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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

Conference Centre

Portage IV

Outaouais Room

Hull, Quebec

Centre de Conférences

Portage IV

Salle Outaouais

Hull (Québec)

October 17, 2001 le 17 octobre 2001

Volume 13


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

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participant à l'audience publique.

Canadian Radio-television and
Telecommunications Commission

Conseil de la radiodiffusion et des
télécommunications canadiennes

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


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


Michel Spencer Hearing Manager and Secretary / Gérant de l'audience et secrétaire
Karen Moore

Natalie Turmel

Legal Counsel /

conseillères juridiques

Conference Centre

Portage IV

Outaouais Room

Hull, Quebec

Centre de Conférences

Portage IV

Salle Outaouais

Hull (Québec)

October 17, 2001 le 17 octobre 2001


SWORN: DAVID J. WATT 3176 / 20165
Mr. Engelhart


3176 / 20166
Mr. Jerome


3177 / 20180
Ms Lawson

ARC et al

3197 / 20319
Commission counsel

Ms Moore

3207 / 20377
Commission 3211 / 20398
Mr. Daniels

GT Group Telecom

3216 / 20436
Mr. Kidd

The Companies

3219 / 20471
Mr. Lowe


3249 / 20645
Mr. Ryan


3253 / 20677


CRTC 43 CRTC undertaking to GT Group Telecom to provide a list of all services that Group Telecom provides to carriers, resellers and indicate whether the company also provides these services to retail customers 3315 / 21106
TELUS 26 TELUS response to undertaking requested by RCI, transcript reference Volume 9, paragraph 14872 3316 / 21107
TELUS 27 TELUS response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 10, paragraph 16005 3316 / 21108
TELUS 28 Response to CRTC Exhibit No. 26 3316 / 21109
TELUS 29 TELUS Response to CRTC Exhibit No. 29 3316 / 21110
TELUS 30 Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 8, paragraph 13581 3317 / 21111
THE COMPANIES-66 The Companies response to CRTC 3317 / 21112
THE COMPANIES 67 The Companies response to CRTC Exhibit No. 31 3317 / 21113
THE COMPANIES 68 The Companies response to CRTC Exhibit No. 17 3318 / 21114
THE COMPANIES 69 The Companies response to undertaking requested by GT Group Telecom, transcript reference, Volume 7, paragraph 11964 3318 / 21115
THE COMPANIES 70 The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 12495 3318 / 21116
THE COMPANIES 71 The Companies response to undertaking requested by GT Group Telecom, transcript reference Volume 7, paragraph 12101 3319 / 21117
THE COMPANIES 72 The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 2, paragraph 3301 3319 / 21118
THE COMPANIES 73 The Companies response to undertaking requested by CallNet Enterprises Inc., transcript reference Volume 7, paragraph 11626 3319 / 21119
THE COMPANIES 74 The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 12501 3320 / 21120
THE COMPANIES 75 Comparison of recent forecasts of growth in real Canada GDP 3320 / 21121
THE COMPANIES 76 GT "It's a Wonderful and Challenging Marketplace" 3320 / 21122
GT GROUP TELECOM 15 CV of Stephen Shoemaker 3321 / 21123
AT&TC 22 Stock performance of Group Telecom, October 1999 to October 2001 3321 / 21124
AT&TC 23 Group Telecom selected performance statistics 3321 / 21125
AT&TC 24 Securities and Exchange Commission, Form 20-F 3321 / 21126
AT&TC 25 UBS Warburg, GT Group Telecom Inc., October 5, 2001 3321 / 21127
AT&TC 26 Salomon Smith Barney "Downgrading to Neutral and Lowering Price Target to a Dollar 3322 / 21128
AT&TC 27 Goldman Sachs "Removing GT Group Telecom from the U.S. Recommended List 3322 / 21129
ARC 60 "Finally the Monopoly is Over," CallNet brochure on residential local service 3322 / 21130

Hull, Quebec / Hull (Québec)

--- Upon resuming on Wednesday, October 17, 2001

at 0903 / L'audience reprend le mercredi

17 octobre 2000 à 0903

20156 THE CHAIRPERSON: We will return to our proceeding now.

20157 Before we do, are there any preliminary matters anyone wishes to raise? No.

20158 Mr. Secretary, do you have anything at this time? No?

20159 MR. SPENCER: Later.

20160 THE CHAIRPERSON: Then we will turn to the next panel of witnesses -- witness, I guess, to be cross-examined, that being RCI.

20161 Mr. Engelhart.

20162 MR. ENGELHART: Thank you, Mr. Chairman.

20163 RCI is presenting Mr. David Watt, the Vice-President, Business Economics, for RCI as its expert witness. Mr. Watt's CV was filed with the Commission and copied to all parties by letter dated 21 September 2000.

20164 Assisting Mr. Watt, in the back is Mary Coates, Manager, Economics, Rogers Wireless.

20165 Mr. Watt is ready to be sworn.



20166 MR. ENGELHART: Mr. Watt, are your qualifications and experience as set out in your CV?

20167 MR. WATT: Yes, they are.

20168 MR. ENGELHART: Was the evidence filed in this proceeding by RCI in its interrogatory responses prepared by you or under your supervision?

20169 MR. WATT: Yes, it was.

20170 MR. ENGELHART: Is the evidence in those interrogatory responses true to the best of your knowledge and belief?

20171 MR. WATT: Yes, it is.

20172 MR. ENGELHART: Have there been any developments since RCI filed its evidence and interrogatory responses that would affect your evidence and testimony?

20173 MR. WATT: No.

20174 MR. ENGELHART: Mr. Chairman, Mr. Watt is ready to be cross-examined.

20175 THE CHAIRPERSON: Thank you, Mr. Engelhart.

20176 Good morning, Mr. Watt, Ms Coates. Welcome to our proceeding.

20177 We will turn now to the first party to cross-examine and that is TELUS.

20178 Messrs Lowe and Jerome.

20179 MR. JEROME: Thank, you, Mr. Chairman.


20180 MR. JEROME: Good morning, Mr. Watt.

20181 MR. WATT: Good morning.

20182 MR. JEROME: I just have a few questions for you, Mr. Watt. I hope you will forgive my ignorance, I am not very familiar with the wireless or cable industry, but I guess I'm not too clear on who exactly you are representing here.

20183 I notice that the evidence was filed by Rogers Communications, but in certain responses to interrogs you provided answers from Rogers Wireless.

20184 I wonder if you could clarify that for me.

20185 MR. WATT: Well, we are here as Rogers Communications Inc. and we are representing as well Rogers Wireless Inc. We are the majority shareholder of Rogers Wireless Inc.

20186 MR. JEROME: Okay. So RCI is the majority shareholder of Rogers Wireless then.

20187 Does RCI or Rogers Wireless provide local exchange service anywhere in Canada?

20188 MR. WATT: It does not provide CLEC service anywhere in Canada. Obviously Rogers Wireless does provide local wireless service, but we do not provide CLEC service anywhere in Canada.

20189 MR. JEROME: Do they intend to in the near future, or is there any plan for either of those companies to provide local voice service?

20190 MR. WATT: Dealing with the cable side first, our expectation would be that we would begin to roll out an IP-based residential telephony service in commercial form, hopefully by late 2003.

20191 However, we are cautious with respect to this date because, as was quoted by, I think, Mr. Nicholson of BCE, the overriding issue here is the issue of technology. We can't predict when the technology will be ready.

20192 So we would like to frame our anticipated rollout date in terms of late 2003 out as far as 2005, so really anywhere from two to four years.

20193 This may seem like an overly long period and too wide a range. I think many people here are -- I should rephrase that.

20194 The cable industry is particularly sensitive to making forecasts that it can't meet. As you are probably aware, the cable industry has taken some criticism for the length of time it took it to roll out its digital radio compression boxes, DVC boxes.

20195 We are sensitive to getting into the same situation with respect to timeframes when we don't control the technology.

20196 I can go into that further if you would like.

20197 On the wireless side we have, over the past four years, looked a number of times at the economics of Rogers Wireless becoming a CLEC. We have been unable to find an economic proposition that would make it attractive for us to do so.

20198 MR. JEROME: Thank you.

20199 You have just mentioned that one of the Rogers companies does intend to enter the local voice market from the cable side, if I understood. Which company would that be?

20200 MR. WATT: That would be Rogers Cable Inc.

20201 MR. JEROME: Rogers Cable Inc. So the answer -- go ahead. I'm sorry.

20202 MR. WATT: I was just going to say Rogers Cable Inc. is 100 per cent owned by Rogers Communications Inc.

20203 MR. JEROME: So the answers that you are going to be providing here today, though, do they only apply to Rogers Wireless or do they apply to the total group of companies?

20204 MR. WATT: They would apply to the total group of companies.

20205 MR. JEROME: Thank you.

20206 So currently you do not provide local voice services into the residential or business market, but do you sell any services or facilities to other Canadian carriers in the wholesale market for example?

20207 MR. WATT: No, I don't. I don't believe that we do.

20208 MR. JEROME: You don't believe. Are you sure?

20209 MR. WATT: I'm searching my memory. Obviously Rogers was involved with Rogers Network Services and that was the telecommunications arm of the Rogers Group of Companies. It certainly provided services to carriers and to retail customers.

20210 That entity was sold to MetroNet in May of 1998 and I do not believe that there is any activity that we currently undertake where we provide services to the wholesale market.

20211 MR. WATT: Is that something that you could consider doing in the future or that you intend to do in the future, to your knowledge?

20212 MR. WATT: We certainly do intend to do that in the future.

20213 As you are probably aware, Rogers Cable is required to make available to third party internet access providers its cable plant so that companies such as AOL, et cetera, would be able to make use of Rogers cable plant to provide high-speed internet service to their customers. So we are in the process of a long regulatory and business process to bring that to fruition.

20214 MR. JEROME: Thank you.

20215 Can you please turn to interrog response CRTC-4200, please?

20216 THE CHAIRPERSON: That is CRTC --

20217 MR. JEROME: 4200.


20219 MR. JEROME: RCI(CRTC), I'm sorry, yes. I think it was filed -- it was asked September 25th and responded on October 1st.

20220 MR. WATT: Possibly just before we go on, Ms Coates has pointed out to me one other activity which might fall under the umbrella that you were pursuing and that is that Rogers Wireless does provide analog roaming services, as I understand it, to TELUS ClearNet.

20221 For example, when the PCS service was rolled out and the two new competitors, ClearNet and Microcell were licensed, Rogers Wireless and the mbility companies were required to provide roaming capability in analog technology for these companies so that they would have more complete coverage across the country as they rolled out their digital service. People could roam in analog and that would provide a more pervasive service.

20222 MR. JEROME: Thank you.

20223 So you have 4200, Mr. Watt?

20224 MR. WATT: Yes, I do.

20225 MR. JEROME: Thank you.

20226 In this interrog RCI was asked to list the types of services they purchase from the ILECs. This is what you did: You have grouped down these different services by order of importance, the first one being interconnect services.

20227 I take it these are all services that are purchased by Rogers Wireless. Is that correct?

20228 MR. WATT: Yes, that is correct.

20229 MR. JEROME: Are there any other companies in the Rogers group purchasing services from the ILECs, to your knowledge?

20230 MR. WATT: Well, certainly all of the Rogers companies other than Wireless purchase services from the ILECs for administrative purposes, for, in certain cases, video transmission, to connect, in some cases, head-ends of Rogers Cable. It is not always provided on our own facilities.

20231 Then there is the normal use of long distance and local services by the various companies. All of those services are, in part or whole, purchased from the ILECs.

20232 MR. JEROME: But these would not be included in that response?

--- Pause

20233 MR. WATT: Yes. All our payments to the ILECs are included here, including the administrative functions, the local lines that we use.

20234 MR. JEROME: Okay. So it is not only from Rogers Wireless, as the response indicates, but it would be from RCI in general.

20235 MR. WATT: No, sorry. I have confused you.

20236 This response is only from Rogers Wireless, but what it does include is the use of ILEC services for administrative purposes, the phone that sits on an individual employee's desk. So it is not just interconnect services and what we would generally consider the wholesale services. It includes the usual local exchange services.

20237 But it does not include payments to ILECs from Rogers Media, Rogers Cable or Rogers Communications Inc.

20238 MR. JEROME: Would it be possible to undertake to refile that answer based on total expenditures for all companies under RCI, since this interrog was directed at RCI.

20239 MR. WATT: Certainly we can do that.

20240 MR. JEROME: Thank you.

20241 I have also noted, on page 2 of 2 of this same interrog you filed the year 2000 expenses in confidence. I have looked everywhere and I haven't found it. I don't know if you refiled this response and disclosed the amount. Have you done that? Is it that I couldn't find it?

20242 MR. WATT: No, I don't believe that we have done that.

20243 MR. JEROME: To the extent that most other carriers in this room today have refiled their response to this interrog and have disclosed these numbers, would that be something that RCI would be ready to do?

20244 MR. WATT: No. I don't think we would be inclined to do that unless we were ordered to do so.

20245 MR. JEROME: Would you consider maybe just giving us the total, so not breaking it down by line item but just --

20246 MR. WATT: Wouldn't that give you precisely the number by line item? I would take the total and apply the percent.

20247 MR. JEROME: Oh, you have given the percentage. I'm not very good in math like other parties.

--- Pause

20248 MR. JEROME: I have also noted in your evidence at paragraphs 39 and following that RCI seems to have a strong bias against the new contribution regime. What was Rogers' position in the proceeding leading up to the contribution decision? Do you remember?

20249 MR. WATT: I do remember our position.

20250 I wouldn't characterize our evidence here as having significant problems with the new contribution regime. The evidence here suggests a way to deal with contribution on a going-forward basis, taking into account some of the characteristics of the price cap regime and some of the issues that carriers such as yourselves have raised in this proceeding, for example, as you put it, the requirement under the first price cap regime to reduce business prices.


20251 So what we have tried to do in our evidence is say that we have a dilemma here, the dilemma being that the application of the price cap mechanism would require the telephone company to reduce its revenue in order to comply with the price cap formula, or price cap index.

20252 Of course, the only way one can eliminate revenue is to reduce rates. This then has caused some problems for the competitive industry and has been, as I say, raised as an issue by the ILECs.

20253 So we have proposed a solution whereby the revenue that would have to be foregone by the telephone company would first go to reducing contribution rather than going to reducing business rates.

20254 MR. JEROME: We will go into that, but can you remind us Rogers' position going into the contribution regime in broad strokes?

20255 MR. WATT: In the contribution regime we laid out, I believe, three options. The first option would be to fully rate rebalance. We considered then the status quo and we considered a per-line charge.

20256 Our final recommendation actually in that proceeding was to do what we are suggesting in this evidence again, and that is that there is an opportunity to use the revenue reduction required by price cap regulation to reduce contribution levels so that in a short period of years you would have eliminated contribution entirely.

20257 MR. JEROME: Is it fair to say that Rogers opposed seeing that the contribution burden broadened to include wireless service providers. Is that a fair statement?

20258 MR. WATT: Yes, that is a fair statement.

20259 MR. JEROME: What was the amount of contribution that Rogers will have to pay in 2001 under the revenue tax mechanism at 4.5 per cent?

20260 MR. WATT: That still is, I think as you are aware, a matter to be finally determined.

20261 MR. JEROME: I don't mind a ballpark figure or a range.

20262 MR. WATT: I was just checking to see if we had placed a precise number on the public record. We have not.

20263 But for a ballpark range, because you can very easily calculate it based on our publicly available revenue numbers, it is somewhere in the order of between $50 and $60 million.

20264 MR. JEROME: This number would most likely go down in 2002 when the revenue tax goes from 4.5 per cent to whatever level it will go to. Right?

20265 MR. WATT: We certainly hope that it goes down to 1.5 per cent. We do note, however, the new loop costing numbers for the high-cost serving areas that Bell has proposed, which would increase by five times the shortfall number, which is, I think, the part of the basis for the expectation that the revenue tax would go down to 1.5 per cent.

20266 We also note that there may be one company that hasn't filed yet, but all the other ILECs have filed notice that they intend to prepare new cost studies in a similar vein to Bell's submission and we are somewhat fearsome that the new cost studies will have the shortfall increase. We are concerned at a worst case, if you took the Bell increase the revenue tax would end up higher than 4.5 per cent. So that after all the effort made to reduce and target contribution that this number would actually go up. But we certainly would like the 1.5 per cent number.

20267 MR. JEROME: Thank you.

20268 Now, if we turn to your price cap proposal per se, I understand from your proposal that you are proposing a productivity offset of 4.3 per cent and this productivity offset would basically apply to a particular basket structure.

20269 You have four baskets that you are proposing. One of them is residential services in both non-high cost and the high-cost serving areas. The second basket would be business local services. You have the existing other capped services and you would propose a new basket of competitor services. Is that correct?

20270 MR. WATT: I guess a couple of points at the very outset.

20271 You made reference to our proposal to apply 4.3 per cent offset. I think in the course of the last two weeks that number has been revised. I take you back to the discussion that RCI counsel had with Mr. Hariton of Bell where we had taken the positive 0.5 per cent input price differential number from a Companies interrogatory response and incorrectly assumed that meant that Bell's input prices were greater than the economy's prices.

20272 So the sign actually flipped around. So instead of the offset being 4.3, it became 5.3 properly. So I should make that correction.

20273 Then with respect to the second part of your question summarizing the Rogers evidence, probably the easiest way to understand it or to clarify it for discussion purposes would maybe be to go to the staff briefing notes. I think on page 96 the Rogers' proposal is specifically described.

20274 MR. JEROME: Was my description correct?

20275 MR. WATT: Almost, but not quite. You said that the residential basket would include the non-high-cost serving areas and the high-cost serving areas. That is not correct.

20276 What we have done is say for the high-cost serving areas, they are taken out of the residential basket because they are being treated separately with respect to costing and productivity. So that what is in our residential basket is the non-high-cost serving areas.

20277 If you look at the Rogers' evidence, you can see in the example we provide as to how our proposal would work. On page 27 you will see the deduction that is made for the high-cost serving areas, on line 4.

20278 With that explanation I think your summary is correct. Four baskets with the price cap applied individually to competitor services, other capped services. With regard to the remaining two baskets, they can actually be viewed as one basket. The price constraint would apply to that basket first going to reduce contribution and then when contribution has been eliminated going to reduce prices as per the price cap index in that basket.

20279 MR. JEROME: So the residential and business baskets can be viewed as one big basket, excluding the revenues from the high-cost serving areas that you have just clarified. The way it would work under your proposal is that you would take the "I" minus "X" formula, you would multiply that by the total revenues generated in that big basket of residential and businesses services and the resulting number would go first to reduce the TSR. Is that correct?

20280 MR. WATT: That's correct.

20281 MR. JEROME: Would you say that using the productivity gains generated in the large basket of services, including all residential and non-high-cost service areas and all business services, would have the effect of reducing the TSR a lot more quickly than if you would only take the productivity gains generated through the high-cost serving areas, the residential service and high-cost area. Would that be fair?

20282 MR. WATT: Yes, that would be fair.

20283 MR. JEROME: In fact, it would go so fast that in the example that you have provided in page 27 of your evidence, the TSR -- in this example the TSR bottoms up after the second year. Correct?

20284 MR. WATT: Yes, that's correct. That is in fact our objective to remove contributions as quickly as possible for a number of reasons.

20285 MR. JEROME: Then any remaining offset after the TSR has been driven down to zero would be used to lower rates in that big basket of residential and non-high-cost and business services?

20286 MR. WATT: Yes, that is correct.

20287 MR. JEROME: To your knowledge, this is causing some concern to some competitors who are saying that rates are already at very low levels and that further reductions, especially in the business segment, would be detrimental to a further evolution of competition?

20288 MR. WATT: Yes, I have heard those statements. However, I guess what I would ask you to do is maybe turn to some of the cost information that is on the record in this proceeding. This would be the letter of June 26th that is filed in the follow-up proceeding to -- it is the Decision 2001-238.

20289 MR. JEROME: I'm really not asking if you think they are right or wrong. I'm just asking if you are aware that some concerns were expressed with regards to that particular aspect of your proposal?

20290 MR. WATT: Well, I think certainly concerns were expressed. I think it would be very surprising if you found competitors who are saying that they like price decreases, but that doesn't mean that price decreases are not appropriate on the part of the ILECs.

20291 MR. JEROME: That's fair enough.

20292 MR. WATT: There is productivity going on. I think there is undisputable evidence that the cost of business exchange services are below the rates. Therefore, to our mind, there is no reason why the productivity adjustment should not go towards reducing those rates.

20293 As I say, part of our proposal is to ameliorate that rate of decline by first using the productivity offset to eliminate contribution so that in this fashion contribution is assisted in a couple of ways.

20294 One, it doesn't face the immediate lower prices that it might face in the business market.

20295 Secondly, it would benefit from the elimination of contribution payments.

20296 MR. JEROME: Has Rogers calculated the impact of its proposal on the contribution pool, the national contribution fund, over the next four years?

20297 MR. WATT: No, it has not. Its calculation, the hypothetical calculation that we did do, is focused on the Bell numbers in our evidence. We haven't done any national calculation.

20298 MR. JEROME: So you haven't calculated how much Rogers would stand to save over the course of the next price cap period by reducing contribution payments?

20299 MR. WATT: No, we haven't precisely done it. What I am just thinking in my mind is, over a four-year period, as we have seen with the Bell numbers, that contribution is eliminated.

20300 There are other areas such as the TELUS area where I do not believe that contribution would be eliminated over the four-year period, but I would have to do the calculation to work that through precisely.

20301 MR. JEROME: Could you undertake to do that?

20302 MR. WATT: Yes, we can undertake to do that. We would do that with the filed TSR numbers that you have in your 700 series of interrogatory responses.

20303 MR. JEROME: Thank you.

20304 For the other two baskets -- we have talked about the first two, which is basically one big basket. The other two baskets are competitor services and what is currently called "other capped services" That is correct?

20305 MR. WATT: That's correct.

20306 MR. JEROME: The way your proposal would work is that you would take again the "I" minus "X" formula and each individual rate for each service included in these two baskets would go down by the "I" minus "X" formula. Is that correct?


20307 MR. WATT: That's correct. The rates would trend down in accordance with the cost reductions.

20308 MR. JEROME: Again, in your response to interrogs 4200 have you calculated how much Roger stands to save for the next four years? I know these numbers are confidential so I'm probably not going to ask you the number of cost savings, but have you calculated that?

20309 MR. WATT: No, we haven't calculated it.

20310 I think in the example that we have provided in the evidence we take the hypothetical situation where if the offset had been kept at the first price cap level of 4.5 per cent and inflation was 2 per cent, these rates on average -- well, these rates would come down by 2.5 per cent per year.

20311 Just to put a ballpark figure on it, if all of Rogers say -- take a number -- well, we probably should leave it simply that the rates would fall by 2.5 per cent times whatever the quantum of dollars is that we paid to the ILECs.

20312 MR. JEROME: Thank you very much, Mr. Watt.

20313 These are my questions, Mr. Chairman.

20314 THE CHAIRPERSON: Thank you, Mr. Jerome.

20315 So we will turn to the next party then, ARC et al.

20316 Ms Lawson.

20317 MS LAWSON: Thank you, Mr. Chairman.

20318 Good morning.


20319 MS LAWSON: Good morning, Mr. Watt.

20320 MR. WATT: Good morning.

20321 MS LAWSON: Mr. Watt, I can't help asking you first to harken back 10 years when you were sitting in the very same seat testifying in this room for Unitel in the hearing that led to Decision 92-12 and the opening up of the long distance telephone market.

20322 Am I right, your testimony then was that long distance competition could occur without any local rate increases through the establishment of a contribution mechanism?

20323 MR. WATT: Yes, that's correct.

20324 MS LAWSON: The Commission in fact adopted that proposal to establish a contribution regime for the purpose of keeping basic local rates low?

20325 MR. WATT: Yes.

20326 MS LAWSON: It just strikes me, I guess, as ironic that you are in the same seat here 10 years later advocating the elimination of contribution.

20327 MR. WATT: Well, certainly circumstances have changed. It's sort of one step at a time.

20328 I think it is fair to say that certainly some -- you would obviously have to ask the Commissioners, but I think it is fair to say that had people thought that local rates would increase substantially at the time of the long distance hearing, it is arguable that the long distance decision wouldn't have gone the way that it did.

20329 I think that contribution could have been maintained and that there wasn't an absolute need for local rates to increase. There are arguments why they should increase, dealing with economic efficiency, et cetera, and the Commission has weighed those arguments over the intervening period and I guess in 1995, four years later, took the decision that they wanted to aggressively rebalance the rates.

20330 Now, no one can argue that part of the incentive or the impetus to do that was arguments over contribution leakage in the system, things such as that, but the Commission weighed all the considerations and decided to implement, I think it was three annual local rate increases of $2.00 a year.

20331 Also, I think as we go forward in time we find the targeting of the contribution to the high-cost serving areas reducing that number. But we are on the course to eliminating contribution shortly, I think.

20332 MS LAWSON: Would you not agree, Mr. Watt, that we have been on a course and we have just been through an extensive proceeding to establish a contribution mechanism that is much more sustainable and competitively neutral and, as you just stated, much, much smaller than what we were looking at in 1992?

20333 MR. WATT: Yes, I would agree with that.

20334 MS LAWSON: But what you are proposing in this proceeding is that we eliminate that newly established competitively neutral explicit sustainable subsidy scheme and that we move backwards to an implicit subsidy regime such as we had before 1992, except that the subsidy won't be coming so much from long distance but rather from other sources within the incumbents?

20335 MR. WATT: That's correct. The reason for that is, as I have discussed with the earlier counsel, we are an industry facing -- the broad industry facing a difficult situation whereby we have people with concerns that prices are falling too quickly for them to sustain themselves in business and we are faced with the situation where we have an incumbent telephone industry earning 15 to 18 per cent return on equity, so what I would consider to be super normal profits by any measure.

20336 So we are facing the situation where the profits of the telephone companies must be reduced. As I said earlier, that requires reducing revenue which requires reducing rates.

20337 Then the question becomes: Where do you reduce the rates?

20338 Our proposal is that we are, in effect, reducing the rates in high-cost serving areas from what they otherwise would be by targeting the productivity improvement to those areas first before the productivity -- the revenue reductions coming from productivity improvements flow through to business rates, or indeed flow through to non-high-cost serving area residential rates, which I would also argue should be done in the future.

20339 MS LAWSON: Thank you, Mr. Watt.

20340 I have to say that the first time I read your proposal it struck me as very attractive, until I realized that the costs of serving those high-cost areas won't have disappeared and won't be covered by the rates. So they have to be coming from somewhere. Correct?

20341 MR. WATT: That's correct. You have understood the proposal. The revenues are coming from other operations within the telephone company.

20342 Of course, from the telephone company's perspective, their revenue remains the same under our proposal as opposed to, say, a continuation of the current mechanism. The difference is that they receive less revenue from contribution, but they do not receive less revenue from business services. In other words, by not reducing business service rates they save the revenue which offsets the contribution that they are no longer receiving.

20343 MS LAWSON: Well, essentially under your proposal, after the two years of the rapid reduction of the subsidy, the incumbents are going to be paying the subsidy, others won't be. Correct?

20344 MR. WATT: That's correct. It's basically for the reasons that I quoted earlier.

20345 MS LAWSON: So I'm just trying to understand what is going to happen next.

20346 With no contribution regime, with the incumbents carrying this implicit subsidy from their non-high-cost area customers to their high-cost area customers presumably, isn't it reasonable to expect that the incumbents are going to then argue that they are at a competitive disadvantage because of this implicit subsidy regime which is totally inimical to a competitive environment?

20347 MR. WATT: Well certainly the incumbents, the ILECs, have made two arguments, possibly not directly in response to our proposal so far but they are applicable to our proposal.

20348 The first criticism is that while it is -- as you have pointed out, the fact is that the rates in the high-cost areas in our proposal are not going to recover the costs. Therefore, the argument is no CLEC is going to enter the high-cost serving areas to provide a competitive alternative.

20349 I think that's true and I think what has to be understood is in the context of both Bell and TELUS you are talking about -- I think it is 12 or 13 per cent of their lines being in the high-cost serving areas. These are small locations, remote locations. I think it is implausible that there will be entrants clamouring to provide competitive service in those territories.

20350 I think, and I'm going to harken back to the statement you put to the CallNet panel yesterday, and that is our position is that high-cost serving area customers, given the choice between paying $25 a month for service and having no prospect of competition would prefer that to paying $35 a month and having the theoretical prospect of a competitor but no realistic prospects for competitive choice.

20351 The second criticism the ILECs have levelled against this proposal, and again you have touched on it, is that of course the non-high cost serving areas are now bearing the burden of the subsidy.

20352 I mentioned earlier, though, those revenues from those non-high-cost serving areas are higher than they would be had the current proposal remained in place, because the current proposal -- the current price cap regulatory regime would have seen those rates decreased.

20353 So the money is there for the telephone companies and it is not a matter of increasing the rates to pay for this "internal subsidy", it is simply a matter of not decreasing the rates as they otherwise would.

20354 Just as a final point, I think this approach would give the telephone companies a good incentive to control the costs and non-costs in high-cost serving areas.

20355 A problem we are going to face is, subsidy requests are going to grow. We know that. We know that the new loop cost studies are coming in and the costs are higher now in high-cost serving areas. The subsidy is going to grow.

20356 Over time under the RCI proposal the telephone companies are funding that shortfall through basically foregone price reductions. They will have every incentive to minimize those costs now because they are coming 100 per cent out of the revenues that they generate.

20357 MS LAWSON: Thank you, Mr. Watt.

20358 I guess I still have problems because it just still sounds too good to be true to me.

20359 In this proceeding you would agree that the ILECs are asking for rate increases in high-cost areas even with the subsidy? So if we eliminate that explicit subsidy you are saying that they are not going to be pushing for rate increases in those high-cost areas?

20360 MR. WATT: Well, their proposal is to increase the rates in the high-cost serving areas and this would then lead to a dollar-for-dollar reduction in the subsidy that they would receive.

20361 Now, as I have said earlier, the money is still available to them for this subsidy by virtue of the fact that they are not being forced to reduce their business rates or their residential rates or the other -- wherever the reductions would come from, from the capped services.

20362 MS LAWSON: Is there not a risk though, Mr. Watt, that if we go down this route of eliminating contribution entirely, the Commission is going to find so much pressure on it that it is going to have to either increase those rates beyond what anyone originally wanted or considered reasonable, or we are just going to have to repeat the exercise of establishing a competitively neutral contribution mechanism that is sustainable in the longer term, the whole exercise that we have just recently completed?


20363 MR. WATT: Well, I do think this proposal is sustainable. It eliminates all arguments for the possibility of contribution avoidance, et cetera.

20364 Your proposition is that, I guess, somehow that if we take Bell Canada's case that a couple of years down the road the contribution is eliminated, I guess, your fear is that if the telephone companies, by virtue of the fact that they haven't reduced rates elsewhere, now face the situation where competition is more viable and they are losing more market share because of the higher rate.

20365 I'm not certain I grasp what is unsustainable about the proposal and where the pressure would come to reinstitute an explicit contribution mechanism.

20366 As I say, as you have pointed out, the telephone companies are asking for higher prices. This provides them -- presumably they argue under the guise of promoting competition. Well, this does give them those higher prices, and it gives them those higher prices and allows them then to recover the cost of the high-cost serving area. Competitors, to the extent that they benefit from these rates that are higher than they otherwise would be, are in better financial condition as well.

20367 MS LAWSON: A final question, Mr. Watt.

20368 You would agree, though, would you not, that if this Commission wanted to hold out the possibility of competition in those -- in that 10-12 per cent of customers in rural and remote areas, then it would need to maintain an explicit competitively neutral subsidy scheme such as it has just recently established?

20369 MR. WATT: Well, I think -- I don't think that type of hope is something that the Commission would want to hold out for the high-cost serving areas. I harken to a quip, I guess, it was Michael Sabian made in another context, but people who think the competitors are going to be rushing by Toronto, Hamilton, et cetera, to serve Baffin Island are mistaken.

20370 MS LAWSON: Thank you very much, Mr. Watt.

20371 Thank you, Mr. Chairman.

20372 Those are all my questions.

20373 THE CHAIRPERSON: Thank you, Ms Lawson.

20374 I will just note, we deal with pressure every day, Ms Lawson.

20375 Commission counsel.

20376 MS MOORE: Thank you, Mr. Chairman.


20377 MS MOORE: This morning, Mr. Watt, you said that you expect Rogers would be rolling out IP-based local voice services anywhere from late 2003 to 2005. You also said that the overriding issue in this regard is the technology.

20378 I wonder whether there are other relevant factors, perhaps not overriding factors, for example cost considerations?

20379 MR. WATT: Cost considerations are important. The reason that Rogers is waiting for IP telephony technology is because of cost considerations.

20380 In 1998 Rogers/Shaw/Videotron/Cogeco participated in a voice-over coax trial in Trois Riviere. This would be using circuit switched technology. We found that while the technology worked well, after a while -- remember this is back three years ago -- our conclusion was that the cost of that technology made offering local telephony using it uneconomic for us.

20381 So we have then turned our sights to IP technology. There there are a number of steps that have to occur before we can hit that 2003 date. We do need the cost trends to come down.

20382 I think one of the -- if I could just quote, it is an investment analyst report from Nesbitt Burns that really touches on, I think, your very question. This is dealing with the issue of internet protocol telephony for the cable industry.

20383 There is a long summary of the need to evolve -- well, first of all, in the case of Rogers deployed DOCSYS modem technology -- we are still using proprietary technology -- and then go through the various versions from DOCSYS 1.0 to DOCSYS 1.1 and develop the callage and soft switches that would route the calls and the PSTN gateways. All of that has to evolve and be developed technically.

20384 But his conclusion -- and this is Tim Casey of Nesbitt Burns in an analyst report entitled "Canadian Cable Industry" dated June 27, 2001 -- at page 17 with respect to all of the costs, and also touching on the costs of network powering that would be required to provide primary line service, he states:

"Industry estimates for internet protocol telephony services range from $750 to $1,000 per subscriber, making current return on invested capital unattractive.

In summary, we believe the commercial introduction of IP services in Canada is four to five years out. We expect the domestic industry will wait for technology advances to improve the cost profile." (As read)

20385 So when I speak about technology as being the threshold hurdle for the cable industry, it is the development of the technological capability to provide the service, but it is also the cost associated with that technological capability.

20386 MS MOORE: Thank you.

20387 Now, assuming that at a certain point the technology develops appropriately and becomes economic to provide IP-based local voice telephony, would Rogers plan to rollout this type of service in all the markets where it currently serves cable customers or would this be phased in?

20388 MR. WATT: It would be a phased-in approach, but our intention would be to rollout to all of the service territories that we currently operate in. This would follow the pattern of our high-speed cable modem internet service where we started in New Market. We trialed and tested for approximately two years, then in November of 1996 we rolled out in Toronto, London and Ottawa shortly thereafter.

20389 Today we serve, I believe it is -- it would be approximately 99 per cent of our systems in Ontario. The one I'm thinking that I don't believe we do serve is Carp, which unfortunately happens to be up here. But Owen Sound, Barry, Orillia, all of these, Tillsonburg, Woodstock, St. Thomas, we roll out the product right across our service territory.

20390 We do not currently have complete rollout of a high-speed internet offer in New Brunswick. We acquired that system and are in the process of upgrading it. But our modus operandi is to provide the service wherever we operate.

20391 MS MOORE: Thank you.

20392 Would you be able to provide a copy of the Nesbitt Burns document that you were referring to for the record?

20393 MR. WATT: Yes, we can.

20394 MS MOORE: Thank you.

20395 Those are my questions, Mr. Chairman.

20396 THE CHAIRPERSON: Thank you, Counsel Moore.

20397 Commissioner McKendry.

20398 COMMISSIONER McKENDRY: Mr. Watt, I think you mentioned to Ms Lawson that the RCI proposal eliminates all arguments for contribution avoidance. To what extent is contribution avoidance a problem?

20399 MR. WATT: I think your question is asking me what is the extent of the problem today under the new regime. We know there were considerable problems previously.

20400 I think the problems are dramatically reduced under the current regime where it is a per cent of revenue tax. I think, though, by -- and maybe this is an overly pessimistic view, but just by nature of the number of arguments that had been put forth over the last seven to eight months you can see the opportunity for requests to include this item, exclude that item, et cetera. Those incentives obviously are removed by eliminating contribution.

20401 Do I think it is a major problem today? No, I don't think it is a major problem today.

20402 COMMISSIONER McKENDRY: So it is the arguments that get removed. It is not a significant problem in terms of actual revenues being --

20403 MR. WATT: No, I think that is true.

20404 Elimination of this problem, quite frankly, was not even a consideration when we developed this proposal. This proposal was developed to address the issues that I have spoken about earlier, the so-called conundrum of having to drop prices without hurting competitors.

20405 COMMISSIONER McKENDRY: Thanks very much.

20406 Thank you, Mr. Chair.

20407 THE CHAIRPERSON: Thank you, Commissioner McKendry.

20408 Thank you, Mr. Watt. I think those are all the questions for you.

20409 MR. WATT: Thank you.

20410 THE CHAIRPERSON: You may step down.

20411 The last party to present witnesses, then, for cross-examination will be GT Group Telecom.

20412 We will take our morning break a little early now, just to give them a chance to change the table.

20413 We will reconvene in 15 minutes with GT Group Telecom.

--- Upon recessing at 1000 / Suspension à 1000

--- Upon resuming at 1015 / Reprise à 1015

20414 THE CHAIRPERSON: Order please, ladies and gentlemen.

20415 We will return to our proceeding now.

20416 Mr. Secretary, I believe you have an announcement to make.

20417 MR. SPENCER: Thank you, Mr. Chairman.

20418 I would like to remind parties that responses to undertakings are due on Friday. Any undertaking responses that are not filed by the close of the oral hearing today should be sent by e-mail to the Commission, with copies to interested parties by Friday.

20419 THE CHAIRPERSON: Just while we are on announcements, for Monday with the oral argument it would be helpful for the Court Reporter and the translators if you could provide a copy of the written text to them when doing that.

20420 In terms of the order, I guess we haven't finalized this yet, but just bearing in mind the time zone difference between here and the folks who have asked to participate by teleconference, we may adjust the order to put them later on in the order just to accommodate for the time change.

20421 Are there any other issues anyone wants to raise? No?

20422 Then we will turn to the next panel of witnesses.

20423 Mr. Daniels.

20424 MR. DANIELS: Thank you, Mr. Chairman.

20425 It is my pleasure to introduce the GT Group Telecom Services Corp panel. I think it is everyone's please since it is the last panel.

20426 For the record, my name is Jonathan Daniels and I am counsel to Group Telecom. With me is Angela Lebreton, who is also counsel to Group Telecom.

20427 Before you, representing Group Telecom and sitting at the table in the position closest to you, is Mr. Stephen Shoemaker, Chief Financial Officer of Group Telecom.

20428 To the right of Mr. Shoemaker is Ms Fiona Gilfillan, Vice-President Regulatory Affairs of Group Telecom.

20429 On her right is Mr. Robert Fabes, Senior Vice-President and General Counsel of Group Telecom.

20430 Furthest away from you, Mr. Chairman, is Mr. David Stinson, Consultant.

20431 The panel is assisted in the back row by Mr. Norman Peacy, Consultant to Group Telecom, and Mr. Robert Noakes, Director of Regulatory Affairs at Group Telecom.

20432 Biographies for Mr. Fabes, Ms Gilfillan and Mr. Stinson can be found as attachments in Group Telecom's letter to the Commission of September 18, 2001.

20433 A biography for Mr. Shoemaker can be found in the attachment of Group Telecom's letter of October 4, 2001.

20434 At this point, could I ask you, Mr. Secretary, to have the witnesses affirmed.

20435 MR. SPENCER: Thank you.






20436 MR. DANIELS: I would like to now ask each and every one of the witnesses whether they have reviewed their biographies and, if so, whether their biographies are accurate?

20437 I will begin with you, Mr. Shoemaker.

20438 MR. SHOEMAKER: Yes, I have. It is accurate.

20439 MR. DANIELS: Ms Gilfillan?

20440 MS GILFILLAN: Yes, I have. It is accurate.

20441 MR. DANIELS: Mr. Fabes?

20442 MR. FABES: I have. It is accurate.

20443 MR. DANIELS: Mr. Stinson?

20444 MR. STINSON: Yes, I reviewed it and it is accurate.

20445 MR. DANIELS: Ms Gilfillan, as Vice-President, Regulatory Affairs, was Group Telecom's evidence and all associated interrogatories prepared by you or under your direction?

20446 MS GILFILLAN: Yes, it was.

20447 MR. DANIELS: Is that evidence and all associated interrogatories correct to the best of your knowledge and belief?

20448 MS GILFILLAN: Yes.

20449 MR. DANIELS: For all the other witnesses, can you please indicate whether the evidence prepared by you or under your direction is correct to the best of your knowledge and belief?

20450 We will begin with Mr. Shoemaker.

20451 MR. SHOEMAKER: Yes, it is.

20452 MR. DANIELS: Mr. Fabes?

20453 MR. FABES: Yes, it is.

20454 MR. DANIELS: Mr. Stinson?

20455 MR. STINSON: Yes, it is.

20456 MR. DANIELS: Ms Gilfillan, do you have any updates or corrections to that evidence?

20457 MS GILFILLAN: Yes. On Monday we filed an update to our evidence which removed the last two sentences of paragraph 12.

20458 MR. DANIELS: Thank you.

20459 Mr. Chairman, I have one further comment.

20460 As many know, Ms Gilfillan is expecting. In fact, she is expecting many things during the course of this cross-examination, but I am in fact here referring to "Expecting" with a capital "E".

20461 A new expert in regulatory affairs is expected to join us in January. As such, I would ask your permission for more frequent breaks than is normally the course. In that regard, I would ask that all counsel cross-examining this panel plan to take a short break every 45 minutes or so.

20462 With that, Mr. Chairman, the Group Telecom panel is now ready for cross-examination.


20463 THE CHAIRPERSON: Thank you, Mr. Daniels.

20464 Ms Gilfillan, gentlemen, welcome to our proceeding.

20465 We will endeavour to accommodate your situation, Ms Gilfillan.

20466 MS GILFILLAN: Thank you.

20467 THE CHAIRPERSON: If I forget, just give me a signal and we will try to take a break at the appropriate time.

20468 With that, we will turn to the first party to examine, GT, that being The Companies.

20469 Mr. Kidd.

--- Pause

20470 MR. KIDD: Thank you, Mr. Chairman.


20471 MR. KIDD: Good morning, panel.

20472 I have a few questions for Mr. Shoemaker to begin.

20473 Mr. Shoemaker, would it be fair to say that in light of the tight economic conditions your company and we all find ourselves in that there have been some challenges between you and the investment community in recent weeks?

20474 MR. SHOEMAKER: Yes. We have certainly seen, even prior to the events of September 11th, especially in the emerging telecom space, certain selling out by investors of their portfolios of the emerging telecom space. I think with the economic tightness in the marketplace there have definitely been some issues in the investor world in the space.

20475 MR. KIDD: I was thinking more specifically of your own company and things like reduced liquidity and your EBITDA forecasts. Maybe you could comment on how you have been relating to the investment community as it relates to Group Telecom's business plan.

20476 MR. SHOEMAKER: Well, we have related to the investment community that we are fully funded. We still have a strong liquidity position. We have over $600 million of addressable liquidity through our cash reserves and our borrowing reserves.

20477 We are seeing tightness in some of the larger business segment in revenue growth in terms of large carriers that buy capacity from us on our network and some of the larger enterprise customers that we sell data services to, but we are still seeing strong growth in the strong to medium-sized business sector and the space.

20478 We have not changed guidance with regards to where we in general expect to take our EBITDA performance. So we are still on track to see a strong narrowing of our EBITDA and crossing over into positive EBITDA some time in the second half of 2002.

20479 MR. KIDD: Would I be correct in understanding that you are under negotiations with the banks and some of your vendors to renegotiate certain covenants?

20480 MR. SHOEMAKER: Yes. To clarify, our secured lending vehicles with our banks and our lenders have certain financial covenants such as revenue targets and EBITDA or operating cash flow targets that need to be met.

20481 In September of 2000, when the world was looking a lot rosier than it is today, we amended our covenant levels to allow us to pursue a very substantial and aggressive expansion of our data centre business plan. At the time we anticipated spending $300 million to expand that business plan and we amended our covenant levels accordingly to reflect our projections for that business.

20482 We were subsequently not able to access cost-effective capital in that business, so we have gone back to the banks and said we would like to remove that element from our business plan.

20483 It characterized the nature of our covenant negotiations more along the lines of removing a business plan that we had thought we were going to embark on which we decided not to.

20484 As we look at the core business, which is our CLEC business, our local exchange business, we are not seeing significant changes versus the levels we expected to be at previously. So the nature of our discussions is more along the lines of removing an element of the business plan that we are not executing to.

20485 MR. KIDD: Without getting into any confidential discussions, the negotiations with the banks regarding renegotiating your covenants, are they going well?

20486 MR. SHOEMAKER: Yes, they are. We had a lenders meeting on October where we had all of our major secured lenders in, walked them through our current business plan. We provided them with a detailed financial model and our proposed changes to the covenants. Our discussions so far have been positive with the banks and we expect to resolve this issue some time later this month.

20487 MR. KIDD: This morning I handed out, through your counsel, an exhibit entitled "Comparison of recent forecasts of growth in real Canadian GDP".

20488 Have you had a chance to look at that, Mr. Shoemaker?

20489 MR. SHOEMAKER: I have.

20490 MR. KIDD: The first question I would have for you is: Looking at the actual results for 1998 through 2000 and comparing it with the forecast results from various groups, you would agree with me that there is a substantial change in the numbers downwards.

20491 MR. SHOEMAKER: I would agree with that. Yes.

20492 MR. KIDD: If we look at the forecasts for 2002 in particular, I was struck when I looked at this table that while they are negative, much more negative than the actual numbers, there seems to be a trend towards lower numbers for 2002 as we look at the more recent estimates.

20493 In other words, if you look at Conference Board in October, their estimate is lower than the others. Would you expect that type of trend to continue as the year goes on?

20494 MR. SHOEMAKER: I think we would expect to see flatness in the economic output. Our assessment is that with the U.S. economy slowing rapidly, that will have an impact on the Canadian economy due the amount of trade between the two countries. Our expectations are for a fairly flattish economic performance in 2002.

20495 MR. KIDD: Hhow do you think that Group Telecom will be able to adjust its business plan to meet that development?

20496 MR. SHOEMAKER: Well, I think if we look at our business plan, we still think we can be very successful in the marketplace, even in a relatively tough economic environment, because our business plan is to service small to medium-sized business customers. So these are customers that are likely to be already buying local telephone service or buying data services and in many instances we may be able to offer them a cheaper solution and we can still sell them on our value proposition.

20497 Our strategy is really about gaining market share. If you look at the big picture, we have, you know, maybe 1 per cent market share. So for us the game plan is to go out and attack the market aggressively and penetrate the market by selling directly to those customers.

20498 So we think we can be effective in that marketplace in that dynamic.

20499 MR. KIDD: Yes. You were saying that you have about 1 per cent of the market share. I guess that would suggest that perhaps compared to the ILECs you are much more nimble in terms of dealing with customers in a negative economy?

20500 MR. SHOEMAKER: I would say we think we can be nimble in dealing with the small to medium-sized business customers. I think we expect to see the larger business customers that buy significant capacity in their network being very conscious of how much they are going to commit to buying.

20501 In terms of revenue generation from that business, we expect to see flattish to slight increases in that business. So we are expecting somewhat slower growth than we would have previously expected from those larger type customers and carriers we sell to, but in the small to medium-sized business space, I think we expect to see performance in line with our previous expectations.

20502 MR. KIDD: Putting my question another way: Would you think that a downturn in the economy would tend to be harder on the ILECs, the facilities-based carriers that are offering service to, say, 95 per cent of the customers versus your profile at, say, 1 to 2 per cent?

20503 MR. SHOEMAKER: I don't think I would characterize it quite that way. I think we would expect to see impact in our ability. Obviously we have a strong liquidity position, but we are attacking a fairly narrow part of the market and we are attacking a part of the market that is generally I think representative of the ILECs' customer base in the business segment, so I think we would expect to see similar impacts in terms of impacts to the ILECs as well as to the CLECs.

20504 MR. KIDD: I would like you to turn to the second exhibit that I have handed out, which is a Telemanagement article from July 2001 entitled "GT: It's a Wonderful and Challenging Marketplace".

20505 The first question I have for you is that Mr. Wolfe, I gather, who was one of the interviewees in this article, is leaving the company.

20506 Could you comment on his departure for me, please?

20507 MR. SHOEMAKER: Yes. Bob Wolfe was one of the original founders of Group Telecom, goes back to its days as a very small Vancouver-based operation. I think, you know, Bob comes from a background in banking and I think Bob is looking to do things on a more entrepreneurial level and a more personal investing level.

20508 I think he has looked at the growth that we have been able to obtain. We have grown into a very substantial company. We have come out of that sort of initial phase of an emerging telecom company. I think Bob would like to go on to something that is more entrepreneurial and start something again.

20509 I would not -- there is certainly no linkages to any other events or circumstances.

20510 MR. KIDD: I am going to resist asking you if you are still a facilities-based carrier because we have lots of evidence on the record on that point.

20511 I would prefer just to turn to some of the other points in your article. For instance, at the top of the second page of the article, page 10, there is a comment by Mr. Milliard:

"Long distance is not a good margin business, especially if you are..."

20512 I think the word is:

"...reselling someone else's. It comes in at about 10%..."

20513 Excuse me, my copy has a hole in it.

"...10% of our revenues going forward which is just about where we want it."

20514 Could you contrast that strategy with the strategy of resellers in the market, particularly other parties that may have appeared here today that are looking for resale or substantial discounts on carrier services?

20515 MR. SHOEMAKER: I think Dan's comment regarding long distance is also a reflection of our strategy, which is to be primarily focused in the local access part of the market. If you look at where we have built our network, it is primarily built into the metro area of the network to provide local services.

20516 When we sell long distance, we don't have our own long distance platform so our cost structure would be higher, as we are basically reselling the long distance component. So I think if you look at long distance it is somewhat of a more commodity-type products in the marketplace.

20517 We recognize that it is important to our customers so we will sell it, but we are not looking for it to be a high component of our revenue mix. We want to be focused on providing next generation services, services that go across our own platform which we can differentiate from our competitors, things such as data services, high bandwidth data services and applications. We do provide the full voice bundle. It is an important part of our strategy because we want to provide the full bundle.

20518 But I think our strategy is to provide services on our network providing high margins to us and long distance is one that we currently don't carry on our network.

20519 MR. KIDD: I would like to now turn to the bottom right-hand corner of that page, the very last paragraph, in fact the last line, picking it up at:

"By May this year, we had established operations in all the 17 markets we had targeted, some 60 cities in all." (As read)

20520 To put that comment in context, we have now turned to the CLEC business, I believe. Is that correct?

20521 MR. SHOEMAKER: Yes.

20522 MR. KIDD: I would like to ask you a few questions about that.

20523 You said you were in 60 cities in all. Do you always find yourself in the same collo space of the other CLECs or do you try to determine a unique strategy?

20524 MR. SHOEMAKER: Our strategy in terms of going to the collocations has been to obviously look at where our market footprint is. So you start with the construct of being in 17 markets and then we look to see where our customers are, where we have targeted our network, and then we choose to be in those collocations that can reach the customers that we are targeting to serve.

20525 So we would tend to find ourselves in collocations where there would be other providers or other competitors in that space as well.

20526 MR. KIDD: Have you made inroads in all the 60 cities to your satisfaction?

20527 MR. SHOEMAKER: We have made inroads into the cities to our satisfaction. We have built quite a substantial network. We have fairly dense fibre optic builds in all of the major 17 major markets that we are in and we also extend the reach of that network through our collocation footprint with the incumbents.

20528 MR. KIDD: In terms of your facility rollout in TELUS territory, I believe it is on the record. I don't have the reference, but I believe that Mr. Grieve mentioned that TELUS buys more from you than you buy from TELUS. Is that your understanding?

20529 MR. SHOEMAKER: I don't have the particulars at hand, but we do know that we do sell significant services to all of the major telecom companies in Canada, including the cable companies, the incumbents, and we would expect to generate substantial revenue from TELUS across certain network where they don't have network at the territory.

20530 MR. KIDD: In the middle of page 11 under the map, the middle column, the paragraph starting "In Toronto". It is Mr. Milliard speaking and he says:

"In Toronto, there are only four carriers going after business on a facilities basis: Group Telecom, AT&T, ..."

TELUS and Bell.

"That's a pretty big market for only four entrants. In the U.S., there are markets half the size with six or eight companies building facilities."

20531 Would you agree with that comment?

20532 MR. SHOEMAKER: I think we would feel that four competitors would be an adequate sized number of competitors for the size of the market in Toronto. If you look across other North American markets, I think part of what's happened in the emerging telecom space in the U.S. is that there may have been too many entrants in those markets and that may have been one of the reasons why there was a competitive shake-out in those markets.

20533 So we think four to five in the major markets is definitely adequate competition.

20534 MR. KIDD: I am going to change topics now.

20535 I would like you to turn to paragraph 1-45 of CallNet's evidence.

--- Pause


20536 MR. KIDD: This question isn't necessarily for Mr. Shoemaker.

20537 I will try to put the question in context because it is not your own evidence, but I would like your comments on it. The section in CallNet's evidence is entitled "Restricting the Carrier Segment to Canadian Carriers".

20538 First of all, are you generally aware of CallNet's evidence and do you know what the carrier segment is?

20539 MR. SHOEMAKER: Yes.

20540 MR. KIDD: In that passage starting at paragraph 1-45, CallNet states:

"CallNet suggests that only Canadian Carriers should be eligible to purchase services from the ILEC carrier segment. In so doing, the Commission can ensure that retail customers do not avail themselves with these offerings." (As read)

20541 My question is: Do you thing that this particular carrier restriction will be adequate in preventing downward spiral in terms of pricing in the after market if the Commission were to accept CallNet's proposal?

20542 MR. SHOEMAKER: Yes.

20543 MR. FABES: No.

20544 MR. KIDD: Could you expand on that please. I'm not sure I understood your answer.

20545 MR. FABES: Could we confer? I'm not sure --

20546 MS GILFILLAN: Could you repeat the question, please?

20547 MR. FABES: I'm not sure I understand the question.

20548 MR. KIDD: The question is: CallNet is saying in this passage that by having the restriction, or access to the carrier segment restricted to Canadian carriers, that would enable the customers, retail customers and others, to be eliminated from gaining access to the substantial discounts that are at issue.

20549 I'm asking the question: Do you think that a Canadian carrier restriction will be an adequate restriction to prevent a downward a price spiral in the market.

20550 MS GILFILLAN: We don't feel that it will. I mean clearly, if carriers can access the carrier segment at a steep discount and there are a substantial number of items in the carrier segment that are retail, then carriers will have an incentive to resell those a below the retail tariffed rates.

20551 Additionally, we think there will be a substantial impact on our carrier business insofar as all the carriers that currently buy from us will expect us to match that price and the discount. We don't have any productivity offsets to recover our fixed and common costs, even if our incremental costs were the same as the ILECs, or even if they were lower I guess.

20552 MR. KIDD: Not quite the question I asked. Maybe I will try it again. You probably are anticipating a different question.

20553 The question I asked was not how you would react. You are a Canadian carrier, you are a CLEC. My question was: Retail customers, the Royal Bank, Bank of Montreal, others, do you think a Canadian carrier restriction as such is going to be sufficient to prevent retail customers from gaining access to these price breaks, if I can call it that?

20554 MS GILFILLAN: I'm sorry, I guess the answer is no.

20555 I think we think then either large customers will become carriers by purchasing a small amount of facilities. Ten metres of fibre I guess would make you a carrier. Either that or there will be an incentive of people who purchase services from the carriers who are Canadian carriers to resell those services substantially below the retail rate.

20556 MR. KIDD: I'm going to give you a hypothetical and just get you to comment on it.

20557 Suppose the Commission were to grant AT&T's proposal, how would your business be affected in, let's say the City of Calgary, if Nexxia comes into Calgary and is able to buy Centrex from TELUS in Calgary for $7.00 an access line.

20558 MR. SHOEMAKER: I think it would obviously impact to the value of our network asset as it would impact to the ability for us to return the cost of that network through the sale of wholesale elements.

20559 I think it would also have a very negative impact on our ability to penetrate and sell at cost-effective levels into the local access market, as I think it would have an obvious downward pressure on pricing and push the pricing for those local voice lines down below levels where it is profitable to essentially return a positive level of return on those at those price levels.

20560 MR. KIDD: Could you turn to paragraph 34 of your evidence, please?

--- Pause

20561 MR. KIDD: In this section of your evidence you are talking about the ILEC's use of long-term contracts. Is that correct?

20562 MS GILFILLAN: That is correct.

20563 MR. KIDD: At paragraph 34 you summarize a number of measures that you are proposing in this proceeding. I am going to read in a few just to put the issue in context.

20564 You state, and I quote:

"To address the barrier to entry represented by multi-year contracts, Group Telecom proposes the following:

(a) prohibit contracts of longer than one year duration for new customers, new installations or renewals of existing contracts for all local exchange services and local DNA-type services offered by ILECs either on a stand-alone basis or as part of a bundle; and

(b) grandfather existing contracts that are longer than one year in duration." (As read)

20565 Stopping there. I will come back to the rest afterwards.

20566 I would like you to explain for the panel what you mean by: grandfathering existing contracts more than one year in duration.

20567 MS GILFILLAN: By "grandfather existing contracts that are longer than one year in duration" we mean that those customers that currently subscribe to contracts that are longer than one year will be able to continue to subscribe to those contracts until those contracts expire.

20568 MR. KIDD: Can I try to rephrase your answer and see if we agree that essentially the customer gets the best of both worlds. He gets the lower rate for the rest of his contract, but he can walk at any time. Would that be fair?

20569 MS GILFILLAN: No, that is not correct.

20570 The only instance in which we have proposed that a customer be able to not pay the termination penalties is upon entry of a facilities-based carrier into an MDA or into a building where the customer is.

20571 Essentially, we don't see this as asking for an advantage. What it is really is an attempt to level the playing field.

20572 CLECs such as Group Telecom are deploying significant amounts of capital as we build competitive national local networks. We are doing so in a competitive market, therefore it is a risky market. There are risks involved in acquiring capital, there are barriers involved in building a network and risks involved in the acquisition of customers.

20573 Once we have extended our network to a building what we are asking for is the opportunity to sign up customers. We are asking that when we actually get to the building that the customers have the opportunity to choose, that they not be tied in to five or 10-year ILEC contracts.

20574 MR. KIDD: But I am just trying to understand this grandfathering proposal.

20575 So I was wrong when I said that for most of the customers they would be allowed to walk out. It is only, as you have in paragraph (d), it is where you are in an MDU that the grandfathered contracts would be without termination penalties?

20576 MS GILFILLAN: Yes.

20577 MR. KIDD: How would we manage that? How would we enforce that? Would we have to then look at all of our long-term contracts and decide which customers are MDUs and which are not?

20578 MS GILFILLAN: I think that it's something that we would have to manage as an industry.

20579 I don't think it's all that complicated. I think that it is pretty clear that there would have to be some mechanism put in place whereby when the first facilities-based carrier builds facilities to a building you would be given notification and therefore all customers in that building would thereby be able to not pay the termination charges included in their contract, if they chose, if they wanted to choose an alternative carrier.

20580 MR. KIDD: Do you have any idea in terms of percentage of revenues how large a customer base we are talking about for the ILECs? The percentage of revenue, say, for the business market?

20581 MS GILFILLAN: I imagine that it is going to occur incrementally because facilities don't get built quickly, as we have all heard over the course of this proceeding, that there are still substantial barriers to entry regarding facilities build.

20582 One of those substantial barriers to entry, we feel, is the artificial depressing of the addressable market by CLECs because the ILECs have the incentive and the ability to tie up that substantial customer base that they have to five and 10-year contracts.

20583 MR. KIDD: My question was not that, Ms Gilfillan.

20584 I was asking you if you knew the size of the ILEC business market that is under contract. Would it be, say, 50 per cent of the total business revenues, 25 per cent, 75 per cent? Do you have any idea how big this market is?

20585 MS GILFILLAN: I would think that would be a question that I could put to you more appropriately. I'm not sure what the size of the ILEC contracted customer base is.

20586 MR. KIDD: So you have not really studied the practicality of your proposal. You are saying that as far as you are concerned the grandfathering for MDU customers, they would be allowed to walk from their contract at any time. For those business customers that are not MDU business customers, they would be stuck for the full duration of their contract?

--- Pause

20587 MS GILFILLAN: Just to address, I think that the practicality of our proposal is to address the incentive and the ability of the incumbents to lock up the entire customer base before we arrive in a building.

20588 I would just note that we built our network -- we are building our network in a competitive environment with all the risks that I spoke to earlier. When you built your network, Mr. Kidd, it was in a risk-free rate of return environment where you were guaranteed a rate of return every time you rolled fibre down the street. Not only that --

20589 MR. KIDD: Ms Gilfillan, I didn't ask you that question, I'm sorry. I'm going to have to just bring you back to the question that I proposed to you. It was a very specific question and it dealt with the practicality of your proposal, MDU versus all other business customers.

20590 My question was: Is it practical, in your view, to keep MDU customers in a separate category where they are going to be able to walk from their contracts, whether it be one, three or five years, and at the same time all other business customers under long-term contract are bound for the full extent of their lease?

20591 Do you understand the question?

20592 MS GILFILLAN: I'm not sure. Could you repeat it again, I'm sorry.

20593 MR. KIDD: Sure.

20594 Your evidence, as I understand it, is that your definition of grandfathering is that for MDU customers, they are allowed to walk from their contract without penalties, and for all other business customers, they are bound to stay with their contract for the life of the contract. Is that correct?

20595 MS GILFILLAN: I guess that what you are suggesting is that our proposal discriminates against customers that aren't MDUs. I would suggest to you that certainly if the Commission felt it was appropriate we think that there would be benefits to extending this proposal to the entire marketplace.

20596 The reason we narrowly targeted our proposal to customers and MDUs is because we felt that there are additional issues that CLECs face as they rollout a network in gaining access to MDUs, the building access -- or the building access framework hasn't been fully flushed out yet. But certainly, there would be benefits, I think, to extending this the entire marketplace.

20597 However, we felt that it was really necessary when we gained access to a building, it might be perhaps more equitable if it was extended to the entire marketplace.

20598 MR. KIDD: I handed out this morning a copy of The Companies' Exhibit No. 64. It is the DNA tariff. Could you turn to that, please?

20599 Mr. Chairman, this is an exhibit that I used yesterday with the CallNet panel. It is The Companies' Exhibit No. 64.

--- Pause


20600 MR. KIDD: Do you have that?

20601 MS GILFILLAN: Yes.

20602 MR. KIDD: If you turn to page 302.4.1, which is the seventh page in the exhibit, entitled "DS-1 Access" and there is a rate table there for DNA?

20603 MS GILFILLAN: Yes.

20604 MR. KIDD: You have that?

20605 MS GILFILLAN: Yes.

20606 MR. KIDD: Looking at the second row in Band 0 which is the Bell Canada rates. Do you see that? Note 4 says "Bell Canada Customers Only"?

20607 MS GILFILLAN: Yes.

20608 MR. KIDD: Looking across on that row you see that the monthly rate for DS-1 DNA is $420 for the initial four and, depending upon the contract period, it goes down to $220 for five years. Do you see that?

20609 MS GILFILLAN: Yes.

20610 MR. KIDD: So as I understand your evidence -- and we will just take it at the MDU basis for the moment, although I take your evidence that you might want to extend it to all business customers.

20611 But as I understand your evidence, if a customer had DNA access from Bell Canada, DS-1, and if they had a minimum contract period of one year that would be the $300 rate, and if the Commission were to accept your proposal there would be customers that would be at $220 for the five year rate, varying rates between $300 and $220, and your proposal for the MDU customers is that those customers that are sitting at $220 would have the ability to walk at any time whereas the -- Is that correct?

20612 MS GILFILLAN: No, that is not exactly correct because, as I think I indicated earlier, the customers would not have the opportunity to walk. All contracts would be grandfathered until there was a facilities-based alternative at their particular MDU, at their building.

20613 So it is not until the customer actually has facilities-based choice that they would be permitted to not pay the termination penalties associated with the contract.

20614 MR. KIDD: All right. If we take that as the scenario, that there is a facilities-based entrant in the MDU, you would agree with me, subject to check, that the difference in the rate between the $300 rate and the $200 -- that is the one year rate -- and the $220 rate is roughly 27 per cent?

20615 Would you accept that, subject to check?

20616 MS GILFILLAN: I am willing to accept it without subject to check.

20617 MR. KIDD: So for those customers that are not in -- let's just take any business customer. If he is a five-year business customer taking this at $220 a month, at the end of his contract he is not able to get that rate any more, is he? That is your proposal?

20618 MS GILFILLAN: Our proposal would be that he would not be able to get that rate if his five-year contract ended before the end of the sunset period. At the end of the sunset period we have proposed that our long-term contract proposal will go away and that is the point at which we think the Commission will determine that there are sufficient alternative facilities in the marketplace.

20619 I would note that if we show up at a building and our proposal isn't in place, we would have to wait five years before we could even approach that customer.

20620 MR. KIDD: Let's assume --

20621 MS GILFILLAN: Five years is a long time.

20622 MR. KIDD: Excuse me.

20623 Let's assume that the contract expires well within the sunset period. You would agree with me that customer would face a 27 per cent rate increase for the same service under the same conditions?

--- Pause

20624 MS GILFILLAN: I'm sorry.

20625 I would propose that at the end of the customer's contract he would have choice because there would be another facilities-based entrant providing facilities in that building.

20626 But if he chose to stay with the incumbent, yes.

20627 MR. KIDD: I just have one final question in that area.

20628 I presume when you restricted this offering to the MDUs you did not expect that any carriers or resellers would qualify for this particular proposal? In other words, there would be no -- would resellers and carriers be limited to offering only one-year contracts to others in the field or is it just ILECs?

20629 MS GILFILLAN: I think we stated in our evidence that it is really an attempt to level the playing field and ensure that there is an addressable market for CLECs as they build out their facilities and as they enter new markets.

20630 So yes, it would just apply to ILECs.

20631 MR. KIDD: Now, what if you were buying DNA from the ILEC? Let's say that Group Telecom has a five-year contract with Bell Canada for this particular service, would you also find yourself in a situation that you would no longer be able to buy at the five-year rate?

20632 MS GILFILLAN: Yes.

20633 MR. KIDD: Thank you, Mr. Chairman.

20634 Those are my questions.

20635 THE CHAIRPERSON: Thank you, Mr. Kidd.

20636 MR. LOWE: Mr. Chairman, if I could have a break I could probably eliminate a lot of my cross-examination.

20637 THE CHAIRPERSON: That would probably serve several interests, Mr. Lowe.

20638 So we will take a short break now then.

--- Upon recessing at 1055 / Suspension à 1055

--- Upon resuming at 1108 / Reprise à 1108

20639 THE CHAIRPERSON: Order, please.

20640 Ladies and gentlemen, we will return to our proceeding now.

20641 I just note that we have this humming sound from the air conditioning system back again. I understand we have a rather short period of questioning left to go, so we will try to bear through it.

20642 So then we will turn to TELUS.

20643 Mr. Lowe.

20644 MR. LOWE: Thank you, sir.


20645 MR. LOWE: Did you mention that you had a new president?

20646 MR. SHOEMAKER: No. To clarify, we mentioned that our President and CEO has announced that he is leaving the company to pursue his own personal interests and investment interests.

20647 MR. LOWE: Has a new president been announced?

20648 MR. SHOEMAKER: No, we have not announced a new president.

20649 MR. LOWE: Okay.

20650 You have heard testimony that GT provides wholesale services to TELUS in the east and Bell in the west. Do you recall that testimony?

20651 MR. SHOEMAKER: I don't recall that particular testimony, but that is exactly how we provide wholesale services, yes.

20652 MR. LOWE: Are there other folks out there providing similar wholesale services as well?

20653 MR. SHOEMAKER: We see wholesale services being provided by, obviously the incumbents, by AT&T Canada, by Group Telecom and, to some degree, even the cable companies have a network that they can provide wholesale services across. So we see pretty healthy competition in that space.

20654 MR. LOWE: Then in the --

20655 MR. SHOEMAKER: In 360 as well, although they are in receivership.

20656 MR. LOWE: Then in the southern Ontario area there are some hydro carriers that have some fibre facilities as well. Is that something that you are aware of?

20657 MR. SHOEMAKER: Yes. There are various municipalities that have fibre facilities that they will either lease or use for their own internal purposes as well.

20658 MR. LOWE: In the west are there any municipalities that have any fibre or is that --

20659 MR. SHOEMAKER: I'm not aware of any municipalities that have significant fibre. They do have significant duct space as an example. When we pulled our network in Calgary and Vancouver we used the duct space to pull -- that they had in their hydro municipalities to pull our fibre through.

20660 MR. LOWE: Thank you.

20661 Now, could you please turn to your response to Bureau-3?

--- Pause

20662 MR. LOWE: Now, in this interrogatory the Bureau asked for empirical evidence as to the prevalence of long-term contracts and estimates that GT would have on the extent of the share markets that is tied up in long-term contracts.

20663 Your answer in (a) -- or your answer to these questions was:

"GT does not possess any empirical evidence regarding the prevalence of long-term contracts used by the ILECs nor regarding the extent of the market that is inaccessible to a CLEC because of long-term contracts." (As read)

20664 And you go on:

"The most efficient way to gather this information would be from the ILECs or for the Commission to gather such information pursuant to their report to the Governor in Council on the status of competition." (As read)

20665 Do you see that?

20666 MS GILFILLAN: Yes.

20667 MR. LOWE: I had a quick look at the State of Competition Report, Exhibit 5, and was that information -- I didn't see any of that information in there.

20668 MS GILFILLAN: No. I think we were suggesting it is something that the Commission should consider collecting on a going-forward basis because we think that it has a material impact on the ability of CLECs to derive revenue off their networks as they build it so that it would shed some light on the role that a facilities-based competition and new entrants' ability to access customers as they rollout their network.

20669 MR. LOWE: Thank you.

20670 Those are my questions.

20671 THE CHAIRPERSON: Thank you, Mr. Lowe.

20672 I believe those, then, are all the parties who had registered to -- Mr. Ryan?

20673 MR. RYAN: Yes, please, Mr. Chairman. I think I staked my claim some weeks ago.

20674 THE CHAIRPERSON: Oh, sorry. I had you crossed off the list. I must have mistakenly done that.

20675 MR. RYAN: Yes. We were overly enthusiastic, Mr. Chairman. I do have some questions.

--- Pause

20676 MR. RYAN: Thank you, Mr. Chairman.


20677 MR. RYAN: Good morning, panel.

20678 I arranged, and I hope you have received copies of them, to have distributed to you a series of documents that I intend to refer to during the course of my cross-examination.

20679 I trust that those have made their way to the Commission as well, Mr. Chairman.

20680 Mr. Shoemaker -- sorry, is it "Shoemak" or "Shoemaker"?

20681 MR. SHOEMAKER: Shoemaker.

20682 MR. RYAN: Shoemaker.

20683 Mr. Shoemaker, I understand that the company began earning revenues in -- was it 1998? Is that your first year of revenues?

20684 MR. SHOEMAKER: Yes, it would have been. The company actually had its origins going back to 1996, but really was fairly small and regional in nature until Bob Wolfe came on board in late 1998 and brought some new financing in to really start expanding the company. So 1998 was really the first meaningful year of revenue generation.

20685 MR. RYAN: And you had an initial public offering of your shares in the first quarter of last year, was it?

20686 MR. SHOEMAKER: In March of 2000.

20687 MR. RYAN: Is it fair to say that it has not been an easy ride for the stock since that time?

20688 MR. SHOEMAKER: Well, clearly the entire Telecom space and the markets in general in the technology sector have gone through a fairly rough road so we think we have performed relatively -- to our peers relatively well, but obviously in general there has been quite a substantial under performance of the sector.

20689 MR. RYAN: Could we look at document 5, which is amongst the documents I passed up to you through your counsel earlier today?

20690 MR. SHOEMAKER: Yes, I have that.

20691 MR. RYAN: Could you tell me what that document depicts?

20692 MR. SHOEMAKER: It looks like it depicts our share performance from -- I'm assuming that would be the initial public offering time period through our current time period.

20693 MR. RYAN: It is document No. 5 I'm looking for, Mr. Chairman, which is headed "Stock Performance of Group Telecom."

20694 I'm sorry, Mr. Shoemaker, I got a bit ahead of myself there. You were saying?

20695 MR. SHOEMAKER: Yes, it is a stock performance graph from October 1999 to October 2001.

20696 MR. RYAN: And fair to say by way of summary that the history of the stock has been in pretty much a continuous decline since the IPO?

20697 MR. SHOEMAKER: It clearly has declined. As I said, commensurate with the entire sector it has declined.

20698 MR. RYAN: Well, I would suggest to you, Mr. Shoemaker, that the decline set in a bit earlier than it did with other companies. Would that be fair?

20699 MR. SHOEMAKER: I would say not. I mean, if you look at -- we measure ourselves against comparable companies in the CLECs space and we noticed earlier on that we actually lagged considerably a lot of the other top tier CLECs in the space in terms of our downward take in the marketplace as we had been perceived to be one of the top tier CLECs, but unfortunately we have been caught up in a broader market downdraft that is unavoidable when you are in the emerging telecom space.

20700 MR. RYAN: Your stock was issued at what price?

20701 MR. SHOEMAKER: We issued our shares at $20.40 Canadian in terms of our IPO price.

20702 MR. RYAN: It is trading at about what today?

20703 MR. SHOEMAKER: In the mid-dollar and a half range.

20704 MR. RYAN: Could we turn next to document No. 1, which is also a one-page document?

20705 MR. SHOEMAKER: Yes.

20706 MR. RYAN: That document, Mr. Shoemaker, is headed "Group Telecom Selected Performance Statistics"?

20707 MR. SHOEMAKER: Yes.

20708 MR. RYAN: Do you recognize that document?

20709 MR. SHOEMAKER: I recognize the information on the document as being indicative of our performance.

20710 MR. RYAN: Have you seen this document prior to today?

20711 MR. SHOEMAKER: I had not seen this particular document prior to today.

20712 MR. RYAN: But you have had a chance to verify the information on it?

20713 MR. SHOEMAKER: Yes.

20714 MR. RYAN: The upper right-hand corner it seems to me there must be a typographical error. It says "Q1-01". I suppose that should mean "Q1-00"?

20715 MR. SHOEMAKER: Yes.

20716 MR. RYAN: If we look first at your actuals, beginning with Q1 of 2000 and going up to Q3 of 2001, and ignore the estimated column which is the row of figures on the left-hand side for the moment.

20717 MR. SHOEMAKER: Yes.

20718 MR. RYAN: Starting with the revenue line we have seen a quarter-over-quarter increase in your revenues since you went public. Is that right?

20719 MR. SHOEMAKER: That's correct.

20720 MR. RYAN: The EBITDA, on the other hand, in each quarter has been negative?

20721 MR. SHOEMAKER: Yes, narrowing sequentially but negative.

20722 MR. RYAN: By EBITDA perhaps you could -- although we have used that term several times, perhaps you could remind us what EBITDA stands for?

20723 MR. SHOEMAKER: Sure. It stands for earnings before interest, taxes and depreciation and amortization. It is essentially a measure, not exactly but a reasonable proxy for operating cash flow, which is essentially your revenue minus your direct cost of goods sold and your SG&A expenses.


20724 MR. RYAN: So it doesn't include, for instance, the interest you have to pay on your debt?

20725 MR. SHOEMAKER: Right. It would not include interest on your debt or capital expenditures in the business and any other taxes.

20726 MR. RYAN: Now, I presume you have a considerable amount of debt at this point, given the early state you are in the stage of development?

20727 MR. SHOEMAKER: Yes, we have a substantial debt and equity position that we have used to fund the start-up nature of our business.

20728 MR. RYAN: What would the size of your debt be today?

20729 MR. SHOEMAKER: It would be approximately $1.4 billion in total debt right now.

20730 MR. RYAN: That would be Canadian dollars?

20731 MR. SHOEMAKER: Yes.

20732 MR. RYAN: Now, the interest that you are paying on that debt, because I presume there is interest attached to that?

20733 MR. SHOEMAKER: That is correct.

20734 MR. RYAN: It would explain why the net loss line is larger than the EBITDA line, or at least more negative than the EBITDA line.

20735 MR. SHOEMAKER: That and depreciation on our substantial base of fixed assets.

20736 MR. RYAN: What we are seeing here is that your net loss for quarter 3, the last quarter for which you have numbers, that quarter alone your loss was $137 million roughly?

20737 MR. SHOEMAKER: Yes. It included a one-time write down of an investment that we had in shares of 360 Networks.

20738 MR. RYAN: That loss has been rising quarter by quarter?

20739 MR. SHOEMAKER: Yes, which would you -- if we went back and looked at our original business plan, that would have been expected in our business plan. As you build your network and you incur a substantial amount of up-front money and incur the interest carry and the depreciation it is a natural evolution. But the number that we focus on in terms of our drive to profitability would be our EBITDA loss, which we have been able to shrink and narrow sequentially in line with our business plan.

20740 MR. RYAN: Well, your evidence is that the company is not concerned about the trend in the net losses?

20741 MR. SHOEMAKER: No, we are not. The Wall Street community does not focus on net loss for an emerging telecom company. We would not expect to actually generate positive net income for some number of years. What we focus carefully on is our EBITDA generation, which we view as a proxy measure for our operating cash flow, our liquidity and our ability to fund the expansion of our business and to make sure that we are on track with the trajectory that we want to see in our business plan.

20742 MR. RYAN: Now, could we go to the fourth quarter results, the estimated results for which you have at least a revenue figure here --

20743 MR. SHOEMAKER: Yes.

20744 MR. RYAN:  -- although not a complete sequence of numbers.

20745 Revenue in the fourth quarter stood at $63 million?

20746 MR. SHOEMAKER: That is an estimate, yes.

20747 MR. RYAN: Now, that number is a bit misleading, I suppose, in relation to revenue figures for other quarters, is it not?

20748 MR. SHOEMAKER: Yes, in terms of -- when you say "misleading," could you clarify your question?

20749 MR. RYAN: Well, I understand you had a dark fibre sale that took place in the fourth quarter?

20750 MR. SHOEMAKER: Yes, approximately $5.4 million.

20751 MR. RYAN: That would be out of the ordinary course of business for you to have a fibre sale?

20752 MR. SHOEMAKER: I would say we have not had substantial fibre sales in the past. I think we expect to have some amount of fibre sale going forward. It is a part of our business where if one of the large carriers needs fibre and is willing a price that gives us a strong return, we can do that. We have a very dense fibre network so we have very substantial amounts of excess fibre, so we would look forward to using this line of business to generate revenues on a go-forward basis.

20753 MR. RYAN: You say "on a go-forward basis." It has not been a part of your business plan in the past, has it?

20754 MR. SHOEMAKER: It has not in the past.

20755 MR. RYAN: You said the number in terms of revenue that was generated by the dark fibre sale was five point --

20756 MR. SHOEMAKER: Five point four million.

20757 MR. RYAN: Five point four million.

20758 If we back that out of the estimated revenue figure for this quarter, we get something in the range of -- help me here, Mr. Shoemaker.

20759 MR. SHOEMAKER: In the $58-millionish range.

20760 THE CHAIRPERSON: I think it has been demonstrated already in the proceeding that lawyers can't add, Mr. Ryan.

--- Laughter / Rires

20761 MR. RYAN: Unfortunately, I have fewer friends than Mr. Koch so that engineering expert that he consults when he has to do addition and subtraction wasn't available to me.

20762 MR. SHOEMAKER: Finance guys can't add without their HPs either.

20763 MR. RYAN: Now, substituting a figure of $58 million to restate these revenue figures on a consistent basis across the timeframe that we are dealing with here, you actually would have a revenue dip in this most recent quarter?

20764 MR. SHOEMAKER: Yes, we experienced a fairly substantial sequential decline in our private line business, which is essentially our wholesale carrier business. As we have seen, a lot of the larger carriers like AT&T Canada, Sprint and even the incumbents have been actively grooming their network so they have been leasing a lower amount of circuits from us as they have been building out their own networks and moving traffic on to their own networks.

20765 So the way we looked at the dark fibre sale was that we were filling in a sequential decline as some of those customers have narrowed in their services with us. We have also seen some carriers exit the marketplace, such as some of the smaller tier carriers like Norigen, C-1 and Axxent that we used to some carrier business with.

20766 So we have seen a somewhat -- what we considere to be a one-time decline in that revenue base but we expect that to be fairly stable. So we are looking forward to seeing decent sequential growth going forward.

20767 MR. RYAN: So if I could sum up your target market, which isn't the dark fibre market, your revenues have ceased, as of this quarter, their growth progression. You are looking forward to that being restored, but that is in the future for us.

20768 MR. SHOEMAKER: The way we would characterize it is the larger business customers, which would clearly include your largest carriers in Canada have been very cautious in how much services they are willing to buy and we have seen a decline in that business. We have seen an intentional decline in our long distance as we had some fairly low margin contracts with long distance resellers that we pulled out, which is part of the decline.

20769 But as you strip it down to the layer below that, we are still seeing good growth out of the core commercial services that we sell to small to medium-sized business customers, so we are actually quite happy with that part of our business continuing to grow.

20770 MR. RYAN: So the business strategy continues to be to focus on the small and medium-sized enterprise?

20771 MR. SHOEMAKER: Absolutely.

20772 MR. RYAN: To the extent that you do sales to carrier customers, that is incidental to your mainline business?

20773 MR. SHOEMAKER: I would not say that the wholesale business is incidental to our business. We will focus on both the small to medium-sized business customers and the wholesale customers.

20774 The wholesale business is a very significant part of our business and it runs very high profit margins. So we look at the wholesale business as being critically important to us as it throws off cash and helps us with our liquidity and our position in the marketplace while we build services to the small to medium-sized business customer in the end market.

20775 The profitability of the small to medium-sized business market is a longer road to profitability than the wholesale carrier business.

20776 MR. RYAN: But the way you put it there, I still sense that it is the small to medium-sized enterprise that is your target market and that the carrier market is a convenient outlet for some products while you continue to build your business?

20777 MR. SHOEMAKER: I would characterize it as being that they are both important markets to us. I mean, we strategically think that over the very long run horizon of a 10-year plan, we want to be focused on driving growth in the commercial side of the business, the small to medium-sized part of the business. But due to the up-front cost nature of investing and building a network, it is critical that we have high value services that we get off of our network in terms of wholesale. So from that perspective they are both strong focuses of our business plan.

20778 MR. RYAN: Could we go back to Bureau 3 that you were looking at with Mr. Lowe a minute ago.

20779 MR. SHOEMAKER: Sure.

20780 MR. RYAN: Mr. Chairman, that is GT(Competition Bureau)31Aug-3.

20781 THE CHAIRPERSON: Thank you, Mr. Ryan.

20782 MR. RYAN: It is not the discussion that Mr. Lowe was looking at with you that caught my eye, Mr. Shoemaker, it's a passage on page 2 of 3. If you look down below the bottom half of the page, there is the letter "A".

20783 MR. SHOEMAKER: Yes.

20784 MR. RYAN: You say there:

"Group Telecom's business strategy is to target small and medium-sized businesses." (As read)

20785 No mention of carrier market or wholesale market there, is there?

20786 MR. SHOEMAKER: No.

20787 MR. RYAN: Is there an explanation for the omission of reference to the carrier market there, given the evidence we have just heard that they are of equal importance to you?

20788 MS GILFILLAN: I think I have to address this question since it was myself and my team who answered this question.

20789 MR. RYAN: All right.

20790 MS GILFILLAN: But I think I guess we thought that what the Competition Bureau was trying to get at in the total of this question was our long-term contract proposal, which we really see as a mechanism to help us address the small and medium-sized enterprise market, not our wholesale business. So that is the context in which we answered this particular section in the context of the overall question.

20791 So I think that it is our strategy to target small and medium-sized business. It is also our strategy to have a healthy wholesale business.

20792 MR. SHOEMAKER: I would just add to that, you know, those that own your network and if you are going to make that substantial investment in your network, anybody that makes that kind of investment will always have a strong focus on wholesale and carrier business. It is a very substantial part of our revenue. It is currently about 40 per cent of our revenue mix and it is an important part of our business and our focus.

20793 MR. RYAN: You are talking now, when you say "40 per cent," you are talking private line collectively or are you talking carrier market?

20794 MR. SHOEMAKER: Sorry. Private line collectively.

20795 MR. RYAN: Within that 40 per cent, are some of the private line customers large enterprises or are they all carriers?

20796 MR. SHOEMAKER: I would say that there is some component of large enterprises but the predominance is carriers.

20797 MR. RYAN: So, Ms Gilfillan, your evidence is that when you read this question, I think you will agree with me that there is no particular reference to the small and medium-sized business, but there was something about the question that caused you to focus on that in terms of the answer that you provided?

20798 MS GILFILLAN: I believe it was the focus of the question on our long-term contract proposal, which is relevant to the small and medium-sized enterprise market and not to the wholesale market. So that is the context in which we answered the question.

20799 MR. RYAN: Could we go next to document 11, please.

20800 I might just say by way of background, document 11, Mr. Chairman, forms part of the record in sort of a way. No need to turn to it.

20801 TELUS asked a question, GT(TELUS)31Aug-2, they asked you to produce a copy of this document, and rather than produce the document -- which I don't take any objection to, but rather than produce the document you provided a web address for it. So it is not, as such, available on the record, although it is identified, Mr. Chairman.

20802 But, Mr. Shoemaker, can you identify that document as a document prepared by the company?

20803 MR. SHOEMAKER: Yes.

20804 MR. RYAN: Could you tell me how that document came to be prepared and what purpose it serves?

20805 MR. FABES: Mr. Ryan, if you don't mind if I respond to the question.

20806 It is an annual report on the company that is filed with the Securities and Exchange Commission in the States and also forms the basis for the annual report that we file with the Canadian Securities Commission.

20807 MR. RYAN: I have simply attached one page of that document to document number 11, and it's page 15. If you just go to that. I'm looking at the subheading "Business Overview", specifically at the second sentence. You say there in the information -- as part of this information you produced for the Securities and Exchange Commission in the United States the following:

"Over our network we provide internet high-speed data and voice services targeted primarily to small and medium businesses." (As read)

20808 Although I have read the balance of that paragraph, Ms Gilfillan and gentlemen, I don't see any reference there to targeting the wholesale market.

20809 Am I reading correct?

20810 MR. SHOEMAKER: Yes, you are reading correct.

20811 MR. RYAN: How is it, in light of the evidence that we have heard today from Mr. Shoemaker and Ms Gilfillan, that these two components of your business are of equal importance that you would indicate to the Securities and Exchange Commission of the United States that your business was, in fact, targeted primarily on small and medium businesses?

20812 MR. SHOEMAKER: I think we were referring to probably the focus of where a lot of our resources are focused as the carrier business does not require as large of a sales force. It does not require as large of a back office infrastructure. So we were pointing the SEC to where a lot of our resources were focused. We were not implying that we don't have a significant component of our business coming from the wholesale markets.

20813 MR. RYAN: Well, we have seen a number of documents like this in the course of this proceeding, Mr. Shoemaker, and I think the thrust of the evidence we have heard so far is that with documents of this sort some importance is attached to providing accurate and complete information to the parties that have cause to rely on it.

20814 In that context, would you agree with me that at the time this document was prepared it was intended to be accurate and complete and this was your best effort to achieve that?

20815 MR. SHOEMAKER: Yes, I would agree with that.

20816 MR. RYAN: So is it your evidence here this morning that is mistaken or the document that you have filed with the Securities and Exchange Commission that is mistaken in that respect?


20817 MR. SHOEMAKER: I don't think either of them were mistaken.

20818 MR. RYAN: So you are sticking with that story. Okay. Well, let's move on then.

20819 Would you agree with this much, Mr. Shoemaker, you haven't designed your network and you don't invest in your network primarily with an intention of being a wholesale provider of telecom services such as 360 is, for instance.

20820 Is that fair?

20821 MR. SHOEMAKER: That's correct.

20822 MR. RYAN: And to that extent, at least, your provision of wholesale services is incidental to your main investment plan, which is to invest to provide services for small and medium enterprises.

20823 MR. SHOEMAKER: Well, given the funding profile of our company, I would not use the word incidental. I would say clearly we view the long term strategy of our business to be focused on providing services to end users, but the wholesale business is a significant component of our funding source for our fully funded business plan. So from that perspective it's a critically important aspect of our business plan. But clearly our strategy and our focus of building a business over the next 10 to 15 years is to focus on the longer term opportunity of serving the end user directly.

20824 MR. RYAN: And just on that point, I understand that about 78 per cent of your customers are served entirely over your own network facilities at this point.

20825 MR. SHOEMAKER: That would be a measure of our -- when we quote access lines, which is a measure of a voice channel or the number of voice circuits that we sell to customers, that's the percentage that we have on our network currently. So it would be a measure of the end point of the network and the percentage that we have on our network.

20826 MR. RYAN: By implication, 22 per cent of your customers are served through some combination of your own facilities and facilities you source elsewhere.

20827 Would that be fair?

20828 MR. SHOEMAKER: Well, to clarify, the 78 per cent would be that portion of voice business that we carry on our own network and the other 22 per cent would be off network in some fashion.

20829 MR. RYAN: Is that different to what I was suggesting to you?

20830 MR. SHOEMAKER: I wasn't quite sure what you were asking but --

20831 MR. RYAN: Okay.

20832 MR. SHOEMAKER:  -- hopefully that clarifies.

20833 MR. RYAN: In fact, in a number of cases then you are dependent on local loops that you obtain from local telephone companies.

20834 Is that right?

20835 MR. SHOEMAKER: We would be dependent primarily on local loops in terms of extending the reach of our network through the ILEC collocation footprint that we have, so to some extent we are dependent on that, yes.

20836 MS GILFILLAN: If I could just add to that. I think that there is a couple of ways that we use loops. One is to serve customers with multiple locations, some of which are off-net in our terminology. That's that we can't reach them over our own network, but we can through our collocates.

20837 We also use loops as a pre-sales strategy before our network is lit. We use loops therefore to justify a build, to develop that initial revenue stream to justify a build.

20838 MR. RYAN: Could we go next to AT&T(Director)31Aug01-30. That is AT&T(Director)31Aug-30.

20839 Do you have that, Ms Gilfillan?

20840 MS GILFILLAN: Yes, we do.

20841 MR. RYAN: Now, no need to turn to it unless you wish, but you were asked by the Competition Bureau in a different interrogatory to produce certain documents. One of the documents that you referred to was a July 9 2001 submission that you made on behalf of yourself, AT&T Canada and CallNet Enterprises, to the Commission, in GT(CompetitionBureau)31Aug01-2.

20842 MS GILFILLAN: Yes.

20843 MR. RYAN: And in fact that document was produced, was it not, as you see here before you by AT&T in response to a different interrogatory from the same source, that is from the Director.

20844 Do you see it attached to the AT&T document?

20845 MS GILFILLAN: Yes.

20846 MR. RYAN: And that is one and the same document as the one referred to in your own response. Is that right?

20847 MS GILFILLAN: Yes.

20848 MR. RYAN: I am looking at the attachment to AT&T Director No. 30. Could you tell us what that document is?

20849 First of all, there is a covering letter to it. Could you explain what that document is?

20850 MS GILFILLAN: These are our comments in one of the follow-up proceedings to Decision 2001-238.

20851 MR. RYAN: And you filed that document with the Commission?

20852 MS GILFILLAN: Yes.

20853 MR. RYAN: And you filed it not only on your own behalf, but on behalf of AT&T Canada and CallNet?

20854 MS GILFILLAN: Yes.

20855 MR. RYAN: And was it authored in some part by you, Ms Gilfillan?

20856 MS GILFILLAN: Yes.

20857 MR. RYAN: Could we go to paragraph 60 of the document. That Is page 18.

20858 Now, I think this is largely confirmatory, but elaborates on some of the testimony you were just giving. In paragraph 60 you say, starting into that first sentence:

"Even aggressive facilities-based entrants such as Group Telecom and AT&T Canada have no choice now and will have no choice for the foreseeable future but to rely on ILEC loop facilities in most areas of non-essential bands as well as in essential bands." (As read)

20859 Is that correct?

20860 MS GILFILLAN: Yes. I think this refers to the existing approach of the Commission with respect to ensuring that these types of facilities and services are available, the near-essential and essential loops are available on a cost-based basis until such time as there is sufficient competitive alternatives. That is something that we fully support.

20861 MR. RYAN: Right.

20862 MS GILFILLAN: I don't think that we are looking for substantial subsidies with respect to our purchase of these facilities, but we do think it's essential that they be available at cost-based rates.

20863 MR. RYAN: And that is a need that you see -- that you saw when you filed this document lasting for the foreseeable future and that would still be your position here today, I presume?

20864 MS GILFILLAN: Yes.

20865 MR. RYAN: And going over to paragraph 63, just one other passage from that document. You say at the beginning of the paragraph:

"Third, as discussed in further detail below, the process of facilities-based entry is not one in which CLECs can simply choose relatively free from constraints whether or not to provision their own non-essential facilities"

20866 And skipping down four or five lines you continue:

"It is simplistic in the extreme to assume that the path to facilities-based competition can involve the exclusive use of CLEC-owned facilities at every stage." (As read)

20867 That is the general thrust of your evidence in this document as filed with the Commission in July?

20868 MS GILFILLAN: That is the general thrust of our evidence. I would note that the first sentence refers to non-essential. It refers to non-essential facilities which we believe should be available for the sunset period.

20869 However, we think that the answer that the Commission arrived at in Decision 97-8, which was you really need an alternative network out there to have true competition is one that we will get to if we have cost-based access to non-essential and essential facilities.

20870 We think that, you know, what really differentiates Group Telecom and where we really are able to have deep market penetration, where people buy our services, is where we offer them on our own network. That really -- that is where the Commission has to focus, on ensuring that there is an alternate network out there so that people, small and medium-sized businesses, have access to truly differentiated services.

20871 MR. RYAN: But going back, just to make sure I understand you correctly, going back to paragraph 60 your evidence there was about the need to have access to both loop facilities and essential and non-essential bands both. Is that right?

20872 MS GILFILLAN: Yes. I think --

20873 MR. RYAN: And not just for the sunset period, but for the foreseeable future.

20874 Is that right?

20875 MS GILFILLAN: Well, I think when we wrote "foreseeable future," we meant the sunset period which is the foreseeable future.

20876 MR. RYAN: You don't have a vision in your plans beyond the sunset period.

20877 MS GILFILLAN: Well, once a sunset period is over, there will be sufficient alternate facilities out there that we don't think that mandated access to these near-essential facilities will be necessary.

20878 MR. RYAN: I might suggest to you that in the future your dependence on telephone company facilities is more likely to increase than decrease as you seek to expand your footprint and grow your market share. Would that be fair?

20879 MS GILFILLAN: I think that I would have to disagree with that statement. We have made a substantial investment I think in our network and that really to -- and where we offer a value proposition to the customer is where we provide services on our own network. So that we foresee, you know, now that we have made a substantial investment in a substantial network, which spans from Victoria to St. John's, where we have local facilities, we feel that we are going to have to go deep on that network and derive substantial revenues off that network.

20880 As we gain revenues off that network, we will build out concentrically and go after sort of the medium margin business and then the small margin business as we drive out from the downtown cores.

20881 But really, our strategy is to own the network. It's not to buy the network.

20882 MR. RYAN: That's where you would like to be.

20883 MS GILFILLAN: That's where we are I think.

20884 MR. RYAN: Yes. Well, we have already, I think, had evidence that 22 per cent of your customers are served in part over telephone company owned facilities. So you are not quite there yet, are you?

20885 MR. SHOEMAKER: Just to clarify that, that would be the loop portion. There is a -- the base of access lines that we are putting in place has predominantly been disproportionate to the on-net pace so while we are at 78 per cent, every quarter we have been adding close to -- our net adds have been close to 90 per cent on net.

20886 MS GILFILLAN: Just to add to that. I think that what we have said in the follow-up decision is yes, we need continued access to near-essential loops because we use that to build a revenue base, help us justify extending our network.

20887 So we don't foresee the percentage of on net customers going down, we see them going up. But we also think that until the sunset period is over we still need continued access to unbundled loops at cost-based rates.

20888 MR. RYAN: So you see the percentage going up. Do you see -- what about the movement in absolute numbers? Will you be adding telco-leased facilities to your network or facilities otherwise acquired from telephone companies?

20889 MR. SHOEMAKER: We expect to see I would say a fairly stable percentage going forward. We do expect to add customers into our access line count that are acquired through purchasing a loop from the incumbent. But essentially we have -- our network takes it from the collocation facility back into our network so we are really only looking to rely on the loop portion.

20890 MR. RYAN: I imagine your ability to follow through with that plan depends upon the availability of capital resources to you?

20891 MR. SHOEMAKER: We currently believe we have the funding in our business plan to execute on the network that we have built. So I would not say that we are reliant on any additional funding.

20892 MR. RYAN: What will your capital expenditure be in 2001, Mr. Shoemaker?

20893 MR. SHOEMAKER: In this fiscal year 2001 ending, we expect to be somewhere in the $375 million range.

20894 MR. RYAN: And what about your capital expenditure plans for 2002?

20895 MR. SHOEMAKER: We expect to be in the $150 million to $175 million range. The difference would be that we have really spent a lot of the time building our network. As an example, in the $375 million we spent a hundred-millionish on just building fibre and building up the 17 markets that we are in.

20896 The heavy lifting or the heavy capital intensive period is over and the $150 to $175 million is consistent with what our plans have been since the time we went public back in March of 2000, and it represents more success-based capital, building out and extending the reach of our network. But the clear, heaviest, capital intensive part of our plan has been incurred over the last two years.

20897 MR. RYAN: So --

20898 MS GILFILLAN: I think just --

20899 MR. RYAN: Yes, go ahead.

20900 MS GILFILLAN: Just to add to that. I think that's consistent with what I said. We have spent a lot of time building a network out to Canadian cities. Now we have, you know, a big local network in many Canadian cities.

20901 Now we need to focus on deriving revenue off that network. As we derive revenue off that network, we will continue to build, but clearly the big build, as Steve has said, has been done.

20902 MR. RYAN: You have just told us that you have spent a considerable time building your network. It amounted to two or three years actually, would be the time you spent building your network.

20903 Is that correct?

20904 MR. SHOEMAKER: That's correct.

20905 MR. RYAN: And we have arrived at this point and now your capital expenditures will take a sharp drop from year 2002 versus year 2001.

20906 MR. SHOEMAKER: Yes, and there is other areas of savings. I mean as an example, we have incurred substantial systems costs to build our back office and pay for substantial software licences to all of our back office vendors. So those costs are coming down, and we are really moving forward to a model of essentially leveraging the network we have and extending the reach of that network. So it's slightly less capital extensive model going forward since we have incurred a lot of the build-up costs to get the core metro networks built.


20907 MS GILFILLAN: But we will continue to build out, just not at the same rate as we have. Now, we have to derive revenue off the network and we will keep building out concentrically outside of the downtown cores.

20908 MR. SHOEMAKER: I would like to clarify that.

20909 I would say that the difference is we won't build out at the same rate in terms of building the core footprint of the metro networks.

20910 Once we have built those 17 metro networks the core backbones are in place, but we will continue to add on that building to about the same rate that we have been adding them historically. So we are not slackening our pace in terms of continuing to reach new customers and putting new customer building locations on our network, it is just less cost intensive to extend from your fibre ring into a building than it is to build the entire ring itself.

20911 MR. RYAN: So you have spent a large portion of what you are going to spend on developing your network, you have achieved 1 per cent market share or thereabouts, and going forward we can see some small incremental investments in capital in that network but nothing in the dimensions we saw, for instance, this year?

20912 MR. SHOEMAKER: I would suggest, going forward, to see capital investment in the ranges that I have discussed for next year going forward on an annual basis.

20913 MR. RYAN: To be about a third of this year's rate of expenditure?

20914 MR. SHOEMAKER: Yes.

20915 MR. RYAN: And it's your evidence that you will be able to reduce your capital expenditure by that percentage and at the same time not increase your reliance upon telco facilities going forward?

20916 MR. SHOEMAKER: Yes. We think we can do that as we think we have built a substantial network footprint across Canada. We have close to 400,000 fibre string kilometres of network. We have dense fibre built in and we have the core backbones built in all the markets they were going to be in and so we think we will continue to aggressively expand our network and do it in a fairly capital efficient manner.

20917 MR. RYAN: Tell me, is the investment community impressed with that plan going forward, Mr. Shoemaker?

20918 MR. SHOEMAKER: I would say, to be honest, that the investment community is probably not impressed with telecom in general these days and we have seen a lot of institutional portfolio managers exit out of telecom completely, but those that follow us I think still believe in a facilities-based strategy. If you look at our performance to date we haven't deviated from the overall performance that people have expected from us in executing our business plan.

20919 MR. RYAN: Could be go next to document 2, please?

20920 Just by way of background, while people are locating that document which is headed "UBS Warburg", I understand that you had a conference call with your analysts on October 4, that is some two weeks ago now.

20921 MR. SHOEMAKER: That's correct.

20922 MR. RYAN: This document appears to have been produced on October 5, the next day. Is that right?

20923 MR. SHOEMAKER: Yes.

20924 MR. RYAN: Could you tell us who UBS Warburg is, please?

20925 MR. SHOEMAKER: UBS Warburg is a large research house that -- and Stewart Ishewat(ph), who you can see his name on this report of the analysts that follows Group Telecom for UBS Warburg.

20926 MR. RYAN: I would just like to take you through some of the comments that that gentleman made in this report and invite your observations on them.

20927 Looking first at the first paragraph of text, he indicates that:

"Wednesday night..."

20928 That would have been October 4th:

"... GT announced that quarter 4 revenue would come in below our expectations. Excluding a dark fibre sale revenue was flat and slightly down from the previous quarter. Also announced was the resignation of the COO Bob Wolfe." (As read)

20929 I think you have already alluded the the resignation of Mr. Wolfe earlier today. That is the same gentleman we have been speaking about?

20930 MR. SHOEMAKER: That's correct.

20931 MR. RYAN: The analyst goes on in the next paragraph to say that:

"Your shares have dropped 76 per cent since the beginning of September, suggesting the market has anticipated these developments..."

20932 Presumably in relation to your quarter 4 revenue results.

20933 The analyst goes on to say:

"However, given ongoing concerns of revenue growth and funding, we recommend caution even at current levels." (As read)

20934 MR. SHOEMAKER: Yes.

20935 MR. RYAN: And under the "Action" paragraph UBS Warburg says that they are reducing the rating on your stock from "buy" to "hold"?

20936 MR. SHOEMAKER: Yes.

20937 MR. RYAN: Is that in fact what happened?

20938 MR. SHOEMAKER: Yes.

20939 MR. RYAN: They make reference to you, like most of your CLEC peers, having funding concerns over the next period of time?

20940 Yes. Yes. I mean, we have spoken with a number of analysts and we have obviously a large number of analysts that follow us and this represents one data point or one reference point obviously. But we would not share the view that we have any funding concerns.

20941 I think unfortunately the equity analysts that follow us don't fully understand how bank covenants work, so I think he had some concern over the bank covenants and did not fully understand how bank covenants work and how the amendment process works to getting amendment. So I think as he has voiced concern over the funding, his concern is over the covenant issue, which we fully expect to have addressed this month.

20942 MR. RYAN: Two points there, Mr. Shoemaker, if I may.

20943 First of all, it's your evidence that UBS Warburg is not in a position to understand --

20944 MS LEBRETON: Excuse me, Mr. Chairman. I would just like to bring your attention to the last page of this document where the conclusion, in fact, is downgraded from "strong buy" to "buy". So it is not from "buy" to "hold".

20945 MR. RYAN: I think we will find as I get to that paragraph that that intervention is incorrect, Mr. Chairman, but I will come to that point.

20946 THE CHAIRPERSON: I think the words to say on the first page "buy" to "hold".

20947 MR. RYAN: And there is an explanation for what appears on the last page. I think the lady concerned has got a bit ahead of herself in terms of the sequence of events.

20948 There is in fact two re-ratings of the stock, but I am prepared to go ahead with the witness --

20949 THE CHAIRPERSON: Go head, Mr. Ryan.

20950 MR. RYAN:  -- and get the witness' evidence on that point.

20951 I was saying two points, Mr. Shoemaker?

20952 MR. SHOEMAKER: Yes.

20953 MR. RYAN: First of all, I understand your evidence to be that this gentleman at UBS Warburg isn't in a position to understand bank covenants the way you should for the job that he is carrying out, for the investment community.

20954 MR. SHOEMAKER: Well, he is an equity analyst, he doesn't follow senior secured banks.

20955 MR. RYAN: So, he is a very specialized gentleman indeed?

20956 MR. SHOEMAKER: Yes.

20957 MR. RYAN: The second point is, you said he only expressed concern about the bank covenants issue. In fact, if we go to the second full paragraph under "Action", the third sentence, he indicates that:

"The company had previously been growing at close to 20 per cent sequentially and that UBS Warburg was looking for 16.8 per cent growth." (As read)

20958 But I think as we know from your testimony earlier today, in fact the revenue growth was flat in the last quarter. Is that right?

20959 MR. SHOEMAKER: That's correct.

20960 MR. RYAN: So it wouldn't be right to say that the only concern he expressed was about the operation of the bank covenants?

20961 MR. SHOEMAKER: No. My comment was more specifically due to his comments on the funding. I said that his issue regarding the funding concerns was driven primarily by not being privy to and understanding the full extent of our discussions with the banks on the bank covenant issue.

20962 MR. RYAN: But you were available to explain that to him during this conference call, I take it?

20963 MR. SHOEMAKER: Yes.

20964 MR. RYAN: But he didn't seem to emerge with the understand of the situation that you have?

20965 MR. SHOEMAKER: That's correct.

20966 MR. RYAN: The third full paragraph under "Action", that is the last paragraph on this page, the analyst goes on to say:

"GT management blames the current economic slow down. While not immune from economic weaknesses, we would have expected GT to be less impacted as GT provides lower cost data solutions than legacy products offered by incumbent telecom operators." (As read)

20967 So the analyst's view as expressed here would be that although we can certainly expect some impact on your revenue because of general economic conditions affecting the industry, you, in his view, performed less well than your peers in the market.

20968 MR. SHOEMAKER: Could you rephrase the question again? I'm sorry?

20969 MR. RYAN: In a nutshell, UBS Warburg thought that you had underperformed your competitors in respect to this last quarter.

20970 MR. SHOEMAKER: Well, as we pointed out, we had a sequential decline in private-line and our long-distance services and on the analyst call we were very targeted in terms of the information that we have given out because we had not reached a full closing of our books. So he may not have a full understanding of the revenue covenants and I would point out he would not yet understand the components of growth.

20971 As we have said, we still continue to see growth out of our small and medium-sizef business sector and it is suspected the one-time decline in revenue on the private-line side will flatten out and we will see flattish to slightly increasing growth going forward. So I'm not sure that he has full colour on all of the underlying components over the revenue growth for the quarter.

20972 MR. RYAN: Next page, under "Funding" --

20973 MS GILFILLAN: I'm also just not sure, I'm sorry.

20974 MR. RYAN: Yes?

20975 MS GILFILLAN: I'm certainly not an expert in this, but I'm just not sure that he was referring to our performance vis-à-vis our peers but just his expectation vis-à-vis our previous performance.

20976 MR. RYAN: All right. So for one reason or another, though, he was disappointed?

20977 MR. SHOEMAKER: We would acknowledge that our fourth quarter results did not come in line with where what we would have hoped them to come in line with, but I would like to point that we did -- for the full year we exceeded all analyst expectations for our fiscal year 2001 and had significantly exceeded expectations in all the prior quarters.

20978 So the way the analysts build their model is that each time you overexceed your expectations they add a little bit more on top for the next quarter. So I think given that, we feel very confident in our business plan and our strategy going forward.

20979 I don't want to take too many shots at the analyst community, but I think across the board we have seen almost all emerging telecom providers put into the same basket, so I don't think they are singling us out for particular treatment, I think they have taken the entire sector and put it onto a more of a hold-type recommendation.

20980 As we compare ourselves to all of the CLECs operating in the U.S. and across Canada as well, most of them are in the same category as we are in terms of evaluation by the stock analysts.

20981 MS GILFILLAN: Furthermore, I think we have, at Group Telecom, full confidence in our business plan and if we didn't, we might be before the Commission asking for massive subsidies but we are not. We are asking for the things that we think we need to build out our network to level the playing field.

20982 MR. RYAN: Very well. Mr. Shoemaker, I think we are backsliding a bit here. If we go back to the passage I was just referring to that says:

"GT management blames the current economic slowdown..."

20983 Which I think is what you are doing now. But the analyst goes on to say that, while you are not immune from those weaknesses, they would have expected you nonetheless to have done better than you did.

20984 MR. SHOEMAKER: And we would have liked to have seen ourselves do better as well but we are confident that we will be back on track.

20985 MR. RYAN: Now, this specific issue of bank covenants, can we come to that in relation to page 2 of this document under "Funding"?

20986 MR. SHOEMAKER: Sure.

20987 MR. RYAN: Just backing up on this bank covenants issue, I take it that under the terms of the arrangements whereby you have borrowed money from various lenders, you have covenanted to meet certain conditions either in terms of -- I don't know what those conditions are, but in terms of revenue performance or some similar sorts of measures?

20988 MR. SHOEMAKER: That's right. There's typical operating covenants which would include revenue and EBITDA performance and capital expenditures levels.

20989 MR. RYAN: Your testimony so far has been that UBS Warburg, who is represented in this matter by a man who specializes in the equity side of the business and doesn't have the same understanding of the debt business, didn't understand your credit arrangements. What he actually says in this paragraph 2 under "Funding" is:

"We are optimistic, given we have seen covenant amendments in similar circumstances and as we believe the banks have no clear alternative..." (As read)

20990 That is you are optimistic that you can actually make an arrangement with your lenders. Is that right?

20991 MR. SHOEMAKER: That's right.

20992 MR. RYAN:

"We now forecast that GT would breach its revenue covenant in fiscal quarter 2 of 2002 without an amendment." (As read)

20993 He seems to have already accepted the fact that you will be able to deal with your bank covenant issue but his concern apparently nevertheless is as he depicts it here. So, he's corrected for that just in the way you would like him to, hasn't he?

20994 MR. RYAN: Yes, he has acknowledged the covenant and we would agree that, with the assessment that we will -- we are very optimistic that we will obtain the necessary covenant adjustments as the covenants, as I have mentioned earlier today, are not reflective of the business plan that we are operating against today and as we adjust those back, we will be adjusting them back to reflect the core business that we are executing against.

20995 MR. RYAN: Going on to page 3, the conclusion, and I think it's in relation to this point that the lady at the back of the room joined the debate here. Mr. Shoemaker, the analyst says:

"We downgraded the stock on August 24 from "strong buy" to "buy" on concerns that they would have to renegotiate their debt covenants." (As read)

20996 That was a previous downgrading of UBS Warburg's recommendation that took place on August 24, as I understand this?

20997 MR. SHOEMAKER: That's correct.

20998 MR. RYAN: Not the further downgrading that took place on August 5?

20999 MR. SHOEMAKER: That's correct. I would again mention there has been a wide swat of telecoms that were downgraded across the sector, so I don't think it was a singling out of GT's story as all of the merging telecoms are being essentially put into the same bucket, if you will, by the analysts' community.


21000 MR. RYAN: In the next paragraph the analyst says again that stock is down 76 per cent since the beginning of September and poses the question, "Is this a buying opportunity," and says, "We do not think so."

21001 That is UBS Warburg's take on the matter as it stands right now. Is that right?

21002 MR. SHOEMAKER: That's right. I think that most of the analysts in the community are saying -- really, I think what they are saying is not a comment about the viability of our business plan but more a question of a lack of buy support in the investor community.

21003 So I think they are also recognizing that there is not going to be a lot of portfolio managers who are going to be taking and investing in emerging Telecom space. So he is also recommending to hold and wait until that event takes place.

21004 So I think as we look at our business plan -- we feel that if we execute our business plan to our plan over the next 12 to 18 months we will see people coming back in with a more optimistic attitude towards our stock and I think the analyst community would agree with that as well.

21005 MR. RYAN: Well, I guess that is the "if" in the equation, isn't it? If you can perform in the way they expect going forward, which they seem to have some doubts about at the moment, at least UBS Warburg, then your stock will recover?

21006 MR. SHOEMAKER: That's correct.

21007 I mean, I would say that in general the analyst community moves together and they have all taken a position on emerging Telecom. However, I think we would say there is also a lack of understanding across some of the analyst community towards the differences between the Canadian marketplace and the U.S. marketplace.

21008 MR. RYAN: Fine.

21009 Could we go next to document 4, please?

21010 MR. DANIELS: Excuse me, Mr. Chairman, I just wanted to ask counsel how much longer are they going to be. Is this an appropriate time for a quick break?

21011 MR. RYAN: I expect to refer to this document and one additional one, Mr. Chairman.

21012 THE CHAIRPERSON: But can you give us a sense of how much more time, Mr. Ryan, in deference to Ms Gilfillan?

21013 MR. RYAN: I would say under 10 minutes, but I am perfectly happy to take a break now.

21014 THE CHAIRPERSON: I guess we are all right if we can go for 10 minutes.

21015 MR. RYAN: Okay.

21016 Document No. 4, Mr. Shoemaker, do you have a copy of that in front of you?

21017 MR. SHOEMAKER: Yes, I do.

21018 MR. RYAN: And could you tell us what that is, please?

21019 MR. SHOEMAKER: It is a research report from Salomon Smith Barney.

21020 MR. RYAN: And that was issued when?

21021 MR. SHOEMAKER: I will look for the date. On October 4th.

21022 MR. RYAN: And that would be?

21023 MR. SHOEMAKER: The day of our call.

21024 MR. RYAN: Immediately after your call, I take it?

21025 MR. SHOEMAKER: That's correct.

21026 MR. RYAN: And could you tell me what Salomon Smith Barney's view of your stock is going forward as of October 4?

21027 MR. SHOEMAKER: They have downgraded our shares to a neutral.

21028 MR. RYAN: This page is not formatted very well but looking at the first, because the margins are outlined, but looking at the first bullet there is a paragraph beginning, "We are downgrading the shares" and they then continue to say they are reducing their price target from $10 to $1 to the shares?

21029 MR. SHOEMAKER: Yes.

21030 MR. RYAN: The bullet in the middle of the page, could you read that for us there, "We believe"?


"We believe that the upside to this stock is limited given the company is no longer growing fast enough to be considered a growth stock and does not have the free cash flow necessary to be considered a value stock. Thus, investor interest will likely be negligible and a neutral rating is appropriate."

21032 I think, you know, our comment on that would be that we have not had specific discussions with Salomon Smith Barney and have not given them significant guidance so I think they also have not been that close to us recently and probably don't have a great position to assess the stock and therefore they are going to take the conservative road and put a neutral rating on the stock.

21033 MR. RYAN: They were represented in the conference call that took place on October 4?

21034 MR. SHOEMAKER: I am not sure if they were on the conference call but I am sure that if they were not that they had the ability to listen into the call.

21035 MR. RYAN: All right. So they certainly had the opportunity to ask any questions they had prior to making their recommendation?

21036 MR. SHOEMAKER: Right. We did not get any significant questions from Salomon Smith Barney prior to the call or prior to the release of this report.

21037 MR. RYAN: Could we just go to -- page 3, please, that document, the third paragraph, beginning "The Major Reasons."

21038 MR. SHOEMAKER: Yes.

21039 MR. RYAN: I take it here that they are referring to reasons that the company has provided for the revenue slowdown.

21040 Is that right?

21041 MR. SHOEMAKER: Yes.

21042 MR. RYAN: This investment analyst says:

"The major reason cited for the revised guidance is a slow down in business, in private lines and long distance that have been manifested by the net disconnects of companies that have gone bankrupt and also by carrier customers that have been `grooming their networks.'" (As read)

21043 I think that is consistent with some of the evidence we have already heard from you today about downturn in that part of your revenue?

21044 MR. SHOEMAKER: That's correct.

21045 MR. RYAN: Then the last sentence in that, the last two sentences in that paragraph, the analyst goes on to say:

"Furthermore, it is possible that the company continues to have dark fibre sales as a significant piece of business going forward. This would represent lower quality (less services and a less stickier revenue base) revenues and therefore we have less confidence and visibility about GT's core business plan going forward." (As read)

21046 My take on that, and correct me if you have a different view, is that this analyst is concerned that you might be losing your focus in terms of the way you address the market.

21047 MR. SHOEMAKER: I wouldn't necessarily agree that he thinks we have lost our focus. I think he has lack of visibility and we have chosen at this point not to give visibility into our business plan. We had planned to do that on our November 15th call.

21048 So I think in some ways we put the analysts in the position of having to take a cautious approach with us right now until we give more specific guidance but we will do so. I think we will give favourable guidance to them regarding our ability to continue to grow. I think that we will see some rebound in some of the reports coming out of the analysts once we get the covenant issue amended and can show them that we do intend to continue to grow.

21049 You know, we don't share everything with Wall Street but we have not indicated to them some of the things that we are seeing in our business which are positive.

21050 MR. RYAN: Now, I think it is fair to say your evidence concerning the UBS Warburg report has been somewhat dismissive of their ability to understand your business and your evidence is roughly similar with respect to Salomon Smith Barney.

21051 Is that fair?

21052 MR. SHOEMAKER: That's fair.

21053 MR. RYAN: Would you have the same concerns about Goldman Sachs, and I am referring now to document 3?

21054 MR. SHOEMAKER: We would have the same concerns as we have chosen to not provide guidance to anybody in the Wall Street community at this point.

21055 MR. RYAN: Could you tell me who your shareholders are?

21056 MR. SHOEMAKER: Our shareholders are -- larger shareholders are Shaw Communications, CIBC and Goldman Sachs Investment Partners, which is a separate fund from the Goldman Sachs banking side of the house so there is definitely Chinese walls between the research side of the house and the fund that makes the investment.

21057 MR. RYAN: I see, but this part of Goldman Sachs doesn't understand the business but the other side does?

21058 MR. SHOEMAKER: This side of Goldman Sachs would not be privy to information that some of our internal shareholders on the Goldman Sachs side would not have. We would treat this side, the research side, as we would treat any other research firm on Wall Street in terms of not giving selective disclosure to one institution versus another.

21059 MR. RYAN: I'm sorry, I thought you were just saying that there is selective information that has been available to some of your shareholders that hasn't been made available to the investment house that this report --

21060 MR. SHOEMAKER: That's correct.

21061 Just to clarify what I am saying, is that that would be made available to the investment fund of Goldman Sachs which is essentially a limited partnership investment fund and there is a Chinese wall between the investment fund and the research side of the house. So the research side would not be privy to the information that our shareholders would be privy to.

21062 MR. FABES: Just so there is no misunderstanding, the only reason why the investment entity that Mr. Shoemaker is talking about would have that information is because certain members of that side of Goldman Sachs sit as directors on our board of directors. There is no selective disclosure being made. It is solely because of their position on our board of directors that they would have additional information in respect of the company and they are bound by all the rules on disclosure that apply to insiders.

21063 MR. SHOEMAKER: In other words, we also treat the research side of Goldman Sachs the same way we treat any other research. We would only provide information in a full forum, publicly disclosed.

21064 MR. RYAN: Yes. I mean, I think you can see why I was getting concerned because what I heard you suggesting was that some shareholders were getting information that other shareholders --

21065 MR. SHOEMAKER: No, I'm sorry if that was the impression I gave you but that is not what I was trying to communicate.

21066 MR. RYAN: So all of the investment houses have the same information?

21067 MR. SHOEMAKER: That is correct.

21068 MR. RYAN: This investment house who is related to your shareholder, could you tell us what view they have taken of your stock as of October 4 as reflected in document number 3?

21069 MR. SHOEMAKER: Goldman Sach's research has removed our shares from the recommended list and put us in as a market performer, which is consistent with their treatment of all emerging Telecom companies in the space.

21070 MR. RYAN: I want to make sure I understand your interest -- your evidence on this particular point.

21071 Does the Goldman Sachs investment side of the house have an understanding of your business?

21072 MR. SHOEMAKER: When you say "the investment side," are you referring to our shareholders?

21073 MR. RYAN: No. I'm sorry, I am referring to the side of the Goldman Sachs business that authored this report.

21074 MR. SHOEMAKER: Okay. I think that is where the confusion on the wording has come --

21075 MR. RYAN: Okay.

21076 MR. SHOEMAKER:  -- as I view the investment side as being the shareholder side and this being the research side.

21077 MR. RYAN: Fair enough.

21078 MR. SHOEMAKER: This research side would have the same visibility into our business as anybody else which would mean that we have not given specific guidance to Goldman Sachs research on where we expect 2002 results to come in.

21079 MR. RYAN: Were they part of the conference call that took place on October 4th?

21080 MR. SHOEMAKER: Yes.

21081 MR. RYAN: Well, when you say that you didn't give them specific guidance what was the purpose of the conference call? Was it not to answer questions and to provide guidance?

21082 MR. SHOEMAKER: It was to give guidance on the -- it was to give an update on Leo Henry being hired as Chairman of the Board and to give an update on Bob Wolfe's departure from the company and to give guidance on our fourth quarter. So we did not give any visibility going forward at this point. We intend to do that on our November 15th conference call where we will go through in more detail our fourth quarter results.

21083 MR. RYAN: Is it fair to say that the information about the departure of your COO was announced for the first time to the market during the course of that conference call?

21084 MR. SHOEMAKER: That's correct.

21085 MR. RYAN: But if I understood your evidence correctly earlier today there is no linkage between your current financial performance and specifically your fourth quarter results and that departure?

21086 MR. SHOEMAKER: That's correct.

21087 MR. RYAN: And that nevertheless seems to have been something that took the investment community by surprise and caused some concern?

21088 MR. SHOEMAKER: I think it took them by surprise as we had not obviously given any indication to Wall Street as we wanted to make sure that we were compliant with any disclosure rules and that we announced at the time that it was completed. I think there has been some limited concern voiced by Wall Street but I think there has also been positive support for the announcement of Leo Henry being named as our Chairman of the Board as Leo has substantial telecom and cable background and is well known throughout the industry.

21089 MR. RYAN: Part of Mr. Wolfe's plan, because it is Mr. Wolfe we are talking about, isn't it?

21090 MR. SHOEMAKER: Yes.

21091 MR. RYAN: Is it part of his plans to move back to the United States?

21092 MR. SHOEMAKER: I can't speak for his current plans. He will reside in Canada for a part of this year since he has children in school but he has not made any final determinations as to where he is going to reside to my knowledge.

21093 MR. RYAN: It doesn't sound like he has a long term plan then. Is that right?

21094 MR. SHOEMAKER: In terms of --

21095 MR. RYAN: Just his personal plans. I am trying to understand how his plans affect the company and the company's performance affect his plans.

21096 MR. SHOEMAKER: Bob Wolfe will be transitioning out of the company on December 31st and I don't know that -- he has not made any long terms as to where he is going to go from here, no.

21097 MR. RYAN: Those are all my questions. Thank you, gentlemen. Thank you, Ms Gilfillan.

21098 Thank you, Mr. Chairman.

21099 THE CHAIRPERSON: Thank you, Mr. Ryan.

21100 I believe then those are all the questions from the parties. I apologize, Mr. Ryan. I had obviously inadvertently crossed you off this list, meaning to do that to another party.

21101 The Commission doesn't have any questions for this panel. So I thank you very much for your participation in the proceeding and wish you well, Ms Gilfillan.

21102 MS GILFILLAN: Thank you.

21103 THE CHAIRPERSON: So, Mr. Secretary, I believe you probably have some exhibits to register?

21104 MR. SPENCER: I have 25 documents, Mr. Chairman.

21105 The first document is Mr. Watts' CV which will be introduced as RCI Exhibit No. 6.

EXHIBIT NO. RCI 6: CV of David J. Watt

21106 MR. SPENCER: CRTC undertaking to GT Group Telecom to provide a list of all services that Group Telecom provides to carriers, resellers and indicate whether the company also provides these services to retail customers. This will be Exhibit CRTC No. 43.

EXHIBIT NO. CRTC 43: CRTC undertaking to GT Group Telecom to provide a list of all services that Group Telecom provides to carriers, resellers and indicate whether the company also provides these services to retail customers

21107 MR. SPENCER: TELUS response to undertaking requested by RCI, transcript reference Volume 9, paragraph 14872, TELUS Exhibit No. 26.

EXHIBIT NO. TELUS 26: TELUS response to undertaking requested by RCI, transcript reference Volume 9, paragraph 14872

21108 MR. SPENCER: TELUS response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 10, paragraph 16005, will be TELUS Exhibit No. 27.

EXHIBIT NO. TELUS 27: TELUS response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 10, paragraph 16005

21109 MR. SPENCER: Response to CRTC Exhibit No. 26, TELUS Exhibit No. 28.

EXHIBIT NO. TELUS 28: Response to CRTC Exhibit No. 26

21110 MR. SPENCER: TELUS Response to CRTC Exhibit No. 29 will be TELUS Exhibit No. 29.

EXHIBIT NO. TELUS 29: TELUS Response to CRTC Exhibit No. 29

21111 MR. SPENCER: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 8, paragraph 13581, will be TELUS Exhibit No. 30.

EXHIBIT NO. TELUS 30: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 8, paragraph 13581

21112 MR. SPENCER: The Companies response to CRTC Exhibit No. 6 will be The Companies Exhibit No. 66.

EXHIBIT NO. THE COMPANIES-66: The Companies response to CRTC


21113 MR. SPENCER: The Companies response to CRTC Exhibit No. 31 will be The Companies Exhibit No. 67.

EXHIBIT NO. THE COMPANIES 67: The Companies response to CRTC Exhibit No. 31

21114 MR. SPENCER: The Companies response to CRTC Exhibit No. 17 will be The Companies Exhibit No. 68.

EXHIBIT NO. THE COMPANIES 68: The Companies response to CRTC Exhibit No. 17

21115 MR. SPENCER: The Companies response to undertaking requested by GT Group Telecom, transcript reference Volume 7, paragraph 11964 will be The Companies Exhibit 69.

EXHIBIT NO. THE COMPANIES 69: The Companies response to undertaking requested by GT Group Telecom, transcript reference, Volume 7, paragraph 11964

21116 MR. SPENCER: The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 12495 will be The Companies Exhibit No. 70.

EXHIBIT NO. THE COMPANIES 70: The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 12495

21117 MR. SPENCER: The Companies response to undertaking requested by GT Group Telecom, transcript reference Volume 7, paragraph 12101 will be The Companies Exhibit No. 71.

EXHIBIT NO. THE COMPANIES 71: The Companies response to undertaking requested by GT Group Telecom, transcript reference Volume 7, paragraph 12101

21118 MR. SPENCER: The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 2, paragraph 3301 will be The Companies Exhibit No. 72.

EXHIBIT NO. THE COMPANIES 72: The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 2, paragraph 3301

21119 MR. SPENCER: The Companies response to undertaking requested by CallNet Enterprises Inc., transcript reference Volume 7, paragraph 11626 will be The Companies Exhibit No. 73.

EXHIBIT NO. THE COMPANIES 73: The Companies response to undertaking requested by CallNet Enterprises Inc., transcript reference Volume 7, paragraph 11626

21120 MR. SPENCER: The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 12501 will be The Companies Exhibit No. 74.

EXHIBIT NO. THE COMPANIES 74: The Companies response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 12501

21121 MR. SPENCER: "Comparison of Recent Forecasts of Growth in Real Canada GDP" will be The Companies Exhibit No. 75.

EXHIBIT NO. THE COMPANIES 75: Comparison of recent forecasts of growth in real Canada GDP

21122 MR. SPENCER: GT "It's a Wonderful and Challenging Marketplace" will be The Companies Exhibit No. 76.

EXHIBIT NO. THE COMPANIES 76: GT "It's a Wonderful and Challenging Marketplace"

21123 MR. SPENCER: Mr. Shoemaker's CV will GT Group Telecom Exhibit No. 15.

EXHIBIT NO. GT GROUP TELECOM 15: CV of Stephen Shoemaker

21124 MR. SPENCER: Stock performance of Group Telecom, October 1999 to October 2001 will be AT&TC Exhibit No. 22.

EXHIBIT NO. AT&TC 22: Stock performance of Group Telecom, October 1999 to October 2001

21125 MR. SPENCER: Group Telecom selected performance statistics, AT&TC Exhibit No. 23.

EXHIBIT NO. AT&TC 23: Group Telecom selected performance statistics

21126 MR. SPENCER: Securities and Exchange Commission, Form 20-F, AT&TC Exhibit No. 24.

EXHIBIT NO. AT&TC 24: Securities and Exchange Commission, Form 20-F

21127 MR. SPENCER: UBS Warburg, GT Group Telecom Inc., October 5, 2001, AT&TC Exhibit No. 25.

EXHIBIT NO. AT&TC 25: UBS Warburg, GT Group Telecom Inc., October 5, 2001

21128 MR. SPENCER: Salomon Smith Barney "Downgrading to Neutral and Lowering Price Target to a Dollar," AT&TC Exhibit No. 26.

EXHIBIT NO. AT&TC 26: Salomon Smith Barney "Downgrading to Neutral and Lowering Price Target to a Dollar

21129 MR. SPENCER: Goldman Sachs "Removing GT Group Telecom from the U.S. Recommended List," AT&TC Exhibit No. 27.

EXHIBIT NO. AT&TC 27: Goldman Sachs "Removing GT Group Telecom from the U.S. Recommended List

21130 MR. SPENCER: Finally, "Finally the Monopoly is Over," CallNet brochure on residential local service will be ARC et all, Exhibit No. 60.

EXHIBIT NO. ARC 60: "Finally the Monopoly is Over," CallNet brochure on residential local service

21131 THE CHAIRPERSON: Thank you, Mr. Secretary.

21132 And just a reminder, any outstanding interrogatories are to filed, or undertakings, sorry, are to be filed by the close of day Friday.

21133 MR. SPENCER: By Friday.

21134 THE CHAIRPERSON: Are there any other issues anyone wishes to bring to our attention?

21135 So that then concludes this phase of our proceeding and, Mr. Lowe, you almost have five days. Even four and a half, I believe, is longer than we have ever given before to prepare oral final argument.

21136 So we will see you all back here next Monday morning, or most of you at least, at 9:00 a.m. at which point we will hear oral final argument, maximum 20 minutes per party as we indicated I think already. We will perhaps have to deal with the order but it will generally be what I laid out earlier in the proceeding. We may make some adjustments to handle the teleconference calls from those out west.

21137 So I'm tempted to say enjoy the rest of your few days, but I know you will all be hard at work and we will see you on Monday.

21138 Thank you very much.

--- Whereupon the hearing adjourned at 1221, to resume

on Monday, October 22, 2001 at 0900 / L'audience

est ajournée à 1221, pour reprendre le lundi

22 octobre 2001 à 0900

Date modified: