only other comment that I would make is we did raise the issue as it relates to what is the definition of an exchange to fall within the subsidy requirement, and we do have some concerns and we hope that the Commission staff will take note of that and through the process be able to deal with that.
929 I guess the last comment, I view it somewhat as an oxymoron because I don't know how we can have anything called a "true proxy". A proxy is a figure that is used, that is someone's best guess, and associating the word "true" with it leaves some questions in my mind.
930 Again, thank you for the opportunity for us to be here today. It's not an easy task to come up with something that works for everybody.
931 THE CHAIRPERSON: Bruce or Corrine?
932 MR. KERR: I guess we have heard a lot about Phase II and the proxy. We think we should proceed with Phase II. It's difficult, but it would give us the accurate numbers that we can support and who to our Council the actual cost of everything.
933 The other thing we have to be very worried about is the small independent companies are drastically impacted by changes in economy -- we have a threat of one closing down in Prince Rupert now that employs 650 people and that would have a huge impact on our revenue base. So we have to be very wary of situations like that.
934 I would like to thank the Commission for having us here today.
935 THE CHAIRPERSON: Mr. Cushing.
936 MR. CUSHING: I think I would just like to say at this point thank you. Certainly O.N.Telcom is grateful for the opportunity to be here today and with respect to how we proceed and we go forward, we look forward to carrying on in this proceeding. With respect to Phase II I think I have said enough today.
937 Thank you.
938 THE CHAIRPERSON: Michel or Jacques?
939 MR. DuBERGER: Well, we just spoke a few minutes ago. So everything is fine as far as we are concerned for the time being.
940 So we just want to thank you very much for your attention.
941 THE CHAIRPERSON: Thank you.
942 Sharon, just a question of clarification. When you mentioned about doing Phase II, do you mean for each of Thunder Bay, Kenora and Dryden?
943 MS HACIO: Certainly it's the intent that it will be done for Thunder Bay and I guess Dryden and Kenora will be looking at the proxy to be utilized at least for a short try.
944 THE CHAIRPERSON: Well, I want to thank you all very much. I think it has been helpful. I hope you have found it helpful in the sense of providing an opportunity to present to us directly your views on the issues that we put out.
945 I guess it's probably fair to say that the Public Notice proposing an option did its job in stimulating discussion around the issue and helped focus the mind on a number of the specific issues.
946 I can say I think it certainly has been helpful for us to get a better understanding of the circumstances that you work and operate in.
947 We are all struggling with how best to deal with this issue about, as Sharon has suggested, coming up with a true proxy, or at least a reasonable proxy that fairly closely represents the environment that you are working in. We took a stab at that. Obviously most of you don't agree with it. Some of you will be doing your own Phase II cost studies which will get us to where you are actually operating in. For others where there is a lot more companies involved with the OTA and SATAT perhaps it's more difficult, particularly recognizing the significant differences in sizes of the companies, and so on.
948 If some sort of proxy looking at some of the Western provinces with the kind of supporting information that, Tim, you or Stephen, have indicated will be present in the submissions, then we will carefully look at those and see if we can't come up with something that will help us deal with that sort of issue.
949 I think from what I have heard today we all want to achieve the same objective which is come up with a more simplified form of regulation that allows the companies to continue to operate and provide services to your customers and at the same time balance out the interest of not just your customers in terms of the rate issues there, but the customers indeed in the rest of the country because to the extent there is going to be a subsidy provided here to support some of those differences, it's going to be the rest of Canadians who will be helping to contribute to that sort of subsidy. So we want to be fair to all the parties involved.
950 Again, thank you very much. I hope it has been useful for you. It has been for us. This is just, I guess, the start of this process. So we will be continuing on through this and we look forward to your submissions in the next round.
951 Thank you very much.
--- Whereupon the rountable ended at 1600 / La table ronde est levée à
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