ARCHIVED - Transcript - Hull, QC - 2001/10/16
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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:
Price Cap Regulation and Related Issues, pursuant to
Telecom Public Notice CRTC 2001-37/
Révision des Prix Plafonds et Questions Connexes, conformément
à L'Avis public Télécom CRTC 2001-37
|HELD AT:||TENUE À:|
Centre de Conférences
|October 16, 2001||le 16 octobre 2001|
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.Canadian Radio-television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Price Cap Regulation and Related Issues, pursuant to
Telecom Public Notice CRTC 2001-37/
Révision des Prix Plafonds et Questions Connexes, conformément
à L'Avis public Télécom CRTC 2001-37
BEFORE / DEVANT:
|David Colville||Chairperson / Président|
|Ron Williams||Commissioner / Conseiller|
|Barbara Cram||Commissioner / Conseillère|
|Andrée Noël||Commissioner / Conseillère|
|Jean-Marc Demers||Commissioner / Conseiller|
|Stuart Langford||Commissioner / Conseiller|
|David McKendry||Commissioner / Conseiller|
ALSO PRESENT / AUSSI PRÉSENTS:
|Michel Spencer||Hearing Manager and Secretary / Gérant de l'audience et secrétaire|
|Legal Counsel / conseillères juridiques|
|HELD AT:||TENUE À:|
Centre de Conférences
|October 16, 2001||le 16 octobre 2001|
TABLE OF CONTENTS / TABLE DES MATIÈRES
|PAGE / PARA NO.|
|PREVIOUSLY AFFIRMED: THERESA MUIR||2910 / 18551|
|PREVIOUSLY AFFIRMED: JOHN T. McLENNAN||2910 / 18551|
|PREVIOUSLY AFFIRMED: DAVID A. LAZZARATO||2910 / 18551|
ARC et al
|2910 / 18554|
|2926 / 18658|
|Commission||2941 / 18744|
|SWORN: IAN SCOTT||2978 / 18926|
|SWORN: WILLIAM LINTON||2978 / 18926|
|SWORN: JEAN BRAZEAU||2978 / 18926|
|SWORN: DON BOWLES||2978 / 18926|
|2978 / 18927|
|2979 / 18954|
3071 / 19535
3103 / 19738
|3155 / 20047|
|Commission||3162 / 20081|
LIST OF EXHIBITS / PIÈCES JUSTICATIVES
|EXHIBIT NO.||DESCRIPTION||PAGE / PARA NO.|
|THE COMPANIES 59||Document entitled "Retail Services CallNet Expenditures on Bell Services Year 2000"||3067 / 19518|
|THE COMPANIES 60||ocument entitled "Distribution of Bell Canada Revenues for Services" in CallNet's evidence, Appendix A||3067 / 19519|
|THE COMPANIES 61||Document entitled "CEO's Message to Shareholders"||3067 / 19520|
|THE COMPANIES 62||"CallNet Reports, Second Quarter Results"||3067 / 19521|
|THE COMPANIES 63||"Economic Evaluation in Support of the Tariff Filing for DNA Access"||3068 / 19522|
|THE COMPANIES 64||"National Services Tariff, Digital Networks Services Item 301"||3068 / 19523|
|THE COMPANIES 65||"CallNet Financial Profiles"||3068 / 19524|
|CRTC 37||CRTC undertaking to AT&T Canada regarding their response to Interrogatory The Companies (CRTC)25-Sep01-4200||3068 / 19525|
|TELUS 18||TELUS' response to undertaking requested by Commissioner Cram, transcript reference, Volume 9, paragraph 15280||3069 / 19526|
|TELUS 19||Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15049||3069 / 19527|
|TELUS 20||Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15029||3069 / 19528|
|TELUS 21||Response to undertaking requested by GT Group Telecom, transcript reference, Volume 8, paragraph 13021||3070 / 19529|
|TELUS 22||Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15002||3070 / 19530|
|TELUS 17||Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related issues, Written Final Argument of CallNet||3171 / 20142|
|TELUS 23||Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related Issues, Written Final Argument of AT&T Canada Corp. and AT&T Canada Telecom Services Company||3171 / 20143|
|TELUS 24||PN 99-6, Review of Contribution Collection Mechanism, Transcript of Oral Hearing||3171 / 20144|
|TELUS 25||TELUS Response to CRTC Exhibit No. 28||3172 / 20145|
|ARC 15||CallNet Enterprises Inc., Part VII Application requesting that the Commission ensure the effective implementation and enforcement of the local exchange service, winback rules||3172 / 20146|
|CRTC 38||CRTC undertaking to the company regarding the overall formula||3172 / 20147|
|CRTC 39||Undertaking to TELUS regarding the overall formula||3173 / 20148|
|CRTC 40||Undertaking to AT&T regarding an alternative to the ILEC's digital network access service||3173 / 20149|
|CRTC 41||Undertaking to CallNet regarding their response to Interrogatory The Companies(CRTC)25Sept01-4200||3173 / 20150|
|CRTC 42||Undertaking to ARC et al regarding Consumer Bill of Rights||3173 / 20151|
Hull, Quebec / Hull (Québec)
--- Upon resuming on Tuesday, October 16, 2001
at 0900 / L'audience reprend le mardi
16 octobre 2001 à 0900
18548 THE CHAIRPERSON: Order, please, ladies and gentlemen.
18549 Good morning and welcome back to our proceeding.
18550 Before we return to cross-examination, are there are any preliminary matters anyone wishes to raise? No?
18551 I understand that TELUS has indicated it does not have any cross for this panel, so that takes us to ARC et al and Ms Lawson.
PREVIOUSLY AFFIRMED: THERESA MUIR
PREVIOUSLY AFFIRMED: JOHN T. McLENNAN
PREVIOUSLY AFFIRMED: DAVID A. LAZZARATO
18552 MS LAWSON: Thank you, Mr. Chairman.
18553 Good morning, Panel Members.
EXAMINATION / INTERROGATOIRE
18554 MS LAWSON: Good morning, witnesses.
18555 I just have a few questions. I don't think I am going to be the 45 minutes that I earlier estimated.
18556 Mr. McLennan, am I correct that AT&T's business plan from the local telecommunications market is focused on the business market as opposed to residential?
18557 MR. McLENNAN: Primarily, that is what we are focused on, yes.
18558 MS LAWSON: Do you have any interest in serving the residential market, any intentions?
18559 MR. McLENNAN: At this particular point in time it is necessary for us to stay focused on the business market because that really does represent the best opportunity for us to succeed as a business.
18560 However, given how the structure unfolds, the regulations unfold and the opportunities presented by that, we could very well be attracted back into the residential market again. I think we would like to be, but it has to make sense to support that decision.
18561 MS LAWSON: I take it if you were to enter the residential market you would be leasing ILEC loops?
18562 MR. McLENNAN: I think primarily we would have to again lease facilities, certainly to get started until you can gather a foothold. Overbuilding a residential infrastructure is a pretty massive undertaking.
18563 MS LAWSON: Have you developed any kind of business plan for the residential market?
18564 MR. McLENNAN: I'm not working on a business plan at this time because we do not have the appropriate infrastructure situated to interface with the kinds of facilities, access to the customer and provisioning facilities to the customer, in place to support the kind of proposal we have made on the business side.
18565 MS LAWSON: Okay.
18566 MR. McLENNAN: We are very much addressing the small business market and medium-sized business market, but our business plans do not include residential at the time.
18567 MS LAWSON: Thank you.
18568 Am I right that if you were to enter the residential market you would be focusing on high-end customers, that is you would be offering bundled services rather than basic local service on a standalone basis?
18569 MR. McLENNAN: I'm not so sure high end or bundled would be the focus as much as concentration of the customers, just thinking about where I would go if I was going into the residential market.
18570 MS LAWSON: You are speaking geographic concentration?
18571 MR. McLENNAN: Geographic. Yes, geographic.
18572 MS LAWSON: Assuming that you were able to get ILEC loops at, say, Phase 2 plus 15 per cent markup for residential down the road. Using the most economic approach to serving the residential market, by how much would the ILEC basic local residential rates have to increase before you could economically offer basic local service on a standalone basis at a price below the ILECs?
18573 MR. McLENNAN: Well, costing is everything. When you say Phase 2 costing plus a markup, I have a certain amount of hesitation in even addressing that as a cost base that I could start from. Because in managing and operating businesses you really have to know your overall true cost structure of providing those facilities.
18574 If Phase 2 was an acceptable cost methodology, to determine that in fact was the cost base that we were all going to start from plus the markup, I don't know exactly what the markup on top of that would have to be to make it logical, but --
18575 MS LAWSON: Let's assume 15 per cent.
18576 MR. McLENNAN: -- I'm not sure I would even begin unless I could know that I was beginning on a competitively neutral cost base with my competitor. I would really have to understand that the cost structure that I was working with was indeed a real operating cost structure that made sense that could be managed.
18577 You see, the struggling I'm having with Phase 2 is that we never manage to that. We don't audit that. I never manage that when I am managing the businesses. I never have and I haven't since. So I manage the real costs of the total package, the total business.
18578 So I would have to be able to find a way to know what my real costs were and then know how to win in the marketplace by providing superior service and competitive services. Certainly that would not -- I couldn't see a scenario where you would go in competing with higher costs.
18579 MS LAWSON: I understand.
18580 If your proposal were adopted in this proceeding by the Commission, would you then look at serving the residential market?
18581 MR. McLENNAN: I don't believe initially we are going to take a look at it because we have our hands full in just trying to establish a viable business in the business we are in.
18582 But there are other organizations who are and who will, and I think that our plan works equally well for them.
18583 But eventually, maybe. I would hate to say that we will without any real plans to do that right now, Ms Lawson.
18584 MS LAWSON: Thank you.
18585 From your previous responses, Mr. McLennan, I guess it seems to me that you don't really know what the threshold for basic local rates is that would then entice you to enter. It depends on the cost structure and you don't have enough information on that?
18586 MR. McLENNAN: I guess that would be a fair statement for me so far, yes.
18587 MS LAWSON: In terms of rates, if the incumbent's local rates did rise to a level such that entry into the local residential market became more attractive to you, and the costs were such that it was attractive, would you have any concern that the incumbents could later drop their prices and force you out of the market after you had entered?
18588 MR. McLENNAN: I think I would take all of those variables into consideration before I went in.
18589 For the financial community to really continue to believe strongly in this marketplace as a place to invest, they really do have to see an environment where they can actually grow their investments and grow the value of the money they are putting in. I would say that I have never seen such a dramatic change in attitudes of investors so quickly in my whole business career as I have witnessed in the last six months.
18590 So even CLEC organizations that were touted as being the greatest new initiative in entrepreneurial companies in this space to come along, have valuations now of fractions of what they were at one time.
18591 So would I be afraid that they would come along?
18592 I don't think in a properly structured competitive marketplace, unless a carrier has a truly dominant position and can support a very aggressive pricing campaign with something else, it can't happen.
18593 If you take a look at what happened in wireless -- I refer to that as probably the closest perfect monopoly environment we have in the country so far -- certainly in the telecom market, maybe I am missing a piece -- both started equally. There was a competitively neutral cost structure, no head start, and it was actually quite invigorating to watch that competitive environment unfold over quite a number of years.
18594 Yes, there was very, very aggressive pricing in that marketplace, new entrants came in and made prices come down even further, but at least they had to come in on the same terms as the originals so there was a check and balance and a discipline in the marketplace.
18595 If there was a discipline in the marketplace I don't think I would be too concerned about an incumbent dropping their prices to take it away. Now, if that incumbent or whatever had a strong leverage and advantage and can do that I would be concerned about it, but if I was concerned about it I might not go into it.
18596 MS LAWSON: So would it be fair to conclude, then, that your concern is really much more on the cost side of the equation than the rate side?
18597 MR. McLENNAN: Well, on every business model I go into if the cost structure and the market model doesn't make sense, it doesn't make sense. So cost is as important as anything else. Certainly, what I can get paid for the service is equally important, but if the cost price ratios don't make sense, then no money will ever be raised to support that kind of an initiative.
18598 MS LAWSON: Thanks.
18599 MR. McLENNAN: So what I have been trying to talk about is competitive neutrality, and that is so important to any competitive environment.
18600 MS LAWSON: Thank you.
18601 I would like to just now move on to more general objectives, I guess, of this proceeding and your proposal.
18602 I am just looking at your submission and you say at paragraph 110 that:
"Fostering sustainable competition must be the focus of this proceeding." (As read)
18603 Would you agree that fostering competition is not the only goal of this proceeding?
18604 MS MUIR: Yes, I think we would agree that there are probably four main objectives and that is one of the four.
18605 MS LAWSON: And you would agree with the Commission -- I think you have even avered to it yourselves in your submission -- that the new price cap plan should balance stakeholder interests?
18606 MS MUIR: Yes, we do. We do think that.
18607 MS LAWSON: Would it be fair to characterize that balance as, on one hand providing the ILECs with an opportunity to earn a fair return, to provide fair rates to competitors and to provide fair rates to end users?
18608 MS MUIR: Yes, I think that is fair assessment.
18609 MS LAWSON: Would you agree that fairness in this context requires some link between rates and costs, whether they are actual costs or target costs?
18610 MS MUIR: Absolutely. I think there has to be a link.
18611 MS LAWSON: I understand your proposal is designed to better balance the stakeholder interests, better than the past regime did?
18612 MS MUIR: Well, I think yes. That is what we were trying to do, is to achieve a better balance.
18613 MS LAWSON: You have acknowledged in your submission -- I'm looking at paragraph 1-5 -- that:
"Under the current regime residential customers were not all that well served insofar as they faced rate increases for both basic and optional services while experiencing a degradation in the level of service quality." (As read)
18614 Is that correct?
18615 MS MUIR: That's right, yes.
18616 MS LAWSON: So you are saying that the next regime should ensure that residential consumers, as one of the stakeholders, obtain their share, their fair share of the benefits from the gains attributable to the move to price caps?
18617 MS MUIR: Yes. We think there should be some discipline on the market.
18618 MS LAWSON: Okay.
18619 Just moving on to your proposal then, and looking at page 48 of your submission where you talk about the impacts of your proposal on key stakeholders.
18620 The first stakeholder you look at are consumers. So I am just trying to understand how your proposal would affect residential customers in particular.
18621 I see first of all in paragraph 6-2 that you are suggesting that high-cost service area rates rise to $35 per month by the end of the period. So there is an increase there, right?
18622 MS MUIR: Yes. We adjust high cost.
18623 I mean, 35 was the highest rate approved by the Commission. We just think there should be a national -- but yes, you are right.
18624 MS LAWSON: I understand. I just want to make sure I'm understanding it correctly.
18625 In the non-high-cost serving areas, you are proposing that rates be allowed to increase by the rate of inflation with a 10 per cent per year maximum for individual rate elements?
18626 MS MUIR: That's right. Yes.
18627 MS LAWSON: Okay. That is pretty similar to what the ILECs are proposing in terms of residential rates?
18628 MS MUIR: It is pretty similar, except that I guess our thinking behind that was if there is some sort of discipline in the pricing in the marketplace, even as competition rolls out, there would be more discipline in pricing in general.
18629 MS LAWSON: So are you thinking that rates in non-high-cost areas would come down, residential rates?
18630 MS MUIR: I don't know if we were thinking they might come down. I think they might stay where they are though.
18631 MS LAWSON: In terms of the inflationary increase that your proposal would permit in non-high-cost serving areas, would you agree that if residential rates would otherwise have fallen under, for example, a cost-based regime, that allowing inflationary increases constitutes an impact on rates, that consumers in that case may be denied rate decreases to which they were otherwise entitled?
18632 MS MUIR: If rates would otherwise have fallen. I guess that is the bit of the dilemma is: Where would rates go. I don't necessarily think they should just rise irrespective of the cost of the service or rise simply because somebody could raise the rate. There should be some sort of market force.
18633 I guess all we were trying to do was put in place a framework that would allow for that market force to discipline but leave enough flexibility so that if there was the ability in the market to raise rates, rates could go up.
18634 MS LAWSON: I'm just looking at paragraph 6-3 where you say the introduction of your proposal here:
"...will have no impact on rates charged to consumers." (As read)
18635 That is at the second last sentence in paragraph 6-3.
18636 Do you see that, Ms Muir?
"Moreover the introduction of the FDC rate proposal..." (As read)
18637 MS MUIR: Yes. No, I see it. Yes.
18638 MS LAWSON:
"... will have no impact on rates charged..." (As read)
18639 But you are agreeing with me that it could have the impact of rates increasing by inflation?
18640 MS MUIR: It could, yes.
18641 MS LAWSON: That could be an impact, and in fact it could be a negative impact if consumers would otherwise have been entitled to rate decreases or nominal fees?
18642 MS MUIR: No, that's right. You are right.
18643 MS LAWSON: Paragraph 5-32 you say that:
"...the longer-term objective in terms of high-cost serving areas should be the complete elimination of explicit subsidies and accordingly of the contribution regime itself." (As read)
18644 I take it that you are suggesting that the subsidy be reduced through a combination of end user rate increases and cost reductions which are reflected in a productivity offset applied to the total subsidy requirement?
18645 MS MUIR: Yes, that's right.
18646 MS LAWSON: Would you agree that it should not be reduced through a move back toward implicit subsidies, by which I mean the ILEC's non-high-cost area rates would be subsidizing the high-cost area rates?
18647 MS MUIR: Well, I guess we were looking from where we have gotten so far on the subsidy, which is isolating the high-cost serving areas.
18648 It is difficult to actually get down to the precise costs associated with serving high-cost areas versus broadly serving. However, since the subsidy regime was built that way, our focus was on suggesting that if you have efficiencies in your business, presumably those efficiencies are over a broad spectrum of services, they are not isolated to particular services. So that subsidy should come down, just as the rest of your cost structure comes down.
18649 MS LAWSON: But it should come down through a combination of the rate increases and productivity decreases, not a shift toward implicit subsidization?
18650 MS MUIR: Well, that is how we were looking at it, yes.
18651 MS LAWSON: Okay.
18652 Those are all my questions, Mr. Chairman.
18653 Thank you.
18654 THE CHAIRPERSON: Thank you, Ms Lawson.
18655 So I think that concludes all the parties who had registered to cross-examine AT&T Canada.
18656 That turns us to Commission Counsel Moore.
18657 MS MOORE: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
18658 MS MOORE: I would first like to discuss some questions in relation to the general area of local competition.
18659 First of all, I wonder what you would say if you were asked to define the phrase "facilities-based competition"? In your view what type of activities would a CLEC be engaged in or what type of facilities would it own or lease if it were a facilities-based competitor?
18660 MR. McLENNAN: Well, I think the original concept or the current concept of facilities-based competition certainly envisages us, or the new entrant CLECs, owning as much of the local infrastructure as possible to provide full connectivity to the end customer where you actually provide access and you bring your access back into either a collocation or a switching centre which connects to all of the different networks, regionally, nationally and internationally.
18661 Our interpretation of full facilities-based competition would be that we would own as much and as many of those facilities as we possibly can so that we have virtually no dependence whatsoever on the incumbent facilities and organizations and we are essentially running in parallel.
18662 MS MOORE: If, for example, a CLEC were leasing 100 per cent of its local loops but it did own other transmission facilities, would you consider this to be a facilities-based CLEC?
18663 MR. McLENNAN: I would certainly consider that close to being a full facilities-based CLEC.
18664 But now we are beginning to move towards what we have in fact proposed in our model, and that is a hybrid model where we begin to actually depend on ILEC facilities for many different things, including access. But I would say that we are beginning to move away from a pure facilities-based model.
18665 MS MOORE: Do you have the transcript volumes with you. Could you turn up Volume 9? And if you could turn to page 2383.
18666 MS MOORE: There is a paragraph that begins at line 15036 if you go down to the last third of that paragraph.
18667 This is Mr. Grieve discussing with me the notion of facilities-based competition and towards the end of that paragraph he says:
"...all you need to have competition is the assurance that there is the ability of these companies to construct their own facilities and where there isn't, or where no other facilities are available..."
18668 It says "they" but I think it is meant to say "there":
"...there are essential facilities."
18669 I wonder if you could comment on this statement. Do you agree? Disagree? Would you modify it?
18670 MR. McLENNAN: When you consider that local competition has been in effect now in Canada for just about four years and we have, I would say, full coverage and access to customers in the range of -- I don't have the figure totally straight in my mind, but it is no less than 2.5 per cent, but it is no more than 4 per cent. When you take a look at the incumbents having 100 per cent, I would say that a form of hybrid model is going to be fundamentally necessary to carry on competition in the local market for some period of time.
18671 Maybe Theresa can help me, but I will admit to being not totally cognizant of what exactly is termed in "essential services", but I know that there are many, many services that we have to buy that are not claimed or declared to be essential services and I would suggest that that phenomena will continue for some time for the hybrid facilities-based model to in fact work and support competition in the local market.
18672 So I would say that we are going to have to have access to a multiplicity of services at a competitively neutral cost for some time, while at the same time still building our own facilities, because this is a very large, massive undertaking.
18673 MS MOORE: What general period of time do you envisage?
18674 MR. McLENNAN: I thought maybe I was going to get asked that question at some time in the next two days, or the last two days.
18675 I'm not going to stand up and say that this model that we are proposing and this hybrid use of our own facilities and ILEC facilities is a short-term phenomena, because when you look at the massive amount of investment required to completely overbuild local facilities, I think in some areas where there are more clustering of customers you will see the facilities built out a lot faster than you will in geographically dispersed areas, in the fringes around urban centres and certainly outside of urban centres. I think that is going to take a lot longer.
18676 So I think progress will be made in rolling out new competitive local facilities as new entrants get stronger and more viable financially and can raise the capital to do that. It's hard to predict.
18677 I honestly don't believe that we can predict if there will ever be fully 100 per cent facilities-based competition, because that is, I think, just asking a little bit too much. But I can see substantial facilities-based competition in the large urban and metropolitan centres and the fringes around those areas evolving quite aggressively over -- certainly through this price cap period.
18678 For instance, if we say that we have a dependence with all of our customers now, even though we have invested $3 billion so far in building local facilities and other facilities, over 73 per cent of all of our orders we still need to buy facilities from the incumbent to meet that customer's requirement. In many cases, we have to, in fact, just simply no bid an opportunity, especially when it is with large organizations who have multiple facilities across the country, when we go to the ILECs and get quotations for prices so that we can participate in the bid, we simply walk away from it because we will lose money. We will absolutely lose money.
18679 So I think that we can make measurable progress. For instance, the 73 to 75 per cent dependence we have on them today, even though we have invested $3 billion, could be measurably monitored, let's say through the next price cap hearing and beyond. I don't know what a reasonable percentage would be.
18680 Here is something straight out of the air, something like 50 per cent maybe. But it would be that kind of progression as opposed to we will get to 50 per cent in two years and 25 per cent in five years. I think the progression, the slope is going to be a shallower slope rather than a steeper slope because of the amount of capital required to completely overbuild the facility.
18681 As a matter of fact, I think I have read recently where one of the incumbent ILEC says, "We are not going to blow our brains out by completely overbuilding a complete network, nor would we expect anybody to completely overbuild our network."
18682 So it is the hybrid model that I think provides us with the opportunity to really create sustainable competition -- sustainable competition -- ongoing strong, healthy competition for a period of time with a higher percentage of competitive local facilities being built as time goes by.
18683 I think measurable targets is not an unreasonable way of trying to measure it, a percentage of dependence on ILEC facilities.
18684 MS MOORE: Thank you.
18685 Could you refer to paragraph 5-10 of your evidence, please? In this paragraph you indicate that expenses for rights of way and building access reduce the benefits from on-network operations.
18686 In particular you state that:
"These savings are somewhat offset by additional on-net costs, including provisioning costs such as on-net per line costs, additional operations expenses for staff, materials and maintenance, rights of way and building access." (As read)
18687 I wonder whether it would be correct to conclude from this paragraph that AT&T Canada's experience has been that while there may be difficulties with access to buildings and rights of way, ultimately this does not prevent the company from serving potential customers.
18688 In other words, is it the case that AT&T can obtain access if it is willing to pay sufficient financial compensation?
18689 MS MUIR: Well, I hate to say it is not a stumbling block because certainly it is a significant expense compared to what we pay the ILECs. It is quite a bit lower obviously, but I can't say we are totally happy with how we get access to buildings.
18690 It is not as significant a cost as the cost we pay to the ILECs for services we need, that is true.
18691 MS MOORE: Can you still profitably serve customers when you encounter problems with access through resale?
18692 MS MUIR: Can we profitably serve customers through resale? I'm not sure.
18693 Are you saying if I had to gain access to the building through resale would I be able to profitably serve customers?
18694 MS MOORE: Yes.
18695 MS MUIR: Just one second.
18696 MR. LAZZARATO: Without being product-specific with respect to resale I think it is very, very accurate to say that if I looked at all my resale customers in total and did a full cost allocation of them, we would not be making money. We would be losing money.
18697 Whether you measure that at a cash earnings line like an EBITDA or at all-in line, which would include allocations of capital and interest and everything else you could thing of. Resale is not a profitable model for us and that is part of the reason behind the proposal we have made, because we think it is really drag on the objective of sustainable competition.
18698 MS MOORE: Do you have data available to support that, in general terms?
18699 MR. LAZZARATO: As Ms Muir said yesterday, we don't do a full GNA allocation across every product and every customer so I don't have data that I could submit, other than what has already been submitted.
18700 Maybe Ms Muir will help me with an exhibit number here in terms of our margins with respect to on-net access customers and, at the other end of the spectrum, resale access customers.
18701 Theresa, do you have that?
18702 MS MUIR: Yes. In The Companies 11 we talk about our gross margin for each of those services. It is filed in confidence, but if you look at that interrog --
18703 MR. LAZZARATO: I will talk to that. Why don't you get the interrog number and then I can talk to it without disclosing numbers.
18704 MS MUIR: Yes.
18705 MR. LAZZARATO: So it's our response to The Companies(31Aug01)-11, page 2 of 3. I'm sorry, page 3 of 3.
18706 If you look at the off-net or resale margin, which is just after the telco costs -- and that is how "margin" is defined in that response -- you will see that there is not a heck of a lot left. I am trying to be coy because the number has been submitted in confidence. There is not much left to pay any operating costs, our own operating costs, whether it's customer service, whether it's cost to acquire customers, et cetera.
18707 So we are certainly losing money. That is an investment for the future, an investment that perhaps will turn into a profitable customer experience for us later on, but it is not current.
18708 MS MOORE: Thank you.
18709 If you could turn to paragraph 3-23 of your evidence, please?
18710 I think you will also need Table A-1 of Appendix A of the same evidence.
18711 MS MOORE: In paragraph 3-23 you refer to various exogenous adjustments accorded to the ILECs and you say:
"Collectively, the adjustments have added in the order of $750 million in annual revenues." (As read)
18712 First of all, if I can just understand, the $750 million that you refer to in paragraph 3-23, is it correct that those figures essentially come from Table A-1? Not all the figures in table A-1, but that in that table you list various exogenous adjustments. Is that --
18713 MS MUIR: The 750 is actually a combination of some of the exogenous in Table A-1. We are also including the pricing -- talking about the optional local service increases. It is the aggregate of the two.
18714 MS MOORE: Okay. Because when I look at Table A-1 it doesn't quite seem to reconcile with your $750 million.
18715 So could you undertake to provide a breakdown of how you derived to the $750 million, please?
18716 MS MUIR: Certainly.
18717 MS MOORE: Thank you.
18718 I would like to turn now to some questions regarding quality of service issues.
18719 If you could turn to paragraph 5-45 of your evidence, please?
18720 MS MOORE: In this paragraph you say that:
"AT&T endorses the concept put forward by The Companies of a residential service quality guarantee, subject to certain modifications." (As read)
18721 The first modification you mention is: You say that penalties should be 25 cents a month and not the 5 cents a month put forward by The Companies.
18722 I wonder how you determined that 25 cents would provide a more appropriate incentive than 5 cents a month?
18723 MS MUIR: I think really all we did was look at the impact the 5 cents a month would have on the existing --given their existing performance. The impact was pretty insignificant. So there is kind of a systemic problem in terms of having to improve processes that involve spending money, so that you are offering service at a level of quality that was appropriate. The penalty has to actually be significant enough so that it would encourage you to make that investment so over the longer term you would achieve the quality that you are supposed to.
18724 So it wasn't a scientific exercise in that sense, it was just "5" didn't seem high enough, given where it would bring the ILECs in terms of penalties payable so we just brought it to "25".
18725 I think you would actually have to look at what the end result is. Is that a sufficient penalty to incent the ILEC to improve in that area?
18726 So there was no real magic coming to that number.
18727 MS MOORE: Thank you.
18728 You also suggest in terms of when remedies should be triggered that you would modify The Companies' proposal such that three misses in total out of a 12-month period would trigger a remedy. I wonder if that trigger were introduced, would that affect your view of the 5 cents or would you still think that trigger should be in place along with the 25 cent penalty?
18729 MS MUIR: No, we think they go together.
18730 MS MOORE: In paragraph 76 of GT's evidence -- I don't think you need to turn to this -- they suggest that remedies for indicators with respect to competitor services should be CLEC-specific rather than a generalized remedy. I wonder whether, in AT&T's view, a CLEC-specific remedy structure would be an equal, a greater or a lesser incentive for incumbents to meet standards?
18731 MS MUIR: Well, we also support a CLEC-specific.
18732 I think that there the relationship is like a business relationship and, generally speaking, you have, with large business customers, a service level agreement so you make certain commitments.
18733 Also, in the case of CLECs, if it were just broad perhaps there was one CLEC who operationally was quite harmed by poor service from the incumbent and therefore they wouldn't be properly compensated for that harm in terms of either losing a customer or having to probably rebate their end customer for service problems that emanated from the incumbent. That is why we think probably that is a more appropriate form of behaviour.
18734 Presumably, having to specifically address service issues with individual CLEC customers would encourage the ILEC to behave appropriately with each CLEC customer.
18735 MS MOORE: In your view, a remedy structure generalize to all CLECs rather than CLEC-specific, would the costs of one, in terms of administration, differ significantly from the costs of the other?
18736 MS MUIR: Actually, I couldn't tell you. I would think, though, if you are managing the relationship with individual CLECs you would be aware -- you should be tracking what services are being delivered, how they are being delivered, whether or not they are on time, so that that process should be somewhat in place today. Then it is a question of whether you actually met these service deliveries.
18737 I'm not entirely sure.
18738 MR. McLENNAN: I think the relationship between us and the ILECs as customers is certainly different than the relationship between the ILEC and the retail customers, because even though our company is certainly one of the largest customers of the ILECs, you know, we haven't received -- I certainly haven't received any visits of any senior executives telling me how they are going to improve service for me or enhance my relationship and hope they do more business with us. So perhaps some special kind of consideration might be necessary here.
18739 MS MOORE: Thank you.
18740 Those are my questions, Mr. Chairman.
18741 THE CHAIRPERSON: Thank you, counsel.
18742 I think we have a few questions from some of the commissioners.
18743 Commissioner Noël.
18744 COMMISSIONER NOËL: Ms Muir, I was listening to you earlier this morning discuss with Ms Lawson the objectives of the price cap regime and you mentioned a fair return for the ILEC.
18745 In the context of the review of this price cap regime, should, in your view, the Commission be concerned with a level of profits of the ILECS? I am stating in a price cap regime?
18746 MS MUIR: In this review, because a lot of the objectives of the regime haven't been met, yes, I think the Commission should be concerned, because that was part of -- the Commission had a number of objectives and this was part of achieving the objectives of the price cap regime.
18747 Also, I don't agree with the notion that that is a piece of information, even in price regulation, that you can never look at. Because if you take it to the extreme, if we only look at the direction of the prices without ever looking at the profitability of all the companies, even just those companies participating in the regime, either you could have a situation in the extreme where all the prices are coming down but all the profitability levels are really going to zero. Everything is going to cost. So it does seem to me a relevant piece of data.
18748 COMMISSIONER NOËL: In a perfect world where competition has unfolded, should the Commission be concerned with the level of profits of the CLECs?
18749 MS MUIR: In a perfect world where competition has unfolded, I think then you would see different levels of profitability. I think you wouldn't see a consistent high level of profitability for all the ILECs and no CLEC making any money. I think if competition unfolded there should be some sort of mixture between the two.
18750 COMMISSIONER NOËL: Should the Commission be concerned with the levels?
18751 MR. McLENNAN: Not in a perfect competitive world, no.
18752 COMMISSIONER NOËL: Thank you.
18753 THE CHAIRPERSON: Thank you, Commissioner Noël.
18754 Commissioner Cram.
18755 COMMISSIONER CRAM: Thank you.
18756 I think I heard you very clearly yesterday that you are not talking about discounts and I take your point.
18757 I was reading that prospectus -- and I was trying to find it today and I can't as yet -- at page 34. Do you have that, the prospectus that was produced?
18758 MR. LAZZARATO: Yes, I do.
18759 COMMISSIONER CRAM: In that at page 34 there is some discussion about regulatory regimes in Canada. I can't find it, so I can't remember what it said, but there was some discussion about the regulatory barriers as at least your securities lawyers saw them.
18760 The first one was the issue of ownership.
18761 Maybe it wasn't 34.
18762 COMMISSIONER CRAM: Maybe I have the wrong page because there were three things mentioned. One was ownership, the second was a lack of a discount regime and then there was a third. My notes say it was 34, "Lack of a mandatory resale discount."
18763 Maybe I should find that for you. Maybe I will find it and we can go back. I'm sorry.
18764 There was somebody else who wanted to ask a question.
18765 THE CHAIRPERSON: Perhaps while Commissioner Cram is attempting to find the reference I will turn to Commissioner Langford.
18766 COMMISSIONER LANGFORD: Thank you, Mr. Chairman.
18767 I just wanted to kind of return to what I think are the basis to the discussion of your proposition or proposal and the lengthy discussion that you had with Mr. Henry yesterday.
18768 I am reading the transcript on page 2819. You don't really have to go there, but at paragraph 17888 Ms Muir says:
"I don't honestly believe there will be a Group Telecom or a lot of competitors in the marketplace period."
18769 I'm sorry, I should have started a little earlier:
"...what I am really saying is, unless there is a dramatic change, I don't honestly believe there will be a Group Telecom or a lot of competitors in the marketplace period."
18770 Mr. Henry continues with his questions about competition.
18771 Mr. McLennan, then, on the next page, paragraph 17895, says:
"If what you are saying, Mr. Henry, is that there will not be a facilities based competitive marketplace unless there are significant changes, I would agree with that."
18772 So we have what I might call the doom and gloom scenario here. The picture looks bad, I assume you are saying, unless there are changes.
18773 Then the changes I think you, Mr. McLennan, summed up basically this morning, and in a number of places yesterday, but this morning you basically said: The costs don't make sense and we need competitive neutrality.
18774 I guess what I'm trying to figure out, after all of what I heard yesterday and some of what I heard this morning, I'm just not clear in my mind what precisely you are saying to us, the Commission.
18775 Are you saying, as you said this morning, that the costs don't make sense, that they are somehow overstated and that we should re-examine these costs in some way, dig into them, audit them and discover, as you have discovered, that they need to be lowered so that the prices to you are lowered by perhaps 70 per cent?
18776 Or are you saying: We feel the costs are high, we can't prove the costs are high, probably you, the Commission, won't be able to prove the costs are high, but for some policy reason to make competition work we want you to have the ILECs reduce the costs to us?
18777 It is a long question, but does it make sense to you?
18778 MR. McLENNAN: It does make sense. It is the nub of the entire situation and what we are describing.
18779 I think what has really been more adequately understood since the introduction of local competition -- not just here but in the United States and in Europe -- is that scale and size and the incumbency really, really does matter. The advantages of having a network that is already constructed, accessing every customer in the marketplace, a network that is a very, very high fixed-cost network which reaches everybody, and this network is already structured so that it is achieving not just adequate returns but returns that are escalating very dramatically -- I think I did mention yesterday that if you take a look at the growth of revenue in this segment and then look at the growth of operating income and profits, you will see that the profits are growing at dramatically faster rates as a percentage than the actual revenue themselves.
18780 The point that I made from that was that either your costs in this huge pre-existing ubiquitous network are declining very, very rapidly, because that is what has to be happening if your profits are escalating 50 per cent faster than your revenue escalation, or in fact you are accruing brand new revenue on this infrastructure and attaching no cost to it at all, which is something I have never really seen in my business career.
18781 So that is really the fundamental basis of our argument.
18782 Then, as we have tried to demonstrate, us trying to duplicate that 100 year old infrastructure in four short years and several billion dollars later, has only netted a coverage of 2 to 3 or 4 per cent, however you want to look at it, of that huge customer base. So for us to try and make any kind of foothold whatsoever in the local marketplace requires us, in response to customers' needs, to buy many facilities and many services from the incumbent ILEC from this huge infrastructure that I have been talking about.
18783 So the question really becomes -- and you cannot have ongoing solid, sustainable competition without competitive neutrality on cost. You can't have it. That is why the wireless thing started together. That is why there was no head start. I think the success of that speaks for itself.
18784 This is a very complicated way to try to introduce -- this is a very complicated challenge for you, for us, for the investors to try to understand.
18785 So what our approach has tried to address is what I firmly believe is the inequity, inequitable cost structure of this ubiquitous network, which is achieving results that are escalating very, very rapidly, way beyond whatever the 11 per cent limit was, and us trying to penetrate it by having to use many more of those facilities than we would like to.
18786 So without going back and trying to undo structures that have already been put in place, like structurally separating, like asking people to re-regulate again or asking -- we are not suggesting we undo things, but this is a complex challenge going forward.
18787 So what we tried to address, which would, I think, go a long way toward creating a more sustainable environment of competition, is the subject of cost. We believe that ubiquitous network infrastructure already accruing these tremendous returns -- and I think admitted as evidence in this proceeding earlier -- were that if the ILEC proposal is supported will continue to grow dramatically, that their cost structure is dramatically less than our own. We are trying to find a way of creating some balance and some neutrality.
18788 Without any access to their costs, without any understanding of -- I am quite capable of taking a cost structure and breaking it down and understanding it and allocating it to services. It is a very lengthy complicated process, but that is what you do when you run a business.
18789 So without any of that information available to us, what we did was we tried to figure out what it would cost if we could put all our own customers on our own network and at the same time take a look at the overall results of the telcos and say that if we could just be accessing those services at a cost that is no higher than what they pay themselves to service their customers, then we begin to move to a form of balance that is mandatory for competition to work.
18790 I know that is a bit of a long answer, but it is a complicated situation.
18791 COMMISSIONER LANGFORD: No, I appreciate the review. It is now or never so you might as well get it on the record.
18792 But what I'm not clear on -- and I do appreciate the review, the clear understanding of where you are and a review of it.
18793 What I am not clear on, though, is what your expectation is of us, because we have all the numbers. Do you expect that when we review the numbers we are going to find, as you suspect, that you are being penalized -- I don't want to use the word discount. I listened to Ms Muir and Mr. Henry say "tomato" and "tomatoe" at each other and I thought they might call the whole thing off after a while.
--- Laughter / Rires
18794 COMMISSIONER LANGFORD: I don't want to get into semantics, but do you expect, to put it in the most colloquial terms, that when we review the numbers and do the study that we will sort of drop our monocles and say, "By jove, Carruthers, McLennan is right, there is a 70 per cent disparity there"?
18795 Or do you expect that we should just,, for policy reasons to get this competitive market going make some sort of a decision?
18796 What do you really expect?
18797 MR. McLENNAN: Well, if you really do have access to the entire cost structure of the operating ILECs, then I would suspect that you will absolutely confirm what I have said, that their costs as an overall percentage of their revenues have been declining very, very rapidly, or in fact revenues are being accrued which have no costs attached to them at all, because that is the only explanation for their dramatic increase in profits and dramatic increase in operating income.
18798 I would be delighted to help you do that, by the way, Commissioner, but I would be very, very surprised if you didn't find what I am suggesting, because that is the only explanation there is to the dramatic increase in profits.
18799 So I would expect you to say: Yes, there has been a dramatic decrease in costs as a percentage of the revenues of this business and, yes, we are obliged to try to create some competitive neutrality around costs or we will not have competition."
18800 COMMISSIONER LANGFORD: If we don't find that, if we have our sherpas crunch the numbers and they don't find anything like this 70 per cent, are you then saying that we should make some sort of change like that anyway on a policy basis?
18801 Is that your second proposition?
18802 I would be very surprised if you don't find what I am suggesting, because there is no other explanation for the profits growing like they are growing.
18803 COMMISSIONER LANGFORD: But if I could interrupt, you have given a second explanation yourself. You have said this morning, just seconds ago, that they may have found new products that they are putting on the market that had cost them virtually nothing, perhaps computer-based in some ways, optional services, discretionary services, bundling different types of services. We heard Dr. Taylor say some days ago, it seems like a lifetime ago, that some of these new products are virtually costless.
18804 MR. McLENNAN: Then I would say that would create such competitive advantage in the marketplace it would be difficult to sustain competition.
18805 COMMISSIONER LANGFORD: So then would you be asking us to make some sort of policy decision with regard --
18806 MR. McLENNAN: I would certainly be asking for some imaginative consideration of how we can get equality back in the cost structure. I don't know what I would be asking for, to tell you the truth.
18807 COMMISSIONER LANGFORD: You can see my difficulty, then.
18808 MR. McLENNAN: Not really. No. Not if you really do believe that the profitability that is being achieved is extraordinary, because there is then created -- you see that wouldn't happen in the wireless marketplace, the example that I have used, because then you have the competitive balance in the market forces determine how you create competitive advantage. Then you have market forces determining it. That is what you need in a competitive structure for it to work.
18809 So if there is something that is extraordinary where revenues can be created without costs on the back of the infrastructure, that is extraordinary and that has to be taken into consideration.
18810 COMMISSIONER LANGFORD: Well, on the subject of costs, the three of you on the panel have more than a passing experience with life as employees of an ILEC rather than as of a CLEC. How much do you know about these costs?
18811 Basically you are talking, if I can put it generally, in terms of suspicion, you know, educated suspicion perhaps, but you have been there yourselves. Do you have a reason to believe that these costs are so vastly exaggerated?
18812 MR. McLENNAN: When I look at the financial results of the ILEC, their costs as a percentage of revenues have changed dramatically -- have changed dramatically.
18813 COMMISSIONER LANGFORD: But what about when you look at the costs -- never mind looking at their earnings, for a moment, although it is tempting, I know, but what about when you just look at the costs. You were in a position to be selling products at one point, when you look at the cost of the products they are selling you, one at a time or in groups as Ms Muir suggested, in aggregate. Do you have, from your experience working in the past with ILECs, any grounds to believe that these costs are inflated to the amount you are talking about?
18814 MR. LAZZARATO: Let me have a shot, John.
18815 I will qualify what I am about to say by saying I never worked at an ILEC, just for perfect clarity. My experience on that side of the industry was at BCE, so not in the operating company.
18816 Our confusion, perhaps is the right word, comes from the fact that Phase 2, as we know it, looks at certain costs and applies them to certain products. I mean, as I think Bell's expert witness, Mr. Talbot, said cost allocation is difficult as best, I think, is paraphrasing what he said. I will agree. But certainly if you are going to do it in an incomplete way.
18817 So when, as Mr. McLennan said, products are introduced that ride a network that is paid for in one way, the products go a different way, those two things can't be ignored. They have to be somehow considered in total, whether they are costed across the board in total or whether they are just considered in setting your policy objectives.
18818 As we look at Phase 2, we think it is an incomplete analysis. It does not go wall to wall and, as Mr. McLennan said the other day, reconcile back to any financial results of the organization. It certainly isn't auditable.
18819 So we are not saying Phase 2 is bad, just saying I don't believe it is complete for the purpose we are looking. So it should be one of your inputs to a decision process. It's up to you to determine how much you rely on that versus some of the other constituents and objectives.
18820 COMMISSIONER LANGFORD: But your experience, to return to my question -- and I take your point that your experience perhaps wasn't with an ILEC but with an umbrella organization.
18821 Still, there is no doubt, Ms Muir, that you were involved in the regulatory process for sometime with an ILEC and Mr. McLennan has some experience.
18822 Does that experience tell you, never mind the earnings for a moment, but does that tell you the costs you are paying are so exaggerated as to propose a 70 per cent reduction in them?
18823 MS MUIR: I think what we did really was to take a look at --maybe it is easier to look at how the costs are developed. They do require a certain amount of judgment and quite a few assumptions and you are taking a huge investment and trying to allocate it to little piece parts of your network and decide going forward what my costs are going to look like for this incremental service or, in the case of loops, actual loops, and it is really difficult to take what is a theoretical application and make it practical, that you don't necessarily have the right information to do that.
18824 I think maybe the motivation, if you are within the incumbent, especially if -- the reduction in costs will only benefit your competitor. I am not trying to suggest that this is a deliberate act, I just think your motivation when you are looking at a specific service, and especially when any reduction in the price of that service really just takes away money to your bottom line, you will be more prone to be bias on the side of caution than not.
18825 But I just think the practical dilemma of trying to actually do this and figure out costs at such a very defined narrow area where vast investment and huge amount of services can be offered as a result of making that investment, to decide which little piece carries that cost is a really difficult exercise and there is no real check on that. So I --
18826 COMMISSIONER LANGFORD: Go ahead.
18827 MS MUIR: I guess what we are suggesting is, first of all, one you leave the ILEC, you don't even have access to that information. Also, the vintage of that information, what is in there would change, obviously, over time and it is almost humanly impossible, even inside an incumbent, to be able to keep the study up-to-date, to be able to keep looking at things, to be able to really test your assumptions. I mean you would need a huge number of employees.
18828 So I think what we tried to do was say: Okay, it doesn't seem right to us for a lot of reasons, most of them Mr. McLennan explained, so why don't we look at our own cost structure because that we have access to. So before you you have what we think it would cost us to be able to get that aggregate group of services so we could supply service to our end customers in the same manner as the incumbent.
18829 I think from there that there is a certain amount of judgment that has to be taken to decide between this allocation process and what the incumbent says and what we are suggesting.
18830 COMMISSIONER LANGFORD: So it looks like you are basically proposing the second of the two options that I put before you at the very beginning. You are proposing that we look at this, take Mr. McLennan's idea that there should be competitive equity, and make a policy decision here because the costs will be, in a sense, impossible to trace back. Is that basically what you are saying?
18831 MS MUIR: I think what we are saying is, if you look at kind of where we are in terms of looking at it on a cost-specific basis and just the amount of difficulty that we have encountered so far and try to establish the correct rates for the proper group of services, and also look at what we are suggesting as this is what we need to be able to compete, and with the combination of the both, our history so far with competition, to make your decision on that basis.
18832 MR. McLENNAN: I might add one more thought. This may surprise you, but when I was in the ILEC I certainly didn't get involved in the Phase 2 costing. It wasn't costing that I used to manage the business at all, so it was not costing that I was involved in in any detail whatsoever.
18833 But I think the point I'm making is, as you grow your business on the back of this ubiquitous infrastructure that I keep referring to that represents such a dramatic advantage from the point of view of scale and cost and reach, access, all of those elements, and if revenue can be derived from that which, as we have projected or subjectively said, may not have any costs attached to them at all, which is extraordinary, because there are small marginal costs sometimes, but it is all derived off of this one huge, ubiquitous infrastructure, then I really truly believe that must be taken in consideration in establishing a competitive cost environment.
18834 That is why I said it was complicated at the beginning, but without the competitive cost element being considered we will not have an ongoing environment of competition on the wire-line side because it is just too strong an advantage when you have such financial strength driven out this ubiquitous infrastructure that we don't have access to. If we don't have access to the advantages, then we are severely disadvantaged.
18835 COMMISSIONER LANGFORD: So, like Ms Muir, you are saying that if your suspicions prove incorrect we should still make a policy decision here in order to keep the market competitive or, in fact, make the market competitive?
18836 MR. McLENNAN: I certainly think there has to be a judgment made as to what has to be done to create a competitively neutral cost environment. Whatever assumptions or judgments are made, that is a necessity for us to continue to grow competition.
18837 COMMISSIONER LANGFORD: Thank you very much.
18838 Those are my questions, Mr. Chairman.
18839 THE CHAIRPERSON: Thank you, Commissioner Langford.
18840 So we will go back to Commission Cram, and I believe it is page 34.
18841 COMMISSIONER CRAM: It was 34.
18842 THE CHAIRPERSON: I have found it.
18843 COMMISSIONER CRAM: You found it also under "Local Services".
18844 I wanted to look at that sub 2, in the first paragraph under "Local Services", talking about:
"...terms of the Canadian telecommunications regulatory regime, such as the absence of a mandatory resale discount and the narrow definition of essential services.
18845 So at that time, May 31st of this year, was that your solution for price cap?
18846 MR. LAZZARATO: As we use the phrase discount here, mandatory resale discount, and I'm not going to do the "tomatoe/tomato" thing, but we are really looking at using that word as saying a reduced selling price.
18847 We don't mean below cost. We don't mean it in the context of cost, however determined, is "X" and our price from that person should be something less than "X".
18848 We meant you could paraphrase and say "lower". So "discount", as the last two days has unfolded, it wasn't taken the same way.
18849 In this document in May we hadn't done our evidence, we hadn't had our interrogatories.
18850 COMMISSIONER CRAM: Just for the sake of argument let's say -- following up on Commissioner Langford -- we choose to make a policy decision that there has to be some sort of, to use a term that has been used, accommodative policies that would overcome the ILEC advantage, what criteria would we use in four years time to say we succeeded or we didn't?
18851 Say we accept your alternative or CallNet's, it doesn't matter, how do we access that? Do we look at sort of EBITDA? Do we look at penetration? How do we assess whether we have succeeded or not? Because at the end of day, in my mind, I know the person who is going to pay for this, you and me and our mothers and our fathers and everybody who has a residential local line.
18852 MR. McLENNAN: I have thought about that myself actually and I think it is a very good question. But let me just begin by saying, I don't think the leading ILEC in the country is in any danger of losing its dominant role as Canada's flagship company, let alone flagship telephone company. I don't think we are proposing anything that is going to in any way address that.
18853 However, I think there should be a measure to see the impact on that. I think that all of the regular parameters of measuring how well you are doing in the marketplace must now include financial measures for sure, but certainly market share gains or market share losses, depending on which side of the fence you are on.
18854 I also think, and I alluded to it a little bit earlier, that I think we should also be measuring the amount of dependence we continue to have on ILEC facilities. I threw out an arbitrary number that my engineers might bash me on the back of the head for even saying, but maybe at the end of the next price cap period we should be looking at a dependence of the 73 to 75 per cent we have now maybe falling to something like 50 per cent, or somewhere, somehow coming up with a target and goal through the price cap hearings to measure how well we are doing actually getting more and more customers on our own facilities. I think that there should definitely be a measure of that.
18855 But outside of that, I think what we are really looking at is: Are the new entrants successfully beginning to become viable because, quite frankly, none of us are at the present time. None of us are viable at the present time. By that I mean we are not financable, independent entities at all. Some people have put forward a business model where the two ILECs, and maybe some day in the future the cable companies, representing competition. I don't think that was the vision and intention of the Commission going into all this.
18856 But I think that the measures that I have just outlined would be not a bad way of doing it. But I think there should be pressure on the new entrants moving more and more competitors on to their own network -- more and more customers on to their own network and there should be real targets in that area, in addition to the financial objectives, the market share objectives, and things like that.
18857 COMMISSIONER CRAM: So would it be reasonable, then, to -- because to me every criteria I can think of ends up turning in on itself. Because at the end of the day, if this structure, or any structure we decide, doesn't work, it seems to me that after four or five years we have to be looking at something -- and dare I say the words -- like structural separation or remonopolization. I mean, we are in a pivotal tide.
18858 So if we say: If you don't meet 50 per cent facilities, you know, reliance on your own facilities, then we are going to talk about structural separation. That doesn't make sense to me.
18859 MR. McLENNAN: Yes.
18860 COMMISSIONER CRAM: You know, it doesn't get me anywhere in terms of --
18861 MR. McLENNAN: You mean the structural separation concept?
18862 COMMISSIONER CRAM: Yes.
18863 MR. McLENNAN: Because it is so complicated the structural separation concept is one that people instantly go to as clean and equitable and simple. But you really are back into a regulated, structurally separated entity. But I think it would be a very worthwhile exercise and initiative through this next price cap hearings to really see if we can make progress utilizing the kind of proposal that we are suggesting.
18864 At the same time, it might be worthwhile to understand what other jurisdictions are really thinking, because certainly some of them are considering price cap. But that brings its own complexities as -- I mean structural separation, not price cap.
18865 But that certainly also brings its own complexities. When you begin to break assets away -- that is why, you know, a long time ago when I was a young man in this industry and we didn't structurally separate long distance and local, I mean that seems to have evolved all right and has worked in some cases. But it left us with a complexity all the way along the way of how do you maintain competitive cost neutrality and we are still faced with it in local competition here today.
18866 So I think it would be a good idea to try a model such as ours, or a modified model such as ours, but really keep a very close eye of where we go if we are not making the kind of progress we need to make with it.
18867 That is why I suggest that we set targets for moving customers on our own facilities, which would require us to continue building facilities, moving customers on net and actually moving more and more towards a facilities-based model, but in a way that we can at least be viable business entities as we go. That is the challenge. That is the tricky part.
18868 COMMISSIONER CRAM: Thank you.
18869 Mr. Chairman.
18870 THE CHAIRPERSON: Thank you, Commissioner Cram.
18871 Commissioner Williams.
18872 COMMISSIONER WILLIAMS: Thank you, Mr. Chair.
18873 Mr. McLennan, during the course of your panel's testimony we have heard much discussion and not a small amount of disagreement about discounts, markups, wholesale costs, whether companies are efficient or whether they are carrying large or small overheads. We have had costs as calculated by a competitive carrier. We have had costs calculated by a monopoly incumbent carrier. We have had costs, in any event, as my colleague has suggested, that will be paid for and borne by consumers.
18874 I guess the last day or so has caused me to wonder a bit about these costs. We do have a fair amount of financial information that has been submitted in confidence and now I'm starting to wonder: Are the costs that have been submitted accurate? Are they reflective of what the real situation is?
18875 So I guess my question for you, or one of my questions for you, is: Should the Commission initiate a public proceeding to establish what the true costs are and would this be a reasonable approach to finding out this information?
18876 MR. McLENNAN: Well, when we manage our businesses, whether it's an ILEC or whether it's a new entrant, we as CEOs must know our costs, I guarantee you. We know our costs. We know our costs and for the most part we really try to understand our costs from an overall point of view to start with and then we try to break them down into segments, because you must be able to do that to manage costs and know how to remove costs.
18877 For instance, back in the days of the ILEC days when so much cost had to be removed and the large amount of that were people and individuals and processes and billions of dollars were invested to reduce the amount of employees, those are all what I call operating costs.
18878 So much of the cost structure in this industry is capital cost. This is where it gets a lot more complicated when you begin to allocate the capital deployed, which is, as you know, in the billions and billions, and as you begin to allocate that by services, this is where it gets very subjective and very complicated.
18879 The bottom line is, you need that infrastructure. That is what everything operates from. To try to understand that on a per-service basis I think becomes very, very complicated and very subjective. To understand your operating costs, that is quite straightforward and not so complicated.
18880 So if such an undertaking was to take place, your big challenge -- our big challenge collectively, all of us stakeholders who are in this business -- would be to try to figure out which services attract which part of the infrastructure costs. Boy, is that complicated. That is very, very complicated and very, very subjective.
18881 I know that there has been a tremendous amount of effort put into it. I actually, in former jobs, used to sit in rooms and have people try to explain the allocations to me and it went on for hours. I got some of it. I don't think I got all of it.
18882 So I'm really trying to think -- I guess my bottom line is I don't think we have the time nor would the results of it -- it would take a significant amount of time and I'm not so sure at the end of the day the allocations we would make on a per-service basis, which, by the way, would all have to roll up into the number, the number that we put on our income statements for depreciation and operating expenses and things like that.
18883 COMMISSIONER WILLIAMS: Could you --
18884 MR. McLENNAN: I guess I would be a little bit reluctant to say that that would really yield us some really meaning -- if we could do it quickly and easily and it was clear, I would say yes. But I think it would take quite a bit of time and quite a bit of effort. Then, at the end of the day, how do you subjectively allocate the physical asset cost to all these different services. That is the complexity.
18885 COMMISSIONER WILLIAMS: In the internal management of these companies they must be able to identify how much revenue is received from each type of service. Could not just a simple allocation of there is one base cost to run this company and 1 per cent of it goes to this product, 30 per cent goes to this product, that would be a relatively simple allocation method, I would think, that might give you a thumbnail sketch of where it's at.
18886 MR. McLENNAN: You see, I think that is a smidgen simplistic, but I will let my colleague who is more expert in it perhaps give his views on it and see.
18887 What do you think, David?
18888 MR. LAZZARATO: Well, I think it's a great question, but I agree with Mr. McLennan that it would satisfy the objective of quick, but I think it would be very simplistic.
18889 You know, as a number of witnesses I guess in these proceedings have said, cost allocation is difficult at best and more than one accountant will come up with more than one method, let alone how seven Commissioners judge the various methods.
18890 To do capital cost, network cost allocations across products, I don't think is anywhere near as simple as, you know, based on a revenue allocation. I think to get it anywhere close to accurate would take, I will say engineering studies without defining what that necessarily means exactly. I think revenue allocation would be simplistic.
18891 COMMISSIONER WILLIAMS: Yes. I personally owned and ran a cable company for about 18 years so I am quite familiar with the way that we used to allocate costs and try to figure out whether we were making a profit or not and we certainly new what each part of our network actually contributed to our bottom line from which revenue stream. That is why I put forward that idea. Quite a bit smaller than Bell Canada, of course.
18892 Anyway, thank you, Mr. Chairman.
18893 THE CHAIRPERSON: Thank you, Commissioner Williams.
18894 Commissioner McKendry.
18895 COMMISSIONER McKENDRY: Thanks, Mr. Chair.
18896 I just wanted to follow up Mr. Lazzarato with a discussion you had with Commissioner Langford, particularly with respect to the Phase 2 studies. I think you told Commissioner Langford that the Phase 2 studies really weren't doing the job they should be doing from the perspective of the competitors, the CLECs.
18897 What I want to ask you is: What are your specific suggestions as to what we should do with respect to changing the way Phase 2 studies are done or whether or not we should do them at all? You are a chartered accountant, you have a lot of experience in senior financial positions, what do we need to do specifically with these Phase 2 studies?
18898 MR. LAZZARATO: I will reiterate, I think, what I said earlier, Commissioner.
18899 The only way to really understand your costs, whether it is a cable business, a phone business or the grocery business, I will assume, is to allocate all costs across all products. My background as an auditor is not why I make the following comment, and it has to tie into something like a financial statement. Otherwise, you are allocating some of your costs to some of your products. That just seems intuitively illogical to me.
18900 So without perfect knowledge of all the ways Phase 2 costing studies are done, it seems to me that the overall framework is such that it is incomplete by design, if I can use that expression. I'm not saying that's bad, I think it leads to a useful input but there are lots of useful inputs, I assume, in your process, including earnings, including trends, including the practical realities of how competition has been executed and unfolded, at least to this point, in addition to the economic theories.
18901 COMMISSIONER McKENDRY: So I take it you are saying there is a fundamental problem with respect to the design of the Phase 2 studies and the solution is to distribute all of The Companies' costs across all of the services, is that --
18902 MR. LAZZARATO: I wouldn't say there is a -- I would say that how the information that is currently constructed is used shouldn't be over relied upon given the inherent limitations in the methodology. I'm not saying it is worthless, I'm not saying it shouldn't be considered, but my recommendation: Don't believe it to be something greater than it actually is, which is a complete allocation of all costs across all products. It is something different than that.
18903 COMMISSIONER McKENDRY: You don't have any suggestions with respect to changing the methodology of the Phase 2 studies?
18904 MS MUIR: Well, if we could devise a way to go to full cost allocation across all products, across everybody's entire business, that would be wonderful. But the complexity of updating what are today's Phase 2 cost studies are fairly complex. They are not updated as frequently as probably everybody would like. To do something broader than that, I appreciate the administrative complexity of that. So what we tried to do here is come up with a proxy as one input. Not meant to replace Phase 2 by any sense, but to come up with a proxy for people to use.
18905 COMMISSIONER McKENDRY: When the Bell witnesses were in front of us there was some discussion about the possibility of improving the tracking of actual results against Phase 2 forecasts. The possibility of introducing auditing into that process, based on your comments, I take it that wouldn't give you a lot of comfort?
18906 MR. LAZZARATO: I think that tracking results against assumptions used and forward-looking information would be useful, absolutely. I'm not sure it would be as useful as, again, allocating all costs across all products, but I think that would be incrementally useful to what exists today.
18907 COMMISSIONER McKENDRY: Thanks very much.
18908 Thanks, Mr. Chairman.
18909 THE CHAIRPERSON: Thank you, Commissioner McKendry.
18910 I think those are all the questions for this panel.
18911 Thank you very much for your participation in our proceeding. You may step down.
18912 We will take our morning break now then, and reconvene in 15 minutes.
18913 The next party to appear will be CallNet.
--- Upon recessing at 1035 / Suspension à 1035
--- Upon resuming at 1050 / Reprise à 1050
18914 THE CHAIRPERSON: We will now turn to the next panel to be cross-examined on their evidence, ant that's CallNet.
18915 Mr. Koch.
18916 MR. KOCH: Thank you, Mr. Chairman.
18917 I would like to thank counsel for ARC who was kind enough to let me sit in the front row for my panel's appearance.
18918 Before you, you have CallNet, the panel of CallNet Enterprises. Let me first begin by introducing the panel members.
18919 Closest to Commissioner Langford is Mr. Ian Scott who is Vice-President, Government Affairs of CallNet Enterprises.
18920 To Mr. Scott's right is Mr. William Linton, who is President and Chief Executive Officer of CallNet.
18921 Next to Mr. Linton is Mr. Jean Brazeau, who is Senior Vice-President, Regulatory and Government Affairs of CallNet Enterprises.
18922 Beside him is Mr. Donald Bowles who is Vice-President, Regulatory Affairs.
18923 The curriculum vitae for CallNet's witnesses were provided as an attachment to a letter from CallNet to the Commission dated September 19.
18924 The backup panel consists of Ms Bonnie Schubert and Mr. Bruce Watson.
18925 Mr. Secretary, the witnesses are ready to be sworn.
18926 MR. SPENCER: Thank you.
SWORN: IAN SCOTT
SWORN: WILLIAM LINTON
SWORN: JEAN BRAZEAU
SWORN: DON BOWLES
EXAMINATION / INTERROGATOIRE
18927 MR. KOCH: Gentlemen, if I could ask each of you to confirm that the information provided in your curriculum vitae is accurate.
18928 Mr. Bowles?
18929 MR. BOWLES: Yes, it is.
18930 MR. KOCH: Mr. Brazeau?
18931 MR. BRAZEAU: Yes, it is.
18932 MR. KOCH: Mr. Linton?
18933 MR. LINTON: Yes.
18934 MR. KOCH: Mr. Scott?
18935 MR. SCOTT: Yes, it is.
18936 MR. KOCH: Firstly, for Mr. Bowles, Mr. Brazeau and Mr. Scott, I understand that CallNet's evidence dated August 20 and interrogatory responses were prepared under your -- either prepared by you or under your direction. Is that correct?
18937 MR. BOWLES: That is correct.
18938 MR. KOCH: Could I have each of you confirm that they are true to the best of your knowledge and belief?
18939 Mr. Bowles?
18940 MR. BOWLES: They are so true, yes.
18941 MR. KOCH: Mr. Brazeau?
18942 MR. BRAZEAU: They are.
18943 MR. KOCH: Mr. Scott?
18944 MR. SCOTT: Yes, they are.
18945 MR. KOCH: Mr. Linton, I understand that you have reviewed the evidence and the interrogatory responses and, to the best of your knowledge and belief, are they true?
18946 MR. LINTON: Yes, they are true.
18947 MR. KOCH: Thank you, Mr. Chairman.
18948 The panel is ready for cross-examination.
18949 THE CHAIRPERSON: Thank you, Mr. Koch.
18950 Welcome to our proceeding, Mr. Linton and gentlemen.
18951 We will turn to the first party to cross-examine, The Companies.
18952 Mr. Kidd.
18953 MR. KIDD: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
18954 MR. KIDD: Good morning, gentlemen.
18955 MR. BOWLES: Good morning.
18956 MR. KIDD: I wonder if you could turn first to two exhibits that I handed out to your counsel last night. Exhibits A and B I have labelled them so it would be easy for the Commission and others to locate them.
18957 At the same time, I would ask you to turn to CallNet(TELUS)31Aug01-5.
18958 MR. KIDD: Do you have the interrogatory reference?
18959 MR. BOWLES: Yes, I do.
18960 MR. KIDD: Now, in terms of introducing my Exhibit A, which is footnoted as referring to CallNet(TELUS)6, I wanted to make sure that the Commissioners and others understood the question in TELUS 6. So I am just going to summarize it rather than reading the whole question.
18961 But the question asks for the carrier segment services shown in Appendix A of CallNet's evidence, they ask you to break down by each ILEC-serving territory the amounts that you spend for a variety of years.
18962 What I have done, as you can see in the Exhibit A, is I have extracted your response for Bell only for the year 2000.
18963 I would first ask you to tell me whether you have had a chance to verify that what I have extracted from the response to TELUS 6 is correct?
18964 THE CHAIRPERSON: Excuse me, Mr. Kidd, before they answer.
18965 You did distribute those exhibits yesterday, but they weren't actually registered as exhibits because you hadn't used them yet. So they didn't get numbered, as I recall. And, frankly, I can't find them.
18966 While I was looking for them, I missed the reference to the interrogatory.
18967 MR. KIDD: Mr. Chair, I wonder if there are extra copies because we don't have them down here as well.
18968 THE CHAIRPERSON: Yes, we will get extra copies as well.
18969 Mr. Kidd, could you just remind us of the reference you made, the interrogatory reference you made?
18970 MR. KIDD: Yes. The interrogatory is CallNet(TELUS)-6.
18971 THE CHAIRPERSON: I apologize for that.
18972 THE CHAIRPERSON: Okay, I think we are with you.
18973 MR. KIDD: Perhaps I will start again, Mr. Chairman, just on this lead-in, so that we are all on the same page.
18974 If you have the two exhibits that I have labelled A and B for now, until Mr. Secretary provides a formal number, I have also asked you to turn up CallNet(TELUS)-6, primary for the question as opposed to the answer.
18975 I was putting to Mr. Bowles a minute a go, I think, just so we have the context of my Exhibit A, that in CallNet(TELUS)-6, CallNet was asked to provide the carrier segment services broken down by expenditures for each of the ILECs.
18976 So what I have done is extract from the attachment in CallNet(TELUS)-6, for Bell Canada only for the year 2000, precisely the numbers that CallNet has provided. In other words, the $164 million and the breakout there that you have in total on CallNet expenditures for Bell comes right off Attachment 1 to that interrogatory. Is that correct, Mr. Bowles?
18977 MR. BOWLES: Yes. Although, there are, I guess, some very minor points.
18978 First of all, you have identified a number of services. You have listed them down here. You didn't cover off all the services in TELUS 6. I assume they are covered under the services not included in the above items. There are a number of minor items that aren't included on your specific list?
18979 MR. KIDD: That's correct. There is a .3 per cent that I have not included.
18980 MR. BOWLES: Okay. Other than that, I guess the only other minor point is that in our list on TELUS 6, the tariff item 40 "Other" -- actually, I understand actually there are some items from tariff notice -- or tariff items 41 as well, but they are minor.
18981 MR. KIDD: Okay. I'm not going to go to that.
18982 What I have done on my Exhibit A, of course, is to add a column called "Per Cent of Total Expenditures" which is my arithmetic. I have also provided -- I have regrouped them under the headings "Retail Competitor Services Toll" and "Competitor Services Local."
18983 Now, before we get to that I would ask you: Is the per cent of total expenditures done accurately, subject to check?
18984 MR. BOWLES: Subject to check, and we are not going to get into arithmetic, I hope.
18985 MR. KIDD: Okay.
18986 So I would like to focus first on the group of services that I have entitled "Retail Services".
18987 If we go down that list, "Local Channels", Digital Channel Service", Megalink", "DEA", we come to one of the services that seems to have had quite a bit of play in this proceeding so far, "Digital Network Access". What you have told TELUS and the Commission is that in the year 2000 you spent $43.6 million in Bell territory and that represented 26.5 per cent of your total expenditures in what you propose to be the carrier segment basket. Is that correct?
18988 MR. BOWLES: That is correct.
18989 MR. KIDD: Moving down to the other big ticket items there, we have "Non-Forborne Interoffice Digital Channels". You spent $38.3 million dollars there, which is 28.3 per cent of your carrier segment basket?
18990 MR. BOWLES: Yes.
18991 MR. KIDD: If we could turn to my Exhibit B for a moment?
18992 First of all I should make sure people understand, those percentages do not add up. It is just the interrogatory that the Commission posed to Bell Canada -- and the source is at the bottom, "The Companies(CRTC)3200 -- asked for a breakdown of the spend that -- or revenues, I should say, that Bell Canada receives for various services broken down between competitors and retail customers.
18993 So, for example, what I have done is just simply reproduce The Companies' answer to that interrogatory and I have only produced it for Bell Canada.
18994 Do you agree with that, Mr. Bowles?
18995 MR. BOWLES: Yes.
18996 MR. KIDD: What I want to get to here is, if we come back to the digital network access for the moment -- in our groupings we had DNA grouped in with data route service so there may be a slight disconnect between the two figures, your digital network access and how we describe it,
18997 But in Exhibit B what Bell Canada shows is that 29 per cent of the revenues for that service come from competitors. Do you see that?
18998 MR. BOWLES: Yes.
18999 MR. KIDD: That would mean that 71 per cent of the revenues come from retail customers?
19000 MR. BOWLES: That's correct.
19001 MR. KIDD: Similarly, for digital private line services we see the same kind of figuring in Exhibit B, that 29 per cent of the digital private line services are from competitors. 29 per cent of the revenues are from competitors and 79 per cent are from retail customers?
19002 MR. BOWLES: That's correct.
19003 MR. KIDD: If we could move on to the second part of Exhibit A, the second category called "Competitor Toll, Competitor Services Toll." Here we have various services that I have grouped under "Toll Interconnection".
19004 The first one is direct connection and access tandem. You see that is a fairly substantial item. You spent $38.3 million in the year 2000, representing 23.3 per cent of your total carrier segment service?
19005 MR. BOWLES: Yes.
19006 MR. KIDD: You would agree with me that the rates for direct connect have declined substantially in the last year?
19007 MR. BOWLES: Yes, they have.
19008 MR. KIDD: Moving on to the 800 carrier ID, while it is a smaller item you would also agree with me that the rates have fallen in that service in the past year by about 50 per cent?
19009 MR. BOWLES: I don't remember the exact event, but I will take your word for it at this point.
19010 MR. KIDD: Let's move down to the final category, "Competitor Services Local Interconnection Related."
19011 Maybe you could tell the Commission what is included in "LNI"?
19012 MR. BOWLES: LNI are the local network interconnection components, the unbundled loops and the other components that were made available in Decision 1997-8 for interconnection with the ILECs.
19013 MR. KIDD: Would that include all essential and near-essential loops?
19014 MR. BOWLES: Yes, it would.
19015 MR. KIDD: On that category we see here that approximately 4.7 per cent of your carrier segment proposal to the Commission is represented by expenditures on essential and near-essential loops and other things that would go into LNI?
19016 MR. BOWLES: That's correct, yes.
19017 MR. KIDD: I wonder if you could turn to CallNet(TELUS)-9, please?
19018 MR. KIDD: That is, Mr. Chairman, CallNet(TELUS)31Aug01-9.
19019 In that interrogatory, I am just going to read the question because it is a slightly different question than was posed to you in TELUS 6:
"Provide a dollar and percentage breakdown of CallNet's intercarrier payments to the ILECs and non-ILECs separately broken down for the years 1998 to 2001 and a forecast for the next price period for essential facilities, near-essential and other." (As read)
19020 If we could go to the Attachment 1 to that interrogatory, I am going to look at the Bell Canada numbers for the year 2000, Mr. Bowles.
19021 What I see here -- which largely confirms what my Exhibit A was trying to do, but I just wanted to understand better what was in intercarrier payments, if that was in any way different than what is in your carrier segment proposal. You see here that for the year 2000 you spend zero on essential and $7.8 million on near-essential, totalling 5 per cent of your total intercarrier payments?
19022 MR. BOWLES: I'm sorry, just let me find it.
19024 MR. KIDD: Okay.
19025 If we look down the year 2000 on Attachment 1 to that interrogatory for TELUS and MTS and Aliant and SaskTel, what we see there is that generally speaking -- well, in fact I can be specific, that you spend zero -- zero on essential facilities in terms of your spend in the year 2000?
19026 MR. BOWLES: That's correct, the essential facilities of course being the loops in high-cost areas and essentially -- effectively that is the -- and we do not lease any of those at this time.
19027 MR. KIDD: If you look at the near-essential, in Bell territory you spent 5 per cent and in TELUS roughly 8 or 9 per cent.
19028 You would agree with me that on balance most of the money that you have spent for intercarrier payments is in the "Other" category?
19029 MR. BOWLES: That's correct.
19030 MR. KIDD: Could you tell me, just out of curiosity, whether the intercarrier payments and your carrier segment proposal match up? Could you reconcile those for me? Because they seem to be roughly the same. I just wanted to know if there is some difference there.
19031 MR. BOWLES: There shouldn't be. I don't think I can reconcile them on the stand here right now, but certainly they have been derived from the same sources of data, so they should be reconcilable.
19032 MR. KIDD: So, in other words, your total intercarrier payment to the ILECs was loaded into your carrier segment proposal. Is that what you are saying?
19033 MR. BOWLES: Say that again?
19034 MR. KIDD: Let me put the question another way.
19035 In terms of your total spend with the ILECs, the question 9 says:
"Provide a breakdown of intercarrier payments..." (As read)
19036 They use the words "intercarrier payments". I don't know exactly what it meant.
19037 I have asked you: Did you interpret that as being the same thing, intercarrier payments, as your carrier segment expenditures?
19038 MR. KIDD: Let me help you, it would seem to me that --
19039 MR. BOWLES: I believe so, yes.
19040 MR. KIDD: It would seem to map in terms of the expenditures. You have about 5 per cent in essential and near-essential local, so I was just asking if there was any difference in your mind?
19041 MR. BOWLES: There shouldn't be any significant difference, no.
19042 MR. LINTON: Mr. Kidd, if I can just add to that.
19043 I noticed on this schedule that it shows retail services. I guess that "retail services" is your title.
19044 A lot of these aren't retail to us. I mean, they are essential. What we use, the majority of this stuff is to back all the calls from the collocations back to our switch site.
19045 So from our standpoint, or from my standpoint, they are essential because there is no other supplier for the vast majority of the collos we are in.
19046 MR. KIDD: I wonder if you could turn, gentlemen, to -- I have handed out your 2000 annual report.
19047 Mr. Chairman, just so you know, this isn't really an exhibit. I wasted some trees here, I apologize, but the copy that was in the interrogatory response was so difficult, at least for me to read, that I had to reproduce it so that we could read it.
19048 It is CallNet(The Companies)31Aug-9, Attachment 3, but I have handed you out a copy and I have written the reference along the top.
19049 Mr. Linton, could you please tell me approximately when your annual report -- this is the 2000 Annual Report -- when it would have gone to print?
19050 MR. LINTON: The writing of it would have been done in the early part of 2001. It probably would have been pretty well finalized by February/March.
19051 THE CHAIRPERSON: Mr. Kidd, just to be clear, this is the document that is titled on the first page "CEO's Message to Shareholders"?
19052 MR. KIDD: That is correct, Mr. Chairman.
19053 THE CHAIRPERSON: Thank you.
19054 MR. KIDD: I wonder if we could turn, please, to page 10 of that document? You will be surprised that I am going to read in the topic, "Regulatory Risk":
"CallNet's business plan currently anticipates it and other competitive local exchange carriers will be successful in obtaining a significant reduction in the cost of local loops necessary to provide local telephone service to Canadian consumers and businesses. The failure to obtain such relief would significantly reduce the projected profitability of CallNet's current business plan related to its increased participation in the local services market." (As read)
19055 Now, could you tell me, please, what regulatory decision or risk you are referring to here?
19056 MR. LINTON: Well, at that time there were a variety of outstanding items. One was the -- I believe the loop decision was outstanding. Certainly there were applications before the CRTC with respect to administrative charges, which is still outstanding I guess. I know we had either presented something to the Commission on winbacks which is an integral part of this. So there are three to start.
19057 MR. KIDD: Could you help me there? I'm looking at the words myself and I could certainly agree with your first one, that you are referring to the local loop decision, but where in those words are you communicating to investors that -- I think you said there was an administrative proceeding and also winbacks? I don't see that in those words.
19058 MR. LINTON: I was answering your question. I thought you asked me what was outstanding between us and the CRTC at the time this was written so I answered that. If I --
19059 MR. KIDD: I'm sorry, Mr. Linton, let me put my question again. That wasn't my question.
19060 It was: What was this passage referring to? Not what was outstanding with the Commission, but what did you want to communicate with investors with this particular passage?
19061 MR. LINTON: Well, this has to be read in the context of this entire, you know, document with respect to risk factors.
19062 This particular one, I think everyone can read it. The first sentence deals with:
"...the cost of local loops necessary to provide local telephone service." (As read)
19063 I just read it back to you.
19064 MR. KIDD: Sure. I just want to get a clean answer for the transcript on this.
19065 This passage refers only to the local loop decision which was outstanding at that time?
19066 MR. LINTON: Yes, I would say that is true.
19067 MR. KIDD: Given what we have just been through in my Exhibit A and referring you to TELUS-9, I find it somewhat curious that what you communicated to investors as being a significant risk for you at the time represented approximately 5 per cent -- maybe 5 to 8 per cent, to be fair to you -- of your total intercarrier payment spend in the year 2000.
19068 Why would you choose to focus on that aspect to say: This is the biggest risk that CallNet faces in the year 2001?
19069 MR. LINTON: I think we didn't say it's the biggest risk we face, number one.
19070 Number two, if you read, I guess it is the very next sentence, it talks about our "increased participation in the local services market".
19071 So as most people understand that we have re-entered the local telephone market in 2001 and are actively selling in the collocations that we are in now.
19072 So as we get larger in providing local telephone service, which right now it is not a bundle basis, this will become, obviously, more significant, as will other decisions affecting this.
19073 MR. KIDD: Just to be clear, when I said the biggest risk, I will rephrase my question.
19074 This is the only regulatory risk that you identified. I take your answer as given.
19075 But you didn't mention the long distance business and any requirements to change the method of calculating interconnection charges or things like that. You focused solely on what you perceived to be your regulatory risk in 2001, which was the local loop decision. Correct?
19076 MR. LINTON: That decision I believe was outstanding at that time. So it was very relevant to the timing that this was written.
19077 MR. KIDD: Why did you not mention the fact that there would be price caps proceeding and that you would be looking for significant change in what you call the "carrier segment services purchased from the ILEC"? Would that not have been much more important to investors to understand?
19078 MR. LINTON: I think as Mr. Lazzarato said yesterday, these are very scrutinized documents by lawyers in the U.S. and to talk about prospective items in these documents they have to be very well developed. I don't believe that this hearing was developed to the point where we would rightfully talk about it in this document.
19079 MR. KIDD: I wonder if you could turn to what I have labelled as Exhibit C, which is your second quarter results.
19080 MR. KIDD: If you turn to page 2 of that document, I am looking at the very last paragraph before we get to the usual boilerplate. There is a quote from you in there, Mr. Linton, and I will just read it in so everyone can catch it.
"We continue our efforts to convince the CRTC of the necessity of fair competition in the Canadian telecommunications market and are optimistic the Commission understands that additional reform is necessary to make the market truly competitive. (As read)
19081 Now, as I gather, this was released sometime in July of this year. Is that correct?
19082 MR. LINTON: I believe that is correct, yes.
19083 MR. KIDD: I guess even here I am struck by the fact that you haven't really given your proposal much play. It seems to me it is kind of low profile.
19084 I don't know what you intended to say by that passage. Maybe you could help me by explaining what was intended there.
19085 MR. LINTON: This is the press release. This isn't our complete results. What I meant when I said that is to -- in a general way we are continuing on many fronts to talk to the CRTC about ways that they can develop fair competition in the Canadian telecommunications market.
19086 As I said, we are optimistic that they will act and that they will, you know, input such reforms that are going to allow for that competition.
19087 MR. KIDD: My impression was that perhaps you didn't want to leave investors with the impression that your proposal was quite radical and that you didn't want to talk about it.
19088 MR. LINTON: I don't believe our proposal is radical. It's too much detail to get into all of the various aspects of our dealings with the CRTC on the Q2 press release.
19089 MR. KIDD: Well, things like having residential service order loop costs for free. Would you not consider that to be radical?
19090 MR. SCOTT: If I can join in here for a moment, Mr. Kidd.
19091 No. I mean, you can isolate particular elements of the proposal. That specific aspect of our proposal is meant to be a way to kick-start local competition with an emphasis on local competition and, no, I wouldn't consider it radical.
19092 MR. LINTON: Mr. Kidd, I don't think our evidence is that the local loop monthly charge would be free.
19093 Our evidence is that we would like to see the 25 per cent markup removed as part of the carrier segment, and we also said that in order to enhance and jump-start competition in local, residential local, that the administrative fee should be waived for a period of time.
19094 MR. KIDD: Yes. That administrative fee -- or let's call it the loop order service charge -- you are proposing to get it for free forever or for a period of time? I wasn't sure there was a sunset on that.
19095 MR. SCOTT: There is no specific sunset provision in our submission.
19096 MR. KIDD: So you wouldn't consider, all things considered, your proposal to be radical, gentlemen?
19097 MR. LINTON: Absolutely not.
19098 MR. KIDD: I wonder if you could turn to paragraph 17 of your evidence.
19099 MR. SCOTT: I'm sorry, Mr. Kidd, did you say page 17 or paragraph 17?
19100 MR. KIDD: Page 5, paragraph 17.
19101 MR. SCOTT: Thank you.
19102 MR. KIDD: I am just going to read in a short passage to you. I think you can see where I am going.
"While this new approach may seem radical at first glance, CallNet submits that it is, in fact, an approach that is consistent with the Commission's objectives and, in any event, that it is the type of significant change that is required to ensure the development of sustainable competition. (As read)
19103 I'm not going to ask you about radical, but I am going to ask you about "significant change".
19104 What did you have in mind there? Because you seem to say to me: Well, you may or may not agree with me that it is radical, but there is significant change I am proposing here. So what is that?
19105 MR. BRAZEAU: I think the significant change -- and I will point out that we said it "seems radical". It doesn't mean it is radical.
19106 But the significant change we were referring to is a change in focus and emphasis from the Commission.
19107 In our proposal, or in our submission we point out that the Commission has been very proactive in removing many of the barriers for competition, but it hasn't really promoted competition. So the radical or the significant change that we are advocating, in our submission, is that they now promote competition.
19108 That is the, if you want to use your word, "radicalism" that we are advocating.
--- Off microphone / Sans microphone
19109 THE CHAIRMAN: Mr. Kidd, your microphone.
19110 MR. KIDD: I'm sorry, Mr. Chairman.
19111 If you could turn to Volume 5 of the transcript. The page reference is 1303.
19112 MR. KIDD: That is Volume 5, page 1303.
19113 I want to pick up the discussion that your counsel Mr. Koch was having with Dr. Taylor.
19114 I think if we start at about line 10 on page 1303. As you will recall, I think a lot of us remember this expression "massive discount". I think both of those words are fairly loaded in this hearing and those were words used by Dr. Taylor in his evidence.
19115 He alluded to both the AT&T and CallNet evidence as having massive discounts. That reference was read in by your counsel.
19116 Mr. Koch -- I am picking it up at line 19 -- says:
"Okay. So you are alleging that we are calling for a massive discount from the current level of service prices for essential and near-essential services.
DR. TAYLOR: Yes."
19117 Then Mr. Koch goes on on the next page, on page 1304, to do some conversions from, I guess it is markup to discount, or whatever. We don't need to read that.
19118 But if we go down towards the bottom to page 1304 and pick it up at line 19, Mr. Koch says:
"Okay. If the mark-up were in fact 15 per cent, then the discount CallNet would be asking for, if you remove the mark-up, would be -- and again I went to my engineer friend -- 13 per cent.
DR. TAYLOR: Okay.
19119 Mr. Koch says:
"I'm suggesting to you, Dr. Taylor, that your use of the words `massive discounts' is overblown. You have overstated the case, have you not?"
19120 Dr. Taylor says:
"Well, I wouldn't agree with that simply because I am characterizing two different discounts. That is, I have discounts on the order of 70 per cent from -- that are part of this sentence as well as the discounts that you have named."
19121 Then Mr. Koch says:
"This is where I'm asking you to focus on the CallNet proposal.
DR. TAYLOR: Yes."
19122 Mr. Koch puts it to him:
"Thirteen per cent or 20 per cent is a `massive discount'?"
19123 I will stop right there for a moment.
19124 First of all, gentlemen, based on my Exhibit A and the discussion we have had on TELUS-6 and TELUS-9, you would agree with me that the CallNet proposal relates to a number of services beyond essential and near-essential services. Correct?
19125 MR. BOWLES: That is correct, yes.
19126 MR. KIDD: In fact, I think your evidence was -- I don't have the quote, you said that over 90 per cent of your carrier segment spend in the year 2000 was on services other than essential and near-essential?
19127 MR. BRAZEAU: That's correct.
19128 MR. KIDD: So that what Mr. Koch describes as CallNet's proposal, if we are talking just about the cost plus 25 per cent markup for essential and near-essential, really only represents about 5 per cent of your total proposal to this Commission for a blended model on the carrier segment?
19129 MR. LINTON: Our evidence, as you understand it, and we understand everybody understands it, is that we are talking about the entire pool, not just the pool related to the essential services. So we are talking about the whole pool.
19130 And we are talking about the whole pool because that, in effect, is the business we are in. We are only just starting to get into the local pool.
19131 So for us to get a reasonable return so that we can continue to invest and be competitive in this marketplace, we require lower input costs, whether you call them retail, which you have, or essential or non-essential, across all of our elements that we buy from the telephone company.
19132 MR. KIDD: Mr. Linton, I have no problem with what you have just said. I am really just coming back to what Mr. Koch was trying to do in terms of characterizing your proposal.
19133 I am asking you a very simple question. That is: Your proposal is 90 per cent other services, maybe even 95 per cent other services, and 5 per cent essential and near-essential, isn't it?
19134 MR. BRAZEAU: For now. As Mr. Linton indicated, as we grow our local business those relationships will certainly change. Our proposal recommends that for essential services that they be priced at incremental cost and for all other inputs that we buy from the incumbents, also be priced at incremental cost.
19135 MR. KIDD: I guess if we can go back to the transcript, then, and look at page 1305. At line 8 Mr. Koch says:
"This is where I'm asking you to focus on the CallNet proposal."
19136 He uses those words. Dr. Taylor says yes.
19137 Mr. Koch says:
"Thirteen per cent or 20 per cent is a `massive discount'?
19138 Mr. Brazeau or Mr. Linton, whoever wants to answer this, if the Commission were to accept your proposal in its entirety, the entire carrier segment and blended model, and were to conclude that the price discount for all of the services in CallNet's carrier segment proposal was in the range of 13 to 20 per cent, would you be satisfied with that?
19139 MR. BRAZEAU: That is not our proposal. Our proposal is for all the input elements that we buy from the incumbents to be priced at incremental cost. For many of the services that we buy from the incumbents today we pay some incremental costs plus a markup, some we pay market rates, some we pay -- we are not sure how the prices are set for other services.
19140 What we are suggesting, in order for us to be able to compete on a bundled basis with the incumbents we need to have access to that infrastructure at incremental cost. We are recommending for those services that you do not have an incremental cost or that incremental costs were produced many years ago that we go back, redo the study and find out what those costs are.
19141 MR. KIDD: I didn't ask you what your proposal was. I'm picking up on Mr. Koch's characterization of your proposal.
19142 You can certainly disagree with your counsel. You are entitled to do that. But if he wants to characterize your proposal --
19143 MR. KOCH: No, they are not, Mr. Chairman.
--- Laughter / Rires
19144 MR. KIDD: If he wants to characterize your proposal -- and he called it "your proposal" -- as to 13 to 20 per cent, I'm asking you, do you agree with him? Is that what you are seeking in this proceeding?
19145 MR. KOCH: Mr. Chairman, I do have an objection at this point.
19146 It is very clear from the questioning that I conducted of Dr. Taylor that where I started was his statement about the discount being requested off of essential and near-essential. That is very clear from the transcript. It's very clear from the transcript portion that Mr. Kidd read from. If he is fair, he will recognize that that was the question put to Dr. Taylor and it was in the context of Dr. Taylor's remarks.
19147 I think he has gotten very clear answers to that from the panel and I would suggest that it is time to move on.
19148 THE CHAIRPERSON: Well, I take your point, Mr. Koch.
19149 But what I heard Mr. Kidd ask, which I haven't heard the answer to yet, was: Notwithstanding what the proposal is, if the Commission were to approve what you had in fact suggested for the overall proposal, would CallNet be satisfied?
19150 MR. KOCH: That is a fair question, but that wasn't the one that Mr. Kidd just went back to.
19151 MR. KIDD: I will put the Chairman's question to you.
19152 THE CHAIRPERSON: Well, for my part --
19153 MR. KIDD: That is what I thought I was asking.
19154 MR. BRAZEAU: And we will give you an answer.
19155 I think we answered it in an interrogatory response -- and I don't have it off the top of my head -- but that decision would result in a very, very small reduction in our total costs and therefore that, we believe, would not achieve the objective that we are all trying to achieve here, which is to promote competition. So we would suggest that would not be acceptable.
19156 MR. KIDD: All right. Just so that we are clear, your proposal is not to seek a 13 to 20 per cent discount across the entire carrier segment -- I want to be fair to your counsel --across your entire carrier segment basket. You are seeking more discount than 13 to 20 per cent?
19157 MR. BRAZEAU: Yes. In CallNet(CRTC)37 I think we estimate that the result of that would be a savings of about $18 million. Our response is that that is not good enough.
19158 MR. KIDD: You have reviewed AT&T's evidence enough to understand that while they may come at the problem or your issue from a different approach, they are seeking a 70 per cent -- and I will use the word "discount" liberally -- on a roughly similar basket of carrier services.
19159 I would ask you if you could put your proposal in AT&T's terms, what is the discount that you are seeking here in your evidence?
19160 MR. BOWLES: Maybe just for clarity sake we should go back to your Exhibit A to start off the answer.
19161 The services that you have listed under competitor services for toll interconnection and local interconnection, most of those services are now rated at cost plus 25 per cent. So under our proposal the result would be a reduction in the rates for those services of 20 per cent to bring it down to the their cost.
19162 The big exception to that one, of course, is the direct connection charge. Right now that is rated at .3 cents. Bell's own costing numbers indicate a cost of about .1 cent. So to bring that down to incremental cost would be a reduction of 66 per cent, if my engineer friend is correct.
--- Laughter / Rires
19163 MR. BOWLES: So then the rest of the services are the retail services. Again, what we are proposing, of course, is to bring those down to cost.
19164 Of course, we don't know the underlying cost figures, and certainly in discussion with AT&T there was much discussion this morning and yesterday about what the underlying costs would be for these services. They are contained in Phase 2 studies. We don't know them. So there is no way we can precisely quantify the overall discount.
19165 We would suspect, I guess pursuant to the discussion with AT&T, that it could be as high as 70 per cent, the reduction to bring it down to cost. But, as I said, we don't have the underlying information to actually determine the exact number.
19166 MR. KIDD: Mr. Linton, you are a very busy man and I know that you have come to this proceeding because you think it is extremely important to your company. You have come here to testify and I am giving you and the panel a chance to tell the CRTC what you think would be a reasonable number, in AT&T's terms, for the price discounts that you are seeking.
19167 I take Mr. Bowles' evidence. I don't want a repeat of the answer that costs are confidential and we don't know. I'm saying to you that if this was important enough for you to come here today, surely you must have a sense for the number that you are seeking. Mr. McLennan was quite clear about his.
19168 MR. LINTON: As my colleagues have said, we have a sense for what it is. We have stated in our evidence that where those services are at cost plus 25 per cent we want them at cost. Where there are retail services, we think a Phase 2 study can be done or simulated very quickly and we believe that internally that the discount to cost will be somewhere between 50 and 70 per cent. Where there is evidence like this switching and aggregation, it is very obvious it goes down by 67 per cent.
19169 MR. KIDD: Overall do you have sort of an average number that you would use, revenue-weighted for the services that you use?
19170 MR. LINTON: We do not have an overall number for the whole industry, no.
19171 MR. KIDD: You mentioned 25 per cent, you mentioned 50 and to 70. You don't have any rough number that you would like to put forward?
19172 MR. LINTON: I apologize.
19173 MR. KIDD: I'm just giving you another chance to kind of aggregate in your mind. I would have thought that when you came to this proceeding on an important issue such as this, you would have in your mind a sense as to how your proposal stacks up with the AT&T proposal in terms of price discount. I thought maybe you could give me your number that equates to AT&T's 70 per cent.
19174 MR. LINTON: When we did our calculations it ranged anywhere from about 40 per cent to 60 per cent, for our company and its services.
19175 MR. KIDD: Thank you.
19176 I wonder if you could turn now to paragraph 146 of your evidence.
19177 MR. KIDD: That is at page 64 of CallNet's evidence.
19178 I want to ask you a few questions about your Phase 2 proxy formula.
19179 I am going to start midway down that paragraph, just to get the context of your evidence.
19180 First of all, I should start with the introductory sentence because it's important:
"CallNet acknowledges the administrative problems associated with establishing the Phase 2 costs for every service listed in Appendix A." (As read)
19181 I am going to skip down. I hope you don't think I'm unfair, but I am just trying to shorten this up a little bit.
19182 You go on to discuss the fact that to facilitate this activity, and I quote:
"...CallNet had requested up-to-date Phase 2 studies from Bell and TELUS for key ILEC retail services that are critical inputs for entrant service offerings. The ILECs refused to answer this interrogatory. As such, CallNet recommends that if the Commission adopts the CallNet proposal, a follow-up proceeding be initiated to review Phase 2 costs of select retail services in Appendix A to determine an average incremental cost percentage, i.e., the percentage of incremental cost as compared to the retail price. From this figure, the Commission will be able to apply an overall average percentage to all services listed in Appendix A in order to reduce the retail rates to the appropriate incremental cost level, the Phase 2 proxy formula." (As read)
19183 Now, is what I have read you correct?
19184 MR. BOWLES: Yes.
19185 MR. KIDD: Could you turn to paragraph 148 on the next page.
19186 Keeping in mind what I have just put to you, I would like you to reconcile the fact that you are going to put your Phase 2 proxy and apply it to all services.
19187 In paragraph 148 you say:
"However, for any services for which a Phase 2 study exists, including all services acknowledged in The Companies 800 and TELUS 800 as being at Phase 2 plus 25 per cent, CallNet submits the Commission should use the existing Phase 2 study rate, less any markup for common costs, eg., 25 per cent or 15 per cent in the case of unbundled loops that may have already been applied." (As read)
19188 My problem here, gentlemen, is I'm confused. In paragraph 146 you seem to be saying: For administrative convenience let's apply the Phase 2 proxy to all services listed in Appendix A. Then in paragraph 148 you seem to contradict that.
19189 MR. BOWLES: I can see the point of your confusion.
19190 Maybe just to go back to first principles here, as we have stated, our proposal is that we get these services at cost. The question is how to determine the cost.
19191 There is a whole range of services and you have identified them certainly in your Exhibit A. Many of these already are at cost plus 25 per cent and therefore, of course, getting to cost is a fairly simple process of subtracting the 20 per cent.
19192 With respect to the direct connection costs again, where in the case of Bell's cost it was 300 per cent, again it would be a fairly simple exercise to get to cost.
19193 So the real question is with respect to the retail services you have listed at the top: How do you get to cost for those services?
19194 In theory there are three different ways, I suppose, one could do this.
19195 One could, as we suggested, have the telephone companies file new Phase 2 studies for all of these services. That presumably would be the purest way to do it. I guess we just wanted to recognize the amount of work involved in that.
19196 Therefore, what we suggested as a proxy for that process, you could pick out various of these services that were considered descriptive of the entire package of services, do a Phase 2 study for those and use the results to estimate the costs for the other services.
19197 I suppose a third solution would be, and certainly it would be possible to -- instead of providing these services under the existing tariffs and doing Phase 2 studies on them, package up the functionality in a new service for the carriers and file one Phase 2 study for that service.
19198 So, as I say, there are a number of ways to get to it.
19199 But the purpose of all of them is to arrive in the most convenient and practical way to the cost, to the underlying costs for these services.
19200 MR. KIDD: I think we have to change either paragraph 146 or 148 to reflect your proposal.
19201 I take what you have just told me is there are a number of ways of arriving at it. I want to know what your proposal is.
19202 I suggest to you that either you are going to have to change the words "all services" in paragraph 146 or you are going to have to change something in 148. But you can't say, on the one hand: Apply the proxy to all services. And then say: However, apply the existing Phase 2 studies wherever they exist. This seems to be irreconcilable to me.
19203 MR. BOWLES: I think to a certain extent you may be correct, in that, as I have just stated, where there are Phase 2 studies, especially for the competitor services, obviously there is no point in applying a proxy to those things. The cost is already established.
19204 MR. KIDD: So if I can go back to paragraph 146, the last sentence there:
"From this figure, the Commission will be apply an overall percentage to..." (As read)
19205 Instead of "all services in Appendix A" what you meant was "to the services for which a Phase 2 cost study does not exist"?
19206 MR. BOWLES: An up-to-date Phase 2 study, yes. I think that would be a reasonable characterization.
19207 MR. KIDD: I would like to look at paragraph 147. Looking at the last two sentences in paragraph 147, here we are talking about this Phase 2 proxy.
19208 I am picking it up at the sentence starting "Accordingly" that is at the top of page 65.
19209 It says:
"Accordingly the services that are used to determine the proxy must be carefully selected. CallNet submits that the list of services contained in TELUS(CallNet)804 and The Companies(CallNet)804 represents a reasonable sample of the Appendix A services." (As read)
19210 I wonder if we could turn to The Companies(CallNet)804, please?
19211 MR. BOWLES: Yes, we have that.
19212 MR. KIDD: Okay. What I gather from the question that was posed is that you selected DNA and interoffice digital channel service -- without getting into the details -- as the two services that you consider to be a reasonable sample?
19213 MR. KIDD: I'm sorry. The two services?
19214 MR. BOWLES: Well, I looked down your (a) to (g).
19215 MR. BOWLES: I see what you are getting at, yes, the various components.
19216 MR. BOWLES: They are DNA (A) to (d) and then (e), (f). I don't know what (g) is, quite frankly, and I am prepared to ignore it. But (a) to (d) DNA and (e) and (f) is interoffice digital channel. Just focusing on those two, because those are the ones you spend the money on.
19217 MR. BOWLES: The mysteries of the Bell General Tariff.
19218 Yes, we have focused on those, obviously, because they are the most significant and we think most representative of our total package of services.
19219 MR. KIDD: Is it also because you think they are the most profitable?
19220 MR. BOWLES: No.
19221 MR. KIDD: Well, you must think they have markup greater than 25 per cent, don't you, otherwise you wouldn't bother to do this exercise.
19222 MR. BOWLES: Certainly we would assume that, yes.
19223 MR. KIDD: You said earlier in paragraph 146 that -- and I'm picking it up in the middle of the paragraph. I have already read this once, but:
"To facilitate this activity CallNet had requested up-to-date Phase 2 studies from Bell and TELUS for key ILEC retail services that are critical inputs for entrant service offerings." (As read)
19224 You have just told me that those key inputs are DNA and interoffice channels in particular.
19225 Then you say:
"The ILECs refused to answer this interrogatory." (As read)
19226 This is important to you, isn't it, because this comes to the heart of your proposal, that you need to have access to costing data in order to understand how to reduce the carrier segment rates to costs. Right?
19227 MR. BOWLES: Well, our proposal is that the rates should go to costs, so presumably whether we have access to it or the Commission, I mean the Commission presumably would have to make the final determination as to the appropriate cost level.
19228 MR. KIDD: You say here that the carriers refused to answer the interrogatory, leaving you kind of up in the air as to what your proposal really meant. Is that correct?
19229 MR. BOWLES: I'm not sure I would characterize it that way. I mean, obviously, to know the precise impact of going from the retail rate down to the costs one would have to have access to this information.
19230 MR. KIDD: Would you accept from me, subject to check, that you didn't contest our response in the deficiency process? In other words, you didn't contest the confidentiality of these cost studies?
19231 MR. BOWLES: Subject to check, yes, I would accept that.
19232 MR. KIDD: Now, in the follow-up process that you are proposing -- first of all, I should probably set that up by saying that you don't expect -- if the Commission were to grant your proposal in its entirety, you don't expect the Commission to strike a discount because you have suggested that there be a follow-up process to file studies and to come to grips with what the rate cost differential is for these various services?
19233 MR. BOWLES: I'm not sure if I exactly understand the intent of your question.
19234 We would hope -- considering that it does take some time to go through these cost studies, we would hope that the Commission might set an interim rate while the studies are being examined.
19235 MR. KIDD: My question is really to focus on the follow-up item that would follow what you suggest might be an interim rate.
19236 You would expect, then, that the cost studies, such as he ones that are referred to in 804 here, plus possibly all others, if I take your proposal as given that are up-to-date and relate to the carrier segment services -- all of those cost studies would have to be filed with the Commission. Is that correct?
19237 MR. BOWLES: Yes.
19238 MR. KIDD: Would it be your proposal that those cost studies -- given that you are asking for the rates to equal the cost, I suppose, then, that all those cost studies should be filed on the public record without abridgement?
19239 MR. BRAZEAU: I think this morning and part of yesterday we heard some of the challenges and problems that competitors have with Phase 2 studies. I think it was mentioned even by the experts for both yourselves and TELUS that there are some problems with Phase 2, in reconciling the Phase 2 with the numbers for The Companies books.
19240 In the past we have seen some problems with the accuracy of Phase 2 being very variable. We know that the Phase 2 are highly judgmental and judgment probably is the most important element affecting the results of Phase 2.
19241 Having said all of that, unfortunately we are where we are and Phase 2 have relied heavily on the Commission in order to set the prices for the services that we buy from you and the other incumbents. So we are prepared to go along and see if we can make the process better, make it more transparent and in order to make it more transparent we need to see the numbers.
19242 So the long answer to your question is that yes, we would like to see the numbers on the public record. I think you filed -- and I am sure we are going to get to this -- one of your Phase 3 studies and all we have there is just blank pages and, you know, we can't work with that any more.
19243 MR. KIDD: From a competition policy perspective, why is that the Commission has generally upheld the confidentiality of carrier cost for competitive services?
19244 MR. SCOTT: I'm not sure I understand you question completely, Mr. Kidd. I think the Commission upholds confidentiality requests based on provisions in the Telecom Act that allow carriers to file information to claim confidence for information that it believes would be detrimental to their business.
19245 Clearly, if you are suggesting that through the disclosure of information one could run into problems under the Competition Act, it seems to me, you know, very much a secondary issue.
19246 We are talking about something subject to regulatory supervision and an Act that has provision that allows you to claim confidentiality and for the Commission to rule upon it.
19247 MR. KIDD: I wasn't intending to get into a discussion of the Competition Act, I can assure you.
19248 I was saying when the Commission tries to balance, as they do in all confidentiality rulings, the weight of the evidence and the value to the public to see the evidence versus the harm that it would cause to the company and, indeed, the harm that it would cause to others in the industry through the disclosure of costs -- and I might point out here we are talking about services like DNA, interoffice digital channels and other services that are offered to retail customers. In other words, we would certainly then be disclosing our cost, our Phase 2 costs to retail customers as well.
19249 I'm just asking you is that the policy decision -- you are asking the Commission to make that policy decision in favour of complete disclosure of the costs?
19250 MR. SCOTT: No. I think, in fairness, Mr. Brazeau's response was that more information should be disclosed and the greater the degree of disclosure the better able we and other competitors will be to test the information and develop a full record to make the ruling on the reasonableness of the costs.
19251 As to the issue of harm, the Commission will regulate, as it always does, in the public interest and reach a balanced conclusion about whether the harm outweighs the benefit of its disclosure.
19252 MR. KIDD: But, Mr. Scott, let me just get to the nub of this question. You are proposing that the rates equal the cost. Even if the Commission disagreed with you on that and said the rate is going to be 25 per cent above the cost, like they do for essential and near-essential, we are talking about DNA, interoffice channels, a whole bunch of retail services here. It doesn't matter whether they strike the rate at cost or at 25 per cent above the cost if they state that is the methodology they are using. The costs have been disclosed.
19253 MR. BOWLES: Mr. Kidd, perhaps you may remember I did offer up a third way the Commission could arrive at an acceptance of our proposal and that is to bundle up the functionality represented by the services essentially that you have listed in your Exhibit A into a new service offering for the carriers, much the way that they bundled up a number of functionalities in the existing transiting and transport tariffs that flowed out of Decision 97-8, the local competition decision.
19254 There, as you very well point out, the rate is set at cost plus 25 per cent; therefore, presumably we do know the cost of those functionalities.
19255 They are, in fact, different than the exact packages of functionalities that are in the general tariff services, the retail services.
19256 So to the extent the release of the underlying costing information of the retail services is considered to cause significant harm to the telephone companies, the Commission could, as I say, create a new tariff, cost-based tariff for the competitors to get around that problem.
19257 MR. BRAZEAU: Just to finish off here, if I can, I think you heard this morning, and you have heard from us time and time again that the competitors are somewhat suspicious of the Phase 2 results and having a more transparent process whereby we can really test the accuracy of these numbers, which are fundamental to us -- I mean that is how we are establishing competition is us using those underlying facilities and will be using those underlying facilities for a number of years.
19258 I think it is critical if you want to remove that suspicion that we have a much more transparent process and, you know, I am certainly open to suggestion on how do we go about doing that.
19259 MR. KIDD: Well, I'm not going to offer any suggestions. You might be surprised to know that, Mr. Brazeau.
19260 But I do sense a little disconnect there from your response and Mr. Bowles' response.
19261 I'm not asking you to give me other alternatives, I am simply asking you to say what is your evidence. What is your proposal to the Commission? I think Mr. Bowles is now moving away from your current proposal in favour of a proposal that might have a follow-up proceeding that would take all of the services in the carrier segment service and derive a blended cost as well as a blended rate for all those services.
19262 Is that the proposal you have? I just want to know what it is your suggesting the Commission should do.
19263 MR. BOWLES: When we started this process we arrived at the proposal that is certainly in our submission -- and the important point is that the costs for these functionalities go down to cost.
19264 During the course of this proceeding -- and the interrogatory process there were questions from the Commission addressing that the concept of bundling together these functionalities into a new service offering.
19265 So we have had time to think about and I think we would accept that is a perfectly reasonable approach to get to exactly the same point that we have in our proposal. The point is, we believe these services should be provided to us at cost and there are a number of ways to get to that point.
19266 MR. KIDD: Thank you for that.
19267 I'm now going to turn to other exhibits. First, let's start with Exhibit D that I have handed out, which is the Economic Evaluation for DNA Access.
19268 MR. BOWLES: Yes, we have that.
19269 MR. KIDD: You realize that this came from a filing. It is the Attachment 4, abridged. It relates to a different filing altogether, but the pagination is useful because I can now ask you to turn to page 6 of 7.
19270 MR. BOWLES: The answer is yes.
--- Laughter / Rires
19271 MR. KIDD: Here we have an estimate of the DNA access demand. Of course, you don't get any figures, but --
--- Laughter / Rires
19272 Mr. BOWLES: I think that was our point.
19273 MR. KIDD: I don't either.
--- Laughter / Rires
19274 MR. KIDD: You are probably familiar enough with Phase 2 cost studies to know that what is going on here is that the carrier is asked to forecast demand out over several years and that demand driver drives the costs. Right.
19275 MR. BOWLES: That's correct, yes.
19276 MR. KIDD: There is a certain profile of growth associated with that and, as you will recall my cross-examination earlier with you that in the particular case of DNA I think we agreed that 29 per cent of the DNA demand is from carriers and 71 per cent is from retail customers? Do you recall that when we looked at CRTC-3200?
19277 MR. BOWLES: Yes.
19278 MR. KIDD: So if the Commission accepts your proposal and bases their decision on a blended model, as you propose, you are not suggesting that we should change the demand forecast for DNA, in light of the fact that maybe carriers would be taking more DNA and retail customers, from the ILEC, less DNA?
19279 MR. BOWLES: Yes, we would be asking the Commission, I think, to conduct a Phase 2 study and to determine the underlying costs of the service.
19280 MR. KIDD: This particular Phase 2 study, I think it is mentioned here -- well, you can tell, I guess, from the data that it is a relatively recent study. It is for 2001 and on. Somewhere in here I think it mentions the date.
19281 But if you will take it from me this is quite a recent study. So really what you would be saying is: Redo those studies to take into account the possible change of demand associated with the fact that if rates go to costs for DNA for carriers -- and I should say carriers only and not retail customers -- that is going to skew the demand, isn't it?
19282 MR. BOWLES: It possibly could, of course. I guess a judgment call would have to be made if the change in demand would result in significant changes to the existing Phase 2 study, whether or not it would have to be redone.
19283 MR. KIDD: Can we turn to Table 5.1-1 in that same study. That is at page 4 of 7.
19284 Here we come to the heart, I guess, of any Phase 2 cost study as far, as I understand anyway.
19285 Here we have an imputation test and what it shows is down the left-hand side for each of the Bands A to G. We have estimated revenues in column 1, and then you go across, in column 2 you have estimated Phase 2 costs, and then there are some issues regarding essential services there which provide costs at tariff. I don't need to get into that.
19286 In column 5, the one entitled "Total Phase 2 cost and LNI tariff cost", you come up with basically the total cost whether it's at Phase 2 or tariff.
19287 Then in column 6 you have the difference, which is basically, as I understand it, a simple deduction of column 1 minus column 5 gives you the margin for each band for DNA. Is that essentially how it works?
19288 MR. BOWLES: It certainly seems reasonable, yes.
19289 MR. KIDD: The way the Commission comes at these things, I think, is that they look at -- as long as it is done correctly what they are looking for is a sense that the estimated revenues exceed the -- in other words, the difference is positive, I put it to you that way, in column 6?
19290 MR. BOWLES: Typically, yes.
19291 MR. KIDD: Otherwise, they are not going to approve it?
19292 MR. BRAZEAU: I'm not sure if we have seen some approval for promotions where they didn't pass the imputation test. I'm not sure if that's --
19293 MR. KIDD: Okay.
19294 MR. BRAZEAU: -- where you were going.
19295 MR. KIDD: This isn't a trick question. I am really just trying to get at the general sense of your proposal here that this is an important service for you, and you are suggesting that the Commission use Phase 2 costing.
19296 So all I'm saying to you is: tell me how this would work.
19297 I take it you want to reduce the revenues to cost, so 'am asking you: What figure are they to take from -- assuming that you had the actual data here, it was all filled in, what number are they supposed to take out of this study and work with when it comes to applying the revenue cost differential to your tariff?
19298 MR. BOWLES: I think you pointed out a very good point earlier on.
19299 Typically, what you are trying to find out from the Phase 2 study is that the rates do cover the costs. Of course, our proposal is that we get the service at cost. So presumably there would be a change in demand, there would be a change in estimated revenue. Presumably the change in demand could change some of the costing. Presumably if the difference was positive before it would still be positive afterwards, because we are not asking for rates below costs, but there would be a change.
19300 MR. KIDD: I'm sorry, my question is simpler than that.
19301 You are going to end up with a bunch of revenue cost differences -- can I put it that way -- in column 6?
19302 MR. BOWLES: Yes.
19303 MR. KIDD: I'm just trying to get at: What do we do with that now? How does your proposal -- tell me how your proposal works. What do we take out of this cost study and what do we apply it to?
19304 Let's suppose the numbers -- the total difference between -- let's say the revenues were $100 and the costs were $40 in all of the bands, just to make it really simple, so then how would your proposal work? Would you take the ratio of the revenues and costs and then apply that to the tariff? I am just trying to understand your proposal.
19305 MR. BOWLES: I'm trying to understand your question.
19306 As I said, our proposal is that we get these services at cost. There is a cost line in there and that presumably would be the tariffed rate for carriers. It would end up affecting the difference obviously, because estimated revenue minus the cost presumably the estimated revenue line would change.
19307 MR. KIDD: I think I'm understanding what you are saying.
19308 If we go to column 5, then, which is the total Phase 2 cost and the LNI tariff cost. Right?
19309 MR. BOWLES: Yes.
19310 MR. KIDD: So what you are saying is you just read down that line for each of the bands, that is the rate that you are looking for.
19311 MR. BRAZEAU: Assuming that all those numbers are the right numbers, that would be the result. Assuming that they are all the right numbers.
19312 MR. KIDD: Well, as you said, you may update the study, but at the end of the day we are going to have a table that looks like this, gentlemen. I'm just asking you: If it is done right are you telling me that the column 5 numbers are going to be what you would use as the rate?
19313 MR. BOWLES: Frankly, I don't understand in this one about the LNI tariff costs, assuming that is not significant to your question. But the Phase 2 cost would be the number that we would be looking for, yes.
19314 MR. KIDD: This is an imputation test so that certain of the essential facilities are at tariff and certain of the other parts of it are at cost. Right? Phase 2 costs.
19315 MR. BOWLES: Okay, I understand.
19316 MR. KIDD: So I'm just asking you: Your evidence is that you would basically pick off those numbers by band for each of the DNA and the column 5 so-called cost numbers, if I can use that term liberally, would become the rate?
19317 MR. BOWLES: The Phase 2 costs would, yes, become the rate, yes.
19318 MR. KIDD: I wonder if we could turn to my next exhibit, then, which is Exhibit E, which is the DNA tariff.
19319 Here the pagination doesn't really work for me, but if you can believe it the page I want to turn to is 302.4.1, which is actually the seventh page in the exhibit.
19320 MR. BOWLES: I'm sorry, Mr. Kidd, which page were you referring to?
19321 MR. KIDD: The page is 302.4.1, which is page 7 of the exhibit. Just to help you, it is a table for DS-1 access.
19322 MR. BOWLES: I'm sorry again. It's page 302.4.1, the table with the big table.
19323 MR. KIDD: Yes.
19324 MR. BOWLES: Yes, okay. We have that.
19325 MR. KIDD: It's the monthly rates and the contract rates for DS-1 that I am interested in. So, it's the seventh page of the exhibit.
19326 MR. BOWLES: Okay, we have that.
19327 MR. KIDD: Now, I'm going to focus on the Bell numbers here, just so you can see how to read this tariff.
19328 Note 4 at the bottom says "Bell customers only". Do you see that?
19329 So I am looking at the second row of the table, Band 0 for Bell only.
19330 First of all, can you tell me, please, what Bands 0, 1, 2, 3, are?
19331 MR. BOWLES: You are pushing my knowledge of the banding. It refers to geographic bands. Presumably Band 0 would be the, I believe, urban cores and then 1 and 2 spread out from there.
19332 MR. KIDD: Do you know whether they -- before when we looked at the cost study in the exhibit, the costs were done by Band A through G. Do they match up with Bands 0, 1, 2, 3 and, if so, how?
19333 MR. BOWLES: I don't know.
19334 MR. KIDD: If we go across on the second row, which is the Bell Canada rates, and you will see for DS-1 access that for the initial four DS-1s, the non-contracted rate is $420 a month. Do you see that?
19335 MR. BOWLES: Yes.
19336 MR. KIDD: Then if you get into longer-term contracts, the rate declines to $220?
19337 MR. BOWLES: Yes, I see that.
19338 MR. KIDD: That is for the five-year rate. Then you see the service charges over on the right-hand side, which are $1,400 for non-contracted and $700 for contracted?
19339 MR. BOWLES: Yes.
19340 MR. KIDD: Do carriers typically buy monthly, one-year or five-year rates?
19341 MR. LINTON: In this type of service on our backhaul it depends on our own construction. So if there are areas where we are not going to build facilities in the near term, we will buy out to the point where we are going to build them. In the case where we have construction under way to build our own facilities, we will buy short term.
19342 MR. KIDD: Can you be any more specific on average? Do carriers tend to buy longer term to get the discount or would you say that you tend towards the lower end of the schedule?
19343 MR. LINTON: I couldn't be more specific, I'm sorry.
19344 MR. KIDD: I would like to come to how your proposal, then, would work.
19345 We have so far gotten to the point, I think, that we have costs out of the imputation test in my previous cost study for each of the bands, Bands A through G, and we would have to do some kind of rejigging the geographic bands, I presume, to get from A and B to Band 0.
19346 But leaving that aside, what are you proposing, then, for DNA across the line that I have just read to you, starting at the $420?
19347 Let's make it easy. Let's suppose the cost is $100 in Band A for DNA, are you proposing that the non-contracted rate go to $100, or what are you planning to do?
19348 MR. BOWLES: Well, I guess it depends to a certain extent what is the underlying cost information that was used to derive these tariffs.
19349 MR. KIDD: I'm putting it to you --
19350 MR. BOWLES: I'm not quite aware. If it is $100 right across the board, if that is what you are suggesting the cost is for a DS-1 access regardless of the contract period or the volume, I guess the Phase 2 cost would be $100 and that would be the number we are requesting.
19351 If there is a Phase 2 cost difference with respect to these different contract periods and different volumes, then that would be the rate we would be asking for.
19352 MR. KIDD: Mr. Bowles, we were discussing with the cost study -- and we maybe we should go back over that -- there is no cost information by minimum contract period. At least I will put that to you as a question, that all we have in the study -- you are welcome to take it subject to check, but the only thing that you get is the cost, the total cost by band for the DNA service.
19353 MR. BOWLES: Well, I will take your word for it that there is no cost information underlying the different contract periods.
19354 MR. KIDD: Let me come back to my question. I'm saying: Even assuming that Bands A and B line up with Band 0, what I am asking -- and assuming that the Band A and B number total cost for the cost study is $100, I want to understand how your proposal works. What rate would they strike across this row here, starting at 420 moving down to 220? What would the rate be?
19355 MR. BOWLES: Well, it seems to me what you are asking is a sort of a mechanical problem. it is that as you are suggesting, you have a list of tariffs here, existing retail tariffs, and there is not an underlying cost, a specific cost for these underlying numbers that is generated from the cost studies. So, as I say, the Commission and the telephone companies I guess presumably would have two choices. One is to regenerate to try to determine an underlying cost for these components or, as I suggested earlier, perhaps extract the functionality and file a new study for the functionality.
19356 MR. KIDD: Now, I asked Mr. Linton a few minutes ago as to where your company typically ends up in terms of minimum contract periods. I take it, in fairness, the answer was he said it was kind of all over the map. I don't mean that in a derogatory way, I mean that just simply there wasn't any particular focus on five year versus monthly, and I take that.
19357 I'm just asking you that how would a carrier typically then get a rate from you under this proposal? Would then we simply take the $100 cost, if you could take my example, and we would have to then restructure the rate table so that there would be a five-year rate and a four-year rate?
19358 You are not suggesting that we actually do away with long-term contracts here, are you?
19359 MR. LINTON: I am going to make this simple, which will probably get me in trouble.
19360 If the cost is $100, we would put in a new column here that is called "Carrier Segment" and it is $100. What you do for discounting for long-term contracts with everybody else that is your business, but there is another column in here and it says "carrier charge" or "carrier segment", I'm sorry, and if the cost is $100, that is what we pay.
19361 MR. KIDD: What about the service charge? You see there $1,400. We don't have any particular information on that coming out of the cost study, do we?
19362 MR. SCOTT: One assumes that there are -- any rate the Commission approves there are some underlying cost data. If that was a problem The Companies could presumably provide The Commission with cost data and you would have a cost-based service charge.
19363 MR. KIDD: So if I understand you, Mr. Linton, your evidence would be if the costs were $100 for Bands A and B, if we were to offer discounts on a minimum contract period of five years off the $100 cost, which is now the rate, we would be charging below cost?
19364 MR. LINTON: Well, that's not what I said. What I said was there is a column in here called "carrier segment" and if you are a company like ours you get it for the cost, and the cost is $100. And there isn't any difference between, you know, whether I buy it for 10 years or five years.
19365 MR. KIDD: Could you turn to paragraph 145 of your evidence, please?
19366 I'm finished with these two exhibits. Thank you.
19367 MR. BOWLES: Yes, we have that.
19368 MR. KIDD: I am focusing on the section entitled "Restricting the Carrier Segment to Canadian Carriers."
19369 I take it from your evidence that you propose that only Canadian carriers should be eligible to purchase the services from ILECs?
19370 MR. BOWLES: That's correct.
19371 MR. KIDD: You go on to say at the top of the next page that once foreign ownership restrictions are lifted resellers should also be allowed to purchase services from the carrier segment as well?
19372 MR. BOWLES: No, I don't think that is what that says. I think what it says is existing resellers that at the moment -- let's say foreign-based resellers that at the moment would be restricted from acquiring services at the carrier segment rates, if the foreign ownership restrictions are lifted they would be able to become Canadian carriers as defined and then they would be able to get access.
19373 MR. BRAZEAU: Mr. Kidd, the test was whether you owned facilities or not, really. That is what we were trying to get at.
19374 Our proposal is to try to promote facilities-based competition and we were just trying to ensure that people who would have access to or companies who would have access to the tariff would be facilities-based carriers and that's why the --
19375 MR. KIDD: So the point about foreign ownership is simply that if foreign ownership restrictions are lifted then the existing group of resellers could acquire a facility, I suppose, a transmission facility and then they would all qualify for the carrier segment discount as well?
19376 MR. BRAZEAU: If you are a Canadian carrier, if you are a facilities-based carrier, you would qualify.
19377 MR. KIDD: I wonder if you could turn to CallNet(CRTC)3202, please?
19378 MR. BOWLES: What is the date associated with that, please, Mr. Kidd?
19379 MR. KIDD: September 13. CallNet(CRTC)31Aug, but I guess the date of the response is September 13th -- 3202.
19380 MR. BOWLES: 3202 we have.
19381 MR. KIDD: I would like to turn to the second paragraph of the response.
19382 First of all, the Commission has asked you to identify the criteria that CallNet applied to assign each service to its proposed carrier segment category and provide the reasons.
19383 The part I would like to focus on is the first part of the second paragraph of your response. You state:
"The criterion used by CallNet for services to be included in the carrier segment is non-forborne ILEC services currently purchased or expected to be purchased by CallNet for use in providing service to retail customers, i.e., excluding services that are explicitly resold." (As read)
19384 Stopping there, I was interested in understanding this so-called flowthrough resale prohibition.
19385 I would suggest that one of the differences between your proposal and AT&T's proposal is that AT&T has Centrex in their basket and you have excluded Centrex from yours because, I would gather what you are suggesting here in this response is that if Centrex is simply resold by the carrier, as opposed to being an input, it wouldn't receive the carrier segment discount. Is that correct?
19386 MR. BRAZEAU: I'm just not sure.
19387 What we are proposing is something that we hope will kick-start, stimulate -- use whatever adjective you want -- local competition. The way we went about it is to look at what are the unbundled network elements that we acquire in order to get us there and to recommend that those elements be priced at incremental cost.
19388 AT&T uses different elements, but they are trying to achieve the same objective and inasmuch as those objectives do coincide I don't think it is necessarily inconsistent.
19389 MR. KIDD: But I sense here a point and I'm not sure I understand it. Maybe you can explain it to me.
19390 What did you mean by the expression "excluding services that are explicitly resold"?
19391 MR. SCOTT: Part of the point here, Mr. Kidd, is that -- and I think Mr. Brazeau mentioned this earlier -- is that we are talking about services that CallNet uses in conjunction with its own facilities.
19392 We are a facilities-based carrier. We are not at all very much in the business of what we call in the industry simple resale. We are talking about a number of service elements that we obtain from ILECs to supplement our network and capabilities to offer a full range of services to our customers.
19393 I think that was the context in which it is referenced here. CallNet listed a group of services that it uses in conjunction with its own in order to provide service to its customers.
19394 MR. KIDD: Do I understand, Mr. Scott, from your answer, that the carrier segment services that you are proposing to have reduced to cost would only be eligible for that discount if they are an input to a broader service that CallNet wished to offer. Is that your suggestion?
19395 MR. BRAZEAU: That's correct.
19396 MR. KIDD: That is why something like Centrex, which one might say is purely a resold service, would not qualify for the discount?
19397 MR. BRAZEAU: That's our proposal.
19398 MR. KIDD: Well, you recall I have been spending quite a bit of time on DNA and we have already established that about 71 per cent of the demand for DNA is retail. I guess the question I have for you is: Do you offer DNA as a straight standalone service to customers?
19399 MR. LINTON: Not to my knowledge. I would say no.
19400 MR. KIDD: That is a curious response, only in the sense that Bell Canada, 71 per cent of our revenues are retail DNA. And you are saying to me that you only use it as an input, you don't sell it as a branded service, whether you brand it yourself, but it is just as a flowthrough service to customers?
19401 MR. LINTON: What we buy from Bell is mostly from our points of presence to either a collo site or potentially to a customer, but not from two points of a customer's network. So it is an input to a solution we give a customer or it is part of our backbone network.
19402 MR. KIDD: So if a customer comes to you and says "I want DNA. I can get it from Bell" -- and it is big time service for us obviously -- "but I want to buy it from you. I just want the DNA, I don't want the rest of your service", you would say "Well, we don't get a carrier rate for that." You would be competing with Bell at the tariff for that. Right?
19403 MR. LINTON: We probably wouldn't make any money on it anyway, so we probably wouldn't bid.
19404 MR. KIDD: I'm just trying to understand how it would work in practice.
19405 You have suggested that DNA is part of your carrier segment proposal and I am putting to you that, in Bell's case at least, the vast majority of the revenues for DNA are retail. Are we to assume that -- how are we going to police that?
19406 If you are saying you don't today but you might tomorrow start to sell DNA retail to customers -- simply DNA, nothing more, nothing less -- how are we going to police that to ensure that kind of DNA doesn't get the discount?
19407 MR. SCOTT: I'm not answering with respect to the detail of the tariff here, but I don't think the issue is about policing.
19408 What we are talking about are a group of -- you know, what do we use DNA for? We use it to supplement our services. We are not engaged in simple resale. That type of simple arbitrage is not, as Mr. Linton said, going to help you build out the business.
19409 The business that we are trying to build out is predicated on broad-based competition, including supplying service to business and residential subscribers, and we are obtaining service elements from you to supplement our facilities to provide a broad range of services. It is not a question of isolating one of them and saying: How are we going to police how you use this specific tariff element.
19410 MR. KIDD: But if the discount is in the range of 40 to 60 per cent, that is a pretty attractive incentive, and all I'm saying is that you might not be in the DNA retail business today but you sure might be tomorrow. I want to understand how your restriction works.
19411 MR. SCOTT: I think I may be repeating myself, but maybe the question has also been repeated.
19412 If that were the nature of our business I assume you would just lower the rates, you know, to the retail customers for DNA and very quickly it wouldn't be an attractive business at all.
19413 I mean, the point is that is not what we are talking about. You know, that isn't the business case that anyone is going to go in the market and compete with the ILECs on.
19414 MR. KIDD: So we would be into a downward price spiral at that point where we would offer our retail services at the same rate that you acquire them at?
19415 MR. BRAZEAU: No, Mr. Kidd, that's not what I said.
19416 What I'm saying is that the ILECs will obviously -- we are talking about price responsiveness.
19417 My point is that one would not predicate a business on reselling, to use your example, digital network access.
19418 MR. KIDD: Mr. Chairman, if this is a convenient time?
19419 THE CHAIRPERSON: It is.
19420 Thank you, Mr. Kidd.
19421 So we will take our lunch break now and reconvene at two p.m.
--- Upon recessing at 1230 / Suspension à 1230
--- Upon resuming at 1400 / Reprise à 1400
19422 THE CHAIRPERSON: Order, please, ladies and gentlemen.
19423 Any preliminary matters before I return the microphone to Mr. Kidd? No?
19424 Then over to you, Mr. Kidd.
19425 MR. KIDD: Thank you, Mr. Chairman.
19426 Gentlemen, I wonder if you could turn to my final exhibit, which is a bar chart. I believe I have marked it as Exhibit F. It is entitled "CallNet Financial Profile."
19427 MR. KIDD: The first question is have I correctly reflected the EBITDA and net income figures for the years in question?
19428 MR. LINTON: I haven't checked them, but I'm sure you have.
19429 MR. KIDD: Now, as I understand your strategy, Mr. Linton, you are achieving substantial gains in EBITDA by focusing on a smaller yet more profitable market segment. Is that correct?
19430 MR. LINTON: Segments.
19431 MR. KIDD: Segments, excuse me.
19432 I wonder if you could turn to page 28 of your annual report 2000 which I have handed out?
19433 MR. KIDD: I would like to turn to Note 15 in your financial statements entitled "Unusual Items."
19434 From Note 15, Mr. Linton, would I be correct in inferring that in the year 2000 CallNet sold certain fibre optic cable assets below their book value and that generated a special charge of $62.3 million? That is the second line on "Unusual Items?
19435 MR. LINTON: The sales were over an extended period of time, but the sale price was lower than the depreciated cost on our books.
19436 MR. KIDD: Right.
19437 MR. LINTON: There is one other item, and that is, because we had created through the transaction with 360 Networks, on the sale of those assets, we also, because we had other fibre for sale, had to write down that other fibre to the same value that we had sold it on the market for.
19438 MR. KIDD: That would be part of the $84.9 million special charge?
19439 MR. LINTON: That's correct.
19440 MR. KIDD: Could we go back to Note 4 in that document?
19441 I take it that on the fibre optic cable line there in Note 4 your accumulated depreciation and book value for the year 2000 is substantially higher than it otherwise would be because of this write down that you took. The 70.6 that I have circled there would reflect, in fact, some of that write down. Right?
19442 MR. LINTON: No, because when you -- there are a couple of things. There are assets that are held for resale that you sell, and then if you write down an asset because it has no value, you write down the cost and the accumulated depreciation.
19443 So you usually don't -- in accounting you don't write down an asset by increasing its amount of depreciation. You write down its cost and then you would make an adjustment to the depreciation.
19444 MR. KIDD: Okay. Because I thought your --
19445 MR. LINTON: That's how you used to do it.
19446 MR. KIDD: Yes.
19447 I guess I was just sort of curious about it, because I thought you were taking a fibre over 20 years straight line and I was kind of curious as to what caused the depreciation line to go up compared to 1999.
19448 MR. LINTON: You mean what caused it to go up from 46 to 70?
19449 MR. KIDD: Yes.
19450 MR. LINTON: Well, it would be a combination of what we had -- the depreciation that we had incurred on our existing base and then plus or minus the depreciation that you take out. When you move assets that are sold that eliminates depreciation. I believe those would be the only two adjustments in there.
19451 MR. KIDD: Okay. Thank you.
19452 If we look at the last item on Note 4, the assets available for sale, they are booked at cost of $148.7 million. There is a note down below the table that says:
"Included in assets available for sale for 2000 are non-revenue generating fibre optic cable and switches in Canada and the United States." (As read)
19453 So would I be correct in understanding -- I'm just trying to connect the two notes.
19454 The write down and the special charge in Note 15, did that go into a write down here in the assets available for sale?
19455 MR. LINTON: What creates the write down is when it is proven that the assets values that you carry on are lower than fair market value. So the write down would only occur after we have made the sale transaction because then you have proven the value.
19456 MR. KIDD: Right. And you said earlier that you had this sale below what was then your depreciated book value and that created the $62.3 million that we discussed earlier.
19457 I'm just trying to connect the $84 million, which I thought was mostly fibre, back to Note 4 in your capital asset, but maybe it is not connectable.
19458 Do you see where I am going there? The $84.9 million special charge I thought -- it looked like -- in the note below it says:
"As a result a provision of 84.9 was taken against assets. Included within this provision is a charge of $73.4 million against redundant assets and assets available for sale." (As read)
19459 So I assume that somehow that got back into your capital asset line somewhere?
19460 MR. LINTON: I believe it would. It doesn't get in the accumulated depreciation line, it gets in the cost line.
19461 MR. KIDD: Right. So that the $148.7 is --
19462 MR. LINTON: I think there is another note in here that says that we value our assets at the lower of cost or net realizable value.
19463 MR. KIDD: Right.
19464 Would I be correct in assuming that some of these fibre optic cable assets that are non-revenue producing were associated with the acquisition of Fonorola?
19465 MR. LINTON: You would be correct in assuming some of them were, yes.
19466 MR. KIDD: Thank you.
19467 I wonder if you could turn, please, to Note 7 in your financial statements. This is your long-term debt.
19468 Would I be correct in understanding that about half of your interest charges today are non-cash items?
19469 MR. LINTON: That would be correct.
19470 MR. KIDD: Below, in sub (a) of footnote 7 -- excuse me, the financial Note 7 it says, "Senior Discount Notes". The second sentence there says:
"The 2007 discount notes were issued in 1997 at a 36.32 per cent discount and the principal amount reflecting that no cash interest will be payable prior to August 15, 2002." (As read)
19471 So I take it that starting in 2002 some of this interest will go from non-cash to cash. Right?
19472 MR. LINTON: That's correct, on these particular notes.
19473 MR. KIDD: That's right.
19474 Gentlemen, I wonder if you could please turn to CallNet(The Companies)10? That is CallNet(The Companies)31Aug01 Revised, Interrogatory 10.
19475 MR. KIDD: If you could turn, please, to page 2 of 3? There is a typo in the pagination, but I'm just going to look at page 2. Do you have that?
19476 MR. LINTON: Yes.
19477 MR. KIDD: This point was gone over yesterday with Mr. Henry and the AT&T panel, so perhaps you know where I am going so it will be hopefully fairly brief.
19478 In the table you have done a weighted average looking backwards over the first price caps period and what you have done, as I understand it, is you have time weighted and revenue weighted the price changes over that period for the services at issue in this interrogatory. You will see there that the weighted average you will come up with is minus 8.7 per cent. Do you see that?
19479 MR. SCOTT: Yes.
19480 MR. KIDD: Now, I have no issue with your interrogatory, it is fine the way it is. So let's just make sure that we understand each other, I am now going to sort of change gears with you and say I want to look forward rather than look back.
19481 So I'm not quizzing you on the answer to the interrogatories here, I'm just saying if we sit here today and look forward so that you don't time wait the price changes -- you got me -- and so we just look forward and say, well, for example, for direct connect or any of those other price changes you time waited them because they had only been in the price cap regime for a short period of time. Correct?
19482 MR. BOWLES: That's correct, yes.
19483 MR. KIDD: So in fact that is mentioned up above, just above the table. You say:
"The weighted average was calculated by taking the average price change for each service weighted by the number of months ... that change would come into effect over a 42-month period examined." (As read)
19484 So all I'm asking you, Mr. Bowles, is this: Could you update the table and take demand for any month -- let's say the month of June 2001, if you have it. Just take CallNet's demand for that month and recompute the average price change looking forward by comparing the Jan. 1998 prices to the July 2001 prices, simply taking out the time weight.
19485 MR. BOWLES: Just say that one more time, please?
19486 MR. KIDD: Sure.
19487 I'm asking you to remove the time weighting and just give us the price changes looking forward on your demand for these particular services by picking a month, let's say June, or whatever, 2001 demand, CallNet demand, and just recompute the average price change revenue weighted by comparing the prices at January 1998 with the prices at July 2001.
19488 All I'm trying to do here, Mr. Bowles, is to take out the time weighting aspect of the table.
19489 MR. BOWLES: So the result would be the simple price change over that period. Is that what you mean?
19490 MR. KIDD: Weighted by your revenue demand, that's right.
19491 MR. BOWLES: Weighted by revenue?
19492 MR. KIDD: Revenue, yes. I still want you to reflect appropriately the fact if you buy a lot more DNA, for example, that would get weighted in going forward, but the price change would be the simple aggregate price change. If, for example, direct connect has gone down by 57 per cent, you would reflect the 57 per cent price change.
19493 MR. BOWLES: And you want it weighted by demand.
19494 MR. KIDD: By your revenue.
19495 MR. BOWLES: At what point in time, the January or the July?
19496 MR. KIDD: Well, I said the price change would be just as it is here, between Jan. 1, 1998 and July of 2001.
19497 MR. BOWLES: Okay. Just to be perfectly clear, for example direct connect went down from 0.7 to 0.3 --
19498 MR. KIDD: Right.
19499 MR. BOWLES: -- somewhere in that period.
19500 MR. KIDD: Correct.
19501 MR. BOWLES: So you would want that reduction, whatever it is, weighted by the demand for direct connect at some point in time?
19502 MR. KIDD: Yes. Pick a month. June 2001, May 2001, I don't care.
19503 MR. BOWLES: Oh, I see, okay.
19504 MR. KIDD: Yes.
19505 You see, all I'm saying is, you answered the question appropriately looking back. What you said was: Looking back over the price cap regime when you look at when the price changes came into effect the time weighted effect was minus 8.7 per cent. That's fine. I'm happy with your answer there.
19506 What I am saying is, "Okay. Now, let's look forward and as of today you are getting the full 57 per cent discount on direct connect, for example." All I'm saying is, give me what the effect of those price changes would be on your demand, the full 57 per cent, looking forward for any given month of CallNet's demand on those services.
19507 MR. BRAZEAU: Are you looking for an undertaking from us or are you looking for an answer right now?
19508 MR. KIDD: I'm more than happy to take an undertaking, if that is the confusion.
19509 MR. BOWLES: We will take that as an undertaking. I think we can do what you are suggesting.
19510 MR. KIDD: Thank you very much, Mr. Bowles.
19511 Thank you, panel. Those are all my questions.
19512 Thank you, Mr. Chairman.
19513 THE CHAIRPERSON: Thank you, Mr. Kidd.
19514 Mr. Secretary, this might be a good time to number the exhibits so that we have them.
19515 MR. SPENCER: Thank you, Mr. Chairman.
19516 I have 13 documents.
19517 The first document is entitled "Retail Services CallNet Expenditures on Bell Services Year 2000."
19518 This will be introduced as The Companies' Exhibit No. 59.
EXHIBIT NO. THE COMPANIES 59: Document entitled "Retail Services CallNet Expenditures on Bell Services Year 2000"
19519 MR. SPENCER: "Distribution of Bell Canada Revenues for Services" in CallNet's evidence, Appendix A, The Companies Exhibit No. 60.
EXHIBIT NO. THE COMPANIES 60: Document entitled "Distribution of Bell Canada Revenues for Services" in CallNet's evidence, Appendix A
19520 MR. SPENCER: "CEO's Message to Shareholders", The Companies Exhibit No. 61.
EXHIBIT NO. THE COMPANIES 61: Document entitled "CEO's Message to Shareholders"
19521 MR. SPENCER: "CallNet Reports, Second Quarter Results", The Companies Exhibit No. 62.
EXHIBIT NO. THE COMPANIES 62: "CallNet Reports, Second Quarter Results"
19522 MR. SPENCER: "Economic Evaluation in Support of the Tariff Filing for DNA Access", The Companies Exhibit No. 63.
EXHIBIT NO. THE COMPANIES 63: "Economic Evaluation in Support of the Tariff Filing for DNA Access"
19523 MR. SPENCER: "National Services Tariff, Digital Networks Services Item 301", The Companies Exhibit No. 64.
EXHIBIT NO. THE COMPANIES 64: "National Services Tariff, Digital Networks Services Item 301"
19524 MR. SPENCER: "CallNet Financial Profiles" The Companies Exhibit No. 65.
EXHIBIT NO. THE COMPANIES 65: "CallNet Financial Profiles"
19525 MR. SPENCER: I also have a CRTC undertaking to AT&T Canada regarding their response to Interrogatory The Companies(CRTC)25Sep01-4200 which will be CRTC Exhibit No. 37.
EXHIBIT NO. CRTC 37: CRTC undertaking to AT&T Canada regarding their response to Interrogatory The Companies (CRTC)25-Sep01-4200
19526 MR. SPENCER: We have TELUS' response to undertaking requested by Commissioner Cram, transcript reference, Volume 9, paragraph 15280, which will be TELUS Exhibit No. 18.
EXHIBIT NO. TELUS 18: TELUS' response to undertaking requested by Commissioner Cram, transcript reference, Volume 9, paragraph 15280
19527 MR. SPENCER: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15049, TELUS Exhibit No. 19.
EXHIBIT NO. TELUS 19: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15049
19528 MR. SPENCER: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15029, TELUS Exhibit No. 20.
EXHIBIT NO. TELUS 20: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15029
19529 MR. SPENCER: Response to undertaking requested by GT Group Telecom, transcript reference, Volume 8, paragraph 13021, will be introduced as TELUS Exhibit No. 21.
EXHIBIT NO. TELUS 21: Response to undertaking requested by GT Group Telecom, transcript reference, Volume 8, paragraph 13021
19530 MR. SPENCER: The last one is a response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15002, TELUS Exhibit No. 22.
EXHIBIT NO. TELUS 22: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference, Volume 9, paragraph 15002
19531 MR. SPENCER: Thank you.
19532 THE CHAIRPERSON: Thank you, Mr. Secretary.
19533 We will now turn to TELUS. Is it going to be Mr. Lowe or Mr. Jerome or both.
19534 MR. LOWE: It is both today, Mr. Chairman. I am going to start off and then turn the microphone over to Mr. Jerome.
EXAMINATION / INTERROGATOIRE
19535 MR. LOWE: Good afternoon, gentlemen.
19536 MR. BOWLES: Good afternoon.
19537 MR. LOWE: I was hoping that we could start with something that we can maybe find common ground on and that was the contribution reform that took place over the last few years.
19538 You will recall that this was a proposal which -- the proposal to change the old per-minute mechanism was a proposal which was brought forward by CallNet and AT&T and it was supported by TELUS.
19539 Mr. Bowles, I recall you had a speech, I'm not sure if it was a paper on the minute compression technology that Canada had developed. Does that ring a bell at all?
19540 MR. BOWLES: You are stretching my memory, I'm sorry. Maybe you can remind me.
19541 MR. LOWE: I seem to recall you saying that the per-minute mechanism had prompted people to come up with ways to compress minutes to reduce the contribution burden and --
19542 MR. BOWLES: Yes, I remember yes.
19543 MR. LOWE: That was an example of the kinds of distortions that you get.
19544 MR. BOWLES: Yes, I remember.
19545 MR. LOWE: Then the Decision 2000-745 gave CallNet and other carriers, long-distance carriers, a significant financial break on contribution payments. Correct?
19546 MR. BOWLES: There was a change in the methodology, yes, which certainly, yes, did reduce our payments.
19547 MR. LOWE: I seem to recall that for AT&T the impact was $80 million. I was wondering if there was similar number that you have?
19548 MR. BOWLES: I don't have the exact number, but I think it was in the same order of magnitude, yes.
19549 MR. LOWE: Now, I provided to you a copy of your final argument in that contribution proceeding. That is the document entitled "Telecom Public Notice CRTC 99-6, Final Written Argument of CallNet". Do you have that?
19550 MR. BOWLES: Yes.
19551 MR. LOWE: Then if we could flip to the third page of that document, page 6 of the argument, you say:
"CallNet notes that Parliament, in section 7 of the Act, specifically cited the enhancement of the efficiency of Canadian telecommunications as a policy objective to be pursued by the Commission. Both the Commission and the FCC have recognized the importance of economic efficiency." (As read)
19552 Do you see that?
19553 MR. BOWLES: Yes.
19554 MR. LOWE: Then I see you footnoted Decision 94-19 and you characterize that as:
"... the Commission stressing the importance of economic efficiency to telecommunications ability to meet its potential as an engine of economic growth and serve as a vehicle for economic, social and intellectual transactions". (As read)
19555 And there is the quote from 94-19, page 19, below that.
19556 I am not proposing to read that into the record, but does CallNet continue to believe that the principle of economic efficiency is a policy objective that this Commission should pursue?
19557 MR. BOWLES: Yes.
19558 MR. LOWE: Thank you.
19559 Some parties to this proceeding are committed to the objective of economic efficiency as well, is that fair to say?
19560 MR. BRAZEAU: I think most parties in this proceeding is committed to promoting economic efficiency. I think the issues that we have are how you measure it and how you get there. I think those would be where we have some differences between the parties, I think.
19561 MR. LOWE: We are all on the same pages as far as principles go, is it not?
19562 MR. BRAZEAU: We are all in the same boat, rowing in the same direction, hopefully.
19563 MR. LOWE: I was going to talk to you about some of the interrogatory responses to the Bureau that you filed and so, if you could refer to CallNet(Bureau)31Aug01-1 and the Director asks for you to explain the extent of virtually non-existent residential competition and, in part 2 of your answer, you say:
"CallNet believes that generally rate levels in Canada are too low and that higher rates would promote sustainable competition." (As read)
19564 Do you see that?
19565 MR. BRAZEAU: Yes.
19566 MR. LOWE: And so, you told the Director that the mischief, if you will, or part of the problem is the rates being too low. Do you have a proposal on how much rates should be allowed to rise?
19567 MR. BRAZEAU: Our proposal does not have any significant -- any specific, sorry, proposal for rate increases. I think the context that you have to take this response in is that the prices we face in the market we compete in is different than what a lot of other consumers -- the prices that they face.
19568 We have to compete on the LD side on the residential market with yourselves and the other ILECs. And the prices that our customers have been quoted in a lot of winbacks from the incumbents are prices that are, at times, significantly below the average revenue per minute that you see in the industry.
19569 So again, the prices we face as a competitor in the market place, I think, would be significantly below the prices -- the average prices that you see in the marketplace.
19570 MR. LOWE: What you told the director is you said:
"CallNet believes that generally rate levels in Canada are too low and that higher rates would promote sustainable competition." (As read)
19571 MR. BRAZEAU: If rates were higher, all things being considered -- all things being the same I mean, then yes.
19572 MR. LOWE: Thank you. Now, turning to your response to Bureau-3, it seems, in question 1, the Bureau is suggesting that you are asking for guaranteed margins and the question is:
"Explain if there is a difference between eliminating price squeezes created by the operation of the price cap and ensuring competitors sufficient margins." (As read)
19573 Then, your answer in (i):
"CallNet has not asked for guaranteed margins." (As read)
19574 Do you see that?
19575 MR. BRAZEAU: Yes.
19576 MR. LOWE: I don't want to get into the cut and thrust as to what your proposal is, whether it is a guaranteed margin or not and run down that sort of a line of cross-examination, but if you were asking for guaranteed margins, that would be inappropriate. Can we agree with that?
19577 MR. BRAZEAU: I'm not sure what you mean by "inappropriate", but that is not what we are asking for.
19578 MR. LOWE: Well, should the Commission approve a proposal which provides for guaranteed margins --
19579 MR. BRAZEAU: If somebody made that proposal, then it would be the Commission's prerogative to agree or disagree to that proposal but, as I stated, I don't think there is such a proposal on the public record so I don't think they have to make that decision in this proceeding.
19580 MR. LOWE: But you are saying it is something they could look at it if they wanted to?
19581 MR. BRAZEAU: The Commission can look at just about anything they want.
19582 MR. LOWE: Thank you.
19583 Then in part 2:
"When is it appropriate public policy to ensure sufficient margins independent of the efficiency of competitor entry?" (As read)
19584 Then you say:
"CallNet has not considered that hypothetical situation..." (As read)
19585 I take it you are saying that is not the case here, so you haven't looked at it?
19586 MR. SCOTT: I think the answer speaks for itself, but part of the problem is that question, quite frankly, is very difficult to understand and I could almost ask you what you think the question is perhaps before we try to answer it any further. It is a very strangely worded question and when we considered it, that was our answer.
19587 MR. LOWE: Well, Mr. Brazeau, you used to, as I learned in 199 --
19588 MR. BRAZEAU: Just to add, and maybe this will answer the question, I do not think that our proposal is independent of economic efficiency. We strongly believe that our proposal is consistent with economic efficiency. So that is why we never considered this issue and that is why we think it is totally hypothetical.
19589 MR. LOWE: Okay. Taking it as a hypothetical, would it be reasonable for the Commission to allow sufficient margins irrespective of the efficiency of competitor entry?
19590 MR. BRAZEAU: Absolutely. If there is a public policy that the Commission needs to achieve, absolutely. The Commission has in the past, 92-12 as an example of where the Commission introduced a policy that may have diverted somewhat from economic efficiency in order to achieve a public policy objective. The results, you know, are -- I think The Companies' first witness indicated that the results were certainly very good on the LD side.
19591 MR. LOWE: Thank you, sir.
19592 Now turning back to the argument that you made in the contribution proceeding, paragraph 83, you say -- I am down at the fourth line:
"The greater the amount of subsidy payments, the greater the distortion will cause." (As read)
19593 Then in the last sentence you say:
"Accordingly, in CallNet's view it is essential that the TSR be calculated in a manner that best ensures that not a penny more is collected than is absolutely necessary to fund universal access." (As read)
19594 Then you go on in paragraph 87 to provide your views on the level of affordable rates and you say:
"In our November 30th submission CallNet stressed an affordable rate must be set at the highest amount approved by the Commission for services making up the basic service obligation. As pointed out by CallNet, monitoring of network drop off offers has determined that current rates for local service remain affordable. Because all rates approved by the Commission by definition are just and reasonable, there is no reason why the highest rate approved by the Commission should not be employed." (As read)
19595 Do you see that?
19596 MR. BRAZEAU: Yes.
19597 MR. LOWE: Does CallNet continue to recommend this definition of just and reasonable rates to the Commission?
19598 MR. SCOTT: Certainly, we have not -- our position hasn't changed with respect to the establishment of rates for basic service.
19599 MR. LOWE: Thank you.
19600 Now, I wanted to turn to flat rate plans. In the contribution case CallNet and AT&T had fairly complementary positions, they wanted to get to the same result which was a moderation or a change in the contribution burden, a change of the per-minute mechanism, similar proposals on the calculation of the total subsidy requirement,
19601 I provided you with a copy of AT&T Canada's argument.
19602 MR. BRAZEAU: I have it.
19603 MR. LOWE: Paragraphs 44 and 45 kind of capture the debate between whether the flat rate calling plans were a mistake, on one hand, repricing the market was a mistake or, on the other hand, was a natural evolution of market forces.
19604 AT&T here is positioning it as -- in paragraph 44 they say:
"The view has been expressed that somehow the flat rate plans were the fault of the entrants..." (As read)
19605 Their counterpoint in paragraph 45 is that:
"The introduction of flat rate plans..." (As read)
19606 This is paragraph 80, second sentence:
"...was a natural evolution in the response to the intense downward pressure of the ILECs that stalled entrant market share growth." (As read)
19607 I was wondering if, as between these two schools of thought, you have a view as to how we should look at these flat rate calling plans.
19608 MR. BRAZEAU: Which two schools are you referring to now?
19609 MR. LOWE: The school that is in the paragraph 44: is the fault of the entrants, was a mistake to introduce these on the one hand, or the AT&T position in this proceeding that these plans were a natural evolution? Or you may have something in between there.
19610 MR. BRAZEAU: I was going to say, they were both.
19611 They were a natural evolution in the sense that as a result of pricing flexibilities -- I think this is where AT&T was trying to explain, as a result of pricing flexibilities resulting from forbearance, we, the entrants, faced some significant very intense price competition for our customer base.
19612 I think we can show you and I think we have shown on our public record the churn rates that we had for our customers after forbearance. In order for us to attract new customers we needed to make -- give them a deal. That is the only reason why customers would come to new entrants.
19613 So we did that and, of course, there was a response, other winbacks, and again a pricing -- you know, price decreases.
19614 So we tried to come up with a creative way of ensuring that we could continue to grow in the LD business. Given that no one had introduced a flat rate on the LD side but it had been introduced on the wireless side, we thought this would be an innovate pricing mechanism to attract additional customers.
19615 And our marketing department, God bless them, incoming with this proposal, made certain assumptions. You always live and die by those assumptions. One assumption was that the new rates would have a drag on the type of customers that we would attract.
19616 Now, the second assumption that they made was that the average usage -- minute usage would not increase significantly. There would be some increase but it wouldn't increase significantly. Of course, that is not what happened. As a result of the fixed contribution rate trying to compete with a flat rate product became unbearable and, you know, we had to change our pricing plan.
19617 MR. LOWE: So the mistake, and I'm really not trying to be judgmental on that --
19618 MR. BRAZEAU: Yes, it is our marketing guys.
--- Laughter / Rires
19619 MR. LOWE: -- let's roll with it then -- was that the prices went rate down, they were flat rated and that really spiked up demand. People just took it because it was for free. They took way more minutes than was thought possible.
19620 MR. BRAZEAU: Yes. That certainly had that impact. But I think the Commission's recent study on the state of competition also shows that minutes keep growing, LD minutes keep growing and so that had a specific impact and there are other impacts in the marketplace that are, you know, generating more minutes on the networks.
19621 MR. LOWE: Mr. Bowles, I provided you an excerpt from your discussion with Commissioner McKendry on net contribution proceeding and this piece of testimony is a little hard to find because it is in the errata section of Volume 2 but it really took place on the first day.
19622 The question is, you know:
"Are you saying there have been some misjudgments on the part of the companies as to pricing?" (As read)
19623 And you say:
"I mean it's a vigorously competitive market and I guess companies like us were trying to do everything we could to gain market share and revenues." (As read)
19624 That is essentially what you are saying, Mr. Brazeau, it was all part of that hurly-burly in the market and trying to get revenues and customers and market share and this is what happened?
19625 MR. BRAZEAU: Yes. We were trying to build and maintain a stable customer base and it was becoming harder and harder doing that, you know, the end -- the objective was to try to grow our customer account.
19626 MR. LOWE: Then the last couple of lines, Mr. Bowles you say:
"Did we go too far? Yes. But that's history and that is something that we will have to live with." (As read)
19627 Do you see that?
19628 MR. BOWLES: Yes.
19629 MR. LOWE: Do you still think that is something ---
19630 MR. BRAZEAU: Again, I think the context was within the existing contribution regime.
19631 MR. LOWE: Okay.
19632 MR. BRAZEAU: And given the assumptions that we made or our marketing department made about the type of customers that this product would attract, given those two realities then Mr. Bowles' statement is correct.
19633 MR. LOWE: Gentlemen, you can put this off on the marketing guys if you want, but do you think some of the blame for your situation may reside with the company's own pricing decisions?
19634 MR. LINTON: The marketing guys work for me too so I have to defend them.
19635 The residential long distance business right now represents less than a third of our revenue. If you look at the number of subscribers that ended up on these plans that were flat rate, or you know, you paid so much and you got all you could eat, it wasn't an overwhelming percentage. I think it was less than 20 per cent of our LD subscriber account. Many of those that when we stopped the plan, we converted them to other plans.
19636 Did it have a huge impact on us financially? The biggest impact was we had to pay a whole bunch more contribution. But no, not really.
19637 MR. LOWE: All right. Well, if we are going to absolve the marketing guys, let's turn to paragraph 41 of your evidence. You say:
"These facts clearly demonstrate that local competition has not developed as planned, and as discussed below, part of the blame must rest with the regulatory regime." (As read)
19638 Do you see that?
19639 MR. BRAZEAU: Yes.
19640 MR. LOWE: Turning to page or paragraph 52, you quote from your AIF, and continuing the same theme, this is the second paragraph of the quote:
"There are currently only a limited number of potential new entrants that have expressed their intention to compete in the local service market in Canada. This can be attributed to the substantial barriers to entry inherent within the CRTC's regulatory framework including: (1) non-resident ownership restrictions;
(2) terms of the regulatory regime such as the absence of a mandatory resale discount and the narrow definition of essential services that the incumbents must provide to the competitors on an unbundled basis; and
(3) significant capital costs." (As read)
19641 Do you see that?
19642 MR. BRAZEAU: I'm sorry. What paragraph are you?
19643 MR. LOWE: Oh, it's paragraph 52 is the quote. I'm sorry.
19644 I will give you a moment.
19645 MR. BRAZEAU: Thanks.
19646 MR. LOWE: So these three barriers, I take it that the first barrier is not something that we can do much about in this proceeding. Correct?
19647 MR. BRAZEAU: That is correct.
19648 MR. LOWE: The third barrier, significant capital costs, that kind of goes with the territory of the local business I take it?
19649 MR. LINTON: It goes to one of our arguments, and one of our arguments is that for a company like ours to get into local and buy the switching equipment, for example, or the voice mail equipment, for example, you don't buy that for one customer or two customers or ten customers. You know, you fork over your 3 million bucks and buy your lucent switch. Then if you want to do it in Vancouver, it's another 3 million bucks.
19650 So the cost of the new entrants going in are very high up front.
19651 MR. LOWE: But that is anywhere in the world, isn't it? I mean that is not the Canadian, the CRTC's regulatory regime, is it? I mean they didn't --
19652 MR. LINTON: I didn't say it was --
19653 MR. LOWE: -- those switches, did they?
19654 MR. LINTON: I didn't say it was the CRTC's regulatory regime. I was explaining to you why we put it in there.
19655 MR. LOWE: Okay. All right. That is fair enough. But the paragraph says, you know:
"This can be attributed to the barriers inherent in the Commission's regulatory framework." (As read)
19656 Then the last one is capital costs and setting aside whether switching is essential or not, I didn't think it was essential but --
19657 MR. SCOTT: If I may, Mr. Lowe, but if you turn the page and go to section 3.4 starting at paragraph 55 on the next page of our evidence, I think we go on to try and explain in more detailed terms what some of those barriers to entry are and they are spelled out in our evidence.
19658 MR. LOWE: Okay. That is fair enough.
19659 MR. BRAZEAU: I see this is sort of the annual information form, and this is for some U.S. consumption. So I think some of the language here might be more as a result of the audience than --
19660 MR. LOWE: Just for the rich gringos down there kind of thing.
19661 MR. BRAZEAU: Well, rich gringos own a lot of our debt.
19662 MR. LOWE: So this is kind of alarmist stuff you put in there to keep your lawyers happy. Is that what you are telling me?
19663 MR. SCOTT: I think clearly it represents -- there are some different terms used in the U.S. When you talk about local competition in the U.S. the models that they understand are wholesale/retail and network unbundling approaches. So those are -- that is the kind of language that one does use with U.S. investors when describing regulatory issues. I don't think that is unreasonable by any stretch.
19664 MR. LOWE: Okay. What I was trying to focus on is if you take these three items, non-resident ownership restrictions, unbundling of discounts and unbundling of essential facilities and significant capital costs, it is the middle one that we can deal with in this case. Is that --
19665 MR. SCOTT: But as I was saying, Mr. Lowe, a second ago, if you turn to the next page, I think rather than focus on the annual information filing, if you are asking us about what we believe are some of the reasons why local competition hasn't come to fruition as quickly as certainly we would have liked, I think they are spelled out on the following page and pages of the submission.
19666 MR. LOWE: Did your lawyers tell you, you had to quote this section of the AIF in your evidence? I mean you chose to put this in, didn't you?
19667 MR. BRAZEAU: Yes.
19668 MR. LOWE: Thank you.
19669 Now, I would like to turn to the tag-along mechanism. I take it in addition to the 40 to 60 per cent discount which you are seeking, you also want this tag-along mechanism. If you could turn to paragraph 149 of your evidence, you describe this tag-along mechanism and it says, I take it that if the price changes in any part of the territory, that price change has to be brought in across the whole territory, whether it is up or down. Have I got that right?
19670 MR. SCOTT: That is correct.
19671 MR. LOWE: Thanks.
19672 So if prices were raised to more affordable levels as you have described them earlier in a more rural part of the territory, they would have to be raised all across the territory. Right?
19673 MR. SCOTT: Although that is an unlikely scenario, that is right. But I think we should back up a step and consider or allow me to explain why we propose the tag-along mechanism. One of the concerns --
19674 MR. LOWE: Can we --
19675 MR. SCOTT: If I could just finish then perhaps --
19676 MR. LOWE: I don't mind you -- I don't mind you answering this. I just want to understand how the thing works and then you can explain how you developed it. So I don't mind hearing your speech at all. I just want to kind of get it out on the record what it is, which is if the incumbent raises prices anywhere, then that same price has to increase in all regions. Similarly, if to respond to competition and put efficient pricing in place, the incumbent lowers prices, not to below cost, within the boundaries of the imputation test, then they have to be lowered all across the territory.
19677 That is the proposal, isn't it?
19678 MR. SCOTT: That was quite a mouthful. If you would like to repeat the question.
19679 The proposal is, as I was beginning to say a moment ago, that rates move, if you will, in lock step in both what we have termed competitive or an area served by competitors and in areas where there is no competition. The benefit that has for consumers in areas where competition will be slower to evolve, is that they are -- they have gained some of the benefits of competitive market.
19680 It works in reverse, that is right, as you have pointed out. So if that answers your question, yes, it works in the other direction as well and could lead to a situation where the ILECs pricing flexibility is somewhat limited.
19681 MR. LOWE: Could you turn to Bureau 11, please, your response to the Bureau dated 31 August 01-11.
19682 The Director asks:
"Explain the criteria CallNet would use to distinguish between competitive and non-competitive areas." (As read)
19683 Your answer is:
"There is no requirement to actually determine which areas are competitive and non-competitive." (As read)
19684 Do you see that?
19685 MR. SCOTT: Yes, I do.
19686 MR. LOWE: So the tag-along approach is indifferent to how competition is developing overall or in any specific area?
19687 MR. SCOTT: The tag-along mechanism, as I said a moment ago, will extend the benefits across the territory of competitive entry in any particular part of the territory.
19688 MR. LOWE: Could you turn to Bureau 15, please.
19689 Here the Bureau asks:
"Under the tag-along mechanism is it the case that there would be no adjustment to either initial business rates or residential rates." (As read)
19690 Then the Director also asks:
"Does this mean that CallNet thinks that existing rates are remunerative for all services but residential in high cost serving areas." (As read)
19691 Do you see that?
19692 MR. SCOTT: Yes, I do.
19693 MR. LOWE: Do you think the question is clear?
19694 MR. SCOTT: Yes.
19695 MR. LOWE: Thank you.
19696 Then the answer is:
"The tag-along mechanism can be implemented with or without any going in rate adjustments." (As read)
19697 So I take it the Bureau is kind of wondering, "Well, maybe there is some hidden subsidies in the ILEC rate structure," and you say, "Don't worry, you can implement the tag-along along with any rate adjustments." Right?
19698 MR. SCOTT: I'm not sure what the Bureau was wondering. Our answer is that the tag-along mechanism can be implemented with or without any going in rate adjustments as it says.
19699 If the Commission were to decide to address the very point that you were raising a minute ago that it wanted to make some going in rate adjustment, for example, to rates in high cost territories it could do so. It doesn't affect the adoption of the tag-along mechanism.
19700 MR. LOWE: Have you proposed any rate adjustments?
19701 MR. SCOTT: No. Our answer is, as it says, that the Commission could do so.
19702 MR. LOWE: And is this something that would be developed in a follow-up proceeding, then?
19703 MR. SCOTT: Is what?
19704 MR. LOWE: Any rate adjustments going in to address the fact that the tag-along mechanism is going to kind of freeze the rate structure for four years.
19705 So it would be pretty important that you change your rate structure to try to get all the subsidies out before you are frozen in time for four years.
19706 Is that something that you would say, "Well, let's deal with that in a follow-up proceeding?" Or is it too late now?
19707 MR. SCOTT: I'm sorry. Perhaps you can rephrase your question. I am not sure where you are going, Mr. Lowe.
19708 MR. LOWE: All right. Well, I gathered what you said to the Bureau was, look, with the tag-along mechanism you can implement rate changes before you implement the tag-along mechanism. So I thought that what you had in mind was you could kind of do some rebalancing, you could raise some rates, you know, in the higher cost areas and lower them in the more densely populated urban areas. Then you kind of cast it all in concrete and let it go for four years. Is that what you had in mind?
19709 MR. SCOTT: I hope I am not repeating myself. Certainly the Director's question asked whether or not the Commission under our tag-along proposal could make going-in rate adjustments.
19710 As you asked earlier, what would you do about high cost areas, there might be -- the Commission may, for public policy reasons, want to make some kind of adjustment there.
19711 Our answer to that is, that is independent of the proposed tag-along mechanism. They could do so. Clearly connected to that, as you point out, is the suggestion by the Director -- or question, I guess by the Director -- as to whether all rates are fully compensatory in all areas, except for high cost. We don't know the answer to that question.
19712 MR. LOWE: So you are saying maybe you would do some readjustment, but that is not something you have given a lot of thought to in the process for how you do that readjustment. That is something we would have to deal with at a later date.
19713 MR. SCOTT: We haven't proposed any specific going in adjustments, no.
19714 MR. LOWE: So if we implement your proposal, the tag-along would freeze the rate structure the way it is now, and it would prevent TELUS from responding to competitive entry in competitive areas without risking repricing the whole market. It is a very strong disincentive to address competition; isn't it?
19715 MR. SCOTT: The first part of your question asked whether or not TELUS would have to reprice all of their customer services; the answer to that is, yes.
19716 You are characterizing it as a restraint on their pricing flexibility. The ILECs, in their proposals, have essentially asked for virtually complete pricing flexibility and very little constraint.
19717 We are proposing a mechanism that would, as I said, serve to discipline, give them less flexibility, discipline any incentive to engage in targeted pricing and, most importantly, assign some of the benefits to residential consumers in areas where there is not direct competitive entry.
19718 MR. LOWE: It makes it pretty tough for an ILEC to respond, doesn't it?
19719 MR. BRAZEAU: Well, I don't think it really does.
19720 The majority of customers that the ILECs are serving are in areas where you would think there would be -- if there is any competition, that is where the competition would develop.
19721 So if the incumbents are prepared to reduce prices in those areas because of competition, then the more urban or more rural areas or high cost areas would see the same benefit. That is a small proportion of your total customer base.
19722 So the impact, that tremendous revenue impact that you talked about I don't think will be there.
19723 As Mr. Scott mentioned, the benefit is that consumers in these high cost areas get to see the same interplay between, you know, that competition brings in prices in their own marketplace. It is something they would otherwise never see.
19724 MR. LOWE: Well, what happens here -- let's just take a service rate. Let's just take res rates and let's say you come into Calgary big time and you really put a lot of price pressure on and then, you know, so the ILEC has to respond. So prices go down. They also have to go down through the rest of the territory. So it all kind of locksteps down.
19725 Then you have the prices in the rural areas that are even further below market levels than they were before; thereby foreclosing further the possibility of competition in those areas and I mean, real competition. Isn't that the effect?
19726 MR. SCOTT: Two points, Mr. Lowe. First is -- and I am not suggesting you said this -- but they don't get below cost. It would cause prices to go down.
19727 The second point -- sorry, I may be repeating what Mr. Brazeau just said -- for that small amount of users, the majority of customers are going to be in areas where there is going to be local competition. We will be rolling out in the major centres. There will be residential competition or competitive supply for the majority of your customers.
19728 MR. BRAZEAU: I guess if your concern is that this will bring some pricing discipline in the marketplace because you have to think twice before you reprice your base or lower the prices where you are facing competition, then the answer is, yes.
19729 MR. LOWE: This is great, then. I mean, it gives greater leeway for the marketing guys to make mistakes because the ILEC just won't follow, right? I mean, it is perfect.
19730 MR. LINTON: Mr. Lowe, what our evidence deals with is the first part of your last question, which was, what would happen if there was competition in the rural areas of Alberta or B.C. There is none now. That is what this evidence is addressing.
19731 If the impact of that is that the consumers end up with slightly lower prices, and through our tag-along that is given to the 20 per cent or 15 per cent in rural Alberta and B.C., that is not such a bad thing either.
19732 MR. LOWE: Well, you told the Director in Bureau one that the rate levels are too low in Canada and higher rates would promote sustainable competition.
19733 Now you are saying rural Alberta and B.C., no competition now or ever, aren't you?
19734 MR. LINTON: No. We are saying to the 80 per cent of the people in Alberta, if that's what it is, who live where there will potentially be competition, that there might be competition in local services, if there are some changes.
19735 That is what we are saying. I mean, you are then taking it to some next place.
19736 What we are saying is, wouldn't it be great if there was a competitive choice for the 80 per cent that we could cover.
19737 MR. LOWE: All right. You have had it easy so far. It is over to my friend Mr. Jerome now.
EXAMINATION / INTERROGATOIRE
19738 MR. JEROME: Good afternoon, gentlemen. I was going to say that this is now the easy portion of the afternoon program. So you can all relax.
19739 I just have a few questions. Basically, trying to understand, at a fairly high level, your proposal.
19740 You state, for example, in your evidence that setting competitor services -- when I am talking about competitor services, I am including all of your carrier segment into it -- at incremental costs will be fair to both ILECs and CLECs.
19741 Is that correct?
19742 MR. BRAZEAU: Fair is a fairly loaded concept.
19743 Let me just say that we believe that this will certainly promote competition and leave it at that.
19744 MR. JEROME: Well, at paragraph 135 of your evidence, you don't seem to have a problem using that loaded concept. You are saying:
"By using Phase 2 costing methodology or the proxy formula the rates for these services would be set at incremental costs. In so doing, the Commission will ensure that these rates are established at levels that are fair both to the ILECs and entrants." (As read)
19745 Do you see that?
19746 MR. BRAZEAU: Yes, I do.
19747 MR. JEROME: So I would like to ask a few questions and discuss how your proposal could be construed as fair, both to the ILECs and to the CLECs.
19748 Is your proposal intended to give CLECs the lowest rate possible in services they buy from ILECs?
19749 MR. LINTON: No, because the lowest rate would be zero.
19750 So our proposal is that they would be provided to us at this form of incremental cost.
19751 MR. JEROME: Well, I don't want to play the radical game, but, again, at paragraph 86 of your evidence the intent -- I don't know if you need to turn -- but in the middle of the paragraph, you are saying that:
"The Commission should make those network elements available to competitors at the lowest rate possible." (As read)
19752 Are you saying now that they should make it at zero?
19753 MR. BRAZEAU: No. I think we have always said that they should be at incremental cost. I think that is our proposal.
19754 MR. JEROME: Would you agree that there is currently a competitive market for the provision of many services that are included in your carrier segment and your list of services that will be subject to the discount?
19755 MR. BOWLES: There is certainly competitive supply, to a limited extent, a very limited extent, and it is limited, both, by geography and -- well, specifically by geography.
19756 For the most part, we don't have a competitive source of supply. I can't remember the exact interrogatory, but I think the number is that only 6 per cent of our facilities are actually acquired from companies other than the ILECs.
19757 MR. JEROME: Well, it's certainly not my intention to argue with you if the glass is half empty or half full, or if it is filling up. But there is a competitive market that is developing. Would that be a fair --
19758 MR. LINTON: Do you mean -- can we go and buy services that we buy from the ILECs from other people; is that your question?
19759 MR. JEROME: Yes.
19760 MR. LINTON: Well, for the most part, no, there isn't.
19761 So for 80 or 90 per cent of what we want specifically -- and I will probably get into trouble for the 80 or 90 per cent -- but 75 per cent, you know, there is no one else we can buy those from.
19762 MR. JEROME: But there are some choices -- it is limited for now. But as carriers are constructing and building more facilities, this market is likely to evolve and to grow in the future. Would that be fair?
19763 MR. LINTON: No. I think what is going to happen is that we are going to more and more build our own facilities.
19764 I mean, that is what we have done to the limited extent that we can by buying fibre from Videotron. That is what we were trying to do in Toronto with TELUS, actually, with this MFN thing, that has blown up, unfortunately.
19765 So where we will -- these costs here will be replaced by -- a lot of them by building our own facilities.
19766 MR. JEROME: So you are saying today that there is really no competitor, no entrant or CLEC that has as part of its strategy to provide facilities and capacity on a wholesale basis?
19767 MR. LINTON: I don't know any CLEC whose business plan is based around being a wholesaler to other carriers.
19768 MR. JEROME: Thank you.
19769 If there were such a market, do you think your proposal would have any negative impact on the development of that market, on the viability of that market?
19770 MR. LINTON: Well, there isn't that market, so it is hard to --
19771 MR. JEROME: Would your proposal -- if the Commission were to adopt your proposal, would any such market likely develop in the future?
19772 MR. BRAZEAU: I think this issue was touched upon yesterday with the AT&T panel as to other company-like group or others are wholesaling services.
19773 Last time I read Group Telecom's annual report, you know, the talk about being in the business of providing service to small and medium-sized businesses and providing particularly data services, focusing on data services to that market. I am sure if they have excess capacity, they would be willing to sell this excess capacity on the wholesale market. But that is not their raison d'être.
19774 But I don't know of any other company that is trying to develop the wholesale local market in Canada. I just don't know who that is.
19775 MR. JEROME: So when you say at paragraph 10 of your evidence -- I am not sure that you have to turn to it -- but you say that your proposal will breathe new life into competition. What you are really talking about is retail competition.
19776 Is that correct?
19777 MR. BRAZEAU: Could you repeat that, please?
19778 MR. JEROME: At paragraph 10 of your evidence, you are saying that the adoption of your proposal will breathe new life into competition. So you are really talking about retail -- competition at the retail level, not at the wholesale level?
19779 MR. BRAZEAU: Yes.
19780 MR. JEROME: Let's discuss the issue of markups a little bit. You are aware that traditionally, historically, at least, the Commission used to include a 25 per cent markup over a Phase 2 cost.
19781 Isn't that correct? You are familiar with that?
19782 MR. BOWLES: Somewhat, yes.
19783 MR. JEROME: What was that 25 per cent markup intended for?
19784 MR. BRAZEAU: I believe that the purpose of the markup was to theoretically recover fixed and common costs from Phase 3.
19785 MR. JEROME: So from Phrase 3, so it would include fixed and common costs and embedded costs?
19786 MR. BRAZEAU: You are taxing my memory.
19787 MR. JEROME: I will help you. It is not a trick question
19788 MR. BRAZEAU: I think so.
19789 MR. JEROME: So these are all other forms of costs that are not captured into Phase 2. Is that correct? When we talk about the markup --
19790 MR. BRAZEAU: I think we had that debate or that discussion this morning about what Phase 2 captures and doesn't capture.
19791 I think you would be hard pressed to get me to admit that somehow the telephone companies are not recovering their costs by just relying on Phase 2, I think, and you know, I thought it was a pretty incredible statement from your witness, Mr. Bernstein, when he was being cross-examined by Mr. Engelhart and discussing BCTel's productivity -- how they achieved their productivity offset and BCTel's costing studies.
19792 Let me just quote Mr. Bernstein here.
19793 He says:
"I would have liked to have used the BCTel information, but unfortunately there was no documentation to the BCTel Phase 2 cost studies. There were just some studies. There was no documentation. There was no listing of assumptions. There was no way to verify. We could not verify any of those numbers.
19794 Then Mr. Engelhart goes on and says:
"But BCTel did PARC studies along with Bell all those years. They were filed with the Commission. Why couldn't you use those PARC studies?"
19795 His response:
"It's not a question of just having the number. It's a question of being able to determine the assumptions, the methodology, all the details that go in behind the number. There was absolutely no documentation."
19796 So we certainly have some issues and other parties in this proceeding has issues with how reflective Phase 2 is of the real company's incremental costs.
19797 MR. JEROME: And what you said earlier in your response is that in your opinion, in your belief, Phase 2, without any markup is enough for a company to recover fixed and common costs and embedded costs.
19798 Is that what you said?
19799 MR. BRAZEAU: No, what we are saying is that if our services that we buy from the incumbents are priced at incremental cost, whatever contribution to fixed, common, or whatever costs that the 25 per cent is supposed to make, that would be recovered by the incumbents allowing to keep the offset, the productivity offset. So on an economic basis you are recovering your costs somewhere else and you are recovering it through the offset.
19800 So those costs are being recovered and the incumbent is made no worse off.
19801 MR. JEROME: Quoting from the TELUS testimony, do you recall that Mr. Grieve, while testifying in this proceeding, has proposed that there will be an audit conducted on Phase 2 methodology and that everyone, including competitors and the Commission would be allowed to have adequate representation and make sure that we have the right assumptions and we have -- are you aware of that?
19802 MR. BRAZEAU: I am aware of it and we certainly welcome this opportunity to revisit Phase 2. My only issue -- and I am not sure what Mr. Grieves meant by an audit.
19803 Hopefully, it is not whether -- having others look at whether you subtracted the right numbers, but the audit would be on the entire process and what goes into the process and, then, how accurate the forecast was and whether the end result can be reconciled to anything that is real. Those are the conditions, absolutely.
19804 MR. JEROME: Under those conditions, then, CallNet would be reassured about the accurateness, at least, of Phase 2 costing.
19805 Would that be correct?
19806 MR. BRAZEAU: It would go a long way.
19807 MR. JEROME: Thank you.
19808 Let's turn to paragraph 125 of Decision 97-8. I believe Decision 97-8 was an exhibit in this proceeding. Unfortunately, I don't remember.
19809 I just have one paragraph. Basically I can read it to you, if you don't have it.
19810 MR. BRAZEAU: My boss said he wasn't born then.
19811 MR. JEROME: Me neither.
19812 MR. BOWLES: Maybe you could read it.
19813 MR. JEROME: So paragraph 125 of Decision 97-8 on local competition, and I quote:
"Parties have not provided evidence to show that Phase 2 plus 25% would be higher or lower than TSLRIIC or TELRIC plus 15%, 10% or even 6%.
In the Commission's view, therefore, there is no evidence to indicate that the 25% markup on Phase 2 is excessive and, further, given the differences between cost inclusions in TELRIC and those in Phase 2, there is support for the proposition that it is not. Moreover, it is noteworthy that generally when each ILEC's total utility segment Phase 3 costs ..." (As read)
19814 That would be the fully allocated costs referred to this morning.
"So when these Phase 3 costs are compared to its total utilities segment Phase 2 costs, the Phase 3 costs exceeds the Phase 2 costs by more than 25%. In light of the above the Commission finds that a 25% markup is not excessive." (As read)
19815 Do you recall that, generally?
19816 MR. BOWLES: Absolutely.
19817 MR. BRAZEAU: Yes, generally I do recall that.
19818 MR. JEROME: To start off with?
19819 MR. BRAZEAU: Yes.
19820 MR. BOWLES: Yes.
19821 MR. JEROME: Thank you.
19822 MR. BRAZEAU: I will let you ask the question.
19823 MR. JEROME: So you agree that generally firms should be allowed to recover their fixed, common and embedded costs over their incremental costs?
19824 MR. BRAZEAU: I think our proposal is not to have the incumbents go bankrupt. I don't think that is our proposal. Our proposal is that we are charged Phase 2 or incremental costs if Phase 2 accurately reflects incremental costs for the group of services that we have listed and that those fixed and common costs be recovered using the productivity offset.
19825 That is our proposal. So at the end of the day you do get to recover fixed --
19826 MR. JEROME: We will come to that, but in general do you agree with the concept of having average markup over the Phase 2 costs or the incremental costs providing services to competitors as a general concept? I know that it is not exactly your proposal.
19827 MR. LINTON: No, but we are here to defend or talk about our proposal and if you are asking us that question, you know, I think we have got to say our proposal is that 25 per cent would not be included in developing the costs that would be charged the new carrier segment.
19828 So, you know, that is what our evidence is.
19829 MR. JEROME: Yes, but it has to be recovered somewhere else, as I heard you say.
19830 MR. LINTON: Yes, and we have given proposals in here. The other thing, and everybody should realize it, is that the ILECs are making a 44 per cent return. That is their EBITDA percentage in 2000. The competitors are zero per cent. I mean, you know, you can look at these very large numbers and, you know, there is lots of money that is going to cover these fixed and common costs.
19831 We have given a proposal. There is a huge amount of EBITDA being earned by the ILECs right now, but our evidence is that the 25 per cent shouldn't be counted in this new carrier segment.
19832 MR. JEROME: So your proposal is based upon the fact your EBITDA is zero? Is that the reason you are asking for the discount?
19833 MR. LINTON: No. No. Our proposal is simply that they developed this new carrier segment and the costs that we buy elements from the ILECs are at the incremental costs which is defined in certain services and in other ones will have to be defined through some sort of Phase 2 or proxy.
19834 MR. JEROME: So I understand you don't have any problems with the ILEC being given the opportunity to recover fixed and common costs including embedded costs. You just have a different opinion of where they should be trying to recover those,
19835 Is that correct?
19836 MR. LINTON: We are all in business to make money for our shareholders. I mean you are in that business and I am in that business and we are going to recover our costs?
19837 MR. JEROME: So that is a yes?
19838 MR. LINTON: I'm sorry. What was the question, again?
19839 MR. JEROME: You don't disagree with the fact that ILECs should be allowed to recover incremental costs plus an appropriate markup to recover fixed and common costs including embedded costs? You don't disagree with that principle. What you disagree with or where you differ is that, you know, is where they can recover those costs.
19840 Is that what your saying?
19841 MR. BRAZEAU: I think that is right, Our proposal is Phase 2 and you said that well, you know, there are some Phase 2 -- Phase 2 normally recovers a markup that is supposed to do something, you know, to recover fixed, common and you are suggesting that is important because a company -- ILECs also have to remain profitable and we don't disagree that ILECs have to remain profitable.
19842 That's why we are suggesting that they get keep the offset.
19843 MR. LINTON: Do you think it would be possible that we could get the same thing so that we could sit up here in four years and the CLECs would be saying, "Don't you agree that we should be able to earn enough money to cover all of our fixed and variable costs and make a profit?"
19844 MR. JEROME: Yes, and it would go a long way if the residential rates would be allowed to increase, but let's continue with me asking the questions for the time being.
19845 MR. BRAZEAU: He was just making a statement not --
--- Laughter / Rires
19846 MR. JEROME: Are you aware of some evidence that was filed by Dr. Bernstein initially as part of the proceeding, the follow up proceeding to Decision 2001-238 and that record was incorporated into this record of this proceeding and that evidence had to do with the levels of markup.
19847 Are you aware of that? Have you looked at that?
19848 MR. BRAZEAU: I know it was made part of this proceeding but, unfortunately, I am not aware of the evidence.
19849 MR. JEROME: So you have not looked at it yourself or have not had someone look at it either?
19850 MR. BRAZEAU: If somebody did look at it, he certainly didn't talk to me about it. So, no. I'm sorry.
19851 MR. JEROME: So that would explain why you did not choose to challenge the conclusions presented in that evidence?
19852 MR. BRAZEAU: I do not know what the conclusions are. Sorry.
19853 MR. JEROME: Thank you.
19854 So I understand from your proposal that you are saying yes, the ILECs are entitled to recover fixed and common costs including embedded costs, whatever, and they can recover that through the productivity gains?
19855 MR. BRAZEAU: They have to recover that through all their services, all their prices. I mean that is what we do. That's what companies do, right. So, I mean the problem with Phase 2 is that you want to recover for such a small -- or individual services or functionality and I think that is where we get into problems.
19856 It is such on a granular basis that it is impossible to get from there to what are the company's total costs and total revenues and there is no connection between that and the company's real cost -- not real cost but total cost.
19857 MR. JEROME: You don't think that if ILECs are not entitled to recover average mark-ups over the services they provide to competitors, that their ability to recover them somewhere else would not be impeded in any way by your proposal because of the risks associated with what was referred to, the downward pricing spiral in the retail market or the guaranteed margin referred to by the director?
19858 MR. BRAZEAU: We are not asking for a guaranteed margin and I don't see the director out there, so I won't answer that question. But I think we have mentioned -- or we stated in our proposal that the amount of offset that we have calculated will far exceed any amount of revenue shortfall resulting from pricing your services at incremental cost for the new entrants.
19859 MR. JEROME: It exceeds right now, according to your calculation, but that's only to the extent that retail rates do not fall as a result of what you referred to as not being a guaranteed margin, that's correct.
19860 MR. BRAZEAU: To the extent that the retail rates would fall and that the marketing department would make bad decisions, then the ability to recover those costs would not be as -- is that correct?
19861 MR. BOWLES: If I may step back just a moment? In any price cap regime and this is -- what we propose is certainly, to a certain extent, is a firm price cap regime. The regime recognizes certain productivity gains in certain areas and what it does is it directs those productivity gains back to consumers or customers in certain ways.
19862 In the first price cap regime, those productivity gains are directed back towards the subscribers to cap services.
19863 What we have done in our proposal is said: perhaps there's a better way to do that and we have suggested that those productivity gains be directed back in such a way to promote competition. Obviously, in any regime such as that, there is a risk that -- there's a risk on both sides; there's a risk that too much productivity is being extracted by the regime and conceivably the ILECs could suffer shortfalls as a result of that.
19864 On the other hand -- and I think the particular history shows that that's the case that happened in the last four years -- is that perhaps not enough productivity gains were extracted from the system.
19865 Again, there's risks on both sides and I think all you are saying is: Is there a risk that the productivity gains that are extracted in this proceeding, will they be enough under our proposal to cover your shortfall over the next four years? We think there's certainly adequate productivity gains there to do so but of course there's the risk, there's a risk with any system such as we are proposing.
19866 MR. JEROME: Thank you very much, gentlemen. Mr. Chairman, that's all of our questions.
19867 THE CHAIRPERSON: Thank you, Mr. Jerome. I think we will take our afternoon break at this point then. So, we will break for 15 minutes and then turn to Ms Lawson.
--- Upon recessing at 1525 / Suspension à 1525
--- Upon resuming at 1540 / Reprise à 1540
19868 THE CHAIRPERSON: We will return to our proceeding now and ARC et al, Ms Lawson.
19869 MS LAWSON: Thank you, Mr. Chairman. Good afternoon, panel members.
19870 I would like to start with a document which I provided to your counsel yesterday, I think it's a copy of CallNet's application to the Commission regarding winback issues.
19871 MR. SCOTT: Yes, I have it.
19872 MS LAWSON: What date was this application filed? It was in June, right?
19873 MR. SCOTT: I believe it was in June, yes.
19874 MS LAWSON: June of this year. I just noticed there's no date on it. Sorry, I failed to provide the covering letter. So June of 2001. I just wanted to run through a few statements in this document. If we could turn first to paragraph 10 and half way through that paragraph, you state:
"Unfortunately, the vast majority of CLEC investments have become wasted or stranded as a consequence of unsuccessful entry into the local exchange market, brought about by the combination of strategic dominant behaviour by incumbents and exogenous financial market factors." (As read)
19875 Do you stand by that statement, Mr. Scott?
19876 MR. SCOTT: Yes.
19877 MS LAWSON: And then, in the next paragraph, you quote from a Yankee Group report which states later, down in the paragraph:
"The capital expenditure dedicated to local services delivery is nearly ten times the amount spent on long-distance service infrastructure." (As read)
19878 Is that true -- still true?
19879 MR. SCOTT: Certainly, it's a Yankee Group report and we quoted it because it illustrates the much higher capital requirements associated with building at local and LD.
19880 MS LAWSON: It's generally true in your view?
19881 MR. SCOTT: Yes.
19882 MS LAWSON: And then, if you just move on a few pages to paragraph 20, you state:
"Perhaps the most significant factor responsible for IXE market share revenue and margin erosion..." (As read)
And we are talking here about the long-distance market.
"...is the effectiveness of the ILECs in using bundles and winback strategies and incentives, including cash promises to lure back customers even before they have generated a dollar of revenue for a competitor." (As read)
19883 And later down that paragraph, you say:
"In the long-distance market today, nearly half of customers signed up by competitors are lost to the ILECs within three months of activation." (As read)
19884 Is this still a problem, do you still stand by this?
19885 MR. SCOTT: Yes, it's a very large problem.
19886 MS LAWSON: I take it then these are the key challenges and problems for Sprint in entering and staying in the local exchange market?
19887 MR. SCOTT: I will begin -- I think perhaps Mr. Linton and Mr. Brazeau may have something to add to this.
19888 The point here is that our experience in the toll business has been that churn and acquisition have been a major problem driven by, as pointed out in the paragraph, the extensive winback activities of the ILECs. When you look at the local market as we attempt to grow in there, we anticipate the problems would be at least as significant, perhaps even more significant because of the difficulty of getting local subscribers to change.
19889 MS LAWSON: Thanks. The earlier quotes that we just went through refer to the problems of strategic dominant behaviour by incumbents and exogenous financial market factors on top of or related to the fact that entering this particular market requires such a huge capital expenditure, correct?
19890 MR. LINTON: Yes, it does require a huge capital expenditure and it -- the other thing is that the margins in this marketplace are, to a certain extent, very volume dependent, so you only start to get a level of profitability on these very large capital expenditures once you hit fairly significant and geographically centred numbers of subscribers.
19891 MS LAWSON: I want to get into that later on too. But I am just struck here, gentlemen, by the lack of any mention in this document of retail rates being a problem for you. Fundamentally, your problem is the cost of entry and the strategic dominant behaviour by incumbents.
19892 MR. LINTON: Right now, where we are in the local market is, we are offering a bundle of services which is local and long distance and a whole bunch of optional services. That gets you into a $40 or $50 rate and it does two things: Number one, it increases your average revenue per subscriber but, number two, because you are selling them an entire bundle of services, it locks the customer in, supposedly, longer than just selling them long distance or that sort of thing.
19893 MS LAWSON: That's exactly what I want to discuss now, the bundled approach to marketing in the local telecom market. I would like to refer to a few more paragraphs in this document. The next one would be at the very top of page 10, at the end of paragraph 27, where you say:
"Today's environment..." (As read)
19894 You refer to, and I am quoting:
"Today's environment in which incumbents and new entrants strive to provide end-to-end services and market their services in bundled packages to the customer..." (As read)
19895 And then later down, in paragraph 29, in the middle there, you say:
"As the margin on individual service offering declines, companies have learned that owning the end user is the only way to be viable." (As read)
19896 And then on to paragraph 30:
"Owning the end user means being the supplier of preference for the end user's entire gambit of telecommunications needs. ILECs and CLECs market their local exchange services with long distance and other services.
In January 2001, Bell announced that it is building a single-bill platform worth $200 million which will facilitate the company's strategy of owning the total customer experience. TELUS is reputed to be working on a similar platform." (As read)
19897 And then, in the next paragraph, you quote BCE's Jean Monty saying on the next page:
"For us, value creation is in owning the customer relationship. It is a strategy that treats the customers as a single total entity with integrated communication needs and wants." (As read)
19898 Now, you would agree with me this is the focus of all companies who are trying to make a go of it in the local telecommunications market?
19899 MR. LINTON: That's correct.
19900 MS LAWSON: This is because, as you have said in your submission, from the CLEC perspective, CLECs will never cover their costs by selling simple local exchange service?
19901 MR. LINTON: There's two components of the costs. There is the capital cost and there is the on-going operating cost of an individual line. As you grow, the capital cost per subscriber decreases. So with volume, you could address that segment of the market that just wanted, for instance, local dial tone.
19902 But the second part of it is the operating cost per, which is what we have to pay for the line and that sort of stuff and so, in our proposal or in our evidence, we are certainly asking for certain incentives to kick start our entry and other people's entry into local competition. But it's also going to have the side effect of allowing us to -- instead of just addressing just the higher-end consumer customers, we will be able to address the middle and lower end with maybe much simpler bundles. So instead of dial tone and voice mail and call waiting and LD, it can be dial tone and a limited amount of LD and it's a lot less money.
19903 MS LAWSON: That's exactly where I wanted to go, Mr. Linton, because that's not what we are seeing right now with your offerings, correct?
19904 MR. LINTON: That's correct.
19905 MS LAWSON: What we see right now is that you are only marketing to the high-end customer, correct?
19906 MR. LINTON: We are marketing to the customer who wants to buy optional services and long distance in a bundle, that's right.
19907 MS LAWSON: The customer who is going to use 100 minutes of long-distance calling per month?
19908 MR. LINTON: Right. But I think there was some -- I think even what the Commission did in their review of the state of competition said that -- or somebody said that the average usage is about 125 minutes per month. Now, that's average.
19909 MS LAWSON: Yes. Let's turn to that right now. Do you have that document with you, gentlemen? So, it's page 44 of the Commission's report, table 5.1, and they have done an analysis of the total customer bills over the period 1995 to 200 where they assumed 125 minutes of long-distance calling per month as an average. Would you say that that's probably a mean average, they just took the total and divided it by the number of customers?
19910 MR. LINTON: I'm sorry, I don't know how they did the calculation exactly.
19911 MS LAWSON: I provided you with a copy of an exhibit in this proceeding. It's The Companies Exhibit 29. Have you got a copy of that, gentlemen? We should have a few copies of that.
19912 This is information that The Companies provided to us, to ARC et al, in response to a question in which we were discussing this very topic. The question I asked was: What is the median? In other words, the fiftieth percentile, the typical customer long-distance usage.
19913 If you look down at the bottom of that first page, you will see Bell Canada's estimate over a six-month period, January to June 2001, they have done the calculations. And if you look in the line "all long distance" the mean, which is the simple average, is 105.6 overall and the median, which is the fiftieth percentile, is 42.5 minutes per month. You see that?
19914 MR. LINTON: Yes.
19915 MS LAWSON: Okay. Now, if we take that 105.6 that is lower than the 125 number that the Commission used in its report. Would you agree with me that the difference may be attributable to the fact that the Commission is looking at industry wide and it may be that competitors have higher users?
19916 MR. LINTON: That is --
19917 MS LAWSON: That is logical?
19918 MR. LINTON: Yes, probable.
19919 MS LAWSON: So the difference between 105 and 125 if we simply apply that to the 42.5, gross it up accordingly, we might get around 50 minutes a month, median, across Canada? Would you agree? Just a rough estimate.
19920 MR. LINTON: Yes, I am not sure how you got to the 105 to the 50.
19921 MS LAWSON: Okay. Well, let's back up and try doing it a different way.
19922 You see the mean -- in Bell's chart, the mean is 105 and the median is 42.
19923 MR. LINTON: Right.
19924 MS LAWSON: So you agree the median is about 40 per cent of the mean?
19925 MR. LINTON: Right.
19926 MS LAWSON: The 25th percentile, which is the use below which 25 per cent of subscribers fall is only 7.4 long distance minutes per month, and that would be about 7 per cent of the mean. Correct?
19927 MR. LINTON: Right.
19928 MS LAWSON: Okay. So let's turn now to the CRTC table. Now, if you took -- let's just take the first line, which is Newfoundland. Okay.
19929 If you took 40 -- you see the long distance spending line, 291, 40 per cent of that would be 116. Correct?
19930 MR. LINTON: Correct.
19931 MS LAWSON: If you then move along to the annual savings category, would you agree, subject to check, that urban users would have saved $38 in Newfoundland looking at the median, but rural users would have actually lost $12. They would be losers coming out of this?
19932 MR. SCOTT: Assuming your math is correct, yes.
19933 MS LAWSON: If you took the 25th percentile, 7 per cent of 291 long distance minutes is 20, subject to check?
19934 MR. SCOTT: Yes.
19935 MS LAWSON: If you apply that figure to the numbers here, we come out with an annual savings, in fact, no savings at all. In both cases urban and rural customers are losing. Urban customers are losing by my calculations 58 -- they are down by $58 and rural are down by $108.
19936 MR. LINTON: If your point is for those customers that don't use a significant or statistically accurate number of minutes, if they are under that, then they haven't saved as much money as the mean.
19937 MS LAWSON: Yes, my --
19938 MR. LINTON: You are right.
19939 MS LAWSON: I'm talking about numbers of customers. So the median is the 50th percentile. Fifty per cent of customers are using less long distance than that.
19940 MR. LINTON: Yes.
19941 MR. SCOTT: Just one point I would add though and perhaps you are going to get to this is we don't know the geographic dispersal of the median user. So it is possible that there are a disproportionate number of rural users who are heavy toll callers and we don't know that based on this information.
19942 MS LAWSON: Right. These are -- I mean we don't know -- I don't know myself and you don't know what the other assumptions were underlying this data in the CRTC report.
19943 MR. SCOTT: That was my point.
19944 MS LAWSON: But to the extent we are making any kind of policy conclusions based on it, I just wanted to run through with you the kinds of differences of magnitude we would be seeing if we are looking at more relevant figures such as medians and like percentiles of population.
19945 Okay. Thank you.
19946 Now, we have established that the median long distance use in Canada is probably somewhere around 50 minutes a month based on these figures. Yet, your offering right now is for 100 minutes of long distance calling. So again, you are targeting obviously the high end of the market?
19947 MR. LINTON: We are targeting people who use optional services and they either use or perceive they use 100 minutes of long distance a month.
19948 MS LAWSON: So you would agree just based on the discussion we have just had, that your package then is only going to be of interest to a minority of residential customers.
19949 MR. LINTON: Yes, it's only -- there is a bunch of minorities. One is the minority of the co-locations that we are built out in, and then there is a second minority within that is the people who feel that they want to purchase that bundle of products. Then the third minority is the people who want to buy it from us.
19950 MS LAWSON: So looking at that second minority, I mean where you are built out your offering right now just doesn't make sense for the majority of residential customers.
19951 MR. LINTON: Yes, and that doesn't mean we are always going to stay there. We want to -- the purpose of building out these co-los and investing in capitals, we want to service a lot more subscribers. To do that we have to build up our subscriber base, which gets our capital cost down and certain of our backhaul costs go down with volume. Then the second thing is we have asked in our evidence that there be certain initiatives put in place that are going to allow us and others to get into the local market much more significantly, which is going to allow us to offer services, you know, I won't say down market but to people who use less telecommunication services.
19952 MS LAWSON: But you are not really interested in those customers, Mr. Linton? You are not targeting them? You are not interested in the low-end customers who is not going to buy features and lots of long distance?
19953 MR. LINTON: I am not interested in them today because I would lose money on every one of them. Tomorrow I could be interested in them for, again, a couple of reasons.
19954 You have got to remember that what I do is I build out a co-lo and a co-lo has a lot of capacity in it. So the more customers I put in that co-lo, then my cost of building it goes down. Then I have to pay a per line charge. So that is independent of my volume. Then I collect all that stuff and I backhaul all of those calls to my switch.
19955 Well, I can put 4,000 lines on a DS-3, I think it is now. So I have got to continue to sell more and more customers per co-lo. So if I could get, you know, the cost of the loop down and the service charge down, then absolutely that is going to incent me to sell more and more on my existing geographic footprint.
19956 MS LAWSON: Okay. So what matters from your perspective is that you are making money overall on your customers. Right? Is that what I take from this?
19957 MR. LINTON: Yes, what matters is I make the most money off of my capital investment which is geographically focused.
19958 MS LAWSON: To the extent that you are looking at -- that you are targeting particular customers or types of customers, am I right that you look at the total customer value in terms of all of the local services you can sell to that customer? I mean that is what you seem to be doing. You are packaging it. You are trying to get the highest total customer value you can.
19959 MR. LINTON: I am trying to get -- yes. Everybody wants to get the most revenue they can out of each customer. That is true. And they want to do that by selling them, you know, more and more services that they either need or think they need.
19960 MS LAWSON: Right. So would it not follow that to the extent that local rates need to be regulated, the regulator should be comparing the total cost of providing local basic and discretionary services with the total revenues from those services. That is how they are being sold in packages. That is the way the market operates.
19961 MR. LINTON: You have to give me the first part of the question again. The second part is are they being sold as bundles in the marketplace today. Yes.
19962 MS LAWSON: Okay. So then the first part is doesn't it make sense then from the regulatory perspective to look at the total customer value and compare the costs and revenues looking at the whole package?
19963 MR. LINTON: Well, our evidence is and our belief is that if there is a competitive marketplace across local services and they are relatively limited, no one is going to invent too many new ones, what is going to happen is that there is going to be choice and what is going to lead to that choice is that there is going to be, in fact, competitive regulation over rates.
19964 In other words, the competition will allow rate decreases where it can be justified by costs. For instance, you could argue now that some of the optional services are really quite profitable and it's quite possible that in a regulated environment some of those optional services might get discounted so that you can offer more services at the lower level, you know, so that competition, in effect, is going to be your regulator.
19965 MS LAWSON: But if we are not yet there, I mean before we get to that point and during this time when the regulator has to set rules for prices and determine just and reasonable rates, is it appropriate in your view that they take into account the costs and revenues of optional discretionary services when they are looking at the costs and revenues of local phone service?
19966 MR. LINTON: Not really because not everybody wants those. I mean they are optional because you can chose to get voice mail from us or the telephone company or you can go out and buy a little box at Radio Shack or you can say I don't want to have voice mail. So they really are completely optional services. So I don't think that is -- so the answer is no.
19967 MS LAWSON: But they are not optional in the bundles you are providing right now. I mean in order to get service from Sprint, one has to buy a feature.
19968 MR. LINTON: But we are not here to regulate us. We are just, you know, we are trying to get into the market so that we could have the opportunity in the future to be in a position where somebody wanted to regulate us.
--- Laughter / Rires
19969 MS LAWSON: Thank you, Mr. Linton.
19970 Moving to your proposal, would you agree, first of all, with AT&T, for example, that the benefits of the move to price cap regulation should be shared among all stakeholders, not just ILECs and CLECs?
19971 MR. SCOTT: Yes.
19972 MS LAWSON: But I understand under your proposal, Mr. Scott, and I'm referring specifically to paragraph 127, and I'm quoting here:
"CallNet does not propose to use productivity gains to directly provide benefits to consumers through retail rate reductions. Rather, CallNet submits that with the adoption of its proposal, consumers will realize significant long-term benefits through the promotion of competition." (As read)
19973 So I take it when you say that ratepayers should get a share of the benefits of the move to price caps, you are saying they shouldn't get a direct share, they should just get an indirect, some kind of indirect benefits.
19974 MR. LINTON: Our belief is, just like, you know, long distance, competition will result in consumers getting direct benefit. You know, we can talk about choice and innovation but there will be a pricing benefit to consumers if there is a competitive marketplace in the local -- the provision of local services. Then I think with the tag-along idea that we get to spread that out to all areas.
19975 MS LAWSON: Well, let's just focus on the majority of customers right now, Mr. Linton, if we can, the ones that are not going to be buying your bundles and packages because it doesn't make sense for them. They don't use enough of the service for it to make sense. Let's just look at the benefits to them that would flow from your proposal.
19976 Now, you have said it numerous times already today that under your proposal, the ILECs would be permitted to keep their productivity gains in order to offset the reductions to the revenues resulting from your competition service pricing proposal. You have explicitly said here in your evidence that none of those productivity gains, the measurable benefits from the move to price cap regulation should flow directly to consumers. Correct?
19977 MR. SCOTT: That's correct. We have not proposed any mandated price reductions. Rather we have said that, in effect, the Commission should invest in competition and have faith that that competition will bring about direct benefits to consumers.
19978 MS LAWSON: So it's a question of faith.
19979 MR. SCOTT: A well-founded one, yes.
19980 MS LAWSON: Basically, all of the measurable gains from this move to price cap regulation would be shared under your proposal between ILECs and CLECs.
19981 MR. SCOTT: By measurable, do you mean that we are not proposing that a specific part of the productivity offset be applied to a mandated rate reduction then, yes, that's correct.
19982 MS LAWSON: You are proposing that the Commission structure the next price cap regime so that the productivity gains flow exclusively to ILECs and CLECs with nothing to retail customers.
19983 MR. SCOTT: I think I answered the question.
19984 MS LAWSON: Okay.
19985 MR. SCOTT: The retail customers will benefit through the Commission and government policy objective of investing in competitions.
19986 MS LAWSON: And, Mr. Scott, we asked you in an interrog, which is CallNet(ARC et al)-3, to identify and quantify to the extent possible these benefits and to give us your best estimate as to the proportion of residential customers who actually have competitive alternatives available to them.
19987 All that you gave us in response was that you expect that your proposal will be to a faster rollout of competitive alternatives, facilitation of the establishment of real competitive alternatives and thus innovation, choice and price competition in the residential local service market.
19988 You didn't provide any quantification or best estimate as to the proportion of customers who would actually benefit from this.
19989 MR. LINTON: I can do that. By the end of this year we will have built out to about a hundred collocation sites. It will cover a little over two and a half million residential units of the total population of 11-point-something million residential units, so we will be a little over 2.5 million of the 11 million.
19990 We have -- you know, on the assumption that the rules or our evidence is accepted and there is an incentive to go into the local market, we have plans to build out to 350 collocations. Three hundred and fifty collocations will give us a footprint of 50 per cent of the residential homes in Canada, homes and apartments and everything else.
19991 After that, there's actually 3,000 collos that cover the other 50 per cent. The price to build out a single collo, you know, is in the hundreds of thousands of dollars. You are limiting your potential after that.
19992 Our plans are, you know, if everything goes well, we could build out to 50 per cent within 18 months. We are at about 2.5 now.
19993 MS LAWSON: And when you say if everything goes well --
19994 MR. LINTON: Yes.
19995 MS LAWSON: -- your plans, I take it these plans are going to go ahead at current rates.
19996 MR. LINTON: These plans aren't going to -- what we are doing now, we have built out to the 100 collos because, (a) a lot of them were built, (b) the last time we went into this market we purchased six or seven Lucent switches, so we have made an investment in switching technology already. It's sitting there not switching very much.
19997 You know, we own 300,000 voice mailboxes and we have embedded costs that we are utilizing right now. For us -- the other thing is we are testing our offerings. We are testing the acceptance of our products in the marketplace. We are judging the competitive response, you know, and how the winbacks are going to work in local or if they are going to work at all.
19998 Based on that and then based on our evidence here and our request for certain changes to make this a competitive environment, then we continue the buildup.
19999 MS LAWSON: But you don't need retail rate increases to continue with your plans.
20000 MR. LINTON: Don't need retail rate increases to continue the plans. Need changes to the cost structure.
20001 MR. BRAZEAU: And it's not part of our proposal.
20002 Sorry. I'm losing my voice. I just mention that it's not part of our proposal, rate increases.
20003 MS LAWSON: And I take it given the tag-along mechanism part of your proposal, you are concerned about the ability of ILECs to raise rates initially and then lower them, say, in a strategic, competitive manner.
20004 MR. SCOTT: Yes, we are concerned about targeted pricing.
20005 MS LAWSON: And that's because that could be a real problem for you if you go into a market and then on the basis of certain price level and they are able to underprice you later on.
20006 MR. SCOTT: Yes. That's one side of tag-along. I hope I don't become guilty of repeating the two sides to tag-along too many times, but I will do it at least once more.
20007 That is it has the attraction of, as you put it, limiting targeted pricing practices. It also has the benefit of extending, if you will, the benefits of competitive entry to all parts of the ILEC's territory.
20008 MR. BRAZEAU: Just to add. I think the principal purpose of tag-along, although it certainly has an effect, as Mr. Scott mentioned, on targeted pricing, the principal purpose of us recommending it was to try to find a creative way to ensure that all Canadians got to taste the benefits of competition, even though they didn't live in, you know, downtown Toronto.
20009 That was really the first purpose of our proposal. Now it has been recognized that it also may limit the incumbent's flexibility for lowering prices in urban areas. I don't think the revenue impact is that significant. Maybe I'm wrong.
20010 Again, the first purpose was to ensure that every consumer in Canada gets the benefit from competition.
20011 MS LAWSON: And that's basically it, right, in terms of benefits to residential customers under your proposal. It's competition. That's it.
20012 MR. SCOTT: You would characterize it as that's it. I think the proposal is that consumers will benefit through competition and certainly that's my understanding of government policy today. It is certainly my understanding of the Commission's objectives.
20013 We are not at all shy in saying that we should rely on competition to bring about benefits to consumers.
20014 MS LAWSON: But basically, Mr. Scott, what you are asking in your proposal, you are asking ordinary consumers to forego their share of the productivity gains from the move to price caps in order to get competition.
20015 MR. SCOTT: Not forego. Competition will come about under our proposal, we hope very quickly. I would rather characterize it as an investment in competition.
20016 MS LAWSON: It's an investment in competition. Do you have any idea of the percentage of consumers who would choose to pay more than otherwise in order to get more choice?
20017 MR. SCOTT: I'm sorry, could you repeat the question?
20018 MS LAWSON: Do you have any idea of the proportion of residential consumers out there of telephone service who would choose if you asked them, if you gave them the choice of two prices, say, $20 and $25, $20 without any competition from the ILEC or $25 with Sprint Canada out there, CallNet. Do you have any idea who --
20019 MR. SCOTT: Well, the short answer is no, I don't. Perhaps Bill may be aware if we have done any market research of that type.
20020 I think we have got to come back to first principles here. Under our proposal we are putting a great deal of trust, confidence if you will, in competitive markets. You know, I think it's a calculated investment.
20021 If you compare what we are proposing, for example, to what the ILECs are proposing, essentially the ILECs are asking for complete pricing flexibility and keep all of the benefits. In fact, I think it's probably not unfair to characterize the first price cap period in that way.
20022 We are saying let's move this along and make sure that there is a competitive choice. I think a lot of customers will take up the opportunity to change suppliers. I'm sure, as fine companies as they are, not everybody loves the ILECs and they will hopefully, you know, rabidly pursue the opportunity to be supplied by someone else.
20023 MS LAWSON: Right, but Mr. Scott, to the extent that there was a cost to that to consumers, they were never given a choice in it. Right? They were never given a choice as to whether to have competition.
20024 MR. SCOTT: In most places --
20025 MS LAWSON: Is the decision made for them?
20026 MR. SCOTT: -- they still don't have a choice.
20027 MS LAWSON: But your proposal, you are saying in your proposal that consumers will be better off --
20028 MR. SCOTT: I believe consumers will be better off.
20029 MS LAWSON: -- foregoing the productivity rate increases.
20030 MR. SCOTT: I do believe that.
20031 MS LAWSON: That's your position. Okay. Just one final question, gentlemen.
20032 Do you agree that when we are talking about sharing the benefits of this move to price cap regulation that benefits should flow to lower end consumers as well as to higher end consumers?
20033 MR. LINTON: You mean the low usage consumers.
20034 MS LAWSON: Yes.
20035 MR. LINTON: Because I know, you know, if you look at our company, some of the -- looking at these statistics again, the overseas long distance calls in our company are huge. I don't know how to say this really tactfully without getting in trouble, but you know those aren't the people that are buying our very top end products.
20036 You know, I think those people have seen huge benefits out of competition because of all the programs to call the -- you know, all these places that they are only one generation from. Anyway, I have no idea what the question was. I read that five minutes ago.
20037 MS LAWSON: Well, I think you have provided a good example of one type of higher end customer. I'm sorry for using terms that are not defined. Yes, indeed, what I meant was higher usage customers.
20038 My question is would you agree with me that when the Commission is deciding what to do in this case and how the benefits should be distributed among the various stakeholders that benefit -- some benefits at least should flow to the lower usage customers as well as to the higher usage customers.
20039 MR. SCOTT: Yes, that's correct, and I think competition and competitive markets have a very practical way of tailoring themselves over time to fit most profiles.
20040 If there is demand for a product from more modest consumers of telecom services, as Mr. Linton said, if there is a market there to serve, we will serve it. So I think competitive markets at the end of the day do turn out to do just that.
20041 Yes. The answer to your question is it should benefit all consumers.
20042 MS LAWSON: Thank you, gentlemen.
20043 Those are all my questions, Mr. Chairman.
20044 THE CHAIRPERSON: Thank you, Ms Lawson.
20045 We will now turn to Commission Counsel Moore.
20046 MS MOORE: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
20047 MS MOORE: Could you turn up Volume 9 of the transcript, please. If you could turn to page 2383. I am going to focus on the passage starting at line 16 on this page, but to contextualize, and you probably heard me discussing this earlier, these were some comments made by Mr. Grieve with respect to the concept of facilities-based competition.
20048 Starting at line 16 he says:
"...all you need to have competition is the assurance that there is the ability of these companies to construct their own facilities and where there isn't, or where no other facilities are available, there are essential facilities."
20049 I wonder if you have any comments on that statement.
20050 MR. BRAZEAU: I think our proposal would disagree with Mr. Grieve's, at least my understanding of his proposition. I think what we have said in our proposal is that consumers are no longer looking at communication services as long distance or local and we need to provide a bundled service or bundled product to the consumer because that is what they want. Therefore we need to be able to compete in that space. Certainly the incumbents are certainly marketing their services based on a bundled product.
20051 So, you know, we -- and this is what our proposal requests is that we be given access at incremental cost to all the inputs we need in order to provide that bundled product.
20052 MS MOORE: Some parties have discussed the idea that on a transitional basis of some undefined period that really the notion of facilities-based competition would involve a hybrid of a CLEC owning facilities and having some type of leasing or even resale of other elements.
20053 Do you agree with that general idea?
20054 MR. LINTON: Absolutely. I don't think it's probable or viable that people like us or AT&T go out and bury more copper wire into neighbourhoods. So the use of the loop setter installed is critical and where we differentiate ourselves is the DSL-type equipment and the services that we provide customers over that loop.
20055 So it is going to be a hybrid and will continue to be.
20056 MS MOORE: Now, when CallNet encounters difficulties, if it does, with gaining access to rights-of-way or to buildings, in your view, is resale a viable alternative in those particular types of situations?
20057 MR. LINTON: You have to break that down into a number of components. What we are trying to do is we are trying to build what are called metro area networks, which connect all of our co-los to our switches by city. In those -- we built one in Montreal because we swapped a bunch of fibre with Videotron, and Videotron had all the rights-of-way. In Toronto we were with our friends from TELUS and Group Telecom in the MFN build and they had terrible problems with rights-of-way, plus they had economic problems so they are just about out of business.
20058 So there is no -- and there is no alternative to that. So we have to buy loops or backhaul from Bell. So for us on these large metro builds we always go in with somebody else and somebody else is usually handling the rights-of-way.
20059 The second part of this is access. Access especially in buildings and in downtown cores to get into buildings is a real problem. In some areas there is competition and we do resell, like Group and AT&T. But their footprint, you know, I don't know how mad they are going to get to me, but their footprint is very small. Once you get outside the absolute downtown core of Toronto and Montreal and Vancouver and a little bit of Calgary, maybe there is a little more, but there is nothing and there we have to resell.
20060 So rights-of-way are always a problem for -- in access and resell. The only real possibility is through the ILECs.
20061 MS MOORE: So I think you are saying that in some situations you do resale because of difficulties and I wonder is -- do you consider that viable? Are you able to do so profitably, for example?
20062 MR. LINTON: In certain situations, depending on how much value you are adding, yes, you can do that. Now, you got to remember that in the big cities most of the landlords have put cable into their buildings, like Cadillac Fairview, and who are the guys that we deal with? Love? What is his name? Oxford Properties.
20063 So what we end up doing is we end up trying to go to the building owner and using their facilities and trying to connect their facilities. But resell as an option, we will continue to use it.
20064 Now, as you know, in our evidence what we are doing is we are asking for that portion of access to be provided to the carrier segment at cost.
20065 MS MOORE: Thank you.
20066 I have a question relating to paragraph 106 of your evidence. Just to contextualize this, actually, in paragraph 105 you submit that there are two productivity pools of money from which the Commission could draw to realize certain policy objectives. Then in paragraph 106 you state that:
"The second pool of money results from the rolling over of exogenous factors from the first price cap regime that would otherwise expire or be modified." (As read)
20067 You estimate that accounting for the effects of these roll overs would generate approximately $300 million a year. I'm wondering if you could break down this $300 million figure by exogenous factor to give some indication of how you derived that?
20068 MR. BOWLES: Perhaps you could refer to paragraph 109. We did recognize that there were a number of exogenous events that were involved in this roll over and they are listed on page 49. The biggest one of those is contribution and accordingly, the $300 million is actually only accounted for by the change in contribution, the roll-over of that exogenous event where the ILECs were allowed to recover money given that the contribution rate was 4.5 per cent, and that was going to be reduced to 1.5 per cent.
20069 So the effect of that exogenous roll over was on the order of $300 million. We didn't go on to actually estimate the effects of the other ones. They would be significant but certainly smaller than the contribution event.
20070 MS MOORE: Thank you.
20071 Now, in your evidence at Appendix H, perhaps you would like to turn that up. This is where you are providing various recommendations for remedies for quality of service indicator misses. If you could turn to page 2 of the appendix, you make a recommendation for indicator 1.16 and you state that:
"A remedy of $10,000 per POY, or point of interconnection, would be appropriate where the standard is missed." (As read)
20072 Now, going back to your evidence at paragraph 179, you state that:
"In the case of bill and keep trunk provisioning, CallNet has chosen arbitrary numbers that are sufficiently high enough to ensure the ILECs maintain their service commitments but are not unreasonable per se." (As read)
20073 So you put forward this notion of numbers being arbitrary but not unreasonable per se. I wonder with respect to the number that you have chosen for indicator 1.16, that is $10,000, how did you come to the conclusion that that would not be unreasonable even if it is perhaps arbitrary?
20074 MR. BOWLES: Well, the trunks that are referred to in this, the bill and keep interconnection trunks are, of course, critical to our operation. If they aren't there, we aren't in business. Therefore it was, as you say, the value, the $10,000 that we chose was certainly -- to a certain extent arbitrary and judgmental. But given the significance of these trunks, we felt that, you know, that value, that level of penalty was appropriate given the circumstances.
20075 MS MOORE: Can you put forward any alternative ways that that particular indicator might be dealt with? Does anything come to mind other than picking a number that you, yourself say perhaps is arbitrary?
20076 MR. BOWLES: I can't think of anything off the top of my head. It seems that the financial penalty is the most appropriate.
20077 MS MOORE: Thank you.
20078 Those are my questions, Mr. Chairman.
20079 THE CHAIRPERSON: Thank you, counsel.
20080 We do have a couple of questions from a couple of the Commissioners. So we will turn first to Commissioner Noël.
20081 COMMISSIONER NOËL: Well, they are more clarifications than questions and you will have to deal with my English, unless you want to answer in French. You are free to do so.
20082 I don't know to whom I will address my questions so I will start with Mr. Linton.
20083 I want to bring you back to the questioning that you had with Mr. Kidd before lunch and the discount issue.
20084 Is it fair to say that an overall percentage discount depends -- he was asking you if you had -- if you can come up with a figure like the AT&T, not call discount proposal 70 per cent. If you could come up with one figure that would encompass your whole proposition.
20085 Would it be fair to say that the percentage that you put on your overall costs would depend heavily on the mix of services that you purchase from the incumbents and that it may vary from time to time?
20086 MR. LINTON: Yes, it would. Because -- if and when we are very successful in local for instance, that would have a greater impact on the loop savings which is just the markup. So it depends on where we concentrate and what services we get. If it's more retail type services, we believe that the retail change to get down to cost will be higher than say 25 per cent.
20087 COMMISSIONER NOËL: So that is the reason why you could not come up with one final or definitive answer of say 65 per cent overall.
20088 MR. LINTON: That is correct. But we did say, I believe that based on our estimate for 2000 it was in the 140 to 160 million range. Isn't that what we said this morning? That is what I said this morning.
20089 COMMISSIONER NOËL: Okay. The other question --
20090 MR. LINTON: I'm sorry. I said 40 to 60 per cent. There is a difference.
20091 COMMISSIONER NOËL: The other question I have is concerning the tag-along proposal. Again, I don't know who wants to answer this one.
20092 But what I understand of your proposal is that the rural, let's say the rural subscribers for lack of a better term, the rural subscriber would reap, under your proposal they would reap the benefit of local competition without actual local competition. It would be sort of a virtual competition.
20093 MR. BRAZEAU: That is a very good description it, Commissioner Noël.
20094 COMMISSIONER NOËL: I have no other questions.
20095 THE CHAIRPERSON: Thank you, Commissioner Noël.
20096 Commissioner Cram.
20097 COMMISSIONER CRAM: Thank you.
20098 Mr. Linton, I heard you say that by December of this year where you will be and then you gave no date as to when you would be at 350 co-location sites and have a footprint of 50 per cent. When? Was it 18 months or did I miss it?
20099 MR. LINTON: We can do it in 18 months, yes.
20100 COMMISSIONER CRAM: Any feasible chance that by the end of four years, even if God were in her heaven and you got everything you wanted, that the other 50 per cent you would ever get out there?
20101 MR. LINTON: We would never get to 100 per cent, no. But we would probably on a fill-in basis, you know, if the economics are there, go beyond 50.
20102 COMMISSIONER CRAM: Would it be fair to say that that same 50 per cent that you may or may not get to peripherally, would be the same 50 per cent that in all likelihood any alternate provider, cable, any of these -- anybody that -- a new entrant, would also be unlikely to reach those people?
20103 MR. LINTON: Well, right now there isn't anybody but us and I don't see any in the foreseeable future. But if they are like us then I don't see them going after, whether it's the last 50 per cent or the last 25 per cent. No.
20104 COMMISSIONER CRAM: So would it make sense that we took smaller bites rather than bigger bites and said in that 50 per cent, which may be -- at least in my area of the world it's about high cost areas -- would it be fair for us to say for now we leave that exactly where it is and essentially bifurcate the market into -- we know there is not going to be any competition there for right now. We may leave it the way it is. There may be a minor subsidy, and concentrate on the other area.
20105 Would that be maybe an interim step for the next four years that might be feasible?
20106 MR. LINTON: I think in effect, if you accept our idea of this tag along --
20107 COMMISSIONER CRAM: I hear you on that one.
20108 MR. LINTON: -- you are doing that anyway.
20109 COMMISSIONER CRAM: Yes.
20110 At the end of four years, how do we assess -- what criteria do we use to assess whether some of price cap is a success or not -- or 5 years? I mean, I am not, you know --
20111 MR. LINTON: The next time we get together. I think you have got to do it based on the -- you are going to do reports on competition. So that is going to tell you trends.
20112 You are going to want to see the major segments of telecom all having a reasonable percentage that are in the hands of competitors, you know, that is 20 or 30 per cent. And you are going to want to see reasonable economic viability on behalf of all the participants. And you are going to want to be able to compare rates, business rates and residential rates to other jurisdictions and convince yourself that they are, at least, equitable or better.
20113 COMMISSIONER CRAM: Thank you.
20114 Thank you, Mr. Chair.
20115 THE CHAIRPERSON: Thank you, Commissioner Cram.
20116 I noted we are dealing with God who is a female, but it is "Son of Price Caps." I don't know whether that is a pejorative reference or not.
20117 Sorry, Commissioner Noël has another question.
20118 COMMISSIONER NOËL: Just a small, very short one.
20119 We have heard of a number of presentations saying that competition is not necessarily -- doesn't necessarily mean a huge number of competitors. What is your magic figure?
20120 MR. LINTON: My magic figure is that competitors should have a minimum of 30 per cent of market segments. So I don't think competition, having 2 per cent of local, when local is now just a bundled product within local and long distance, you know, there isn't really any competition there any more.
20121 MR. SCOTT: And if you mean number of competitors --
20122 COMMISSIONER NOËL: What I mean is, how many competitors?
20123 MR. SCOTT: Well, more than two. And I think Mr. Linton's point is as long as there are multiple competitors then you really want to look at their comparative success. I mean, their ability to gain market share or their ability to earn at least a sufficient return to be sustainable.
20124 MR. LINTON: We are going to do what we said we would never do, which is answer a question four times.
20125 But, one more thing: the competitors, the way they are developing, you know, they are going after different spaces.
20126 TELUS has got a strategy that they will give you, which is not to compete in all services. We are in certain ones. AT&T are in others.
20127 COMMISSIONER NOËL: Let's say in a given market.
20128 MR. LINTON: In a given market you need three, at least.
20129 COMMISSIONER NOËL: Thank you.
20130 THE CHAIRPERSON: Thank you, Commissioner Noël.
20131 Well, gentlemen, that concludes the questioning for this panel. I want to thank you for your participation in our proceeding. You may step down.
20132 MR. LINTON: Thank you, Mr. Chairman.
20133 THE CHAIRPERSON: I think given the hour that will conclude our work for the day.
20134 Mr. Daniels.
20135 MR. DANIELS: Thank you, Mr. Chairman.
20136 I would just like to bring it to your attention that there has been some back room discussion about changing the order. I know that the Telecom group is scheduled to appear first tomorrow morning, but Rogers is prepared to go ahead of us, considering the late arrival of some of our panel members.
20137 I know that -- I think most of the parties in the room have had this discussion, but I thought I would check with you and put it on the record to see if anyone had any problem with Rogers going first in the morning, followed by Group Telecom.
20138 THE CHAIRPERSON: Well, I was going to raise that, Mr. Daniels, in any event.
20139 Had we finished early enough, we were going to start with Rogers today. We will not go to the next party today. We will, though, commence tomorrow with RCI, followed by GT Group Telecom. It would be my proposal that we go until we finish tomorrow. Until we drop.
20140 Mr. Secretary.
20141 MR. SPENCER: Thank you, Mr. Chairman. I have 10 documents.
20142 The first document is Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related issues, Written Final Argument of CallNet. This will be reintroduced as TELUS Exhibit No. 17.
EXHIBIT NO. TELUS 17: Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related issues, Written Final Argument of CallNet
20143 MR. SPENCER: Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related Issues, Written Final Argument of AT&T Canada Corp. and AT&T Canada Telecom Services Company which will be introduced as TELUS Exhibit No. 23.
EXHIBIT NO. TELUS 23: Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related Issues, Written Final Argument of AT&T Canada Corp. and AT&T Canada Telecom Services Company
20144 MR. SPENCER: PN 99-6, Review of Contribution Collection Mechanism, Transcript of Oral Hearing, TELUS Exhibit No. 24.
EXHIBIT NO. TELUS 24: PN 99-6, Review of Contribution Collection Mechanism, Transcript of Oral Hearing
20145 MR. SPENCER: We also have TELUS Response to CRTC Exhibit No. 28, which will be TELUS Exhibit No. 25.
EXHIBIT NO. TELUS 25: TELUS Response to CRTC Exhibit No. 28
20146 MR. SPENCER: CallNet Enterprises Inc., Part VII Application requesting that the Commission ensure the effective implementation and enforcement of the local exchange service, winback rules, ARC et al, Exhibit No. 15.
EXHIBIT NO. ARC 15: CallNet Enterprises Inc., Part VII Application requesting that the Commission ensure the effective implementation and enforcement of the local exchange service, winback rules
20147 MR. SPENCER: CRTC undertaking to the company regarding the overall formula, CRTC Exhibit No. 38.
EXHIBIT NO. CRTC 38: CRTC undertaking to the company regarding the overall formula
20148 MR. SPENCER: Undertaking to TELUS regarding the overall formula will be CRTC Exhibit No. 39.
EXHIBIT NO. CRTC 39: Undertaking to TELUS regarding the overall formula
20149 MR. SPENCER: Undertaking to AT&T regarding an alternative to the ILEC's digital network access service, CRTC Exhibit No. 40.
EXHIBIT NO. CRTC 40: Undertaking to AT&T regarding an alternative to the ILEC's digital network access service
20150 MR. SPENCER: Undertaking to CallNet regarding their response to Interrogatory The Companies(CRTC)25Sept01-4200, CRTC Exhibit No. 41.
EXHIBIT NO. CRTC 41: Undertaking to CallNet regarding their response to Interrogatory The Companies(CRTC)25Sept01-4200
20151 MR. SPENCER: Finally, undertaking to ARC et al regarding Consumer Bill of Rights, CRTC Exhibit No. 42.
EXHIBIT NO. CRTC 42: Undertaking to ARC et al regarding Consumer Bill of Rights
20152 MR. SPENCER: Thank you.
20153 THE CHAIRPERSON: Thank you, Mr. Secretary.
20154 Just on that point, just to be serious, judging by the hour showing, I think we can easily finish RCI and GT Group Telecom within a reasonable working time tomorrow. So that is why I suggested that I think it would be in all our interest if we work to complete cross-examination in this phase of our proceeding tomorrow.
20155 With that, I will see you at 9:00 a.m. tomorrow morning.
--- Whereupon the hearing adjourned at 1645, to resume
on Wednesday, October 17, 2001 at 0900 / L'audience
est ajournée à 1645, pour reprendre le mercredi
17 octobre 2001 à 0900
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