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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES AVANT
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
FORBEARANCE FROM REGULATION OF LOCAL EXCHANGE SERVICES /
ABSTENTION DE LA RÉGLEMENTATION DES SERVICES LOCAUX
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
Portage IV Portage IV
140 Promenade du Portage 140, promenade du Portage
Gatineau, Quebec Gatineau (Québec)
September 27, 2005 Le 27 septembre 2005
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
FORBEARANCE FROM REGULATION OF LOCAL EXCHANGE SERVICES /
ABSTENTION DE LA RÉGLEMENTATION DES SERVICES LOCAUX
BEFORE / DEVANT:
Charles Dalfen Chairperson / Président
Richard French Commissioner / Conseillier
Michel Arpin Commissioner / Conseillier
Stuart Langford Commissioner / Conseillier
Joan Pennefather Commissioner / Conseillère
Andrée Noel Commissioner / Conseillère
Elizabeth Duncan Commissioner / Conseillère
Rita Cugini Commissioner / Conseillère
Barbara Cram Commissioner / Conseillère
Ronald Williams Commissioner / Conseillier
Helen del Val Commissioner / Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
Marielle Girard Consultation Secretary /
Secrétaire de la
James Wilson Legal Counsel /
Shelly Cruise Conseillers juridiques
Chris Seidl Project Manager /
Gestionnaire des projets
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
Portage IV Portage IV
140 Promenade du Portage 140, promenade du Portage
Gatineau, Quebec Gatineau (Québec)
September 27, 2005 Le 27 septembre 2005
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PRESENTATION BY / PRÉSENTATION PAR
Saskatchewan Telecommunications 294 / 1624
Telus Communications Inc. 347 / 1960
MTS Allstream Inc. 482 / 2750
ARCH 561 / 3105
The Commissioner of Competition 595 / 3249
Gatineau Quebec / Gatineau (Québec)
‑‑‑ Upon resuming on Tuesday, September 27, 2005
at 0918 / L'audience reprend le lundi
27 septembre 2005 à 0918
seq level0 \h \r1619 seq level1 \h \r0 seq level2 \h \r0 seq level3 \h \r0 seq level4 \h \r0 seq level5 \h \r0 seq level6 \h \r0 seq level7 \h \r0 1620 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
1621 Madam Secretary...?
1622 THE SECRETARY: Thank you, Mr. Chairman. Good morning, everyone.
1623 We will now move on to Panel No. 3, saskatchewan Telecommunications.
PRESENTATION / PRÉSENTATION
1624 MR. MELDRUM: Good morning. My name is John Meldrum. I am the Vice‑President, Corporate Counsel in Regulatory Affairs at SaskTel. With me today is Bryce Schurr, who is Acting General Manager of Regulatory Affairs. I will make our formal presentation and then both of us will be available to respond to any questions you may have.
1625 In our presentation today we intend to provide the Commission with a Saskatchewan perspective on the main issues up for debate.
1626 We thought that the description of this proceeding provided in the Public Notice was pretty clear:
"In this proceeding, the Commission will determine the framework, including the criteria, for forbearance from the regulation of residential and business local exchange services ..."
1627 As well as whether there should be a transitional regime that provides ILECs with more regulatory flexibility prior to forbearance.
1628 The scope of this proceeding has now been made very clear by the Commission's decision that the proposal to refrain from the regulation of discretionary services is outside the scope of this proceeding. Nonetheless, a number of parties continue to present arguments and seek information regarding the current or future conditions of the local exchange markets.
1629 With all due respect, the current or future market positions of the incumbents or competitors are not relevant. What is relevant is for the Commission to be aware of the future direction of the local services markets, with a view to setting the criteria for local forbearance to be applied in the future. I will have more to say about that later.
1630 Many parties also speak to the issue of barriers to entry. Again, in our view this has nothing to do with the issues to be addressed in this proceeding. The Commission has determined that this proceeding is all about setting the criteria for forbearance after a competitor has entered, so how can any alleged barriers to entry be relevant if competitive entry has occurred already?
1631 In 1994, the Commission established the criteria it would employ when making a determination to forbear and it has utilized those criteria in its forbearance proceedings since then.
1632 The first step is to define the relevant market.
1633 SaskTel, along with Bell and Telebec, have proposed that the appropriate product‑based market segments are residential local services and business local services. There is a clear differentiation in the marketplace today between the local services that are offered to businesses and to residences.
1634 In turn, we propose that business local services can be broken down into three clusters, namely business primary local services, Centrex services and digital trunk services. Based on our experience, these services are provided to different segments of the business market based on the distinctive needs of each segment.
1635 The next step in defining the relevant market is to determine the appropriate geographic boundaries. Several alternatives have been suggested by the parties to this proceeding. In evaluating them, it is appropriate that we recall that competition will emerge and be sustained only where it will be economically viable. That means it is very unlikely that widespread local competition will appear in high cost serving areas in Saskatchewan.
1636 In addition, it is important to remember that there are less than one million people spread widely and unevenly across some 650,000 square kilometres of the province. In fact, some 41 percent of our residential customers reside in what the Commission has identified as high cost serving areas.
1637 Given those facts, it should be clear why we anticipate head‑to‑head facilities‑based competition for wireline local exchange services will appear first in Regina and Saskatoon, where one half of the population resides, and may materialize later in smaller cities such as Prince Albert and Moosejaw. The remaining communities are simply too small and the population too widely dispersed to support any significant entry from traditional wireline service providers, at least in the near term.
1638 Let me now present some of the reasons why we think the geographic region other than the local exchange is not the relevant geographic market for the Commission to base a forbearance determination upon.
1639 It has been suggested a provincial territory is the smallest geographic area to be used in the local services forbearance test. SaskTel suggests that this is far too extensive to be the relevant market, especially for Saskatchewan.
1640 As I noted above, head‑to‑head facilities‑based competition will most likely develop in Saskatoon and Regina and later in Prince Albert and Moosejaw, which are cities of about 40,000 people. This represents only four of the 229 exchanges in the province.
1641 Using such a broad definition as the province as the relevant market when competitive entry is not likely to occur in most of the province would prove to be problematic. Using a province‑wide criterion would inflate the competitive losses that SaskTel would face in order to gain forbearance. The cablecos have suggested that a 30 percent market share loss should be required to trigger forbearance. We of course do not agree.
1642 But let's suppose the Commission adopts a 30 percent market share loss as the trigger. If competition occurs only in Regina and Saskatoon exchanges, using the entire province as the relevant geographic area would require SaskTel to lose over 70 percent of the residential market in Regina and Saskatoon in order to meet the 30 percent threshold.
1643 If competition were to occur only in Saskatoon ‑‑ which is not beyond the realm of possibility ‑‑ the threshold could never be met. Even if SaskTel lost 100 percent of its local customers in Saskatoon, the provincial threshold of 30 percent could not be met. If we add in Prince Albert and Moosejaw, a combined loss of 60 percent in those four markets would be required to gain forbearance.
1644 Obviously using the province as the relevant market would result in an effective threshold much higher than the target due to the limited degree of competitive entry that we expect in much of Saskatchewan.
1645 MTS Allstream has suggested the use of two geographic markets, non‑high cost and high cost serving areas. This would likewise inflate the competitive losses that SaskTel would face in order to gain forbearance. There are nine non‑high cost exchanges in the province, and we expect competitive entry in no more than four of these exchanges.
1646 If the Commission adopts a 30 percent market share threshold and uses MTS Allstream's relevant geographic market proposal, and competition occurs only in Regina and Saskatoon, SaskTel would have to lose over 40 percent of the residential market in these exchanges to meet the 30 percent threshold. If we add in Prince Albert and Moosejaw again, the combined loss is 35 percent.
1647 The Commission asked SaskTel and others for data regarding the homes passed by facilities in census metropolitan areas, leading us to assume that the Commission may be considering their use in defining the relevant geographic markets for forbearance purposes.
1648 SaskTel was unable to provide a complete response to this question because our operational systems do not contain any information regarding the boundaries of Statistic Canada's geographic designations.
1649 We also explained in our final argument that CMAs cover communities and municipalities associated with multiple exchanges and that CMA boundaries do not match SaskTel's exchange boundaries.
1650 Selecting the CMA as the relevant geographic market as a criterion for determination of forbearance would impose a costly and unnecessary burden upon SaskTel, not only to identify when the threshold had been met, but also in the systems and procedures used to administer marketing programs, bill customers and meet regulatory reporting requirements after forbearance is granted.
1651 Some parties suggest that the local interconnection region is the relevant geographic market because it represents a community of interest. Such a conclusion must be based on the assumption that the LIRs proposed by the Commission met their objective to broadly align the LIRs to boundaries reflecting a community of interest.
1652 Although that may have been the intention when the LIRs were first established, in SaskTel's case they were based on regional economic development authorities which are just not suitable to define where interconnection should occur, so we proposed alternative LIRs that are consistent with the design of SaskTel's host remote network and provide greater efficiencies in interconnection and coverage of the province.
1653 The LIRs proposed by SaskTel have not been objected to by any competitors following their presentation in the LIR proceeding.
1654 If I may direct your attention to the maps that are provided as an attachment to this paper ‑‑ and they are at the very end of our submission ‑‑ in particular the one providing a view of the province, you will see the boundaries of the proposed LIRs on that provincial map. There are only eight for the entire province.
1655 If you then turn to the maps labelled Regina District and Saskatoon District which follow that map, it will be obvious that they constitute very large geographic areas. In fact, Indian Head, home to one of the CRTC's Commissioners, is in the middle of the Regina LIR, which stretches from Kenaston to Moosomin, and is probably an area bigger than Prince Edward Island.
1656 In addition to the cities themselves, the Regina and Saskatoon LIRs encompass vast areas of rural Saskatchewan comprised of First Nations Reserves, farms, hamlets, towns and villages.
1657 Why is that important? It is important because adopting the LIRs as a relevant geographic market would have the same effect described earlier of unreasonably inflating the forbearance market share criterion due to the anticipated lack of facilities‑based competition in rural areas of Saskatchewan.
1658 Recalling that competition for local exchange services is expected to concentrate in the major cities, SaskTel would have to lose a higher percentage of customers in Regina and Saskatoon in order to meet the overall criteria for market share loss.
1659 Continuing our example of adopting a 30 percent market share loss as a threshold for forbearance, SaskTel would have to lose 40 percent of the residential market in Regina in order to have an overall market share loss of 30 percent in the Regina LIR.
1660 In other words, using the LIR for Regina, skews the criteria by 33 percent for the Regina LIR, due to the large proportion of the Regina LIR that is rural.
1661 Generally the same results would occur in the Saskatoon LIR.
1662 For this reason alone, there is substantial doubt as to the selection of LIRs in Saskatchewan as the relevant geographic markets for forbearance.
1663 I would offer the observation that the geographic definitions of the relevant market are being proposed for one reason: To inhibit the ability of the ILECs to respond to competition.
1664 The adoption of any of the above as a relevant geographic market for forbearance in Saskatchewan would result in the forbearance of local services in areas where no competitor would exist to discipline SaskTel's pricing. Hypothetically rates charged to those customers could be raised in order to make up for revenues lost to competitors in the cities.
1665 Yes, it would be possible to address this through the introduction of price ceilings, but that would undermine the fundamental purpose of forbearance, allowing market forces rather than regulatory oversight to discipline the market. It would be far more practical and appropriate to simply establish the right market geographic area to begin with.
1666 It is SaskTel's submission that the ILECs local exchange is the relevant geographic market for forbearance of business and residence local exchange services. In 1997, the Commission identified the exchange as the basic unit for the administration and provision of telephone service by an ILEC and it normally encompasses a city, town or village and adjacent areas. There is no reason to believe that assessment is any less correct than it was in 1997.
1667 SaskTel's exchanges generally are the closest approximation to the footprint of the cableco service area. Although the exchange includes non‑urban areas where competition is not expected to emerge, they make up a much smaller percentage than would be produced if the province, CMA's, non‑high cost/high cost serving areas, LIRs or local calling areas were to be adopted as the relevant geographic market. And, compared to the alternatives, the exchange constitutes the smallest geographic area in which a firm with market power could profitably impose a sustainable price increase.
1668 You heard earlier from Bell Canada that the predictions they and we made during the VoIP regulation proceeding are coming true in spades. Bell and Telus are seeing their local exchange services being replaced by IP‑based services from the cablecos and other VoIP service providers.
1669 SaskTel identified 11 access independent VoIP service providers that are marketing their services within Saskatchewan.
1670 During the VoIP proceedings, SaskTel stated its belief that the major and most likely source of facilities‑based competition for local services would come from the cablecos.
1671 The cablecos will try to convince you they are not prepared for competition. That is really difficult to believe. SaskTel noted in its final argument that Shaw was presenting a story about its ability to compete in the local services market in response to a Commission interrogatory that contradicted what was presented to its investors.
1672 In Saskatchewan, Shaw is ready, willing and able to compete with SaskTel. 99.1 percent of the households in Saskatoon are passed by Shaw's own digital facilities for providing local exchange services.
1673 One wonders why companies like Shaw and the other large cablecos seek regulatory protection. Why do they support the continued regulation of the incumbents? The cablecos are not new companies, only recently emerging on the marketplace. They are not operating in limited markets. For instance, Rogers' acquisition of Call‑Net gives it nationwide coverage as both a wireless and wireline service provider.
1674 Shaw has extensive operations in the west and, through their affiliate Big Pipe, expansive telecommunications facilities. Individually, Shaw and Rogers are several times larger than SaskTel and demonstrate that they are able to make the investments required to compete with SaskTel and the other ILECs.
1675 Bell Canada offers that the competitors want the ILEC regulated just in case, just in case some ILEC undertakes some anti‑competitive actions.
1676 Well, in our view just in case is not a good enough reason. SaskTel submits that the Commission and the Competition Bureau both have sufficient authority to respond to any action by any service provider that would be regarded as anti‑competitive or threaten competitive entry or the maintenance of competition in the local exchange services market.
1677 Bell told you of a study by Decima Research that found that Canadians overwhelmingly support policies and regulations that treat incumbents and entrants the same.
1678 Back in June of this year, Decima conducted a similar survey of the residents of Saskatchewan. It shouldn't surprise you that the June survey showed the same results. Almost three‑quarters of the respondents were satisfied with the level of competition in Saskatchewan. Nearly four out of five respondents believe that the same rules and regulations should apply to telephone companies, cablecos, cellular companies, broadcasters and internet service providers.
1679 In closing I would like to say a few words about the context in which you are making your decision. There is a fundamental shift occurring with respect to plain ordinary telephone service. In terms of markets based on generations, it is no longer the main means of communication for anyone other than seniors and near seniors.
1680 For my teenage children, the main means of communication is MSN, Microsoft's instant messaging. For the young men that I play soccer with, the main means of communication is their personal cell phone. For people my age it is e‑mails, now made even easier with consumer‑friendly devices such as a Blackberry.
1681 But the biggest shift of all is voice communication over the internet. VoIP is here, it is ubiquitous and it is growing. Following the purchase of Skype by eBay for $2.6 billion, plus an additional $1.5 billion if Skype hits certain performance targets, The Economist now says it is no longer a question of whether VoIP will wipe out traditional telephony, but a question of how quickly it will do so.
1682 For SaskTel the stakes are high. Today we face competition against companies that are up to 20 times bigger than us. This is a daunting task when the regulatory rules are designed to benefit those same competitors.
1683 But looking to where this is all headed, even our competitors are going to be dwarfed by our mutual competitors such as America Online and Microsoft.
1684 For Microsoft, SaskTel isn't even a rounding error. Their profit last year was 130 times that of SaskTel and, of course, their marketing reach and domination are world renowned.
1685 The future telecommunications battles will be between the Canadian facilities‑based providers on the one hand, the LECs and, on the other hand, the likes of Vonage, Primus, Google, eBay, Skype, AOL and Microsoft. To be successful, Canadian facilities‑based providers will have to be very efficient marketing machines with competitive offerings that can meet or beat the free or near free offerings of these transnational enterprises.
1686 We believe the Commission needs to ask itself whether the current form of regulation, with its regulatory constraints and market protection, is going to prepare either the CLECs or the ILECs for these future challenges.
1687 In making your decisions on the ground rules for local forbearance, don't just focus on the here and the now and the protectionist cries from the poor little cable companies. Look to the future. It is a future where none of our places are secure.
1688 Bryce and I would be pleased to answer any questions you may have.
1689 THE CHAIRPERSON: Thank you. I will call on the Commissioner from Indian Head.
1690 COMMISSIONER CRAM: Thank you, Mr. Chair.
1691 For your information, Indian Head should have been the capital of Saskatchewan but the Lieutenant Governor owned land in Regina, just so you know that.
1692 Thank you. Welcome, gentlemen. I first wanted to ask a little personal question.
1693 It doesn't seem that Access Cable is going to be going into VoIP, is that ‑‑‑
1694 MR. MELDRUM: Well, the most we know is what they have told the public. They have made investments in upgrading their cable network, and as part of their discussion with the press they did talk about positioning themselves for future services, including telephony.
1695 But in terms of having announced anything concrete, we are not aware of anything at this point. We do expect them to do something, but we are just not totally sure what it will be or when it will be.
1696 COMMISSIONER CRAM: Eventually.
1697 I want to ask, Mr. Meldrum, when you, in your presentation today, broke down the business market I was comparing your version to the Aliant version.
1698 Aliant had basic, single line, multi‑line and small Centrex, 30 or less accesses, as one. The second was mid‑size Centrex, 31 to 1,500 accesses. The third was enterprise Centrex, greater than 1,500. Then digital trunks.
1699 You have put all of the Centrex in one.
1700 Can you tell me why you would disagree with Aliant? Is it the size of your market?
1701 MR. MELDRUM: In our case it is really the feature‑rich aspect of the Centrex, which is much different than just a plain ordinary telephone service.
1702 Do you want to add to that at all, Bryce?
1703 MR. SCHURR: Also conditions of the market. They divide that market up in such small pieces and make forbearance determinations on such small segments you get into the administrative complexities that we were talking about, the dividing up a geographic market that telephone companies operate in the exchange.
1704 The differential between small and large Centrex, as John said, in terms of the feasibility and features didn't seem to be very different, but it is different from primary business service.
1705 COMMISSIONER CRAM: I wanted to go to your maps. Thank you so much, they are wonderful maps.
1706 If I looked at the LIR for Regina, which of course does include Indian Head, the smaller centres do have cable. Are they mainly Persona Cable in the smaller centres around Regina?
1707 Do you know?
1708 MR. SCHURR: Mainly, yes.
1709 COMMISSIONER CRAM: Are you aware of any upgrades being made by Persona at all?
1710 MR. MELDRUM: No, we are not. There are a couple of small independents as well, but they would be very small.
1711 COMMISSIONER CRAM: Yes. All of them in analog.
1712 Is that your knowledge?
1713 MR. MELDRUM: Yes.
1714 COMMISSIONER CRAM: So if we chose anything larger than the exchange, or maybe a couple of exchanges, say if we chose the LIR in Regina, if Access were going to get into the business, the only other type of competition then would be resale and those independent ISPs I guess?
1715 MR. MELDRUM: There would also be the potential for VoIP, Access independent VoIP. If you include that in resale, yes.
1716 COMMISSIONER CRAM: Yes, from the independent ISPs.
1717 MR. MELDRUM: Yes, because SaskTel has extended high‑speed into probably every one of the towns that is shown on this map as well as smaller towns and is in the process of rolling out wireless high‑speed to ‑‑ I think it covers another 10 percent of the province from where we are at the moment, 10 percent of the population. So again that would enable Access independent VoIP services to be provided.
1718 As well, image wireless is still in the high‑speed business.
1719 COMMISSIONER CRAM: In Yorktown, yes.
1720 MR. MELDRUM: A couple of areas, yes.
1721 COMMISSIONER CRAM: I wanted to turn to your final argument at paragraph 11 on page 4.
1722 I will just give you time to read it.
1723 COMMISSIONER CRAM: Have you finished?
1724 MR. MELDRUM: Yes.
1725 COMMISSIONER CRAM: What I'm looking at is the word "meaningful" in the penultimate sentence:
"The result would be that large numbers of customers would have their local services forborne but yet have no meaningful competitive alternatives". (As read)
1726 When I was reading through this ‑‑ and in fact through a lot of the arguments ‑‑ I got the feeling that you are really talking about cable VoIP competition. So then that leads me to Telus's two‑facilities bright‑line test.
1727 What problems would you have with that particular proposal of theirs? I won't go into the numerator and the denominator just yet, but the whole idea of the geographic area being the footprint of the competitor, facilities‑based competitor.
1728 MR. MELDRUM: It does force you back to subdividing the exchange, but what you are subdividing is those areas that don't have the facilities‑based competition, but it does create some operational issues. Other than that, it does get at the heart of where competition is expected and where ultimately the customer should be forborne.
1729 COMMISSIONER CRAM: So you don't have that strenuous an objection to their proposal?
1730 MR. MELDRUM: Not as strenuous, no.
1731 COMMISSIONER CRAM: Mr. Grieve is looking on and nodding happily.
‑‑‑ Laughter / Rires
1732 MR. MELDRUM: We are not completely happy with it, but it is workable, yes.
1733 COMMISSIONER CRAM: From an operational point of view it would be workable, but it wouldn't be the best?
1734 MR. MELDRUM: Right.
1735 COMMISSIONER CRAM: Okay.
1736 MR. SCHURR: I would understand that it would be workable, but it would be costly, costly to set up the systems.
1737 COMMISSIONER CRAM: Initially.
1738 MR. SCHURR: To divide customers into forborne and non‑forborne segments. The footprint of the competitive supplier, it may alter, it may change, you could throw it out. So you are into like who sets the criteria for future forbearance as that competitive footprint changes.
1739 COMMISSIONER CRAM: So is it an issue of software? Is that really what it is, software development?
1740 MR. SCHURR: Frankly, Commissioner Cram, I don't think we have given it that much attention but, yes, it is systems and software. My knowledge of the truculent billing systems of telephone companies always frightens me when we want to change them.
1741 COMMISSIONER CRAM: Yes, that's true. It seems people have learned that.
1742 I wanted to talk about the effectiveness of winbacks and promotions. I guess maybe the best way to do that would have been: In the 1990s what was your lowest point in terms of share of long distance revenue?
1743 Was it ever at 70 percent?
1744 MR. MELDRUM: If you did it on the basis of revenues it was in the 70s. If you did it on the basis of lines in the 1990s, it wouldn't have dropped below 90 percent.
1745 COMMISSIONER CRAM: You used winbacks and promotions in order ‑‑ because you have moved that share back up, haven't you?
1746 MR. MELDRUM: I don't know if it ever sort of dipped and came up. It has just sort of slowly declined.
1747 COMMISSIONER CRAM: So then winbacks were never effective in getting at ‑‑
1748 MR. MELDRUM: Oh, they have always been effective, yes. Customers like to hear from you and like to understand what the offers are that you have in the marketplace.
1749 If I think about when local competition first came into Saskatchewan a number of the things that were being said by competitors just weren't true. I guess it was at the height of some of those companies that failed and some of the things that they were telling our customers were atrocious.
1750 I think even our own Minister at the time was telephoned and told that SaskTel had been sold and that they had taken over all of the long distance service and come over to us and all you have to do is give us this information and your long distance will be with us.
1751 So it was that kind of discussions that needed to take place with customers to understand some of the marketing stories they were hearing weren't true.
1752 COMMISSIONER CRAM: What about the effectiveness of winbacks and promotions in terms of your market share? Would the effectiveness of both winbacks and promotions, and maybe de‑averaging, be lesser the lower your market share went?
1753 What it really is, is this is the argument of Québecor saying that they, I think, wanted the market share to be at 80 percent before winbacks and promotions could be allowed, because by then ‑‑ I think the word was "diluted" ‑‑ that they had a big enough of a share that they could take a hit, they could take a loss?
1754 MR. MELDRUM: I would think the first ones that leave would actually be the toughest to get back. They are the ones who have been looking for choice perhaps the longest. They are the ones who are most receptive to the offers from the competitors. In the case of ourselves, often they are people who don't want anything to do with a Crown corporation.
1755 COMMISSIONER CRAM: Yes. Elsewhere I have heard from some people it is "anything but Telus", "anything but Bell".
1756 MR. MELDRUM: Yes. For various reasons, yes.
1757 COMMISSIONER CRAM: So you would think, then, that it would be more effective if your share loss were in the 5 percent range than if it were in the 20 percent range?
1758 MR. SCHURR: What would be more effective, I'm sorry? The winback?
1759 COMMISSIONER CRAM: Winbacks and promotions.
1760 MR. MELDRUM: Would be more effective at 5 than 20?
1761 COMMISSIONER CRAM: Yes.
1762 MR. MELDRUM: No, I think I would have gone the other way. I think I would have said they would be more effective at 20 than at 5.
1763 COMMISSIONER CRAM: Because you have a larger pool to win back from?
1764 MR. SCHURR: I forget whether Shaw is appearing, but if they are you might ask them the success of their early winbacks when we introduced Max in Saskatoon. Our DIV broadcast service had a lot of immediate gains, as I recall, and I'm sure that Shaw didn't sit around just watching customers go. They might have some real firsthand knowledge as to what small share winback effectiveness is.
1765 But I still don't understand ‑‑ I still come down to John's point that I think the first ones to leave are ready to leave when competition comes in and probably the hardest to win back.
1766 COMMISSIONER CRAM: Okay.
1767 Now, I know you would be unhappy if we used a market share other than 5 percent, but if we used a smaller area, say an individual exchange, and said you could use promotions at 80 percent and then be deregulated at 70 percent, there would be the financial loss, but you would be able to sustain the competition and probably gain back some share?
1768 MR. MELDRUM: How do you mean, after we were forborne at the 70?
1769 COMMISSIONER CRAM: Yes.
1770 MR. MELDRUM: Certainly at that point you would expect to be unfettered in the marketplace and hopefully your marketing plans would be successful.
1771 COMMISSIONER CRAM: What if it was groups of exchanges, instead of using the smaller exchange, if we had groups of exchanges with not less than, say, 50,000 people in total? You would still be able to sustain a fairly healthy competition if you were deregulated at 70 percent and given the ability to do promotions at 80?
1772 MR. MELDRUM: Maybe it is just the way our province exists in terms of geography, but groups of exchanges wouldn't really work because the Regina exchange is only one exchange and anything outside of the Regina exchange, other than perhaps White City, which is served by Access but is part of the Regina exchange, I don't think there would be any competitive entry so it wouldn't make any sense for us to group exchanges.
1773 COMMISSIONER CRAM: What is the population of Regina, 225?
1774 MR. MELDRUM: Somewhere between 200 and 225, yes.
1775 COMMISSIONER CRAM: Yes.
1776 MR. SCHURR: The number of residence customers for Regina and Saskatoon business customers and Centrex customers are provided in the attachments that we have given you.
1777 COMMISSIONER CRAM: Number of customers, is that by household?
1778 MR. SCHURR: No, it is number of subscribers. We don't do them by households.
1779 COMMISSIONER CRAM: Okay.
1780 Which then brings me to: Can you, in the fullness of time ‑‑ I know you have 229 exchanges ‑‑ let us know the number of A band exchanges and B band exchanges and the average number of people in each exchange in Saskatchewan?
1781 MR. MELDRUM: We can certainly do that, just give you an overview and then we will provide it in writing.
1782 In terms of A exchange, that is Regina and Saskatoon, the central area. I terms of the B exchange, that is the rest of Regina and Saskatoon. The C exchange is the rest of the cities ‑‑ which our new president keeps reminding me are only big towns ‑‑ he is from Hamilton ‑‑ there is only six of them. Then the rest, the 221 exchanges are all high‑cost, either bands E, F or G.
1783 Band E is small towns less than 1,500 total lines and that is the band that Indian Head is in.
1784 MR. SCHURR: Commissioner Cram, just one question to make it clear?
1785 COMMISSIONER CRAM: Yes?
1786 MR. SCHURR: You said you wanted the number of people in those bands.
1787 COMMISSIONER CRAM: Yes.
1788 MR. SCHURR: Do you mean the number of subscribers?
1789 COMMISSIONER CRAM: Yes.
1790 MR. SCHURR: Okay. Thank you.
1791 COMMISSIONER CRAM: Much was spent yesterday on paragraph 101 of Bell's final argument. That is the numerator and the denominator.
1792 Is that substantially your position?
1793 MR. MELDRUM: Yes, that's right.
1794 COMMISSIONER CRAM: Just to be clear, your wireless would be in the numerator?
1795 MR. MELDRUM: Yes.
1796 COMMISSIONER CRAM: Your VoIP would be out of the picture, right? No, it would be in the denominator, but not ‑‑
1797 MR. SCHURR: By our VoIP ‑‑
1798 COMMISSIONER CRAM: If you had a VoIP service.
1799 MR. SCHURR: Yes. Our VoIP over our line ‑‑
1800 COMMISSIONER CRAM: Yes.
1801 MR. SCHURR: ‑‑ or our VoIP over a competitor's line ‑‑
1802 COMMISSIONER CRAM: Both Access ‑‑
1803 MR. SCHURR: ‑‑ or our VoIP over a DSL dry loop.
1804 COMMISSIONER CRAM: Yes.
1805 MR. SCHURR: Dry loop.
1806 COMMISSIONER CRAM: All VoIP.
1807 MR. SCHURR: Can I take this under advisement?
1808 COMMISSIONER CRAM: Sure.
1809 MR. SCHURR: Thank you.
1810 COMMISSIONER CRAM: Your count when you are using the percentages, you are using connections the same as Bell.
1811 So we are not distinguishing between first lines and second lines?
1812 MR. SCHURR: That's right.
1813 MR. MELDRUM: That's correct.
1814 COMMISSIONER CRAM: I then wanted to move on to ‑‑ and I feel particularly qualified to talk about this ‑‑ brand loyalty and the consumer inertia issue.
1815 I think you would agree that SaskTel has quite a good brand in Saskatchewan, in fact probably I would venture to say a better brand than virtually any of the other ILECs in their territories.
1816 MR. MELDRUM: I couldn't speak to other ILECs, but we do have a strong band in Saskatchewan, yes.
1817 COMMISSIONER CRAM: Yes. Every time I look at that monitoring report and see the 100 percent I realize that all over again.
1818 Do you think we should in some way compensate for that in, say, the market share or some other test for SaskTel because of that brand loyalty?
1819 MR. MELDRUM: I don't think that would be consistent with the criterion in 94‑19. I think that if you meet the criteria in 94‑19 that is what should be focused on.
1820 COMMISSIONER CRAM: Okay. Post‑forbearance would it be in your plans to offer a standalone basic local service?
1821 MR. MELDRUM: For sure.
1822 COMMISSIONER CRAM: Yes. No politician in Saskatchewan?
1823 MR. MELDRUM: No. Unless you wanted short careers, yes.
‑‑‑ Laughter / Rires
1824 COMMISSIONER CRAM: Yes. Thank you.
1825 Thank you, Mr. Chair.
1826 THE CHAIRPERSON: Commissioner Langford.
1827 COMMISSIONER LANGFORD: Thank you, Mr. Chairman. Just a couple of questions arising from responses to Commissioner Cram.
1828 Mr. Schurr, when Commissioner Cram was questioning you with regard to the feasibility of ILECs, yours in particular, utilizing the competitor's footprint rather than your own existing exchange patterns, if I can call it that, as the appropriate geographic market, you responded saying that it would be "costly". I got that much down, quote/unquote. Then I think you said you would have to kind of read ‑‑ I don't have that as a direct quote, but I think the sense of it, and you can correct me if I am wrong, obviously ‑‑ was that it would be costly. You would have to redefine your customer bases and the way you dealt with customers because you would be forced into a new geographic pattern.
1829 Do I have the sense of that right?
1830 MR. SCHURR: More or less.
1831 What I was trying to point out is that, as the Commission observed in 94‑19 ‑‑ sorry, in the local competition decision, the exchange is the fundamental unit in which the telephone companies operate.
1832 To take and divide up an exchange places conditions upon the operational systems and procedures of the telephone companies that they are not used to. That complexity needs to be overcome. It could be a one‑time or it could be an ongoing cost, the amount of which we have no idea.
1833 COMMISSIONER LANGFORD: Would it be fair to say, then, that if we look at it from a competitor's point of view the same costly need to adjust would apply to them? In a sense what we are talking about here is who has home field advantage, to use a sports analogy? If it isn't fair to you to force you to use the competitor's footprint, it is equally unfair to them to force them to roll out their entry plans and their competitive strategies to fit your exchanges?
1834 MR. SCHURR: I don't think that is what we are suggesting. The footprint of a cable operation may extend beyond more than one exchange.
1835 If the bright‑line is 5 percent loss or 5 percent gain, in competitor's facilities based in that exchange and if 5 percent is reached it is forborne. If only a portion of the exchange is covered by the competitor which doesn't equal 5 percent of the customer base, then that exchange is not subject to forbearance.
1836 We are not forcing the cable companies to operate within our exchanges. The response I gave to Commissioner Cram was if you adopted the service provider's footprint as the relevant market, not only to determine when forbearance should be granted but to administer after forbearance, would place difficulties upon us, not the competition.
1837 In 97‑8 the Commission made a determination that the competitor didn't have to have local serving areas which were equivalent to the ILECs and that continues. We are not suggesting that they be forced to operate only in exchange boundaries.
1838 COMMISSIONER LANGFORD: But doesn't it force them from a pragmatic point of view? I mean, fine, everybody, say, has downtown Regina because that is a logical place to go, as you say. That is where the people are. Why do you rob banks? That is where the money is. Why do you roll out in Regina? That is where the people are.
1839 But once you start to get into the periphery it may force a cable company for example, or the type of CLEC that EastLink is should one arise in Regina or Saskatchewan or Saskatoon, it may force them to have to roll out network to match your exchanges in order to compete customer‑against‑customer or home‑against‑ home for each customer, whereas that is not the way they would normally do it.
1840 In other words, doesn't it once again give the incumbent the sort of advantage of setting all the rules, all the ground rules? Doesn't it mean they have to come to you under this system and they have to play on your home field?
1841 MR. SCHURR: No, I don't believe so.
1842 You said what if the competitor ‑‑ well you did say, I believe, that would force the competitor to move out and serve in another territory. I suggest to you, sir, that is the option presented to the competitor, to expand his service where he wishes, not forced to.
1843 I am just saying that the bright‑line criteria is 5 percent within an exchange. If he chooses to enter the exchange and only gains 1 percent of that exchange, I don't believe that would meet the criteria.
1844 COMMISSIONER LANGFORD: But as soon as he gets to the 5 percent he is pretty well forced to keep rolling out because competition is in that exchange. He can't ‑‑ I mean, it would take some incredible engineering to sort of roll your network around say the fringes of Regina into the outlying exchanges which you have shown on your map so that you are only touching 4.9 percent of the customer base.
1845 In a sense, once the competitor commits to competition in an area, pragmatically he either has to stay below 5 percent, as you indicate, or he has to go the whole way and therefore play on your field. So it seems to me that they have the same costly disadvantage you would have if you had to re‑engineer the way you bill and the way you deal with customers based on someone else's footprint.
1846 MR. SCHURR: I believe that would be based on your assumption that it is expensive to roll services out within an exchange. The Commission's various decision, from local loop prices up to the CDN decision, the wire‑centre to wire‑centre intraexchange channel rates make it now very ‑‑ I won't say cheap, less costly, less of an investment once entering an exchange at the post to get access to all the other wire centres within that exchange. The rollout then is very ‑‑ if you are using those kinds of facilities.
1847 With respect to a cable company, I would just pause to observe that Shaw is not interconnecting with any of the telcos networks where they are operating. They are using an established LEC in those marketplaces who has the ability to roll out services into the exchange in the manner that I have just described it to you.
1848 MR. MELDRUM: We believe that when Shaw starts in Saskatoon it will be the entire City of Saskatoon, contained within the City of Saskatoon and no cable operators in Saskatchewan have facilities that go across exchange area boundaries. The exchange area boundaries, at least as in Saskatchewan, are very distinct. I understand that is not necessarily the case in the rest of Canada, but in Saskatchewan they are very distinct.
1849 COMMISSIONER LANGFORD: I will come back to that in one second.
1850 Mr. Schurr, you said it would be costly. It wouldn't be all that costly to roll out what the cable companies require.
1851 You are complaining about the cost of readjusting your administrative procedures to fit a new footprint, and yet you seem reasonably unconcerned about the cost of actually having to roll out a network. I'm not in your business and I can't possibly know down to the last dime what these costs are, although we have people with us who can do that sort of thing, mercifully, but it would seem to me that it must be more costly to adjust and to change an actual physical network than it would be to start working the computers and readjusting your approach to your customer base.
1852 Am I wrong on that?
1853 MR. SCHURR: I have no idea what the costs of the competitors are.
1854 COMMISSIONER LANGFORD: Yet you are willing to have these same competitors be forced to play on your field and to roll out because the costs, as you maintain, are not that high.
1855 MR. MELDRUM: No. I said they have come down. They are considerably less. They are far easier and far ‑‑ but yes, the threshold to get coverage within an exchange from all wire centres through the Commission's CDN decision has been reduced considerably.
1856 COMMISSIONER LANGFORD: For your last point with regard to the uniqueness of Saskatchewan's exchange system, is it possible that we will just not be able to make a national test with regard to the appropriate geographic market and that in fact we will have to make a number of tests?
1857 MR. MELDRUM: I would hope that would be something that the Commission would consider, because if you are going to end up with sort of a national number for the bright‑line test, well, then you have to do something in terms of getting back to what the appropriate geographic market is, because otherwise we have a higher hurdle if you choose something like the LIR.
1858 COMMISSIONER LANGFORD: Your earlier statistics about the effect of kind of losing Saskatchewan in one fell decision does make one wonder. We had here earlier Aliant with a very particular sort of situation that seems to exist nowhere else, at the present time anyway.
1859 Have you given that any thought, the notion of more than one test for the appropriate geographic market?
1860 MR. MELDRUM: I don't know why for Saskatchewan it couldn't be the exchange. It matches the geography. To me, it works. If it doesn't work in another jurisdiction, then I would think you would choose something else for other jurisdictions.
1861 I think the act itself requires you to look at the regions and regulate on the basis of issues that occur within the regions.
1862 COMMISSIONER LANGFORD: Certainly something that came along about the same time as you folks into our life.
1863 MR. MELDRUM: That's right.
1864 COMMISSIONER LANGFORD: Thank you very much.
1865 Those are my questions, Mr. Chair.
1866 THE CHAIRPERSON: Thank you.
1867 You have a question? Go ahead.
1868 COMMISSIONER FRENCH: Let me just pursue this question for a moment.
1869 In the 19th paragraph of your statement on the subject of orphaned customers within a forbearance area where this very expensive cable network has not yet been rolled out, you say:
"It would be possible to address this through the introduction of price ceilings, but that would undermine the fundamental purpose of forbearance allowing market forces rather than the regulatory oversight to discipline the market." (As read)
1870 You have gone on to say that ‑‑ if I may paraphrase and you will correct me ‑‑ the problem of subdividing exchanges, where there are orphaned customers as I have defined them, involves billing mods which are expensive and also create instability in a very sensitive system.
1871 Is your argument then primarily a pragmatic one that you couldn't make the switch mods, or a philosophical one that you believe that once a defined forbearance unit has been forborne, that the forbearance must ipso facto apply to every single customer automatically?
1872 MR. SCHURR: I believe it is the latter.
1873 COMMISSIONER FRENCH: Yes, okay. Fair enough.
1874 Why would you worry about price ceilings if you have no intention of raising prices for orphaned customers in this hypothetical situation where there are customers who don't have a choice but you need to be forborne to compete?
1875 I mean, you are not asking for forbearance to raise prices, so what is the issue? Why is the philosophical issue important, I guess is what I am asking?
1876 MR. MELDRUM: We thought that was something that the Commission would be worried about, that given pricing flexibility that we would jump in and increase prices.
1877 COMMISSIONER FRENCH: But you have just told us you can't do that because it is very expensive to make the switch mods.
1878 MR. MELDRUM: Right. We wouldn't either as a Crown corporation. Raising prices is not a very easy thing.
1879 COMMISSIONER FRENCH: Fine. Fair enough.
1880 I am not trying to harass you and put you in a corner here, I am just trying to understand very clearly what you have said.
1881 Your opposition to a price ceiling for orphaned customers ‑‑ and the State of Iowa we are informed by the Competition Bureau has done that ‑‑ is based on a philosophical premise that you recommend to us, to wit that when we forbear we forbear totally, and there is no residual form of upward protection ‑‑ excuse me, protection against an upward price movement.
1882 But is it a practical question or would you object to the Commission's use of that kind of protection for orphaned customers?
1883 MR. SCHURR: There are two questions there.
1884 COMMISSIONER FRENCH: Yes, fair enough.
1885 MR. SCHURR: I would like to address the first one.
1886 The discussion I had with Commissioner Langford was the footprint as the example of the cable company spilling over to exchanges and not completely covering those, if you wish. The use of that term may get me into trouble.
1887 My presumption in that situation would be people within the competitor's footprint would be forborne, people outside the competitor's footprint would not, they would still be subject to tariff. Now we would have two systems operating, our billing systems would have to be adjusted to say that, "Oh, John Jones lives in there. He is in the forborne area. I can now charge him this rate or price differentials or whatever he is, but Mary Smith sitting outside of this footprint I now have to charge tariff to. Well, that means that my billing systems have to be adjusted so that I can do more detailed divisions on them and dividing up exchanges into areas where tariff services would apply and where non‑tariff services would apply. That was the administrative difficulty I had.
1888 The issue I think ‑‑
1889 COMMISSIONER FRENCH: Sorry, could I just respond to that one? I want to make sure I understand.
1890 MR. SCHURR: Yes.
1891 COMMISSIONER FRENCH: What you are saying is, you don't want to reprice the orphaned customers?
1892 MR. SCHURR: In the scenario that I was speaking with Commissioner Langford about we would not be able to, because those "orphaned customers" would still be under tariff.
1893 COMMISSIONER FRENCH: All right.
1894 MR. SCHURR: But in the LIR situation ‑‑
1895 COMMISSIONER FRENCH: In the ...?
1896 MR. SCHURR: In the LIR, I'm sorry.
1897 COMMISSIONER FRENCH: L‑I‑R?
1898 MR. SCHURR: Yes.
1899 COMMISSIONER FRENCH: Sorry. Thank you.
1900 MR. SCHURR: It is a term that is adopted just east of Swift Current.
‑‑‑ Laughter / Rires
1901 MR. SCHURR: In the LIR situation it would be my assumption that if the bright‑line test is met the entire LIR is forborne. And our point was ‑‑ we thought, as John said, it was a concern of the Commission ‑‑ there would be no market forces outside of the area, in Regina for instance where all the competition was, to protect customers and we didn't believe philosophically that the imposition of a price ceiling in areas where there was no competition was consistent with a forbearance decision.
1902 COMMISSIONER FRENCH: Thanks. I understood that it applied to LIR.
1903 I was trying to ask you what your thoughts were about if we adopted your exchange as the unit, how you would feel about a price ceiling for the orphaned customers within an exchange. That is my only question.
1904 I know I should have phrased it perhaps better or not cited this item in your paragraph.
1905 Just to make sure I understood, you would not object to a residual price ceiling for orphaned customers within a forborne exchange, assuming we adopted the exchange as the unit? You never raise prices, you are a Crown corporation and anyway you don't want to make the switch mods.
1906 MR. SCHURR: Maybe it is my bizarre concept of the expanse and the ability to compete within an exchange, I don't understand what an "orphaned customer" would be within an exchange.
1907 I mean, one that isn't able to be reached by the competition?
1908 COMMISSIONER FRENCH: One that the competition, for whatever reason, hasn't chosen to offer his services to.
1909 MR. SCHURR: So now we are back down to the individual, or are we talking about wire centres?
1910 COMMISSIONER FRENCH: We are talking about exchanges as you define them.
1911 MR. SCHURR: Yes.
1912 COMMISSIONER FRENCH: We are agreeing that cable companies don't have to roll out to cover exchanges. They don't roll out relative to your structure.
1913 MR. SCHURR: That is correct.
1914 COMMISSIONER FRENCH: Your structure is the only administratively consistent structure that the Commission has to refer to and you are saying: On those grounds, Commissioners, we respectfully suggest it is the appropriate item, the appropriate unit.
1915 Maybe I'm failing to make it clear, but I am just trying to get a grip on what your view would be as to how we deal with customers who are in an exchange which has been forborne but do not have an option.
1916 MR. MELDRUM: Maybe I will just indicate that, at least in the case of Regina and Saskatoon, there would be options for those customers outside of the City of Regina and Saskatoon, because we will have high‑speed wireless internet and they are within the footprint of both SaskTel and Rogers Wireless coverage areas.
1917 So they are not totally orphaned, but there wouldn't be a cable company going out to them any time soon.
1918 COMMISSIONER FRENCH: I guess you will understand the Commission can't make a national policy based on Saskatoon, so I probably asked the wrong people.
1919 MR. MELDRUM: Yes.
1920 THE CHAIRPERSON: Just to follow‑up on paragraph 19, I had a different question.
1921 You were basically addressing larger areas, geographic service areas, than the exchange, namely province and LIR, right, in that paragraph?
1922 MR. SCHURR: Yes.
1923 THE CHAIRPERSON: I guess the sentence that begins at the bottom of page 6:
"The documenting of any of the above as the relevant geographic market for forbearance in Saskatchewan would result in forbearance of local services in areas where no competitor would exist to discipline SaskTel's pricing. Hypothetically, rates charged to those customers could be raised in order to make up for revenues lost to competitors in the cities." (As read)
1924 When we read Shaw's evidence ‑‑ I am referring to paragraph 31 of the evidence which you can check ‑‑ their position in support of the LIR says that:
"Under this arrangement, local switch providers can offer a service throughout an LIR via a single POI and using only one switch." (As read)
1925 There are two significant implications.
1926 First, the administrative region‑based LIR allows a company such as Shaw to provide service to any new customer within the LIR.
1927 Second, a customer can be served without the service provider incurring additional sunk costs.
1928 So why wouldn't an effort by you to raise prices to customers who are not yet served in that LIR be met with the offering of service by Shaw as suggested in that paragraph? That would be the disciplining without the need for a price ceiling in that case.
1929 MR. SCHURR: Can I correct one thing?
1930 Access to the LIR provides a single point of interconnection. If the competition is going to run a facilities‑based model based upon that of a telephone company it is going to have to make its presence known in the exchange, in each of the exchanges, in each of the wire centres of that ‑‑ each of the exchanges of that LIR in order to pick up local loops.
1931 THE CHAIRPERSON: Why would they necessarily use local loops?
1932 MR. SCHURR: I said if they were ‑‑ I am not limiting it just to the cable companies. I'm saying if they are a facilities‑based company operating in a manner of a telephone company ‑‑
1933 THE CHAIRPERSON: I take that.
1934 MR. SCHURR: ‑‑ they have to go to the exchange and pick up a local loop.
1935 THE CHAIRPERSON: Right.
1936 MR. SCHURR: If they are a cable company who may not require local loop, they are going to have to extend their service out to that exchange. It does not give them access to the exchanges in the LIRs at no additional cost. That is an error that Shaw is portraying.
1937 THE CHAIRPERSON: They say "without incurring additional sunk costs". We will ask them what that exactly means, but I appreciate that you extend they would have costs. But again, it is a cost benefit and I guess it is a response that one could contemplate in that area. I guess Shaw and a number of the cable companies are putting it forward as one of the reasons for adopting the LIR, that the point of interconnection allows them effectively to go forward and serve the LIR and meet competition, thereby addressing one of your points which is effectively the unequal competitive circumstances in regions outside the exchange.
1938 MR. SCHURR: It gives them cost avoidance on establishing POI or point of interconnection in each one of the exchanges, granted. I'm not sure that it removes a hurdle to getting out to all of the exchanges.
1939 THE CHAIRPERSON: Right. So we don't have the quantification on either side to really address that argument.
1940 MR. SCHURR: Right.
1941 John wanted to address the heart of your question.
1942 THE CHAIRPERSON: Go ahead.
1943 MR. MELDRUM: I guess if you look at the Saskatoon LIR, Shaw doesn't serve any of those other areas at all. They don't have any cable plant. There is a fairly large area. They only serve the City of Saskatoon on the Saskatoon LIR. And for them to then provide service in Elrose or Kyle or any of those other places, they would have to either buy the facilities from Persona, or whoever the carrier might be there, or overbuild.
1944 So I think it is an absolute throwaway comment on the part of Shaw to say that that is one reason why it works.
1945 THE CHAIRPERSON: We will address them on that.
1946 Have you had dealings with them in terms of them seeking members and other facilities from you in order to serve Saskatchewan at this point?
1947 MR. MELDRUM: I think as Bryce indicated, they are using an established CLEC so they are dealing with another carrier.
1948 THE CHAIRPERSON: In response ‑‑
1949 MR. SCHURR: Specifically in the Province of Saskatchewan, it is my understanding that there have been discussions with our CSG Group. I am not aware of any concrete arrangements that have been established yet as to how they are going to provide their service in the province.
1950 THE CHAIRPERSON: Right. In their interrogatory response, CRTC‑907, they make reference to "homes passed does not provide an indication of the lengthy delays frequently imposed by ILECs to complete work needed before local telephone service is available".
1951 They don't specify SaskTel in that. I was wondering whether you had any response to that in respect of those.
1952 As you have said, you don't deal directly with them. You deal indirectly with them, if I am taking your evidence.
1953 MR. MELDRUM: Definitely we are not aware of any issues on our part that are holding up Shaw one iota.
1954 THE CHAIRPERSON: Thank you very much.
1955 MR. MELDRUM: Thank you.
1956 THE CHAIRPERSON: Madam Secretary.
1957 THE SECRETARY: Thank you, Mr. Chairman.
1958 I will now call on Telus Communications Inc.
1959 THE SECRETARY: You may introduce yourself and proceed with your 20‑minute presentation. Thank you.
1960 MS YALE: Good morning.
1961 Monsieur le président, mesdames et messieurs, les membres du Conseil, je m'appelle Janet Yale et je suis vice‑présidente à la direction, Affaires de l'entreprise, chez Telus Communications Inc. C'est avec plaisir que Telus vous présente aujourd'hui sa perspective en ce qui a trait à l'abstention de réglementation des services locaux résidentiels et affaires.
1962 With me this morning is a bit of a gang. To my immediate left is Willie Grieve, Telus Vice‑President Telecom Policy and Regulatory Affairs. To Willie's left is Dr. Robert Crandall, Senior Fellow in Economic Studies at the Brookings Institution, and Dr. Craig McTaggart, Telus Senior Regulatory Legal Counsel.
1963 On my right is Ted Woodhead, Director of Regulatory Matters at Telus. To Ted's right is Dr. Dennis Weisman, Professor of Economics, Kansas State University, and Fred Di Blasio, our Vice‑President, Consumer Product Marketing.
1964 We appreciate in particular that Drs. Crandall and Weisman could be with us today to address any questions you may have about their statements, which form part of the record of this proceeding.
1965 I will begin our presentation with an overview of Telus' recommended approach. Willie Grieve and Dr. Crandall will then address a number of key aspects of the Telus proposal.
1966 This is one of those regulatory proceedings that stands out as particularly important because the decision that will flow form it has the potential to shape the course of telecommunications for many years.
1967 Full facilities‑based competition has arrived in major urban centres across Canada just as the Commission forecast. The challenge now is to adapt the regulatory framework so that, as an industry, we can fully realize the opportunities and benefits of competition.
1968 We have in Canada solid examples of past success in doing just that. The CRTC's deregulation of long distance telephone services and cable services and its decision not to impose regulatory restrictions on the internet and wireless telephony can serve as guides for implementing forbearance in local telephony.
1969 Certains d'entre nous pourront se rappeler qu'il n'y a pas si longtemps, la réglementation nous forçait à louer un appareil téléphonique de la compagnie de téléphone ‑ et le choix de couleur était simple: c'était noir ou rien. A mesure que la concurrence a évolué, le CRTC a éliminé ces restrictions et les consommateurs se sont vus offrir davantage de choix.
1970 My point is that regulation has continually adapted to the emergence of competitive markets in the past, and customers have been the winners.
1971 With durable facilities‑based competition now a fact of life in the provision of local service, it is once again time to adapt regulation to the competitive environment so that consumers can reap the benefits.
1972 That is why we have proposed a rigorous, objective and conservative forbearance test that will allow the Commission to be fully satisfied that customers in a geographic area have a choice among viable facilities‑based competitors.
1973 The two‑facilities bright‑line test proposed by Telus is modelled on tests previously approved by the Commission: for example, the two facilities bright‑line test for deregulating cable television rates and forbearance with respect to inter‑exchange private line services.
1974 The Telus test is a simple, effective means of determining whether competition is both sufficient to protect users' interests and durable.
1975 Here is how it works. When we look at any geographic area as determined by the entrant's serving territory, we ask two questions:
1976 1. Is there a full facilities‑based competitive local exchange carrier ‑‑ a CLEC ‑‑ offering residential services throughout its serving area?
1977 2. Does that CLEC have at least 5 percent of the total residential network access lines or their equivalent in its serving area?
1978 If both criteria are met, an incumbent local exchange carrier ‑‑ or ILEC ‑‑ may apply to the Commission under an expedited process for forbearance within that facilities‑based CLEC's serving area. The test would be the same for business services.
1979 Let me add as an aside that it is important to understand that our test does not replace the Decision 94‑19 test. Conditions that justify forbearance may arise in other ways with combinations of loop resellers, access independent VoIP providers and the continuing evolution of mobile wireless.
1980 If our test isn't met, we or others would still be able to apply for forbearance under the Decision 94‑19 test if the conditions of that test would otherwise be met.
1981 Coming back to our test, we believe the Telus test fully responds to the need Commission has identified for ‑‑ and I quote ‑‑ "clear criteria that it can use to determine when it is appropriate to forbear from regulating local exchange services".
1982 Our bright‑line test is objective. It is conservative. It is administratively simple, and it can be applied quickly.
1983 It is conservative in that it does not ask how many customers we have lost but rather asks whether customers have chosen to subscribe to a particular full facilities‑based competitor, notwithstanding the presence in the market of other local service competitors.
1984 For example, there are consumers today who have chosen resellers of our local facilities, access‑independent VoIP providers or mobile wireless providers. Only the presence of a full facilities‑based competitor offering a wireline or fixed access service would satisfy our forbearance test.
1985 The exclusion of non facilities‑based competitors and mobile competitors and mobile wireless from the forbearance test is not a minor matter. The substitution of wireless for wireline service is increasing in British Columbia and Alberta every day.
1986 The internet has shattered the economics of entry into local telephony, enabling more than 30 foreign and domestic companies to provide telephone service in Canada.
1987 Our test only takes into account full facilities‑based competition and only in an area no wider than that in which we actually face that full facilities‑based competition.
1988 Our test requires evidence of actual facilities‑based competitive entry and actual customer migration to another facilities‑based carrier.
1989 Il s'agit‑là d'un aperçu détaillé proposé par Telus. J'aimerais maintenant laisser la parole à Willie Grieve qui vous présentera en détail notre position à l'endroit des préoccupations soulevées au sujet du pouvoir de marché.
1991 MR. GRIEVE: Thank you, Janet.
1992 I will spend a few moments on market power or, to be more precise, an incumbent local exchange carrier's lack of market power when competition comes from a full facilities‑based competitor.
1993 The Commission's task here is to consider two questions it is required by the Telecommunications Act to answer before forbearing. Both are market power questions.
1994 First, is there or will there be competition sufficient to protect the interests of users? In other words, can the ILEC profitably raise prices to consumers above competitive levels?
1995 Second, if you find that there is competition sufficient to prevent price increases, you must ask yourself whether forbearance would impair the establishment or continuance of a competitive market. In other words, would the ILEC lower prices to exclude competitors from the market?
1996 Our bright‑line two‑facilities test was designed to address these questions by ensuring that once the test is met, so too are all of the elements of the market power test set out by the Commission in Decision 94‑19.
1997 Once again, we are not recommending that our test replace the 94‑19 test. What we are saying is that the Commission can be assured that when our test is met, the 94‑19 test is met.
1998 The first question is about protecting consumers from higher prices, the Commission's traditional role; and the second is about protecting the competitive process.
1999 I will address the first question and Dr. Crandall will address the second.
2000 Before I answer the first question, though, let me say a word about the geographical area. This proceeding is about determining when and where forbearance is warranted for local exchange services.
2001 Local services are, by definition, local. Do the individual customers have a choice for their local exchange services where they live? When our test is met, they certainly do. If they don't like our service or prices, they can simply change providers. This is local competition.
2002 Now let me address that first question: When our test is satisfied, can the ILEC raise local prices without consequences?
2003 We asked Dr. Alfred Kahn, author of the leading text on the economics of regulation, to provide his views on the existence of an ILEC's market power when Telus' bright‑line test is satisfied.
2004 Dr. Kahn concluded that:
"... the demand of customers for innovative products and the ability of alternative suppliers to satisfy the demand at attractive prices means that there is no remaining market power."
2005 In its recent voice over IP decision, the Commission recognized that the entry of a facilities‑based carrier removes concerns about market power.
2006 Let me quote from that decision:
"The Commission considers that if forbearance were granted prematurely, the ILEC's ability and incentive to engage in the combination of targeted below‑cost pricing of local VoIP services, as well as bundling strategies, prior to the entry and roll‑out of other facilities‑based competitors, would have a material negative impact on the potential for sustainable competition in the provision of local VoIP services, and therefore on the protection of the interests of users."
2007 Telus' bright‑line test requires the entry and roll‑out of another facilities‑based competitor ‑‑ precisely the development that the Commission acknowledges will alleviate concerns about market power.
2008 The presence of another facilities‑based carrier means that substitutes are plentiful and entry barriers are low because there is another network already in place ready and already serving customers.
2009 In summary, when and where there is a full facilities‑based entry, an ILEC cannot raise its prices above competitive levels.
2010 Now I will ask Dr. Crandall to address why our test also satisfies the second question the Commission must consider: whether the Commission can be assured that to forbear will not impair the establishment or continuance of a competitive market.
2011 DR. CRANDALL: Mr. Chairman, Commissioners, at the heart of most of the recent Commission decisions involving the incumbent telephone companies is the Commission's implicit or explicit fear that the incumbents can exclude competitors.
2012 While this concern may derive from the pat seven years' experience with local entry through resale and unbundled loops, no evidence exists that these entrants' failures were due to exclusionary practices by incumbents.
2013 The Commission must examine very carefully any argument that suggests that the incumbents have the power to exclude Shaw, Rogers, Videotron, Vonage or Skype (now eBay) from offering telephone services. These arguments fail for a number of reasons.
2014 First, the cable companies' costs for entering telephony are very low. The entry costs of other VoIP providers are even lower.
2015 Second, I believe that any concern that incumbent telephone companies could exercise market power to exclude entrants in the current environment is misplaced. In this environment, incumbent telephone companies could not successfully wage a predatory price war, because they are the high‑cost providers of telephone service.
2016 The Commission may perceive that incumbent telephone company revenue streams could make such a predatory strategy feasible. Such a strategy, however, means that the profits an incumbent forgoes during the price war, which may be large and protracted, would have to be offset by a future price increase.
2017 If the entrants have low variable costs, as both the cable companies and voice over IP providers surely do, the required price cut may be quite substantial and the cost of the price war could be enormous.
2018 The future gains would require that the predator be able to raise prices substantially at some future date. In addition, these high prices would have to be sustained for some time in order to recoup more than their losses from the predatory war.
2019 Even if some might contend that, given these facts, predation by incumbents is still feasible, it is inconceivable that such a strategy could be profitable.
2020 In fact, in the current environment I do not believe that there is any strategy available to the incumbents, including say de‑averaged pricing, that would enable them to exclude facilities‑based competitors.
2022 MS YALE: Thank you.
2023 Plus tôt cette année, Telus a déposé une demande auprès du Conseil l'intimant de révoquer les règles relatives à la reconquête et à la non sollicitation des clients du service local dans les marchés où Shaw offre un service téléphonique concurrentiel.
2024 Nous avons demandé à ce que cette révocation entre en vigueur dès maintenant à Calgary, où Shaw a déjà percé le marché, et éventuellement dans les régions du territoire d'exploitation de Telus où Shaw offrira dans l'avenir le service téléphonique local.
2025 The Commission closed that application, noting that the issue would be dealt with in this proceeding. I would like to briefly review our position.
2026 The restrictions that we believe should be removed are:
2027 One, the winback, no‑contact restrictions after a customer's service has been completely transferred to another local service provider.
2028 Two, general promotions and winback promotion restrictions, including the restriction on waiver of service charges.
2029 And, three, the prohibition on de‑averaging rates within a band.
2030 Why remove the marketing restrictions?
2031 To quote Dr. Weisman's statement:
"Winbacks and promotions are an integral part of the interminable, competitive struggle between market participants."
2032 So too, is de‑averaging rates in response to competition where it exists. In other words, Telus should be able to reduce prices in Calgary and Edmonton in response to Shaw without having to reduce prices across the rest of Alberta.
2033 All the marketing restrictions we have today were developed for a different set of circumstances and in today's environment they are not in the public interest. Full facilities‑based competitors who enter across a wide area ‑‑ usually an entire city ‑‑ do not need a grace period or protection from competition.
2034 In B.C. and Alberta, Shaw has ubiquitous networks in place with very large customer bases. Shaw relies on Telus for little, if anything, for the purpose of providing local telephone service. Anything that Shaw does require is subject to established and proven processes and is obtained through its business partner Bell.
2035 Shaw's local service will be available in all major B.C. and Alberta markets by the end of 2005.
2036 The most important reason for removing the marketing restrictions boils down to one word: customers. And we should all remind ourselves that regulation should be about customers.
2037 The marketing restrictions prevent Telus from making its best offers to potential customers.
2038 The regulatory barrier that prevents us form making our best offers to customers in turn reduces rivalry ‑‑ meaning that Telus' competitors do not need to make their best offers.
2039 I want to underline that the Commission's imputation test requirement would remain in place. Our best offers would comply with that imputation test, which protects other suppliers, our competitors, from below‑cost pricing.
2040 Rather than the interminable competitive struggle, competition becomes a chaperoned dance. That is hardly what Canadians expect and deserve from competition. I think they would much rather see Shaw and Telus take each other on in a fair fight in the marketplace.
2041 Indeed, cable is one step ahead. In our territory, for instance, Shaw now offers television, high‑speed internat access and local telephony over the same network with consolidated billing and integrated customer service. Shaw and other cable companies have already been very successful in attracting customers to their local telephone service where they have entered.
2042 This is evidence of rivalrous behaviour on the part of the cable companies. Of course, the Commission's marketing restrictions severely restrict the rivalrous behaviour in which the ILECs can engage. This reduces the very rivalry that the Commission needs to see in order to forbear.
2043 Instead of protecting consumers from higher prices, these rules protect competitors from competition, which is hardly the outcome envisioned by Parliament.
2044 In conclusion, the marketing restrictions placed on Telus should be removed in order to allow the benefits of competition to flow to Canadians.
2045 The time has come to establish a clear forbearance framework and the time has passed for a transitional regime prior to forbearance.
2046 The cable companies have successfully launched facilities‑based local telephone services, providing ubiquitous wireline local access where they have entered.
2047 Facilities‑based competition is here. It is time to adapt regulation to that fact of life.
2048 Nous sommes d'avis que le CRTC a devant lui aujourd'hui une occasion idéale de mettre en place un critère spécifique qui permettra de déclencher l'abstention de réglementation lorsqu'un concurrent doté de ses propres installations offre des services au sein d'un marché.
2049 Les consommateurs et les entreprises canadiennes bénéficieront tous des avantages de la concurrence dans le domaine des télécommunications.
2050 Thank you for this opportunity to present our position. We look forward to any questions you may have.
2051 THE CHAIRPERSON: Thank you.
2052 Commissioner del Val...?
2053 COMMISSIONER del VAL: Thank you.
2054 I am going to address several topics in my line of questioning and I will let you know what those topics are, probably just five topics.
2055 I would like to explore, in order to understand better, the two‑facilities bright‑line test. In that category I would like to understand better the calculation and also the administration of the test.
2056 The second topic will be geographic market, your proposal and then the others' proposals.
2057 The third topic will be product and service market, your proposal and then the others.
2058 The fourth topic is what we have talked about a lot, the 5 percent. Under the 5 percent I would like to address the sufficiency of the 5 percent, symmetry to cable, and also the whole issue of the legality of the predetermined threshold.
2059 The fifth topic will be other proposals for competition, competitive safeguards, consumer safeguards.
2060 My sixth topic will be my safety net, miscellaneous.
2061 I will also tell you that most of the references ‑‑ but don't hold me to this ‑‑ will be from the Telus final argument, Telus June 22 comments, the Call‑Net June 22 comments, Rogers final argument, Rogers interrogatory with CRTC, then the CCTA June 22nd comments and then the Telus CRTC interrogatories, if you want to pull those.
2062 My first question is to help me better understand the two facilities and 5 percent, the bright‑line test. For this I would like to refer to the interrogatory CRTC‑901, please.
2063 MS YALE: I think we are ready.
2064 COMMISSIONER del VAL: I think in your answer you gave quite a comprehensive discussion of that test, I would just like to understand better.
2065 I am looking at the "A" part to your answer, NAL equivalents being a viable commercial alternative to ILEC local exchange.
2066 If I were to take out NAL equivalents, what would I be deleting from your formula? That is the question. That is where I would like to get to.
2067 So if you want to discuss what is an NAL equivalent first, that would help.
2068 MS YALE: The obvious category that would be eliminated would be Access independent voice over IP.
2069 COMMISSIONER del VAL: Okay. Then when you say "an NAL equivalent is any like connection using any technology", is wireless there?
2070 MS YALE: No. We have completely excluded wireless from the calculation, not because it may not be a substitute, but because we felt as part of being conservative in our test we didn't want to get into the wireless debate.
2071 COMMISSIONER del VAL: Okay. So then on page two of the interrogatory when you quote from your June 22nd comments, that quote, the purpose is really ‑‑, the last sentence is that this is a conservative test. The first part, am I to take it this formula is also wireless ready?
2072 Should that be how I read it?
2073 MS YALE: No. What we were trying here to talk about is the fact that there may be customers who choose a variety of other alternatives. For the purpose of this test we are looking at we are not including wireless in the calculation. That is all it is meant to suggest because, as I say, we wanted to be conservative and keep it simple.
2074 MR. WOODHEAD: Commissioner, in terms of it being wireless ready, if you were to find at some point in the future that there was massive amounts of wireless substitution, such substitution that I guess you don't see today, then, yes, you could put wireless into the equation, but, as Janet said, at this point in time, to be conservative, we have not included it.
2075 COMMISSIONER del VAL: Okay. I guess that is where your answer to Interrogatory 202 comes in in section E, where you say:
"Should the Commission determine that wireline service and mobile wireless service are in the same market Telus has proposed two‑facilities bright‑line test for variance would need to be restated. That would be a second full facilities‑based local service provider in much, if not all, of an ILEC serving territory (a non‑ILEC wireless carrier) and the second part of the test would be if 5 percent of the customers in the full facilities‑based carrier's territory (the territory considered for forbearance) subscribed to a non‑ILEC mobile wireless or wireline service to confirm that these non‑ILEC services were viewed as substitutes for the ILEC's own wireline and mobile wireless service." (As read)
2076 MR. WOODHEAD: I'm sorry, could you just direct us within the interrogatories?
2077 COMMISSIONER del VAL: I am jumping to Interrogatory 202, page 3, section E.
2078 MS YALE: So what we are looking at is a single alternative full facilities‑based carrier and whether 5 percent of customers have gone to that carrier. That could be over time. If the Commission saw them pursuant to this answer as wireless as in the same market, it could be restated in terms of 5 percent of customers switching to that alternative full facilities‑based carrier within the serving territory, but we haven't done that.
2079 COMMISSIONER del VAL: Okay.
2080 MS YALE: Does that answer your question?
2081 COMMISSIONER del VAL: Yes, I think so.
2082 In that case you would take, though ‑‑ an ILEC mobile wireless, that is going to be excluded from your count. Right? That is going to be ‑‑
2083 I'm sorry, I will get the example for you.
2084 MS YALE: It is highly speculative, because we didn't really focus on whether or not wireless is in the same market at this point in time. So we are trying to be helpful with your hypothetical and I'm just not sure exactly what it is you are puzzled about.
2085 COMMISSIONER del VAL: I wasn't certain about your position of whether wireless would be included in ‑‑ would be included in the service market at this point, and if it does become a substitute this formula would not change.
2086 MS YALE: At this point it is not in. That's the short answer.
2087 COMMISSIONER del VAL: Okay.
2088 MS YALE: If at some point enough people see wireless as a substitute for wireline we could get into a debate about how you would incorporate it in. All we are saying here is, we just think that we are not at that place and we haven't incorporated it in the test.
2089 COMMISSIONER del VAL: Okay. The use of NALs, the lines, I am going back to Interrogatory 901 on page 3 and to the bottom of that page.
2090 On the sixth line of the final paragraph you talk about:
"... avoiding the under counting that might result from focusing on physical links to a switch." (As read)
2091 Can you elaborate on that? Can you explain that, please?
2092 MR. WOODHEAD: Are you talking about sub 3 here?
2093 COMMISSIONER del VAL: Yes.
2094 MR. WOODHEAD:
"... avoids the under counting that might result from focusing on physical links to a switch"? (As read)
2095 Well, the classic example of that is you may have one physical link with a number attached to it that terminates at a PBX behind which there are a thousand telephone numbers.
2096 MS YALE: But coming back to the point, it was about Access independent voice over IP where an individual may have several telephone numbers for a single line because they want to be local wherever they are.
2097 COMMISSIONER del VAL: All right. Thank you.
2098 Then going on to using the competitor's footprint, I was looking at Appendix 4 to your June 22nd comments, which is the map of, I believe, Calgary. There I believe that even on the map itself for business customers the areas are not always contiguous. So how would you apply the competitors' footprint in a that scenario?
2099 MR. WOODHEAD: The footprint we use is the footprint that the cable company in this case, what we face today, actually launches. Did you say residential business?
2100 COMMISSIONER del VAL: Just business.
2101 MR. WOODHEAD: Just business. Well, it doesn't really matter, because the area is where the cable company defines it. For example, in the map you are looking at metropolitan Calgary is the largest one and then there is Leduc and some other outlying systems that are not contiguous, as you pointed out.
2102 If they launched in all of these areas at one time, that is their area and the cable company would be capable of serving residential and business customers within those areas, irrespective of whether they are contiguous or not.
2103 COMMISSIONER del VAL: Okay. So then when you are looking at that map, you would apply the test to each little area where is competition, say, in the business local?
2104 MR. WOODHEAD: We would apply the test to where the cable company launched service. So if it launched service in all of these areas at the same time, that defines their area. If the cable company launched in the big area, in the middle of the diagram, that defines an area. If they then subsequently launched in a non‑contiguous area, that would count as its own area. Much, for example, as the way outside of the hypothetical you raised, which is a good one, certain of the cable companies have launched in discrete metropolitan areas.
2105 For example, in the case of Videotron they defined the south shore of Montreal as an area. Subsequently, the West Island, subsequently, Laval, and so on and so forth. So we are simply following their launch, their geographic area and their timing. They define where they serve, they define the geographic area and that is what we use as our building block.
2106 COMMISSIONER del VAL: So in the in between areas that they do not serve, do you count them into ‑‑
2107 MS YALE: No. Where they serve is where you look at whether or not they have met the threshold in terms of acquiring customers, where they have chosen to enter. That's it.
2108 COMMISSIONER del VAL: Okay. So say in Vancouver, downtown Vancouver is a good example. Let's just say, for example, then there is nothing in between until you go to metro town where all the towers are. They serve that way.
2109 We would then have to apply the test to see whether there is competition in the metro town core and then the downtown area. That would be where we would be aggregating and collecting the numbers.
2110 MS YALE: Not aggregating, just ‑‑
2111 COMMISSIONER del VAL: I'm sorry, yes.
2112 MS YALE: ‑‑ area by area. Because at the end of the day, as has been discussed many times here already, the problem is, if you go broader than that you end up with pockets of unserved customers. So we felt that it was important to look at where there is an actual overlap of an incumbent and a full facilities‑based provider. You know where they have entered. You have a complete overlap. What we were trying to do was to be able to identify those areas of complete overlap.
2113 COMMISSIONER del VAL: The other parties have pointed to a lot of the administrative difficulties earlier this morning, the costliness of just data collection and monitoring.
2114 In Rogers Interrogatory 210, Rogers does list the challenges that it believes using the geographic footprint would pose.
2115 MS YALE: Sorry, can you give us the exact reference, the page?
2116 COMMISSIONER del VAL: Yes. It is Rogers Interrogatory CRTC‑210.
2117 MS YALE: Okay. We have that.
2118 COMMISSIONER del VAL: Could you respond to the concerns raised by Rogers, and then do you have any solutions that you could propose or suggest?
2119 MS YALE: I am going to give Ted here a chance to read it while I start off. But before Ted gets into the detail I am going to ask Fred Di Blasio.
2120 This is an important issue, because we debated whether or not to look at our exchanges or where entry actually takes place, and at the end of the day we believe that it is important to focus on where there is a complete match in overlapping footprints, as I said.
2121 From an administrative perspective, as an ILEC, we believe that that is quite readily solvable in terms of any administration that you have to deal with.
2122 I am going to let Fred explain to you from a marketing perspective in the consumer marketplace how that would work.
2123 MR. Di BLASIO: Thank you, Janet.
2124 We have a number of ways we can slice and dice the data with respect to the cable serving areas and the footprint and customers that are being served by cable companies that are also in our footprint. So one of the tools that we use is geomatics, for instance, that assists us in actually locating those areas and making sure that we can do the overlap that Janet speaks of.
2125 MR. WOODHEAD: Commissioner, I have read Rogers' answer to "A" and it would appear to say that irrespective of the fact that what we are saying is that the geographic area is defined by the cable serving area, they then overlay the telephone network exchange on that, and say, well, the cable area may cut across an exchange and there would be people or consumers, customers outside of the cable serving area. Then they somehow seem to imply that that would force them to drive their network into those areas.
2126 Telus' position is not that. Telus' position is that the cable serving area defines the relevant geographic area. Whether the cable company wants to expand beyond its existing footprint ‑‑ which incidentally it does on a daily, weekly basis, whatever ‑‑ through organic growth to subdivisions and other areas of communities as they grow, but there is nothing implicit or explicit in our proposal that would force any competitor to put a network anywhere that it doesn't want to put it.
2127 So that is the answer to "A" and if you will give me just a second to review "B".
2128 MR. WOODHEAD: In "B" what they seem to be getting at is that this would be as they grow. I think they are saying that as they grow out their network this would become administratively burdensome to collect data and report that data and adjust those serving area maps.
2129 then they point to our evidence where we ask for enhanced data collection and that is something that Telus has done consistently across a number of proceedings, including IXPL and some other ones, and they point out that in our evidence we have asked for a monthly updating by all carriers and competitors of data.
2130 I'm willing to sit here and concede that maybe monthly might be a bit aggressive, but the fact is that cable companies report their cable serving areas on the 6th floor of the Commission pursuant to their license and as they grow their networks there are maps that they file, there is a database up there that has all of that information in it, exactly where their networks go. I guess what I am suggesting is, and what our evidence is suggesting, is the information is available, the Commission actually has it, and that forms the relevant geographic area because it encompasses all customers within their serving areas who are offered service by their network.
2131 That is a rather long‑winded answer, but I think I answered your question.
2132 COMMISSIONER del VAL: Okay.
2133 I think Aliant pointed specifically to the example that, say, what if the footprint of the competitor covers half of an exchange, so half of it would be forborne and the other not forborne.
2134 How would the reporting be done on that one?
2135 MS YALE: That is the whole point, is that what we want to do is avoid pockets of unserved customers so we focus on where they have entered, where there is an overlap. As Ted has indicated, the Commission knows what that serving territory is and how many customers are served within that geographic area and the only question that flows from that is could we, as the telephone company, manage to split our exchanges based on whether there is and isn't forbearance. As Fred has explained, we can sort by postal code and it is quite administratively straightforward to do.
2136 COMMISSIONER del VAL: Okay. Then what are your comments on SaskTel's comments today that it would be ‑‑ it is doable, but it is costly?
2137 Is it?
2138 MS YALE: Well, as competition evolves it is more costly to do business, because we have to be able to respond to competition where it takes place and we are seeing competitive entry selectively by cable companies within their serving territory.
2139 So, I mean, those are the facts of operating in a more competitive environment.
2140 We were very concerned about a couple of things. One was the problem of the pockets of customers who didn't have a facilities‑based competitive alternative and how do you deal with that.
2141 Second, the ability to game the test if you have a geographic area that is larger than where the entrant is serving.
2142 If you use, for example, an entire exchange and the cable company could enter the entire exchange but chooses not to, the larger the geographic area, the easier it is for them, through selective entry, irrespective of their capacity to enter, to delay the benefits of competition to those pockets in order to ensure that the threshold, wherever it is established, isn't met.
2143 So we thought, well, the best way to get around that problem is to say, okay, where you enter, where you the cable company enter is the relevant geographic market, and it avoid the potential to game the system in the way I have just described.
2144 THE CHAIRPERSON: On that note we will break for 15 minutes.
2145 We will break for 15 minutes. Nous reprendrons dans 15 minutes.
‑‑‑ Upon recessing at 1105 / Suspension à 1105
‑‑‑ Upon resuming at 1126 / Reprise à 1126
2146 THE CHAIRPERSON: While we are waiting, for planning purposes it is likely that we will sit tonight until sometime between 6:30 and 7:00 depending on the pace of the presentation. We won't start somebody off at that hour, but we will likely finish our proceedings between 6:30 and 7:00.
2147 We will continue the questioning with Commissioner del Val.
2148 COMMISSIONER del VAL: Thank you.
2149 Still on the topic of the competitors' footprint, my next question was: We do anticipate hopefully the expansion and the competition to be aggressive so you can anticipate that the competitor will be expanding its footprint. Right?
2150 The question is: One, how would you practically track the expansion of the footprint? How would the reporting keep up with it? That is the first part of the question.
2151 MR. WOODHEAD: As I said, in our proposal we were talking about monthly reporting and, as I think I conceded, that might be a tad aggressive. But you could pick some reasonable period of time where the cable ‑‑ in this example in terms of a cable company where it files, whatever the interval is, you can pick some reasonable interval, is it quarterly, is it two times a year, is it yearly and that would reflect the organic growth of the network that the cable carrier will expand its network to offer the full suite of its services, be it cable services, internet services and now telephony services. So there will be some expansion.
2152 As to what the appropriate reporting period is, as I say, I concede it may not be monthly. It may be quarterly or twice a year or yearly, but some reasonable period of time that you would be able to administratively track.
2153 THE CHAIRPERSON: While Commissioner del Val is pausing, leaving aside the time dimension, in terms of the geography dimension you gave as an example before Videotron's expansion from the South Shore to, say, the West Island of Montreal, assuming we can define exactly what that means.
2154 In your proposal, assume they have met the 5 percent threshold on the South Shore and are now expanding to the West Island, does that become one area for your purposes?
2155 MR. WOODHEAD: No, it would become two areas, because if you did it as it is the South Shore ‑‑ in the case of Videotron it is the South Shore they launch, they are in the market for two or three months and then they add the West Island, then if they had reached 5 percent in the South Shore you just have a rolling ‑‑ well, they don't reach it now because they just added a whole pile of new homes that they pass in the South Shore.
2156 So what we have sort of proposed is that you follow the cable company. So if for example Shaw in our circumstance ‑‑
2157 THE CHAIRPERSON: No, stick with the example if you could.
2158 MR. WOODHEAD: Okay, sorry.
2159 So my answer to you is that they would become two discrete areas and once you reach 5 percent in one you have met it.
2160 THE CHAIRPERSON: So if the cable company decided not to go to the entire West Island but to go to a six‑block area next, after the South Shore, would you then try to apply the 5 percent to the entire combined area of the South Shore in the new six blocks or are the six blocks now a new area for your calculation?
2161 MS YALE: We can kind of get pretty far down the path of what‑ifs, but what we are trying to do is deal with separate areas. So if they choose to enter a particular geographic area, the problem we were grappling with was the unserved pockets and the entry that we have observed has been selective. Even though they could do more, they haven't chosen to do that.
2162 So how do you from a forbearance perspective, and how do we from a competitive response perspective, deal with that. Right?
2163 The fact that entry is taking place selectively by cable companies is their choice about how to enter the market. So we have said, "Okay, if it is the South Shore let's treat that as a discrete area. The next discrete area they pick will be its own discrete area." You can posit them doing it six blocks at a time I suppose, but I find that ‑‑
2164 THE CHAIRPERSON: Well, just as a hypothetical. So you are saying that every new addition to a boundary ‑‑
2165 MS YALE: A non‑contiguous addition becomes its own discrete area. I suppose what Ted was trying to deal with is the natural extension as within areas. Right? The maps get updated, there are sort of small increments at the margin. That is different than a new pocket with a new area.
2166 THE CHAIRPERSON: Okay. The new area I think I understand.
2167 MS YALE: Right.
2168 THE CHAIRPERSON: But it is accretion I guess, because in the new area the 5 percent that might have been reached in the old area is now diluted by the fact that they are only at 0.5 of a percent in the new area, so that the combined total is now below 5 percent. So you go back and forth over that with contiguity or you run the risk of that.
2169 This proposal has been challenged by a number of people as administratively difficult, so let us try and work through some of these basic administrative issues.
2170 MS YALE: That's right. But most of the administrative issues that have been posited have to do with the ability of the ILECs to administer on a sub‑exchange basis as opposed to the ability of the Commission to monitor the attainment of a 5 percent.
2171 From our perspective, I will put it simply, that is a price worth paying to be able to deal with sub‑exchanges to avoid the pockets of unserved customers and the gaming issue that I was referring to before.
2172 So it really responds to the issue of: Do you have a facilities‑based entrant in a meaningful cable‑serving territory? Typically, as we have seen with Shaw, they enter a serving territory at a time.
2173 THE CHAIRPERSON: As you know, the devil is in the details.
2174 MS YALE: Right.
2175 THE CHAIRPERSON: If you are a cable industry, whatever the rules are, as you would expect competitors to do, they will try and adjust their business plans to their advantage. So unless one has very clear and precise answers to a number of ‑‑
2176 MS YALE: To those increments at the margin of a serving territory ‑‑
2177 THE CHAIRPERSON: ‑‑ scenarios like that, I think you run the risk of vagueness and vagueness undermines your proposal.
2178 MS YALE: Absolutely.
2179 I think Willie has an answer.
2180 MR. GRIEVE: Mr. Chairman, we obviously are very sensitive to the fact that competitors might choose to try to game any system that is in place.
2181 So there are two kinds of questions here. I am going to use an Alberta example because I saw the map.
2182 So look at the map of Red Deer. Red Deer goes out and it stops. It has new subdivisions and they stop and after that is the country. Well, we know that Shaw eventually will update its maps for that area. So we count. If they enter in Red Deer, we count all of Red Deer where they enter because they typically enter wherever they have a headend or the facilities to enter.
2183 So then a new subdivision is built. What happens when the new subdivision is built?
2184 Well, if they were at 5 percent and then the new subdivision is built and all of a sudden they are not at 5 percent any more, then you ask yourself the question, "Well, we just forbore, are we going to have to deforbear?" ‑‑ I call it "rebear" ‑‑ are we going to now rebear, right?
‑‑‑ Laughter / Rires
2185 MR. GRIEVE: Our proposal for when you look at deforbearance is that you see, "Oh, now the territory has expanded they are below 5 percent." You come back to us and you say, "Show cause why we shouldn't deforbear or reregulate in Red Deer" and we say, "Well, because they are new subdivisions. We are rolling out, they are rolling out network, you have two facilities in place and we know throughout Red Deer that this service is a service that is accepted as a substitute by customers."
2186 THE CHAIRPERSON: Okay. I see administrative problems, particularly in Alberta. The last few times I have been there, subdivisions are rolling out of most cities very rapidly. Administratively, again, if we don't have clear answers to these we are kind of looking subdivision by subdivision at show causes as to why potentially.
2187 Unless you are way over the threshold. It may raise the issue of is the threshold right? Should there be a range? Who knows?
2188 But I leave you to refine your proposal.
2189 MS YALE: No, no. It is a very good point. I guess whatever threshold you pick you have that issue of if you are too close to the margin what happens if?
2190 So I don't think it is an issue of therefore do you wait until it is a little bit more above the threshold in fast‑growing communities, for example, so that you take into account the potential for those differences at the margin where there may be new subdivisions added.
2191 But at the end of the day we thought on balance it was more important to focus on where there was actual facilities‑based competition. It is a balancing act in terms of which geographic territory do you pick. Do you pick a larger area over which there is definitely going to be unserved pockets or do you start with where there is actual entry and grapple with the question of growth?
2192 THE CHAIRPERSON: Thank you.
2193 Commissioner del Val.
2194 COMMISSIONER del VAL: Thank you.
2195 On that note, let us talk about the other ILECs' proposal of using the exchange.
2196 What do you see there as the biggest challenge that hasn't been covered already and why is that not a good proposal, in your view?
2197 MS YALE: The single biggest problem from our perspective is the unserved pockets and the fact that cable‑serving territories may cover part of an exchange and not others and what do you do with the unserved pockets when you look at making sure, from a public policy perspective, that there is competition.
2198 At the end of the day from a local service perspective for individual customers in their homes, it is small comfort to know that on the other side of the exchange there is competition but serving them there isn't.
2199 So from our perspective we felt that it was important to ensure that there were two full facilities‑based competitors for every customer for whom forbearance was granted. At the end of the day, we thought that took precedence for us over anything else from a public policy perspective.
2200 As I said, from a gaming perspective there is no doubt that the larger the geographic area, whether you go to the exchange or the LIR, the easier it is to delay extending the benefits of competition by that facilities‑based entrant in order to make sure that you never get to the threshold or that you delay the attainment of the threshold wherever it is set.
2201 COMMISSIONER del VAL: So would that view or that answer apply also to the proposals of using the LIR or the local calling area?
2202 MS YALE: The LIR is ‑‑ the larger the geographic area the bigger the problem.
2203 COMMISSIONER del VAL: Now I will move on to the product and services market.
2204 Call‑Net's view was that the relevant market would be the wireline including VoIP, and you agree with that?
2205 MS YALE: Yes.
2206 COMMISSIONER del VAL: Okay. In the business product market Roger's proposal is to divide the business market into Centrex and digital trunk services.
2207 Do you agree with that?
2208 MR. WOODHEAD: Under our proposal we have just said that the business market is a separate market. In our view, if you are a full facilities‑based carrier within that defined area where you have full facilities, you can offer any number of these services, be it Centrex, primary business line, whatever that service group is.
2209 We don't differentiate. We have not segmented it into these various segments.
2210 COMMISSIONER del VAL: When Aliant proposed the four relevant product markets, they have the basic business services which include the single‑line businesses, multiline business and small Centrex, 30 or less, The second group is the mid‑size Centrex, 31 to 1,500 accesses. The third category is Enterprise Centrex, which are greater than 1,500 and digital trunks is the fourth group.
2211 Aliant's view is that the relevant market determination must be based on the market structure in the area under consideration and this may not be the same in all areas.
2212 So the first question is: Do you agree with Aliant's proposed product groupings for determining relevant product market.
2213 The second question is: Do you believe that the relevant market determination should vary by ILEC territory?
2214 MR. WOODHEAD: I will start.
2215 The answer to the first question is that our proposal treats all business services the same. We don't segment the service into those various groupings.
2216 I'm sorry, could you repeat the second question?
2217 COMMISSIONER del VAL: Yes.
2218 The second question is: Do you believe that the relevant market determination, particularly for business, should vary by ILEC territory?
2219 MR. WOODHEAD: Our proposal is that if you have a full facilities‑based carrier in a particular serving area that it has chosen, it has the ability to offer all of those services within that area.
2220 COMMISSIONER del VAL: So you don't see any need to further segment the business products, services?
2221 MR. WOODHEAD: No. Obviously in some of those ones that you have mentioned, in the higher Centrex ones, there is already competition in the enterprise. Those are large enterprise accounts. There is a lot of competitive activity in there in terms of companies like MTS Allstream and Rogers Telecom now in that segment, but our test focus is obviously on the full facilities‑based carrier within that defined serving area and we bunch them all together.
2222 COMMISSIONER del VAL: Based on your answer wouldn't it therefore make more sense to segment it, say, for just what you said, the large Centrex. There is already competition?
2223 MR. WOODHEAD: Well, there is competition, but in our proposal obviously we still reserve the right to come in with a standard 94‑19 application to deal with that, even in the absence of a full facilities‑based competitor if those conditions present themselves in our serving territory.
2224 COMMISSIONER del VAL: What do you think of the Bureau's comment that the division of the relevant residential market into first‑line market and then a second market being second‑lines mobile wireless and VoIP?
2225 MR. GRIEVE: Well, we have looked at the first and second line issue quite a lot and I think Aliant's witnesses made reference to it yesterday. If you had Telus and Shaw both offering service in a particular area and a household took one line from Telus and one line from Shaw, how do you know which is the first line and which is the second line?
2226 We have had requests from our marketing group in the past to look at whether there was a way to get special treatment of second lines and we just could not find any way at all of making a practical distinction between first and second lines.
2227 COMMISSIONER del VAL: Now I am moving into the 5 percent category.
2228 I think you heard yesterday a lot of discussion on why 5 percent and 5 percent seems low, particularly in light of, say, Rogers pointed out compared to the international and general competition precedents it seems low.
2229 Then I think closer to home Call‑Net used the example of the Ontario Power mitigation framework and they are talking of reducing control of electricity supply to below 35 percent within 10 years.
2230 Do you have any more to add that is different from what was discussed yesterday and, in particular, would you have any examples of other jurisdictions using 5 percent as a threshold and finding that to be sustainable competition?
2231 MS YALE: Let me start by clarifying I think a really important point in our proposal, because this is not a market share loss test and most of those other examples focus on the loss by the incumbent of market share and we don't do that.
2232 What we are focusing on is whether or not competition in the form of a facilities‑based competitor is viable in the sense that customers are willing to place their confidence in that provider as a serious alternative and a substitute for the services of the ILEC. So the analogy to other market share loss tests we think is not the appropriate and relevant analogy.
2233 Where we borrow the idea, frankly, is the cable test, because there the Commission wanted to be sure that DTH entry was meaningful and that in the eyes of customers this was a meaningful alternative, viable from their perspective and so we borrowed from the Commission's own test looking at the acquisition and the willingness of customers to go to that competitor.
2234 Dr. Weisman, I believe, has some specific comments relative to your question.
2235 DR. WEISMAN: I believe the 5 percent speaks to the fact that customers are switching and establishes that they are in fact substitutes.
2236 If you look at the law and economics literature with respect to regulation and market share what that literature tell us is that, to the extent regulation has been effective, the relationship between market share and market power is severed.
2237 Next, if you are going to use a market share measure, as the Bureau has suggested in their comments, you would want to do a market share measure based on capacity. When Telus' test is satisfied, 100 percent of the market is addressable by at least two facilities‑based providers, and if you calculated the meaningful market share measure according to that metric, it would be no higher than 50 percent. That is the appropriate measure if you are going to use a market share measure in this context, not 5 percent or 95 percent.
2238 COMMISSIONER del VAL: Okay. Thank you.
2239 Going back to Ms Yale's answer on the 5 percent, taking that from the cable industry, then of course you have the Rogers and the counter argument that when 5 percent was established in the deregulation of basic cable rates the company's market share at that time was around 75 to 80 percent. Unlike the cable industry, there is almost universal adoption of local exchange service. 97 percent of households have wireline service. There is also argument that the demand characteristics of the two markets are different.
2240 Can you comment on those, please?
2241 MS YALE: Sure. I have a number of comments.
2242 First of all, the reference on the cable side was that not every household had cable television service, not whether or not of those who chose to take cable service what percent of those took it from the cable company. In the absence of competition, 100 percent of households that took cable television service took it from the cable company. The fact was that not every household took it. Not every household had cable.
2243 Similarly, for us today in B.C. and Alberta 10 percent of households don't take wireline service. Don't take wireline service from us, 10 percent of households. So whatever market share number you may want to use to reflect of those who do take wireline service what percent take it from us, the fact of the matter is it is the missing households in both cases that are evidence of the fact that not everybody sees wireline service in our case, and cable service in the cable industry's case, as something they need in their homes.
2244 So I think it is important to look at the issue from that perspective.
2245 I am going to turn it over to Dr. Crandall in a minute.
2246 But at the end of the day the 5 percent test was really, as I said, about looking at whether or not DTH would be seen by customers as a meaningful alternative, because there were concerns that this was a new technology, there were concerns about customer inertia, barriers to switching, it was an all‑digital service, people would have to put a box on every TV, where in those days analogue cable still didn't require you to have a box only if you took digital service, which is something people are getting used to.
2247 So there were all these concerns at the time as to whether or not people would actually switch. So the 5 percent test was put there as evidence that people were comfortable with DTH as a meaningful alternative.
2248 In fact, in the case of telephone service we sort of borrowed from that notion to say this isn't about how much market share we have because we know there are other providers already in the market subscribing to services of CLECs, subscribing to access independent VoIP. So it is not that we will have 95 percent and the cable company would have 5, it is that whatever other competitive factors may be going on in the market the facilities‑based competitor would be seen by customers as a meaningful alternative.
2249 I will turn it over to Dr. Crandall.
2250 DR. CRANDALL: Just one brief comment, and that is to the extent that the cable television operators only had 70 percent of the households, or whatever the relevant number was at the time, and then a 5 percent test was applied to a new facilities‑based provider, namely a DTH service, the implicit suggestion I suspect coming from Rogers is that they had already lost 30 percent of the market.
2251 Those 30 percent of households were never in the market. That they have not chosen to subscribe to cable as it went from 12 to 24 to 25 to 100 to 200 channels or whatever is available today suggests they are really in a different market.
2252 So for a DTH system to take 5 percent, if it all comes out of the cable company's hide, it is really a 7 percent test.
2253 COMMISSIONER del VAL: Then what about the comment that the demand characteristics in the two markets are different?
2254 MS YALE: Can you elaborate on what you mean by that?
2255 COMMISSIONER del VAL: Call‑Net's submission on June 22nd said that:
"A market share target developed in one market, that is cable, is not necessarily suitable for forbearance in another market with different demand characteristics such as local residential service and local business service." (As read)
2256 Do you have any further comment on just the demand characteristics being different?
2257 MS YALE: I guess the real issue is whether or not customers are willing to take up an alternative. At the end of the day what you are looking at is customers' willingness to switch. Whatever the different attributes of the product or he service are in question, whatever factors may motivate their decisions, at the end of the day the question that the Commission has to address is: Does market power continue to exist in the local telephone market or is competition sufficient to protect the interest of users? And customers willing to switch to an alternative is evidence that whatever attributes they see in the product or service they think that there is a viable competitive alternative that is a substitute.
2258 COMMISSIONER del VAL: Did you want to add something?
2259 DR. CRANDALL: I just want to add one thing to that.
2260 To the extent that you are focused on demand differences I suspect that you ought to be concerned about the supposed consumer inertia. How quickly will people shift from the incumbent to the entrant service?
2261 I think you will find that in telephony people switch more rapidly than they do in video. I think you will find at least the experience in the United States would be that the two DTH providers have attracted subscribers more slowly than, say, Cox has attracted telephone subscribers in areas where they have deployed it, or the UK cable companies attracted telephone subscribers when they first deployed, or perhaps ‑‑ and I think there is only developing evidence here in Canada, households are switching to cable telephony today.
2262 COMMISSIONER del VAL: So there are actually studies on this, that people are more prepared to switch their telephone service than cable service, than their television service?
2263 DR. CRANDALL: There certainly is experience with the UK cable systems. There have been reports in the financial reports of Cox ‑‑ which is now a private company, but back when it was a public company ‑‑ of how rapidly they were able to attract telephone subscribers, and the subscription levels of DIRECTV and the DISH network in the United States are matters of public evidence. You can look it up.
2264 MS YALE: I would like to turn it over to Fred Di Blasio to talk about it from a customer perspective, because at the end of the day one of the differentiators, if you will, is that this isn't like a cable television service from DTH providers where it was a single standalone service. This is about adding to a bundle of services. I think that affects the willingness of customers to switch.
2265 Perhaps I can let him expand on that.
2266 MR. Di BLASIO: A couple of quick points.
2267 One of them is, I spent quite a bit of time in the UK market on the cable side of the equation and it was clear that initially the cable companies came in wanting to ‑‑ usurp the position and have a telephony sweetener. It quickly became apparent to us that in fact we were going to have to try and fight on the telephone side and hopefully get some cable customers, multichannel video customers to speak of.
2268 So that I think is an interesting and relevant point to what has taken place here.
2269 In addition, I was at AT&T Broadband when we decided to deploy TDM across the United States in those markets where we had franchises and it was very clear to us that it was much easier to actually go after those customers when you bundled them with all of the services that we were able to offer, the sticky application being the video bundle. So you offer video and then you layer on the high‑speed and then it was a quick sell for the telephony.
2270 So I think the experience I have had, certainly in the UK and in the U.S., is relevant and speaks to what we are talking about today.
2271 COMMISSIONER del VAL: Thank you.
2272 I will move onto the last aspect of my questions regarding the 5 percent. This is actually more generally about a predetermined criterion under the Telecom Act.
2273 I think Rogers, in their final argument, said that:
"The use of a predetermined level of market share alone to decide whether to forbear is not appropriate as it would fail to consider the important factors that should be considered in order to make the factual determination mandated by Parliament." (As read)
2274 I think Call‑Net, in their June 22nd comments, were even stronger and said that:
"To the effect that predetermined criteria violate the mandate granted under section 34 of the Act and has the effect of unlawfully fettering the Commission's discretion..." (As read)
2275 Did you want the references to these quotes? I just wanted your response to that.
2276 MR. GRIEVE: I am familiar with the arguments.
2277 COMMISSIONER del VAL: Okay, great.
2278 MR. GRIEVE: First of all, there are two things going on here.
2279 One is that the Commission can't set a rule because they are not abiding by Parliament's instruction. Well, when you set a rule, just as when we set our test, what we did was we looked at the 94‑19 test in the context of sections 34(2) and 34(3) to make sure that when our test is met all of those requirements are met. So you can certainly have that.
2280 That addresses the first question.
2281 The second question is whether you are actually fettering your discretion by picking a number. I think there are mountains of court cases ‑‑ and I promised Janet I wouldn't go too far back in history, but there are mountains of court cases that say that a regulatory agency is perfectly entitled to set a rule, as long as it is always open to parties in suitable circumstances to raise new factors, new facts that hadn't come to their attention before and challenge the rule or the application of it in a specific case.
2282 So there is no fettering of discretion problem here, unless somebody came in and wanted to present new evidence that you hadn't considered before and new circumstances and you refused to hear it. I don't think you could refuse to hear it.
2283 COMMISSIONER del VAL: Thank you.
2284 I am going back a bit now. Would your proposal of the 5 percent threshold change if the geographic market were the exchange?
2285 MS YALE: No, it would actually be a tougher test because of course there are pockets of unserved customers so you would actually have to lose more market share in areas where the cable company had entered in order to meet the 5 percent threshold.
2286 COMMISSIONER del VAL: Thank you.
2287 In the next set of questions I am just trying to assess the various proposals regarding criteria for competition and I would like your views on those.
2288 What are your views as to whether as part of a forbearance test the Commission should examine the entrants and incumbents cost structures, including whether the entrant has similar or lower variable costs than the incumbent?
2289 DR. CRANDALL: In the opening statement I mentioned that the new forms of telephony, namely voice over internet, that is the Access independent as you are calling it here in Canada, and even the more Access dependent types of voice over internet have lower costs.
2290 The new player on the block gets to choose the technology and there has been technological progress since my colleagues here at Telus have deployed their network and these definitely have lower costs. I was suggesting that is a reason not to be concerned about any attempt by Telus ‑‑ there are other reasons, but this is one reason not to be concerned that Telus would engage in predation. You don't engage in predation against someone who has costs lower than your own in any circumstances and there are other reasons not to do it too.
2291 But I think that the lessons of regulation of telecom over the last 15 or 20 years is that you don't want to get into these attempts to measure costs. It is going to be very difficult, particularly given that you are talking about an evolving network. At what rate do you assume it fills up, and so forth.
2292 I think it is an undertaking that would delay you, complicate the matter and not satisfy you in the end.
2293 COMMISSIONER del VAL: Thank you.
2294 COMMISSIONER del VAL: The company is Bell. In their Interrogatory 305 they provided a study that indicated that in certain countries they are replacing the regulation of retail rates with regulation of rates at the wholesale level.
2295 Do you think a switch from retail to wholesale regulation of local services would be appropriate for forbearance from regulation of local services here?
2296 MS YALE: Well, there are rules around the unbundling of our networks and rules that require us to make our facilities available at a wholesale level to our competitors that choose to enter on that basis, and those would continue in place, notwithstanding forbearance. In other words, no economic regulation at the retail level.
2297 COMMISSIONER del VAL: Thank you.
2298 Do you have any comments on the CCTA's proposed two‑part test for determining forbearance, the quantitative test of the market not being served by the ILEC, that a minimum of 30 percent not being served; and then the second part, that the facilities‑based competitive alternatives exist in the relevant geographic market on a pervasive and sustained basis?
2299 MS YALE: Well, obviously their geographic area that they propose within which they measure that market share lost is much larger than our proposed area and suffers from all of the defects that we have already discussed.
2300 Again, a 30 percent test we believe is much too high. For reasons that I think we have addressed, the evidence of sustainable competition I think is there by virtue of the fact that the cable companies are established players in the market with an infrastructure in place to serve customers for their broadcast distribution undertakings and their high‑speed internet. So I don't think these are fragile competitors that are at any risk of leaving the market.
2301 COMMISSIONER del VAL: Then what do you think of the Bureau's structured rule of reason approach requiring information on the costs of each of the parties and the possibilities for capacity expansions and the measurements of demand?
2302 Is this type of information likely to be available for both the entrants and the incumbent?
2303 MR. WOODHEAD: I will take a crack at that one.
2304 For all of the reasons that Dr. Crandall discussed with you, a sort of merry journey down a costing exercise would be a long and tremendously complicated one which, I agree with him, at the end would leave you less than satisfied.
2305 There is little, little debate in my mind ‑‑ you don't have to believe me, you can listen to Mr. Shaw or Mr. Rogers.
2306 With respect to Mr. Shaw, in his quarterly reports he states that the capital cost for the first 100,000 subscribers are in the range of $50 to $55 million and only $35 million for the next 100,000 subscribers.
2307 For Mr. Rogers' part, he indicates with a somewhat more robust system where they are going full in as a CLEC that they are going to spend something in the order of $200 million, and their annual report in 2004 indicated that their capital expenditures at that point with $106 million.
2308 Rather than going through a costing exercise to see which provider has equivalent or lower variable costs, I suggest to you, assuming that they are not being disingenuous, that that is a low cost alternative in terms of expanding.
2309 So that is my answer to that part.
2310 Assuming now that we are talking about the ability to expand capacity to meet demand, cable networks, and particularly the major cable providers ‑‑ and as you well know because you sit as both broadcasting commissioners and telecom commissioners, that over the last 10 to 15 years a multitude of issues have come before you in terms of digital migration, HD, upgrading systems to provide a whole new host of services including VOD and a whole raft of just new programming undertakings that you have licensed and finding room on the cable system to do that.
2311 All of these major systems have upgraded their capacity in order to provide digital cable, get those channels that you have licensed on there, including the Cat 1 and Cat 2's, where they have chosen to distribute Cat 2's.
2312 Rogers launched in North America the first high‑speed internet service. All of these services take capacity. They have now all launched telephony services on varying geographic areas, but these are upgraded broadband networks that have the ability to serve customers and the demand that they face. In fact, the only gating issue that I am aware of ‑‑ and I have followed this reasonably closely over the last eight or nine months ‑‑ is with Videotron who said not that our network doesn't have capacity to do it, our service is priced so attractively in our serving area that we just don't have the CSR capability, the call centre capability to answer it.
2313 So I would suggest to you, I guess that is a long way of saying I don't believe there is any constraint on their capacity for them to meet demand.
2314 Having said all of that, there was another one, there was another factor. Let's pass it over to Dr. Crandall.
2315 DR. CRANDALL: We are talking here about telephony and about entry into the incumbents market for largely voice services, and things have changed in that market, as we talked about in the VoIP proceeding and in this proceeding again today.
2316 But another major thing has changed in this market, and that is every incumbent, not just in Canada but elsewhere in the world, is looking to roll out video services. The people we are talking about is the potential and actual now. Now actual entrants into telephony in Canada are the cable companies who are earning substantial rents ‑‑ and I have this in the appendix to Telus's June filing ‑‑ on their video offerings.
2317 To the extent that they don't win the customer for telephony from Telus and the other incumbents, they risk losing their video services. This is a completely different marketplace and they have to be aggressive going after that line that connects the customer to the incumbent telephone companies for fear if they don't they will start losing a substantial share of their video customers to terrestrial‑based broadcast systems.
2318 COMMISSIONER del VAL: Thank you.
2319 The next line of questioning is around competitive safeguards really, giving the competition an opportunity to let it take hold.
2320 If the Commission determines that it needs to retain marketing safeguards such as competitive safeguards on winbacks, promotions, in a forborne market, should these be identical across all markets or should there be instances where in a forborne market that some are, for lack of a better term, more forborne than others?
2321 MS YALE: Our proposal is that upon entry by a cable company the marketing restrictions should be eliminated so that there is actual rivalry among all players in the marketplace in terms of the ability to do promotions, winbacks and price responses. With forbearance presumably all of that would disappear.
2322 So this is really, from our perspective, a preforbearance question in terms of the ability of competitors to take customers from the ILECs, and we just watched them walk out the door. It is particularly troublesome for us, as Dr. Crandall just mentioned, as we are ready to launch our television service over our infrastructure.
2323 So for the first time we are about to see triple play competition between the cable companies and the telephone companies with very asymmetric rules, because the bundle the cable companies can offer is completely unregulated and unrestricted and the bundle we can offer comes with substantial restrictions. So right now every customer that Shaw takes, every customer they take for local telephone service, we can't contact for one year for any service, including our BDU service in which we are a new entrant and they are the incumbent.
2324 So it is that asymmetry that we are arguing should be lifted immediately on their entry into the marketplace. That would apply across all ILEC territory.
2325 COMMISSIONER del VAL: Thank you.
2326 In your final argument, on page 20, paragraph 25 ‑‑
2327 COMMISSIONER del VAL: Page 20, paragraph 57. I'm sorry, page 20, paragraph 57.
2328 MS YALE: We have it.
2329 COMMISSIONER del VAL: Am I correct in interpreting that you are saying that winback rules are predicated on loop resellers?
2330 MS YALE: That they were put in place in the world of competition from the original CLEC entry model where the entrant leased our local loop and offered service over our infrastructure.
2331 COMMISSIONER del VAL: I know the decision that you are referring to, but I just wanted a fuller discussion.
2332 My understanding is that winback rules are predicated on giving the competitors an opportunity to gain a foothold in the market and it really doesn't matter whether this competitor is a loop reseller or facilities‑based.
2333 What is your response to that?
2334 MS YALE: From our perspective there is a significant difference with cable entry, because of the fact that if you think back to that model of entry, let alone the infrastructure issues that I have described, they were standalone entrants with essentially one product, a not well‑known brand, no established customer base, and instead what we are looking at in B.C. and Alberta is competition from Shaw, which has over 2.2 million customers, an established brand, relationships with every single one of those customers for cable television service, and in many cases high‑speed internet, and monthly bills that go to all those homes.
2335 So the notion that these providers need protection from competition is one that, from our perspective, just doesn't apply. It just doesn't apply.
2336 COMMISSIONER del VAL: In your final argument on page 22, paragraph 62, the last sentence you say that:
"Cable LECs have not experienced customer inertia at all and instead have rapidly acquired local exchange service customers as demonstrated in the previous section." (As read)
2337 So besides the Aliant territory what other basis do you have for this statement?
2338 MS YALE: Shaw has entered in Calgary and Edmonton. Perhaps I can let Fred talk to you about what that experience has been for us in the marketplace.
2339 MR. Di BLASIO: In our ILEC territory we have seen a distinct and significant increase in the number of NALs losses we have seen since the entry of Shaw in the marketplace.
2340 Under the rules I'm not allowed to see who goes where, but I can tell you that if you look at the trend rate and then you look at Shaw's entry in the market you can see a substantial increase in terms of the number of NAL's losses we are experiencing.
2341 I would also draw your attention to perhaps some other territories, when we hear Videotron suggesting that they are going to blast you the 120,000 subscriber mark in fairly short order, in fact more aggressively, more quickly than they had originally anticipated.
2342 In addition, if we look to Jim Shaw's comments at quarterly results with Bay Street, he too suggests that the timeline for him to drive the number of subscribers on his telephony service is far superior than what he had originally anticipated.
2343 I think all that points to the fact that there is indeed competition, it is aggressive and we are losing subscribers.
2344 MS YALE: Does that respond to your issue? I mean, what we are trying to address is the fact that there isn't inertia. People are willing to switch, they are taking up the service and they are responding positively to the arrival of the cable companies in the markets in which they have chosen to enter.
2345 COMMISSIONER del VAL: Thank you.
2346 I was just wondering whether you have any sort of numbers to back up this "there is no inertia" position?
2347 MS YALE: Well, I mean, we are not saying there is no inertia. The issue is: Are customers willing to switch? If you look at their actual behaviour, at the end of the day there is a simple question: Do they take up the services of a competitor or don't they? Every cable company has indicated that the take‑up rate has exceeded ‑‑ has exceeded their expectations.
2348 So there may be some customers for whom inertia is an issue and they are the ones who haven't yet switched ‑‑ thankfully for us, not everybody is leaving ‑‑ but at the end of the day the issue for you is: Is there meaningful competition in the market such that competition rather than economic regulation is going to protect the interests of users.
2349 So not everybody has to switch. It is just a question of whether there is a meaningful number of customers who are willing to switch to the services of a competitor. The answer is clearly yes, given the entry that has taken place and the response to that entry that has occurred.
2350 COMMISSIONER del VAL: I guess that leads to the next question, which yesterday I also asked Aliant. I'm just taking a snapshot of the country today. I'm not saying in the future, particularly with the introduction of VoIP and your position regarding VoIP. I acknowledge that.
2351 But if we take a snapshot of the country today, why, in your view, are other parts of the country so behind Aliant's territory in the competition?
2352 MS YALE: Let me just start by saying one thing. We are not saying that the forbearance test is met today.
2353 COMMISSIONER del VAL: No, I recognize that.
2354 MS YALE: Our position is that it is time to set the test today so that we don't have this debate and delay forbearance when the time is right.
2355 COMMISSIONER del VAL: Yes, I agree.
2356 MS YALE: So I just want to be clear. We are not saying that we are there, we are re saying the time is right to establish a test.
2357 As far as entry is concerned, EastLink made a decision to go in using circuit switch technology rather than wait for the evolution of IP. So that decision to enter early was based on the fact that they decided to enter on a non‑IP basis rather than wait.
2358 Interestingly, in addition to that they also made a decision ‑‑ because of the way the cable company back office works they decided not to get into some of the billing issues that some of the later entrants have faced in terms of being able to offer local service with different calling features. So you could take calling features one at a time, two at a time in packages, or deal with the rating of long distance calls, for example.
2359 EastLink said we are going to keep it simple. So it was everybody got local service, all the features, for a single price, which meant that they could kind of leapfrog ahead of some of the other entrants in terms of needing to adapt their billing systems to accommodate some of the things that traditional telephone companies do, and they sent out their long distance traffic to a re‑biller to figure out how to bill for it.
2360 So they resolved some of the back office issues that allowed them to enter more quickly. That was their business decision that they felt was appropriate for their marketplace. You would have to ask Rogers and Shaw or Videotron or Cogeco why they chose not to enter that way.
2361 They have clearly made a decision to enter on an IP‑basis, and what the real issue now is, as they choose to enter is the competitive market emerging in the way the Commission hoped.
2362 COMMISSIONER del VAL: Thank you, that is helpful.
2363 In your final argument again, on page 22, paragraph 62, the second to the last sentence, you are saying "they" referring to the cable LECs:
"... do not require a period to demonstrate the quality of their services". (As read)
2364 I'm just wondering what led to that conclusion. Is the suggestion that customers will scrutinize the quality of their service less?
2365 MS YALE: No, more. I think the issue was they wouldn't take a risk on introducing something unless they were sure it would be successful and of high quality because they have a brand to protect given their presence as incumbents in the cable distribution market. In the case of Shaw, they have more than half of the market for high‑speed internet in B.C. and Alberta.
2366 So when you have a reputation and a brand already in the marketplace, adding the third element of the triple play you are going to make sure that you don't dilute the quality of your brand in the way you do that.
2367 COMMISSIONER del VAL: Okay. Thank you.
2368 I believe it is in the same final argument on page 21, paragraph 80, I think it says ‑‑ sorry, this is in Rogers final argument. I will just read it to you:
"Rogers has limited access facilities into business locations, making extension of the network to business locations very expensive." (As read)
2369 Do you agree?
2370 MS YALE: That may be true for them. The issue is entry, where they choose to enter. It is true that cable companies have historically not approached the business market, and certainly in B.C. and Alberta the competition we face in the business market is primarily from companies like Bell, MTS Allstream and Call‑Net, now Rogers.
2371 But at the end of the day every provider faced with declining revenues in their incumbent business, in our case wireline; in the cable companies cable television with the emergence of competition, has to look at a growth strategy. Every business thinks about what is the most appropriate growth strategy, whether it is adding products and services to their existing customer set or branching into new lines of business like cable companies getting into the business market. Each company is going to develop the growth strategy that they think is a winning bet for them.
2372 COMMISSIONER del VAL: Thank you.
2373 In Rogers' final argument on page 18, paragraph 71, they are talking about the price differential between VoIP service and basic circuit switch local exchange service and that that price differential means that customers who do not readily subscribe to high‑speed internet access are less likely to switch to VoIP service.
2374 Do you agree?
2375 MS YALE: Sorry. What you are saying is that if you don't already have high‑speed internet you are not as likely to take up Access independent voice over IP?
2376 COMMISSIONER del VAL: Yes.
2377 MS YALE: Well, it is kind of true. We have always said that Access independent voice over IP appeals to those who already are on a high‑speed internet connection. It is an add‑on, if you will, as an application to those already making the investment or spending the money, if you will, on a high‑speed connection, absolutely.
2378 COMMISSIONER del VAL: Okay.
2379 Do you agree, then, with their apparent conclusion that accordingly VoIP providers will not be in a position to discipline the exercise of market power by the ILECs?
2380 MS YALE: That conclusion I disagree with completely and I will let Dr. Crandall start on that.
2381 DR. CRANDALL: In order to defeat a price increase by an incumbent or anyone else in the marketplace, not everybody has to switch, and with 50‑60 percent of the market able to obtain VoIP services ‑‑ I don't know exactly what the number is now in Canada ‑‑ certainly only a small share of those would have to switch in order to discipline a price increase.
2382 COMMISSIONER del VAL: Thank you.
2383 Turning to the issue of consumer safeguards I believe it was Professor Townley who suggests that in low density areas possibly overlooked by competitors an incumbent may not be able to raise prices.
2384 Do you agree?
2385 MS YALE: Can you say that one more time? It is really hard to get that out of context.
2386 COMMISSIONER del VAL: Okay, that in low density areas possibly overlooked by competitors an incumbent may not be able to raise prices.
2387 MS YALE: I'm not sure what that means. Our ability to raise prices right now is constrained by regulations, so I have no idea what that is about.
2388 Unless you are talking about ‑‑ I imagine that hypothesis there is the pockets?
2389 COMMISSIONER del VAL: Yes.
2390 MS YALE: So if you adopt a larger geographic area where there are unserved pockets, the issue is would we increase prices where we are forborne in unserved pockets.
2391 I take it that is the hypothetical?
2392 COMMISSIONER del VAL: Yes.
2393 MS YALE: The question that was posed earlier today in that regard ‑‑ it is one of the reasons we think that is the wrong geographic area.
2394 But assuming for the moment that was the test that was adopted from a geographic perspective, we would have no problem giving an undertaking not to increase prices in the unserved pockets.
2395 COMMISSIONER del VAL: All right. Thank you.
2396 In the forborne environment do you foresee selling basic local exchange service on a standalone basis?
2397 MR. Di BLASIO: Absolutely.
2398 COMMISSIONER del VAL: Great.
2399 If the Commission were to maintain section 24 conditions of service and 27(2) of the Telecommunications Act to ensure access for disabled and imposes these or other conditions on all service providers, would competition be impeded in any way?
2400 MS YALE: No, and our view is that the social obligation should be imposed on a nondiscriminatory basis to all providers. That in fact ensures that competition is equally available to all customers.
2401 COMMISSIONER del VAL: If it were not imposed on all providers equally, what would be your view?
2402 MS YALE: Are you saying it would be imposed only on the ILECs in that scenario?
2403 COMMISSIONER del VAL: Yes.
2404 MS YALE: I think we would be of the position, similar to what was addressed by Aliant, that it seems from a customer perspective, not extending the benefits of competition, two customers who have particular needs doesn't seem appropriate to us. Obviously, if there are differential costs associated with having those obligations relative to our competitors that would put us in an unfair competitive situation.
2405 COMMISSIONER del VAL: Thank you.
2406 This is just a pure clarification.
2407 What is your position on re‑regulation?
2408 MR. GRIEVE: Re‑bearing? Our position ‑‑
2409 As Janet just said, we should be so lucky as to be in the position to have to think about it.
‑‑‑ Laughter / Rires
2410 MR. GRIEVE: We have said in this proceeding and in other proceedings including IXPL that if you have a threshold of the bright‑line test and you pass the bright‑line test you get forborne and then you fall back below the bright‑line test, then before the Commission re‑regulates we should have a proceeding where we would have to show cause why the Commission shouldn't re‑regulate. You can see then a number of different factors, especially with our bright‑line test which is sort of specifically focused on a cable company.
2411 COMMISSIONER del VAL: So you think still the 5 percent would be the trigger?
2412 MS YALE: As the Chairman posed earlier, the question is what happens if you fall below the 5 percent, if through territory expansion or whatever. I suppose the Commission would have to look at it case‑by‑case and consider whether or not there was a market power issue that would suggest there was a need for regulation.
2413 I mean, at the end of the day the issue is does the incumbent have the ability to exercise market power in the market in question? This is a test as an alternative to Decision 94‑19 to assess that.
2414 At the end of the day it is the existence of market power that is really the fundamental question that has to be addressed and this is just a means to that end.
2415 COMMISSIONER del VAL: This is not a trick question. I am just trying to understand.
2416 So for forbearance the 5 percent would be more automatic than, say, re‑regulation?
2417 MS YALE: Yes.
2418 COMMISSIONER del VAL: Okay, good. Thanks.
2419 Questions for the experts.
2420 A lot of what I am reading we are talking about really it is very focused on the competition that the cable companies will provide in terms of wireline local exchange service.
2421 Is the best that we can hope for in a wireline, in terms of competition in the wireline local exchange market, is a duopoly? Is that the best that you think we will do?
2422 MR. CRANDALL: At first it is obviously going to be those people who are selling other similar services like high‑speed data and video and have a network rolled out. Things are changing so quickly that I wouldn't think that you have to despair in that fashion.
2423 It is possible that the electric utilities would be in this game too. My own view is ‑‑ but I am not an engineer nor a crystal ball gazer ‑‑ is that it is more likely to be wireless‑based in the future.
2424 But if you have two full facility‑based carriers going at it over these services, I don't think you need to worry about that awful word "duopoly". You have it now in broadband and it works very well. No one is engaging in predation. There is no concern that they are colluding or anything of that sort. We have it in other markets and it works perfectly well.
2425 The reason it didn't work in cellular, at least in the United States, is that they were guaranteed protection by the regulator from entry.
2426 COMMISSIONER del VAL: But I would have to worry more about coordinated efforts in a duopoly than, say, where there are more competitors. Right?
2427 MS YALE: We are not positing a duopoly.
2428 COMMISSIONER del VAL: No.
2429 MS YALE: There are already more than two providers in the market. What we are positing for this simplified test is a full facilities‑based competitor.
2430 There isn't a duopoly today and so I am having a hard time imagining a scenario where there are, for any given customer given the existence of 20 or 30, however you count, Access independent voice over IP providers, three are lots of choice in the marketplace today.
2431 What we were focused on is actually making sure that that alternative ‑‑ that that alternative wasn't a provider that depended in any way on our infrastructure in order to compete.
2432 COMMISSIONER del VAL: Thank you.
2433 I believe this is for Dr. Weisman.
2434 You were talking about the forbearance principles and then that premature forbearance is better than delayed forbearance.
2435 Can you explain why?
2436 DR. WEISMAN: Yes.
2437 First of all, what my statement says is that forbearance should occur at the appropriate time based on an objective assessment of market conditions, but it is likely that the errors involved in ‑‑ or the risks involved in forbearing too late are greater than the risks involved in forbearing too early.
2438 The Commission itself recognizes this principle in essence in 94‑19 when it recognizes that residual levels of market power are not sufficient for regulation to continue. There are very high costs associated with regulation in the form of pegging prices or quality levels at non‑market levels, diversion of managerial attention; the cost of the regulatory process itself. The higher are those costs, the more a cost‑benefit test would justify earlier rather than later forbearance.
2439 But again I will come back to my main message, which is it should occur at the appropriate time based on an objective assessment of market conditions.
2440 COMMISSIONER del VAL: So then in your view, in terms of the interplay between the principles of balance between ‑‑ I think it was principle No. 2 and then No. 8 was premature versus delayed, and the 5 percent ‑‑ so you think at 5 percent we are at the best equilibrium?
2441 DR. WISEMAN: Well, I wouldn't call it an equilibrium. Again, the 5 percent is simply a marketplace acknowledgement that customers are switching and we have established that these products are substitutes.
2442 Again, to the extent that market share measurement in this environment has any significance the appropriate way to measure that is on the basis of capacity. Under those conditions, as both the Competition Bureau has recognized, and recently to go down south across the border the FCC has recognized in its Cingular merger proceedings that capacity is the right way to look at that question.
2443 Again, the literature is very clear on this point that in a regulated environment to the extent that regulation is effective there is no relationship between market share and market power, but if you are going to measure it capacity is the appropriate metric.
2444 COMMISSIONER del VAL: Good. Those are my questions. Thank you for your time.
2445 THE CHAIRPERSON: Thank you.
2446 Commissioner Cugini.
2447 COMMISSIONER CUGINI: Good afternoon.
2448 Ms Yale, in your opening comments today you cited the example of how forbearance of terminal equipment has provided consumers with choice. ARCH, however, points to exactly the same example to demonstrate how deregulation of terminal equipment has left persons with disabilities with almost no choice.
2449 I take note of your response to Commissioner del Val's questions regarding this issue, but I'm wondering if you have any suggestions or recommendations on what mechanisms or safeguards we can put in place to ensure that persons with disabilities enjoy as much choice as all other consumers in a forborne market?
2450 MS YALE: I think my response would be that all of the social obligations that the Commission feels are important should be applied to all competitors in the marketplace to ensure that customers, notwithstanding their abilities, are able to fully benefit from choice. We are completely supportive and distinguish between social regulation on the one hand and economic regulation on the other.
2451 COMMISSIONER CUGINI: I noted in your response, in fact, to ARCH's interrogs that your list was quite extensive. They may argue that it is not exhaustive, but it is extensive nonetheless.
2452 Would you see those measures being adopted by all local exchange services or carriers?
2453 MS YALE: I don't have the list in front of me, but whatever the obligations are we think they should be applied equally to all competitors and we are completely supportive of that.
2454 COMMISSIONER CUGINI: Thank you.
2455 THE CHAIRPERSON: Thank you.
2456 Commissioner Williams.
2457 COMMISSIONER WILLIAMS: Good morning, Ms Yale and panellists.
2458 Recognizing the lack of crystal ball gazers on your panel, and I guess on this Panel, if we use the CCTA‑proposed criteria for implementing forbearance can you give us your opinion and describe the effect that this decision would have on your business in the short to medium to long term?
2459 Specifically, how quickly do you anticipate being in a position to apply for forbearance if the CCTA criteria was implemented by the CRTC and what competitive responses would Telus exercise before and then after forbearance has taken place?
2460 MS YALE: It is kind of hard to predict what our competitors are going to do in terms of the rollout of their service.
2461 There is no doubt that their ability to enter is unconstrained wherever the cable operator has serving territory. The issue is whether they choose to enter. There is no obligation for them to enter, they have to decide to enter as part of their growth strategy, as part of their bundling strategy and so on.
2462 I'm going to turn it over to Fred to talk about what he sees as their efforts to date. The main caveat that I would suggest to you is that if you have a very large geographic area with a very high percentage threshold it is going to take a very long time until we get there. The cable industry has it in its power, through selective rollout, to ensure that they get close but don't quite attain the threshold that would allow us freedom from economic regulation.
2463 In terms of timing, maybe I can turn it over to Fred to give you a sense of that.
2464 MR. Di BLASIO: I believe, given the course and speed of what we are seeing the marketplace today, you know, their prediction is that it is roughly a five‑year time horizon for them to hit their 30 percent benchmark. That would have, you know, a significantly ‑‑ would put us into significant difficulty with respect to the current rules in terms of the way they are approaching the market, which is really a bundled approach, trying to own the home and the rules, as they currently stand, preventing us from going back and maintaining or actually winning back the relationship with our customers on forborne services, such as internet and eventually TV.
2465 COMMISSIONER WILLIAMS: So during this five‑year timeframe what types of competitive responses would Telus be exercising to try and maintain their I guess hold on all or part of the home that we are talking about?
2466 MS YALE: Well, let me just come at that ‑‑ our growth strategy with respect to the consumer market is clearly to add television service to our bundle.
2467 One of the frustrations that we face is as an entrant in that market the customers that are most likely to try to new technology and to switch may be the ones that are going to Shaw right now and, because of the winback restriction, we have a no contact rule for one year. So we launch TV service, the very customers that are most interested in switching are the very ones that we can't contact. So that is a huge impediment to us from a marketing perspective.
2468 If you look at the range of tools that we could have in our toolkit, it is going after customers that are most interested in trying new things. As I have said, the winback rule prevents that; offering promotions as part of our launch strategy. The promotion rules kind of prevent that; and being able to respond in pricing terms where there is competitive entry. We can't do that because the rules require us to reduce prices across entire bands in order to respond to selective entry by the cable companies.
2469 So the concern we have is that the cable entry strategy, by being selective in their entry, by targeting the customers that are most willing to switch, given the rules we face give us very little to respond with. That is the reason why we have suggested that those marketing restrictions, particularly the winback rule and the ability to respond selectively in terms of prices, be relaxed.
2470 As we have said, in a pre‑forbearance environment there is a difference between responding in terms of lower price in a true competitive fashion and responding in what might be considered too low a price, anti‑competitive fashion. That is why we have suggested that in a pre‑forbearance environment the imputation test, the price floor test, would ensure that our price responses would not in fact be anti‑competitive, but would in fact allow customers to really benefit from competition by seeing the best offers, best offers from both providers.
2471 COMMISSIONER WILLIAMS: On the top of page 16 in this morning's oral presentation you talked a bit about de‑averaging rates in response to competition where it exists. To quote:
"In other words, Telus should be able to reduce prices in Calgary and Edmonton in response to Shaw without having to reduce prices across the rest of Alberta." (As read)
2472 Why should the smaller centres in Telus territory effectively subsidize Telus' competitive response in the larger centres?
2473 MS YALE: Well, they wouldn't be subsidizing. Prices wouldn't go up. Prices wouldn't go up. The issue is, when do prices come down?
2474 We understand that the Commission would like us to reduce prices across all of band A and band B, which means basically not just Alberta, actually it is most of B.C. and Alberta.
2475 COMMISSIONER WILLIAMS: No. I'm just using your example.
2476 MS YALE: The problem with that is that is just not the way competitive markets work. There is an assumption behind that question that charging different prices is somehow inappropriate. That is the way competitive markets work. That is the way other markets work, whether it is wireless, high‑speed internet, cable, prices aren't the same in every community. That is because competition and the competitive circumstances are different.
2477 The real issue is: Is the price reduction anti‑competitive. We completely agree that we should meet the price floor test to make sure that the price reductions that we choose to offer are not anti‑competitive in a pre‑forborne environment.
2478 COMMISSIONER WILLIAMS: Would not the economy of scale enjoyed in the larger communities provide that sort of buffer that you are seeking by being able to de‑average prices?
2479 MS YALE: I don't think I understood the question.
2480 COMMISSIONER WILLIAMS: A larger centre providing more revenue, more opportunity to reap revenue off a network, like a basic economy of scale opportunity that the larger centres provide over the smaller centres.
2481 MS YALE: So that we should extend the lower prices to those smaller centres? Is that what you are saying?
2482 COMMISSIONER WILLIAMS: No, that the economy of scale gives you enough of an opportunity that you don't need to lower the prices in competitive centres.
2483 MS YALE: That has to do with our costs. The fact of the matter is, whatever our costs are, if the competitor is offering lower prices the customer is going to leave, right, and we can't match their offer. The problem right now is we can't match the offers because we are not allowed to lower our prices unless we do it across all bands.
2484 The other point, from a competition law perspective the irony is that if you actually lower prices in communities before the arrival of the entrant you actually discourage entry in those communities. So it is a bit of a public policy trade‑off, because what you want ‑‑ it is the high prices that encourage entry.
2485 COMMISSIONER WILLIAMS: Correct.
2486 MS YALE: So if you lower prices before the entrant comes in you actually increase the barrier to customers switching before the arrival of the entrant, as opposed to letting the entrant come in with the lower price and then only responding with lower prices after the entrant has arrived.
2487 So we are not actually trying to lower prices before entry, what we are trying to do is to respond to entry where it takes place.
2488 COMMISSIONER WILLIAMS: Okay, thank you very much, Ms Yale.
2489 THE CHAIRPERSON: On that point, I think you have summarized well the concern about the accretion point, because in that new accretion area that the ILEC has already served but the cable company enters, if you are forborne on the basis of it being merely an accretion to the larger area you could do that, i.e., lower prices before the entrant has really entered.
2490 MS YALE: No, their extension of their serving territory would be the trigger point, because until they expanded the territory to include that subdivision we wouldn't be forborne in that area.
2491 THE CHAIRPERSON: Is it the announcement that ‑‑
2492 MS YALE: No, it is offer.
2493 THE CHAIRPERSON: Well, it is offer and then at what point do you measure the actual service take‑up in that accreted area?
2494 MS YALE: I'm having a hard time following, I'm sorry.
2495 THE CHAIRPERSON: I guess it is part of the ‑‑
2496 MS YALE: Because of course we have to do it by postal code, right. That is the way we would do it.
2497 THE CHAIRPERSON: Right.
2498 MS YALE: So if a portion of an exchange is served by a cable company, in the example you are positing, and within that portion we are forborne because the cable company is already serving, right, and then in another portion ‑‑
2499 THE CHAIRPERSON: Maybe it is our definition of "serving".
2500 I was looking back at your written argument at paragraph 8 where you refer to "its serving area" and then you have defined a number of terms but you don't define that one. I guess in the example again of the accreted area, let's call it, what does "its serving area" really mean? You say "offer", but offer can mean before any take‑up.
2501 So an announcement by a cable company that it is now going into a new area that you already serve, is it at that point that you are forborne from that area, in which case the very problem you just discussed with Commissioner Williams, as you said, is a real possibility?
2502 Unless you hive it off and say, "Well, now we are going to start the count again for that accreted area" and then it becomes a little clearer," but then you get into the prospect of immense numbers of boundary disputes, it seems to me, and so the administrative issues comes up again.
2503 I don't want to rehash the problem again, but ‑‑
2504 MS YALE: No, I understand.
2505 THE CHAIRPERSON: ‑‑ I advise you to kind of ‑‑
2506 I don't think in your argument you responded to the points that Commissioner del Val raised and discussed with Mr. Woodhead, the response to the Rogers 210 interrogatory and the administrative and related points dealing with your proposal. I think it would be helpful at some point if you tried to deal with them very precisely and answer some of these so that we could take what is a pragmatic proposal and work with it in better way.
2507 MS YALE: If it would be helpful, I think rather than do it on the fly we would like to do an undertaking and give you a detailed response as to how that would be done in a simple way that didn't make the entire thing collapse from complexity.
2508 THE CHAIRPERSON: Given that you show a lot of, as my colleague would say, sang froid, I am leaving it to the ‑‑ you are basically saying to the competitor "You dictate the terms and we will kind of live by them." What that really entails in practice and how we can avoid endless numbers of "We are serving the area", "We are not serving the area", what the boundaries actually are.
2509 MS YALE: Right.
2510 THE CHAIRPERSON: Because one thing we know this is going to evolve and roll out and is not going to be statically opposite, it is going to be rolling and dynamic. In that context we need to have some clarity, which is I guess why the 94‑19 test discusses defining a geographic service market.
2511 MS YALE: Okay. Right.
2512 THE CHAIRPERSON: So you are trying to just sort of short circuit. I'm not saying it in a negative way, perhaps in a helpful and pragmatic way, but you still need to come to grips with all of these problems.
2513 MS YALE: Which obviously is more of an issue in a high growth area than in a stable community. So we will put our minds to it.
2514 THE CHAIRPERSON: Even in a stable community, I mean it depends on where the cable industry and a couple of other competitors choose to enter next and how you apply your test for forbearance so we know whether forbearance agrees or it doesn't.
2515 MS YALE: We will respond to that by way of an undertaking.
2516 THE CHAIRPERSON: Thank you.
2517 COMMISSIONER FRENCH: On the same subject, if I may, because I don't want to ask you this question at the end because we are running out of time, an undertaking to deal with the question of how the cableco games the system as you hypothetically evoke.
2518 I want to know how the cableco deals with his own existing structure of his network, his service territory configuration, your exchange boundaries, his price and service bundling and all the marketing expenses he is going to have to game the system so that they don't get too many takers in any one piece of geography that belongs to you.
2519 I know you are not going to answer me know. It is just I would like to hear it, because I don't believe it at the moment.
2520 THE CHAIRPERSON: Commissioner Cram.
2521 COMMISSIONER CRAM: Thank you, Mr. Chair.
2522 I must say that when you were talking about the chaperoned dance I sort of felt like Aunt Mildred at the prom. I'm wondering if Aunt Mildred in the form of a price cap is anticipated by you to stay around.
2523 I'm looking at our interrogatory to you No. 503. Maybe you can just take a look.
2524 MS YALE: It's on its way.
2525 MS YALE: Which part are you focusing on?
2526 COMMISSIONER CRAM: It is the second paragraph in A and B.
2527 It looked to me like you were actually anticipating that even in a forborne market ‑‑ because the question was in the situations occurring in a forborne market ‑‑ that you are anticipating the price cap will remain?
2528 MR. GRIEVE: I think we were getting at the pockets issue here. So if you had a situation where if you did go to something like an exchange and you had pockets, we would anticipate that the price cap mechanism would stay in place to regulate the rates and the pockets.
2529 COMMISSIONER CRAM: So the unserved?
2530 MR. GRIEVE: Unserved by the facilities‑based competitor until there was sufficient competition there by other means that we felt we could have the 94‑19 test apply.
2531 COMMISSIONER CRAM: Okay, until you do 94‑19?
2532 MR. GRIEVE: Right.
2533 COMMISSIONER CRAM: Now I am really lost. This is in a forborne thing already. It is in a forborne market, you are talking about the orphans, the price cap would exist for them ‑‑ help me here ‑‑ but then you would go to a real forbearance under 94‑19 and then there wouldn't be a price cap?
2534 MR. GRIEVE: It depends whose test it is.
2535 MS YALE: Our test doesn't have pockets. In our test either there is competition or there isn't. Right? So the way price caps would work is, where there is forbearance that comes out of price caps, and where there isn't forbearance price caps still govern as the provisions and the terms and conditions of service to those consumers.
2536 So we don't have a pockets problem.
2537 COMMISSIONER CRAM: Yes. No deep pockets, no nothing pockets and no Aunt Mildred.
2538 UNIDENTIFIED SPEAKER: Complete deferral.
‑‑‑ Laughter / Rires
2539 COMMISSIONER CRAM: When you are talking about footprint ‑‑ and I need maybe a little help from you here ‑‑ is BellWest a full facilities competitor?
2540 MR. GRIEVE: That is a really good question.
2541 MS YALE: He has been waiting.
2542 COMMISSIONER CRAM: Oh, you have been waiting for this one?
2543 MR. GRIEVE: No, no.
2544 BellWest is building and has built interexchange facilities, interexchange and some intraexchange facilities, in Alberta mainly and in B.C. It has built facilities into a number of large buildings in Alberta and British Columbia. The rural area in Alberta is SuperNet, that is actually owned ‑‑ well, it is IRU'd to the provincial government on a long‑term IRU, but it is basically controlled by the provincial government. It is not controlled by Bell, it is not their network.
2545 So the area in between, I guess from the Medicine Hat/Lethbridge area up to Grand Prairie, that area there, there is an alternate network for interexchange and a lot of intraexchange.
2546 The difficulty with a competitor like Bell is that we would probably be using the 94‑19 test in the case of Bell, because in certain situations they use their own access facilities, plus their own network, but their own sort of last mile or local loop kinds of facilities into buildings, and in other cases they lease those facilities from us.
2547 At some point there will come a critical mass where Bell is using mostly its own facilities and only using ours as a temporary measure the way the Commission envisioned in 97‑08, the local competition case, as a temporary measure to get the customer and then build the facilities later to serve those, in which case our investment or our network gets stranded unless we can find another use for it.
2548 So is Bell a full facilities‑based carrier? I wouldn't say they are there yet, but in time I think they probably will be, especially in Alberta and the Lower Mainland in B.C.
2549 COMMISSIONER CRAM: So then that gets me to definition. "Full facilities" means 100 percent?
2550 MR. GRIEVE: Yes. The way we have defined it is someone who uses their own network to take the service from the customer's premises to their local switch equivalent and could lease from someone other than the ILEC for other things as Shaw does with BellWest. They lease facilities from Bell to do the interconnection with Telus, for example. In other words, Shaw doesn't directly interconnect with us, they go through BellWest.
2551 So the trick is that all of those facilities are independent of us other than the interconnection for the purpose of exchanging calls.
2552 MS YALE: But to be clear, the test is primarily an alternative to Decision 94‑19 for the consumer market.
2553 COMMISSIONER CRAM: Oh, okay. So you weren't really talking about ‑‑
2554 MS YALE: We were focused on that. So if and when it does become relevant for the business market, so be it. We didn't mean this as a substitute for Decision 94‑19, you know, replace it, but as an alternative where it made sense, so that there would be a simple clear test where it made sense to use it.
2555 From our perspective that is primarily the consumer market.
2556 COMMISSIONER CRAM: If you could do it by undertaking in case Aunt Mildred doesn't like the footprint, could you let me know the number of exchanges in your territory; how many A band you have, B band, the average number of subs per exchange, and can you give me a map of your LIRs?
2557 MS YALE: Yes, we will do that.
2558 COMMISSIONER CRAM: Thanks.
2559 I have one more question. Sorry? Yes, Mr. Grieve.
2560 MR. GRIEVE: We can give you a map of the LIRs with the cable serving areas also on the same map ‑‑
2561 COMMISSIONER CRAM: Overlap, yes.
2562 MR. GRIEVE: ‑‑ to show you how big the pockets would be in Alberta. This is not Atlantic Canada and it's not Ontario, Southern Ontario. This is the Prairies. It is quite different.
2563 COMMISSIONER CRAM: It is big country, I know. Yes.
2564 My last one is, everybody has been relying it appears a lot on what we did in cable a long time ago, before any of us were on the Commission, and yet at the same time, on the other hand, you want us to get rid of the winback, no contact restrictions, which we have kept in cable. Three months.
2565 MS YALE: Not for single family.
2566 COMMISSIONER CRAM: Single family we have gotten rid of, okay.
2567 MS YALE: Right. It is a very, very limited ‑‑
2568 COMMISSIONER CRAM: The MDUs.
2569 MS YALE: It is just MDU's.
2570 COMMISSIONER CRAM: Thank you.
2571 Thank you, Mr. Chair.
2572 THE CHAIRPERSON: Thank you.
2573 On the question of the NALs and NALs equivalent, I assume that you have excluded mobile wireless, but you would not exclude fixed wireless?
2574 MR. GRIEVE: Correct.
2575 THE CHAIRPERSON: Thank you.
2576 Commissioner Duncan.
2577 COMMISSIONER DUNCAN: Thank you. I have a number of questions. Hopefully it won't take very long though.
2578 Just on the assumption that wireless were to be, if not today at some point, taken into consideration in calculating your market share loss, would you think it appropriate to include or exclude the wireless‑only subscriber or the wireless subscribers that are lost to Telus themselves?
2579 MS YALE: They should be excluded.
2580 COMMISSIONER DUNCAN: From the calculation of market share loss. In other words, it wouldn't be added to the loss to the cablecos for example.
2581 MS YALE: Sorry, yes. All wireless only would be considered lost. We don't agree with the market share loss approach, but if you went that way it wouldn't matter to whom they went.
2582 COMMISSIONER DUNCAN: I'm just having a little bit of problem on why we would leave the Telus‑only ones in there, the ones that went to Telus.
2583 MS YALE: Because what you are looking at is our market power in the wireline market. So the fact that someone has chosen among competitive wireless providers to use Telus doesn't tell you anything about our market power in the wireline local exchange. What we are looking at is whether you need economic regulation for wireline primary exchange service. So it is really about that and that only.
2584 COMMISSIONER DUNCAN: All right. Thank you. That is the answer we got yesterday from Aliant. That is it.
2585 On the second lines, I think Aliant said yesterday that that was a very small portion of their business, 2 percent I believe they said.
2586 Is that similar in your situation?
2587 MR. Di BLASIO: The second line market we guesstimate roughly 5.7 percent or so.
2588 COMMISSIONER DUNCAN: Thank you.
2589 If I understood you earlier, Ms Yale, you said you would give an undertaking on behalf of the company not to increase prices in that portion of a forborne market that was not served by a facilities‑based competitor.
2590 I just wanted to clarify if that commitment applied only if the geographic market was defined as the exchange or if it applied as well if it was defined as a local calling area or an LIR?
2591 MS YALE: It would apply where there were pockets. In any of those definitions there would be pockets, so yes, subject to whatever price cap rules would allow prices to move generally. I don't want to ‑‑
2592 COMMISSIONER DUNCAN: Yes. But you wouldn't increase them, at any rate, unless there were rules that allowed you to do that. Thank you.
2593 The re‑regulation, I will just speak about the re‑regulation. Just specifically, because I understand your process that you have suggested and I think it is reasonable that we would have some type of discussion if there was to be a re‑regulation scenario, but what would trigger the re‑regulation? Would it be when your market share loss fell to 4.75 percent or 3 percent?
2594 What do you see being a trigger point?
2595 MS YALE: Well, it could be on complaint. I mean, if there was a bright‑line test that determined deregulation, then falling below that threshold could create a circumstance where you might want to ask us to show cause why there shouldn't be re‑regulation, but there could be other circumstances, because at the end of the day the question is: Is there market power?
2596 If for any reason the Commission was concerned that there was market power being exercised by an incumbent, the Commission would have the ability to ask that incumbent to show cause why there shouldn't be regulation.
2597 COMMISSIONER DUNCAN: I gather that the subsequent hearing or whatever, public notice, whatever process that we would have, would determine if there was market power, but just as a trigger point, just as a number, just like you are suggesting the 5 percent for the deregulation.
2598 Do you have a number in mind that would prompt us to look?
2599 MS YALE: No.
2600 COMMISSIONER DUNCAN: Thank you.
2601 That's good. As far as selecting the LIR as CCTA has suggested ‑‑ I suppose I know the answer to this question even as it is ‑‑ would you feel more comfortable if the winback rules and the promotion rules were adjusted and would it affect your ability to compete in an LIR, for example, if those rules were removed even though the market wasn't forborne?
2602 MS YALE: Getting rid of the marketing restrictions improves our ability to compete irrespective of the market. If there is no competitor, obviously it doesn't really apply. So the larger geographic market really is a problem for us because of the pockets of customers who may not have a facilities‑based competitive alternative, in which case there is no one to winback from in the same way.
2603 So I guess at the end of the day, from our perspective, dealing with those marketing restrictions is about ensuring that consumers have the full benefits of competition as competition emerges.
2604 I'm not sure if that is an answer to your question, but I am not sure the geographic market affects that. What it really affects is whether or not, from a Commission perspective, you have parts of exchanges that are not overlapped by the facilities of a cable company, whether it is an exchange or an LIR.
2605 COMMISSIONER DUNCAN: I think if I'm understanding correctly then, if the LIR was determined to be the geographic market it would be less of a problem, obviously for you, if the winback and promotion rules were eliminated or minimized.
2606 MS YALE: I think the problem is the same. I think what I'm trying to say is the problem is the same, because it is our ability to respond to cable companies that is at issue, and where they offer service to customers we want the ability to respond to them. Our ability to respond is impacted by those marketing restrictions in terms of our ability to offer benefits of competition to customers.
2607 What really changes with the size of the geography is the ability to attain the percentage required for deregulation, because we have to lose more customers than the threshold in the pockets where competition exists to offset the fact that there may be no competition in the pockets of the exchange or the LIR where there is no competitive alternative.
2608 COMMISSIONER DUNCAN: I take your point.
2609 That's it, Mr. Chairman. Thank you.
2610 THE CHAIRPERSON: Thank you.
2611 Commissioner Langford.
2612 COMMISSIONER LANGFORD: Thank you, Mr. Chairman. I will try to be brief because we have all had a long morning. I'm afraid I have a couple of questions and I'm not going to see you folks again.
2613 The first one is to you, Dr. Crandall. This will be a bit of a potpourri because I am just trying to pick up some points.
2614 I think you said, Dr. Crandall, in response to somebody's question sometime today, in talking about switching in the market, you said something like if 50 percent of users are able to switch, then only a small percentage would have to switch to discipline the market.
2615 Is that more or less what you said?
2616 DR. CRANDALL: Well, less in all of them. I don't know what a small percentage would be. It depends on the price cost margin, but there is a calculation you could make on that. Not all of them would have to switch.
2617 COMMISSIONER LANGFORD: No, I think you said small percentage.
2618 DR. CRANDALL: Okay. I don't know. Without knowing what the price cost margin is, I'm not sure.
2619 COMMISSIONER LANGFORD: Would five do it, under your scenario?
2620 DR. CRANDALL: As I say, we could give you a set of calculations under alternative costs, price costs margins, if you like. It is something that has to be calculated.
2621 COMMISSIONER LANGFORD: Let's go to the other side of it. If we don't know the small number, the big number you used was 50 percent. How far down could we go on that number?
2622 DR. CRANDALL: As I say, I don't know. It depends on the price cost margin. I did say 50. We were talking about 50 percent have access to broadband.
2623 COMMISSIONER LANGFORD: Right.
2624 DR. CRANDALL: I was told by my colleague here that it is now 60 percent in Canada, so we are working with 60 percent rather than 50 percent.
2625 COMMISSIONER LANGFORD: Are you familiar with the test partially upon which I think Ms Yale said she was either relying on or inspired by, which was the cable test which roughly says if cable is available to 30 percent of the market ‑‑ sorry, if the alternative to cable is available to 30 percent of the market and 5 percent of the market has actually switched, we will forbear.
2626 DR. CRANDALL: Yes, I am aware of that.
2627 COMMISSIONER LANGFORD: Can you see something like that applying to the markets you are most familiar with, the Telus markets?
2628 DR. CRANDALL: Well, the 30 percent, the two facilities‑based bright‑line test is much stronger than that. It is 100 percent being available.
2629 COMMISSIONER LANGFORD: I'm asking you if you could see this test applying in your markets.
2630 DR. CRANDALL: Well, in the Telus markets, yes.
2631 What I'm saying is, it strikes me that it is very similar except that what Telus is proposing is 100 percent with at least 5 percent taking it up, yes.
2632 COMMISSIONER LANGFORD: The problem we have is that when we applied that test and forbore from most of the cable companies, all of the prices went up ‑‑ it wasn't our best test I suppose we ever came up with ‑‑ and continued to go up a little bit and nothing has come down.
2633 So if you take kind of an example in the area around here across the river, you have ExpressVu or StarChoice available, and Rogers or Videotron, and ExpressVu's prices have gone up and Rogers prices have gone up after forbearance, they have all gone up. No prices have gone down.
2634 So I'm just wondering why you are so confident that a small percentage would be enough to discipline the market. It just hasn't worked for cable.
2635 DR. CRANDALL: I'm not sure it hasn't worked and I'm not sure the alternative isn't worse.
2636 In the United States we have the same situation, except that we have tried on occasion to regulate the price of cable. What has happened is that the price of cable has gone up, but not as rapidly as the number of channels have gone up. What has happened is the quality of the service has improved.
2637 I think you have to be very careful about that. I'm not saying that even today cable is perfectly competitive and there are no economic rents being earned. In fact, in my appendix to the Telus June statement filing I conclude there are some rents being earned. But it is far worse to try to regulate.
2638 The effects of trying to regulate on a per‑channel basis or for a given quality of service something as diverse in terms of the offerings of entertainment programming as cable offers is a terrible mistake.
2639 That is exactly Professor Weisman's point, that there are costs to regulation. There are costs to reducing the development of new services and innovation. The fact that you may not get a perfectly competitive outcome immediately is not sufficient reason to delay forbearance.
2640 COMMISSIONER LANGFORD: Well, that sounds really great as part of a Ph.D. thesis or a paper given to a learned counsel, but the problem is we have to sell our product to Joe Lunchbucket, and Joe Lunchbucket, the average consumer, has seen prices go up where we have forborne, and they have seen prices go up where this magic rate of 5 percent has been hit, and they are seeing the ILECs in here now and the ILECs are saying, "Okay, we have some different market tests, but 5 percent is our magic number."
2641 You can't help but think that they would like us to look at the public interest, not in terms of theories that maybe could be worse if we hadn't applied them, but in terms of reality. I find that what you are telling me is cold comfort for these people.
2642 MS YALE: Maybe I can jump in and first of all talk about the fact that in high‑speed internet ‑‑ well, internet market, where the Commission chose not to have economic regulation, we started with dial‑up, then we moved to high‑speed. We now have different grades of service with different price points depending on the needs and interests of consumers. They are different quality at different prices, both for high‑speed, high‑speed light and dial‑up. That is a vigorously competitive marketplace, notwithstanding the fact that there are two primary broadband providers.
2643 The other thing I would say to you is that I don't think the real concern here is that we would raise prices. I think the real concern is that we would lower them. Most of the discussion in fact is about whether or not we would lower prices and whether we can lower prices selectively to respond to competitive entry.
2644 Our real desire, frankly, is to have freedom to drop prices and to get out from the situation that is created by price caps on the deferral account where prices are kept artificially high, which is what is in fact creating a nice umbrella under which our competitors can enter the market.
2645 Increasing prices is not the issue, it is the ability of an ILEC to respond to competitive entry where it is taking place and where right now we can't respond in terms of lower prices, and where we are not forborne we can't raise prices.
2646 COMMISSIONER LANGFORD: Let me speak to your first point about broadband.
2647 I would argue, or it certainly could be argued, that the broadband example, the internet forbearance is completely different from this, as was the sort of wireless example, because what you had was a whole bunch of new entrants all on the starting line at the same time, all starting more or less equal. Okay, you folks had a ubiquitous network that you could do things with and so did cable that they could add to and pump up and do things with, but you were all starting more or less at the same place.
2648 That is not the same scenario here. You are asking us, in a sense, to throw the whole competitive market wide open at only 5 percent when the entrants are starting from very staggered starting blocks. You may feel that some of your lunch is being nibbled at at this point and is in danger of being gobbled at, but at this point the starting points are very, very different. You folks have a huge percentage of the market today.
2649 You said earlier, Ms Yale, "We are not saying that the forbearance test is made today." So I assume you have more than 95 percent today, if that is correct. Nobody else has anything like that. So how can you draw an analogy between forbearing here at 5 percent and forbearance in internet, or even wireless if you like, when the fact situation was so different?
2650 MS YALE: I was just commenting on the issue of whether or not we would be able to raise prices in a competitive market. It is the entrants right now that are setting the price point, because they are coming in at lower prices. We can't raise prices because our entrants are stealing customers from us and we have no tools in our toolkit to respond. So they are taking customers with great offers. We don't want to increase prices, we want to lower them.
2651 So you are absolutely right that the circumstance is different in the sense that our price point sets the bar under which they have to compete and they are competing quite successfully and the issue for us is to be able to respond to that.
2652 COMMISSIONER LANGFORD: I had this discussion yesterday with Aliant, I simply don't buy that prices are the only tool you have in your toolbox. You can bundle forborne products and offer those. You are getting into television, you can offer that. You could settle your labour disputes and maybe, you know, reduce your overheads. There are a number of ways that you can become more productive and then you can offer attractive packages.
2653 I mean, let's look at a basic question: How much of your revenues are actually at stake here in this hearing? What percentage of the Telus revenues are we discussing here in these hearings?
2654 MS YALE: I think I'm going to turn it over to Fred to talk to you about our ability to offer competitive bundles relative to the cable companies.
2655 COMMISSIONER LANGFORD: I'm not so sure I would call them bundles as much as groups of products. I think with a little bit of creativity you could get around ‑‑
2656 I mean, Aliant yesterday, ILECs are keen to point at the stumbling blocks, but I would like you to look at some of the stepping stones you have here too. You have got some ways to sell some attractive products.
2657 I would be interested to know what percentage of all your revenue we are actually dealing with and how hamstrung you really are.
2658 MR. Di BLASIO: Whether we like it or not the consumers today view bundling ‑‑ and I know you would rather say groups of packages, if you will, or groups of services, but today bundling is effectively a proxy for discount in the consumer's mind.
2659 Let me give you a real tangible example. I put a call into Shaw last week to talk a little bit about their cable pricing and I asked for basic service. That is not on their website but the price point was $24.95. I called them again and asked them about their DSL light pricing and it was $24.95.
2660 However, the CSR quickly told me if I wanted to bundle that, that price point would go down to $40 and, by the way, there is this spectacular deal right now, you won't have to pay for that installation charge that we normally charge you, which is anywhere from ‑‑ I don't recall. I forget the exact number, but anywhere from $35 to $55.
2661 So to suggest that pricing is going to go north on us I think doesn't reflect ‑‑
2662 COMMISSIONER LANGFORD: Is north up?
2663 MR. Di BLASIO: North would be up.
2664 It doesn't reflect ‑‑ sorry, it is my marketing flair coming through here. I apologize.
2665 But bottom line, I think to suggest that pricing will go up in a competitive environment is certainly vastly different from the competitive experience that I deal with everyday marketing our services to customers.
2666 Now, if we take that on and go beyond to your suggestion of how we could make it attractive to subscribers to keep our services or add services, well, if I were to lose a customer to Shaw, for instance on the telephony side, there are services which are currently forborne, internet and soon to be video off the Telus platform, that I can't go after the customer and offer them up to the customer given the current winback rules. So I am actually completely hamstrung to tackle those customers that have changed from us as a local provider to Shaw.
2667 COMMISSIONER LANGFORD: Oh, okay. You are the marketer and if you feel hamstrung may God have mercy on you.
2668 But I would suggest that perhaps you are doing this wrong. I mean maybe you are waiting to lose the customer and then realizing that you have a bit of a problem trying to win them back. But why aren't you trying to keep the customer?
2669 Let me give you a scenario. If you sell a customer broadband television product which you are bringing on, long distance and cellular, I find it hard to believe that customer would leave with their standalone local. So why aren't you using the tools in your toolbox now rather than coming to us and saying the sky is falling?
2670 MS YALE: I don't think we are saying the sky is falling. I think what we are saying is that the entry of the cable companies is a significant change, because for the first time the Commission is faced with two facilities‑based providers into every home, into the residential consumer's home, offering a triple play, and that triple play, when provided by the cable companies, is offered under substantially different rules than that same triple play when offered by the telephone companies because they don't have bundling rules; we do.
2671 They don't have any part of their service offering regulated; we do. They don't have, for single family homes, winback restrictions; we do. They can promote any piece of that product they want on any terms they want and we can't.
2672 So most customers want to take one‑stop shopping; many do. The fact that they may choose to keep one piece of the bundle out, well, as we know, you don't get the same discount when you take services a chunk at a time as when you take them all together.
2673 So do we have some alternatives? Yes, but it is hard to justify those asymmetries relative to the cable company. It is no longer the case ‑‑ if it was just a single play for local telephone service, which was the case of entry in the past, that is a very different scenario than a cable company that is already sending a bill to every one of those homes offering cable television for over 50 percent of those customers high‑speed internet and now they say, "Have I got a deal for you, just add local to the bundle", and they sever the relationship completely with us. They sever the relationship with us and we have no contact with that customer for a year.
2674 It is a very different model of entry than the case of entry in the past.
2675 COMMISSIONER LANGFORD: You have heard me on it. I think we disagree. I think there are differences, there is no doubt when you are operating in a reactive mode, but I think you could put together some awfully wonderful packages.
2676 Just a couple more questions.
2677 You did say, Ms Yale, we are not saying the forbearance test is made today, but if we use your test is it in fact made today? If we accepted your proposition right now, ruled off the bench and asked you to come back within a month for your first set of forbearance applications, how many would you be ready for?
2678 MS YALE: I don't know. You would have to ask Shaw what their rate of acquisition is. As you know, we don't know who our customers go to. We know when we lose customers.
2679 COMMISSIONER LANGFORD: Let's assume everything you have lost has gone to Shaw.
2680 MS YALE: I'm not sure we can make that assumption. There is Access independent voice providers, there are other CLECs. We have CSG safeguards that prevent us from knowing who our customers go to. That is the reason in fact why we suggested that the Commission is the only one who can get the data. We can certify how many we have lost. We have no idea and should have no idea who they have gone to.
2681 COMMISSIONER LANGFORD: What is your gross figure in cities like Calgary and Edmonton?
2682 Have you lost 5 percent in any of those cities?
2683 MR. WOODHEAD: No, is the answer to that.
2684 COMMISSIONER LANGFORD: Right across the board.
2685 MR. WOODHEAD: Pardon me?
2686 COMMISSIONER LANGFORD: Right across the board to everybody. You haven't lost 5 percent?
2687 MR. WOODHEAD: No.
2688 MS YALE: Sorry.
2689 We just can't answer that. I mean, that information isn't disclosed publicly by city.
2690 COMMISSIONER LANGFORD: I see. Could you disclose it ‑‑
2691 MS YALE: It is competitively‑sensitive information for us.
2692 COMMISSIONER LANGFORD: Could you disclose it to us confidentially?
2693 MS YALE: We can take an undertaking but, as I say, one of the reasons we proposed the way we did to the Commission is that the Commission is the only one who should know by serving territory who has what subscribers.
2694 COMMISSIONER LANGFORD: It's just that you said, "We are not in any position to forbear today". Earlier, though, you had mentioned that you could be talking of 10 percent losses in certain cable areas.
2695 So it is kind of a mystery for me to know. You obviously have a sense of where you are losing. I am not asking you to give away confidential information if you can't do it here in this room, but it is difficult for me to try to understand how desperate the situation is. I know that pain isn't the test, but it does give us a sense of what we are looking at.
2696 Though you have offered in a sense an attractive geographic and very creative geographic market test, you have offered a very, very low threshold test. I take Dr. Crandall's sense that it might work in theory, but I also take the realities of the cable world where it hasn't worked. There may be reasons, as Dr. Crandall says, but we do have basic and basic hasn't changed in a long time and the price is going up.
2697 So I'm left here somewhat at sea as to what you are asking us to walk into.
2698 MS YALE: What we are asking for today is the ability to respond competitively through the removal of the marketing restrictions, and that is not an issue of pain, that's an issue of making sure that customers have the opportunity to see the best offers from all players in the markets subject to anticompetitive safeguards like the imputation tests that make sure that what we are doing is not inappropriate and that over time ‑‑ over time ‑‑ that the Commission is really looking to satisfy the test in Decision 94‑19, which is whether or not there exists market power or whether or not there is competition sufficient to protect the interests of users, such that economic regulation ‑‑ regulation of our prices, not our social obligations ‑‑ is no longer required.
2699 So by the time a cable company will have met the 5 percent acquisition test ‑‑ it is not a market share loss test ‑‑ the actual loss of customers will be much greater because of course we have already lost customers to traditional CLECs as well as Access independent voice over IP providers as well as wireless customers, people who have chosen not to have a line in their home.
2700 The real issue is market power, and if there is no market power then you don't need economic regulation.
2701 COMMISSIONER LANGFORD: So you say.
2702 Let me ask you one last specific question, if I may?
2703 The Chairman and Commissioner del Val probed the kind of notion of your area, your competitive area that you are describing, expanding. I think you are going to get back to us on some of those problems.
2704 I want to go to it as you initially find it before there is any expansion, assuming a kind of stases, if you will. I am trying to figure out how small it could be. I have some difficulty trying to imagine where it all might end. Never mind how big it could be and what growth might mean, I see the problems there and the uncertainties and I think you do as well, but how small could it be?
2705 Could it be just one building?
2706 MS YALE: I think you should ask that question to the cable companies in terms of their entry strategy.
2707 COMMISSIONER LANGFORD: No, I'm asking it to you.
2708 MS YALE: Because what we are saying is the beauty of our test is it is not about where we offer service, it is about where the entrants choose to go, because then you have confidence as a commission that from a public policy perspective there is a meaningful facilities‑based alternative in the market and you don't have to worry about the unserved pieces of that territory when you define it too large.
2709 COMMISSIONER LANGFORD: I take your point on the unserved part and it is a creative way to deal with that, but let us leave aside the cable companies.
2710 Let's say we have a traditional CLEC that has wired one high‑rise office tower in Edmonton ‑‑ that's all they have done right now, and have taken in that area obviously 5 percent of the tenants ‑‑ could you come in with a forbearance application for that office tower?
2711 MR. WOODHEAD: Sorry, Commissioner, could you restart your example?
2712 COMMISSIONER LANGFORD: Sure.
2713 MR. WOODHEAD: Are you saying, for example, like a cable company?
2714 COMMISSIONER LANGFORD: No, no, it's not a cable company.
2715 MR. WOODHEAD: It was just some hypothetical new provider?
2716 COMMISSIONER LANGFORD: I mean, we had people like 360 that were rolling out fibre in different places and trying to attract big contracts and whatnot. You know, I could give you three examples.
2717 We could have a CLEC that has decided to wire a downtown office tower, or we could have a CLEC non‑cable that has decided to wire maybe with fibre, maybe with copper, who knows, maybe a bit of both, a university or a hospital or a government building. So they get in there. We have a government building that has three departments in it ‑‑ bloody unlikely in this day and age of government growth but let's assume we have a very big building with three sort of medium‑sized departments in it ‑‑ and they wire the building and they scoop one of the departments. So they have got approximately a third of the building.
2718 Could you make a forbearance application for that building?
2719 MS YALE: I suppose you can conceive of examples like that where theoretically our forbearance test would apply.
2720 As Willie already indicated, the Commission always has a discretion and if for whatever reason the Commission doesn't think it is appropriate in those circumstances to grant forbearance ‑‑ this is primarily business applications you are positing and we ‑‑
2721 COMMISSIONER LANGFORD: University, it could be residences.
2722 MR. WOODHEAD: The point is ‑‑
2723 COMMISSIONER LANGFORD: It could be a high‑rise apartment.
2724 MR. WOODHEAD: ‑‑ Commissioner, in the hypothetical, yes, you could it that way, as a short answer.
2725 What you are facing, however, the facts, as we have been reminded, are what you are interested in, what is before you; what is real. That is not how cable networks are deployed. That is not how our networks are deployed. There could come along some full facilities‑based competitor who would do precisely what you are saying, but that isn't what you are facing today.
2726 COMMISSIONER LANGFORD: But you know, these ‑‑
2727 THE CHAIRPERSON: Excuse me, Commissioner Langford, just one second.
2728 Are you okay? I'm trying to finish the questioning so that you can be liberated.
‑‑‑ Laughter / Rires
2729 THE CHAIRPERSON: If you need a lunch break you let me know. Are you okay to carry on? I don't expect it will be that much longer.
2730 MS YALE: I think there are a couple of panel members that would appreciate a bio break.
‑‑‑ Laughter / Rires
2731 COMMISSIONER LANGFORD: Well, you know what, I could drop the questions. I have lit the candle of the sort of concerns I have. I'm not sure whether you want to come back to it.
2732 MS YALE: We will do an undertaking with respect to that issue and see if we can be helpful on that question.
2733 COMMISSIONER LANGFORD: Maybe you could give me an undertaking with regard to sort of the percentage of revenues at stake here that we spoke about but I didn't get an answer for and the notion of where you could forbear now, these sorts of areas, and the sort of loss of customers at this point we talked about.
2734 I would be happy with that, Mr. Chairman, and we could all go and have a bio break.
2735 MS YALE: That's fine.
2736 THE CHAIRPERSON: Are you all right with that?
2737 MS YALE: I don't know if there are other questions.
2738 THE CHAIRPERSON: Commissioner Noël promised me she had a quick question and since she is ‑‑
2739 COMMISSIONER NOËL: My questions are always quick.
2740 Am I right in assuming that your bright‑line two‑prong test applies to the consumer market rather than to the business market?
2741 MS YALE: Primarily, yes.
2742 COMMISSIONER NOËL: Thank you.
2743 THE CHAIRPERSON: Those are our questions. Thank you very much.
2744 MS YALE: Thank you.
2745 THE CHAIRPERSON: We will resume at 2:45. Nous reprendrons à 1445.
‑‑‑ Upon recessing at 1340 / Suspension à 1340
‑‑‑ Upon resuming at 1450 / Reprise à 1450
2746 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
2747 We will call the next item please, madame la secrétaire.
2748 LA SECRÉTAIRE: Merci, monsieur le président.
2749 We are ready to proceed with the MTS Allstream Inc. panel.
PRESENTATION / PRÉSENTATION
2750 MR. PEIRCE: Thank you and good afternoon, Commissioners. Thank you for the chance to be in front of you. To new Commissioners it is probably time to ask how you like it so far as you move through your first endeavour of this sort.
‑‑‑ Laughter / Rires
2751 MR. PEIRCE: With me today are Ron McKenzie, who is Executive Vice‑President, Marketing and Business Development for our national division for the business outside of Manitoba; Teresa Griffin‑Muir, who is our Vice‑President of Regulatory Affairs with MTS Allstream; and me, Chris Peirce, who is responsible for Regulatory and Government Affairs for MTS Allstream.
2752 A few of these early on slides some Commissioners will have seen before, but at the risk of repetition just to underline who we are.
2753 We are the third largest national competitor provider of local LD data and, more recently, TV services to residential and business customers in Manitoba and business solutions to large and medium‑sized business customers throughout Canada and into the U.S.
2754 We are, and acknowledge that we are, dominant in Manitoba. We are second to Bell Canada and Aliant in central and eastern Canada, and second to Telus in western Canada in terms of our market, which is a mid and large‑sized business market. We are, to put a bottom line to it, inherently national in character.
2755 Turning to slide 3. In that respect, I think we are coming to a significantly different perspective than you have heard so far. The incumbents you have heard from so far have pretty much exclusively addressed themselves to you about protecting their market in the face cable entry and what they are able to do in the face of cable entry.
2756 That is not the perspective that we are coming to you from. We are coming to you from the perspective of one who has a far larger proportion of its revenues than any other incumbent from outside of its region. We survive and prosper by growing our business nationally. We are, by our very nature, committed to national competition.
2757 For Commissioner Cram, we did point out last time using this slide that we have shown the proportion of revenues that come from in and outside of regions in terms of those columns. Those columns do not reflect our relative size. We are a tenth the size of Bell and less than half the size of Telus. But a far greater proportion, 60 percent or more, come from outside of our territory.
2758 So we present a view to you that balances the interests of an incumbent in Manitoba, a competitor nationally, a new entrant if you will nationally, the oldest new entrant stemming back to our first days, and a new entrant in Manitoba in terms of presenting a TV alternative to the cablecos which we have now been doing for nearly a couple of years.
2759 Turning to page 4. In terms of the issues in front of you, we would suggest to you that what underlines your consideration should be reality versus theory. We don't really need to look too much at economic theorists and their view of competition, because we have a lot of experience in the Canadian market, we have a lot of experience with markets that are not forborne and with markets that are forborne.
2760 If I think back to my days as a litigator, if the facts were pretty clear you didn't need expert evidence. If you are having problems with the facts you might find yourself an expert to interpret those facts the way you want the decision maker to see them. We are comfortable with the facts in terms of what they say about the development of competition in Canada.
2761 The criteria you employ needs to balance a scope of a relevant geographic market against the degree of competition. Broadly speaking, of course, we would say that the smaller the area you are considering forbearing upon the greater must be the competition present to justify that forbearance, because the incumbents in our experience bring their whole economic power to bear across their region in combating competition where it arises.
2762 That is why we would say that in terms of analysis of the incumbents overall market power in terms of market share the relevant geographic market is the ILEC non‑high cost serving area and the relevant product market is the total of the residential and business local voice market.
2763 To the extent that you step back from those propositions, the necessity to bump your threshold in terms of what competition would justify forbearance would follow.
2764 We also would say that demonstrably in the market, both in those markets where forbearance has happened and where not, where possible, that pre‑emptive activity has characterized the response of the incumbents. They have done so to the full extent of their ability to do so, most recently in terms of Bell Canada and its $5.00 long distance bundle or package and what it is doing with its digital voice service in Ontario today where it meets competition.
2765 Turning to slide 5. Further to that criteria being based in reality and not in theory, the appropriate parameters we believe are well set forth in Decision 94‑19. We do not believe in a bright‑line test in terms of the utility for you now to set a market share level that will trigger automatically forbearance.
2766 In that regard I obviously disagree with those that have been in front of you thus far. We think that the analysis in 94‑19 has been employed by you in reaching numerous other forbearance determinations. You have done that with more facility than most other regulators in the world.
2767 You have managed to forbear from a significant part of the market and you need to look at the facts, actual market conditions and dominant firm behaviour, not simply constructs and paradigms that you hear from theorists. Because if forbearance is granted on too narrow a market definition, the development of competition will clearly be arrested.
2768 As we will say later in our piece, it is clear that where you have forborne competition is pretty much stalled. There has been no greater competitive activity in markets that have been forborne from you from the date of that forbearance.
2769 Slide 6. The facts in terms of then speaking clearly, at the end of 2004 collectively from the numbers you take in yourself, the incumbents controlled 94 percent of the local voice market, virtually unchanged from 2003. Of course, not too long ago you were hearing from incumbents: You can't look at those numbers that the CRTC puts out, they are old, they are dated, but those old and dated numbers don't change year after year after year.
2770 The share of the residential market dropped by 1 percent to 97 percent, and the business market, which some would put the proposition forth is intensely competitive, has remained stagnant, at 88 percent for the last four years, and that large and mid‑sized business market is as concentrated as any in the country.
2771 With that, just in terms of our real world experience on the ground in terms of dealing with significant market power of the incumbents, I will pass it over to Ron McKenzie.
2772 MR. McKENZIE: Thank you, Chris.
2773 If you will turn to slide 7. In many ways the market share on its own stands to represent the power and control position that incumbents have within the business marketplace in particular. So the perspective that I want to bring to the Commission is very much a day in the life of competing with an incumbent in the business marketplace.
2774 While the market share, as I have said, is concentrated and has remained stagnant for the last four years, what has truly happened is you have to understand how the technology and services are now being delivered in the marketplace and the dynamics of those services and the impact they have in terms of how you compete against an incumbent.
2775 In particular I want to focus on two key areas.
2776 One is the incumbent's ability to control the supply and demand of services within a given area.
2777 The second area is the ability to control the technological evolution.
2778 Let me talk about supply and demand for a minute. If you look in the past at how services were built ‑‑ and I think the Commission is well aware of this ‑‑ you typically had standalone services.
2779 So you could look at voice in isolation. Voice is a standalone service delivered on a dedicated network. You could look at data networks, delivered once again over a standalone infrastructure.
2780 That is not the reality of the way next generation services are being built and delivered to the marketplace. What is physically happening now is voice is migrating as an application onto that data network. So that is an inherent dependency of the underlying delivery of that service that voice becomes an application, not a standalone item that you can look at in isolation, so that when you marry voice onto that network what happens is you drive the demand for bandwidth performance up.
2781 Today, if I look at although we have invested $5 billion in network across the country and continue to build and build and build, I am still, for that last mile, that access into the building, I am reliant on the incumbent to get there.
2782 So as you add more and more services, whether they are voice services combined on a data service network, what happens is the speed of that access continues to go up. Now, we are talking about in the IP world, Ethernet everywhere or higher speeds, whether it be switched Ethernet or gigabit Ethernet, the reality is these are well above CDNA rates.
2783 So my costs continue to go up and up as you converge more and more services onto that platform. This is not an area of lower costs, this is an area of costs actually increasing as you move to the higher‑speed services.
2784 So today the reality is, for every dollar in revenue that I collect from a customer, $0.25 goes to the incumbent. That's the reality today. And that cost continues to go up.
2785 Once again, controlling the access and the ability to build those services into the network gives the incumbent a unique capability to control the supply and demand of those services in the marketplace, because once you are above CDNA rates the incumbent is fee to set the price effectively for wholesale offerings that I have to purchase for that last mile.
2786 The second area that I wanted to focus on is when you actually look at the types of voice services that are being delivered to the business marketplace ‑‑ and in particular this is controlling the evolution of technology ‑‑ one of the predominant services for voice, local voice, is Centrex services.
2787 For those of you who aren't familiar this is where the technology and an appreciation for how the technology is delivered. Centrex is basically what I would refer to as a network resident service. It resides in the core of the network. In order for that customer to migrate from that network resident Centrex service to, say, an IP voice service, we are reliant on the incumbent to support that migration because they control what is called the flashpoint or the cutover point from all those independent lines over onto a VoIP service. Without full support and cooperation there is no way to migrate a customer with thousands of lines, and migrating that customer overnight is not technically feasible.
2788 So what happens is, every Centrex customer is effectively a stranglehold for the incumbent and they can control at that position the migration path to their IP networks. Once again, if they were fully forborne they can control the supply and demand by bundling of services and control of the speeds and access into the building, and with the migration of technologies they can control the evolution of that technology to IP‑based services, which I would argue gives it unique capability, not to mention they are starting from a position of 94 percent market share on average across Canada.
2789 So if you turn to slide 8 you will see after eight years of competition and fighting and, once again, offering very unique services, we have delivered the first national NPLS network in the year 2000. We were the first in Canada to offer those services. So even after delivering unique functionality, after eight years the incumbents still control an average 94 percent.
2790 MR. PEIRCE: Turning to slide 9, there clearly is a rational economic incentive for the incumbents to use pre‑emptive market tactics to hold onto their market power. It allows the ILECs to not only control, as Ron was saying, retail pricing, but also competitive pricing, our ability to provide an alternative solution to customers in the marketplace.
2791 It would be irrational for the incumbent not to engage in targeted pricing, winback violations, or any other tactics they were allowed to utilize, to win back customers, once taken in a residential market, a cable provider or in the business market someone like us, because clearly cable is not present to any extent that is significant in the business market.
2792 The economic consequence of this strategy is positive. The ILEC retains dominance. I can tell you those kind of conversations will go on in Manitoba if that activity was permitted by the Commission. You see the customer leaving. You are going to react to that customer leaving by contacting them. That is why we would say Aliant, Bell and others are urging a very narrow geographic and product definition for you.
2793 Turning to page 10, just talking back for a brief second about Bell's ability to raise prices, a factor we were looking at earlier.
2794 If you think about their $5.00 bundles, they were introduced, as stated to be introduced, in response to Primus and Rogers. In less than a year they attracted more than 400,000 new customers. That is as compared to 80,000 that VoIP has managed to attract across the country in the last year.
2795 What have they done now? They have taken that bundle away because it has served its purpose apparently. Taking that bundle away is effectively a price increase in the market which they have been able to obtain. It also, of course, explains the conduct that you yourself have ruled on several times in the past few years of Nexxia or the tariff and winback violations of Aliant and Bell to this point.
2796 I will just turn over to Teresa now with respect to our comment on the transitional regime which we say would serve better than a flash guide.
2797 MS GRIFFIN‑MUIR: Okay. So in order to kind of temper the ILEC's rational response to the market, what we are proposing is to introduce gradual pricing flexibility and that can be done in a number of ways. It can be done by reducing the time of the winback period. It can be done by taking out of the caps some of the bundles. There are a number of ways to address the market.
2798 By doing this, not only will we be able to accommodate what the legislation wants us to accomplish, which is to ensure that we don't arrest the development of competition, particularly now that cable is actually entering the residential market probably nationwide. It also allows the Commission and everybody in the market to assess what the impact is of being able to address the market with a little more flexibility as the incumbent without full forbearance.
2799 So it doesn't kind of force fit the forbearance test into a model that says, okay, once I get to 5 or 10 or 15 that's it. It gives the time to assess how the market does actually respond and how pre‑emptive or not certain behaviour of the incumbent might be in terms of competition.
2800 If you just turn to the next page, in looking at what has transpired in the competitive market, contrary to what has been put before you this morning in terms of premature forbearance is a better thing than a little too late, I guess we would say the reverse.
2801 The incumbent has a lot of market power and, as a consequence. if we just look down through history, it has actually been kind of a bright‑line mark where competition either stopped ‑‑ so if I had lost 80 percent roughly speaking in the data market as an incumbent, that is pretty well where I have stayed since 1996.
2802 In IXPL or long‑haul private line, that situation is actually reversing. So we went from roughly 60 percent market share for the incumbent steadily growing up to 79 percent in 2003. We are roughly in the same spot with LD.
2803 So if the bright‑line test is 5 percent we can feel pretty satisfied that that is pretty well it, plus or minus 5 percent.
2804 MR. PEIRCE: In closing, we would say that granting any forbearance at the current market share levels would, at a minimum, freeze out the possibility of further competitive inroads and that transition measures will prevent the irreparable damage that premature forbearance might cause while without constraining unduly incumbents in response to a market entry that does occur.
2805 To slide 14, we do believe that moving to forbearance, making sure that barriers to entry have been removed, is essential. Those barriers to entry still exist and are significant. A robust competitive regime has to exist. It has to exist for both underlying access to existing and next generation facilities and services. Those access issues remain unresolved.
2806 Competitor quality of service standards must be consistently met. In the last few months that has been our most significant issue. Today we are experiencing an 86 percent failure rate from Bell, and Telus has failed to provision at all since their strike. So we are forced to be telling a customer in 86 percent of the occasions that we can't fill their order as they requested it because the guy that we have to get the service from won't meet his quality of service standards.
2807 So the last slide, timing is everything. Local forbearance framework needs to balance the market realities with the theoretical considerations that underpin your deliberations. The limited extent of local competition to date and, really, the agonizingly slow rate at which competition has developed in the local market, our evidence that ILECs still have that market power and barriers to entry exist.
2808 Bear in mind that the limited local competition in Aliant has taken eight years to develop and has only developed, according even to the incumbent, in a limited number of exchanges over the three to four provinces that they serve.
2809 The damage caused by a framework that results in premature forbearance will be impossible to rectify after the fact.
2810 Thank you. We welcome your questions.
2811 THE CHAIRPERSON: Thank you very much.
2812 Commissioner Langford.
2813 COMMISSIONER LANGFORD: Thank you, Mr. Chairman.
2814 Thank you, lady and gentleman, I guess, for that. It is very clear, as were your original submission and your final argument and your answers to the interrogatories. In a sense I suppose if we accept it we could just go home. Maybe that would be a good thing for some people as well. I know Commissioner Cram has had to hire a dog‑walking service while she has been here because she can't get the poor mutt out for its daily run, so she would be happy. But we can't do that.
2815 As I read your stuff and as I listened to you today I thought how can I best use my time? Your submissions are so clear that I actually don't have any questions on them precisely, maybe a little bit on the sort of extras, meeting Q of S and that sort of thing at the end, but the submissions are clear as clear can be.
2816 With your permission, what I thought I would do is pick your brains a little bit because you are kind of the ILEC that is out of step in a way, and see if I can get some background information and some thoughts from you on the positions of the other ILECs, not necessarily their overall positions but on particular positions, if that is amenable to you. I suppose if it isn't then you can signal the Chair and he will get the cane.
2817 Where I would like to start is with the appropriate geographic market. Again, your submission is very clear on what it should be and you were clear this afternoon as well saying that, you know, the bigger it is perhaps the lower the bright‑line test or whatever it can be, the smaller it is the higher it should be.
2818 So let's start with the smallest one we have heard, although I have some questions about Telus. It might be very, very small but we will see.
2819 Let us start with the local exchange. I thought I would just ask you if you, from your position as an ILEC, could give me some background into the creation of local exchanges, why they are or what they are or why they were set up that way. Is there some economic reason for setting up the exchanges the way they are set up? In the old days did this mean you could make more money?
2820 Maybe you don't want to bear your soul on this but it would be very, very helpful, I think, for us to have an understanding of why the exchanges look the way they do.
2821 Is that a fair question?
2822 MS GRIFFIN‑MUIR: I'm not sure I'm totally equipped to answer that fair question.
2823 A lot of it is driven by technology and I guess historically in the local exchange it really covered, along with the local calling area, just how many other telephones you could reach in a certain area.
2824 COMMISSIONER LANGFORD: So would it have been to the benefit of the monopolies then to keep the local exchange areas small so that you had to spend more money on long distance?
2825 MS GRIFFIN‑MUIR: Well, you know what, the rates actually worked on kind of that value proposition anyway where you had rate groups and where the more telephones you could reach the higher flat rate you paid. I don't know if there was a consideration in terms of balance between pricing of long distance and pricing of local, it was just a very different proposition.
2826 I think technology, though, also had something to do with how far out you expanded. I think Ron can probably talk to that better than ‑‑
2827 MR. McKENZIE: Yes, I can talk a little bit, Commissioner Langford.
2828 A lot of it was the transition, the technology capabilities itself. When you were in the analog days you had distance limitations because of it being analog. Without getting into the engineering principles of distance and what you can do analog versus digital, when you migrated the infrastructure to a digital world it enabled higher concentration so you could support more, call them customers, on a single switch. So it allowed many of the incumbents to actually consolidate, which would help reduce the operating costs by consolidation of the switching points. It is still separate from the calling areas but that is the switching technology. So it allowed for a higher concentration on a single switch.
2829 So there are some economies of scale that was gained in the migration to digital.
2830 The same thing happens when you migrate into the data world as well, that you can get higher concentration, higher performance and, once again, depending on how you architect the network, you can actually start to introduce unique services within those areas as well. That is where some of the decided advantages can be gained through that control of the technology.
2831 COMMISSIONER LANGFORD: Yet we have had such varying views on this. We have had Aliant and SaskTel, for example, who have made very, very strong cases for why the local exchange is the only way to go, and we have had Telus, who you must have heard some of this morning, indicating, no, they are willing to break away from that.
2832 An analogy I made yesterday with one of the participants was a kind of local playing field advantage in sports or something like that.
2833 When you go into another ILEC's territory as a competitor, do you sometimes wish you didn't have to play by the local exchange barriers or is that really any disadvantage at all?
2834 MR. PEIRCE: I think just before answering that question, or having Ron answer that question, just in terms of the preamble, Commissioner, I think probably we would say that all those incumbents are doing is presenting you with the smallest area they can describe for you according to metrics that they use that would enable you to forbear, which again goes to the basic logic, which is they want to rationally preserve their dominant position and be able to respond as quickly as possible.
2835 So you have local exchange or you have got Telus. We figured out a way to go smaller than local exchange. There is nothing more, I don't think, intellectual afoot than that.
2836 But no, I don't think we would say that the local exchange in itself affects our ‑‑ we have had issues obviously around the local network and around local interconnection and that sort of thing that you have dealt with in early proceedings. So how the network was constructed historically by incumbents that were building out piece by piece by piece has posed difficulty for us in a competitive environment having to try and figure out how to utilize that network and build. I don't think the local exchange in and of itself bears in that light.
2837 COMMISSIONER LANGFORD: Did you have something you wanted to add to that?
2838 MR. McKENZIE: No. I think the argument that you are probably hearing from the incumbents is one of where in a voice over IP world the non‑facilities‑based players have in some ways the freedom to effectively offer service and terminate into one location. So I think what you may be hearing ‑‑ and certainly this is better answered by the incumbent that is trying to defend the position ‑‑ but I'm sure the position they are trying to do is give me as much freedom as possible, if I have to move around or I want to be able to bypass certain areas to compete with these other providers in a VoIP world.
2839 That may be where the motivation is coming from, but it is not a limitation from a competitive point of view today.
2840 MR. PEIRCE: And it is not a limitation that would bear on the incumbent's market power because there is no accounting or division of revenue or costs or anything like that. It is just a way they can justify getting back in.
2841 I can imagine conversations around a larger incumbent table just as I can imagine conversations around an MTS incumbent table about if that is what is afoot then how you craft as neatly as you can those guys you don't want coming in and then you are going to respond to those guys and you are going to respond in a targeted way to chase them off if you possibly can.
2842 COMMISSIONER LANGFORD: Of course, cable puts them off that stride a little bit in a sense that they are bringing their own rollout patterns in.
2843 I don't know if you heard the representatives from SaskTel who did make a rather interesting case, at least in their particular territory, that it is configured in such a way that if ‑‑ this would be their submission and I hope I am getting it right ‑‑ that they could, in fact with the wrong test, lose an entire city like Saskatoon because it is one exchange kind of thing.
2844 If you don't go exchange by exchange and you have a high enough entry barrier of not 5 percent but 20 or 30 percent or something, they could end up losing an entire city like Saskatoon, a major part of their population base, about a quarter of a million people out of a million, and still not qualify for forbearance.
2845 Do you have some sympathy for that type of a position or predicament?
2846 MR. PEIRCE: Teresa will add in here.
2847 I think probably there would be no better candidate than the Province of Saskatchewan that, I think, Mr. Goodale describes as the toughest to spell and the easiest to draw, as one where you could adopt the measure of non‑high‑cost serving areas. It is so small in any event that if you utilize a non‑high‑cost serving area that it would probably be the easiest layover of any province.
2848 COMMISSIONER LANGFORD: I don't do layovers, sorry.
2849 Could you help me with that one?
2850 MR. PEIRCE: As you think about provinces where you were rolling out that type of approach ‑‑ I apologize for the cloudy communication, but just if you were putting out an approach of a non‑ high‑cost serving area as your measure for a decision on whether to forbear or not, Saskatchewan given its relatively limited geography and, as you say, population that is pretty well centred might be a candidate for ‑‑ the easiest candidate for a non‑high‑cost serving area approach as your market test.
2851 COMMISSIONER LANGFORD: You are probably making perfect sense but, unfortunately, I'm not quite getting it, for which I apologize.
2852 MR. PEIRCE: Saskatchewan is small.
2853 COMMISSIONER LANGFORD: I know that.
‑‑‑ Laughter / Rires
2854 COMMISSIONER LANGFORD: What I'm trying to get at, though, is the problem that SaskTel put on that if we use too big an area, if we define the appropriate geographic market in too large a way, anything bigger than an exchange, because they are in a strange position where their two main pockets of population are in fact two exchanges. So they could lose, in a sense, half the game and still not qualify for forbearance.
2855 I wonder, being in the second easiest ‑‑ probably the third easiest province to draw, but maybe the second hardest to spell, you would have some sympathy for that and perhaps some notion about how we could work out a solution that would help them.
2856 MR. PEIRCE: Maybe I will let Teresa try to communicate a little better.
2857 MS GRIFFIN‑MUIR: I think actually what we were trying to suggest is that you are balancing, depending on where you strike if you want to go in a bright‑line test ‑‑ which I am assuming Saskatchewan is suggesting to you ‑‑ so where you strike that balance is really a balance between how much market power I have as a result of having the entire market versus how much I am going to lose in a particular part of the market.
2858 Because Saskatchewan, actually you are correct, is not dissimilar to Manitoba where in the south of the province is the highest concentration and a very small number, actually in our case two as well, cities or cities in the surrounding area.
2859 But generally speaking, it balances between high cost and non‑high cost, which I think is what Chris was saying. Sure, maybe the threshold where you think there is sufficient competition overall where I cannot exercise market power in Manitoba any longer, or at least I have to think about it because really it is an economic decision.
2860 If you look at Aliant, they had 32 exchanges. They never ever came to lower a price though overall. Why? Because overall you look at it and you think economically it makes more sense for me to stay where I am and lose market share than to reduce my price, which means I have market power.
2861 The same test could apply in Saskatchewan and in Manitoba where you are just balancing ‑‑ what I guess we are hesitant to do is say, okay, if it is this small a size, the percent, I would say it would have to be much greater than 5 percent and much greater than a percent you would put overall.
2862 So you would balance in really how you look at the whole province, because what Saskatchewan is really saying to you is, "If you take my whole territory and you set it at too high a threshold I will have lots more, obviously, out of Saskatoon." They are absolutely right, but I would expect that you would have to lose more in some areas to lose market power generally speaking.
2863 COMMISSIONER LANGFORD: So you are saying they have the option even under the present unforborne rules of lowering prices, putting together more attractive products and maintaining more of that market share than they are doing?
2864 MS GRIFFIN‑MUIR: Well, yes.
2865 COMMISSIONER LANGFORD: Saskatchewan has it all, but in Aliant's case.
2866 MS GRIFFIN‑MUIR: No, I would say that for us, for everybody that is the case.
2867 I think we would also say, though, that that is where when you are looking between black and white, "Okay, today I regulate; tomorrow I stop, there are a whole bunch of things that you can put in place that are measurable in terms of market response that reduce regulation without completely eliminating regulations.
2868 COMMISSIONER LANGFORD: Right. Your submissions are clear on that and we will get to some of them. I don't mean to overlook them, but if you don't mind I am going to continue to pick your brain a little bit about some of the other problems people have faced because you are in some of their territories competing and I think you are kind of uniquely positioned. Plus, when you go home you are an ILEC so it is kind of an interesting animal we have here in front of us.
2869 Saskatchewan also thought it might be practical to have something other than a national test, to have a series of tests across the country for forbearance rather than one, so that in their case perhaps given the way their demographics are set out or their geographic spread is set out perhaps the exchange would make sense for them, but for other provinces perhaps it would not.
2870 How do you react to the notion of having different tests?
2871 MR. PEIRCE: I think we agree with those words "a different test in different regions", but we would say that that test relates to what the evidence of competition is and the ability of competitors to be swayed or the fact of competitors being swayed by market power and that that leads you upfront to recognizing ‑‑ you know, implicit in that is a recognition that setting a bright‑line market share test as a general proposition for local voice deregulation is really not going to get you there, that it offers false promise in that way and what SaskTel is putting in front of you is probably an excellent argument on that side.
2872 COMMISSIONER LANGFORD: I may have pushed them into it slightly, but anyway we shall see.
2873 Let's move up to the next biggest possible geographic market that some have suggested, I'm thinking for example the Coalition on Business and others, and that's the local calling area. So we move up a little bigger and we talk about things like community of interest and then they would suggest that, "Look, these are the people I normally call. This is what I'm comfortable with. It is bigger than one exchange most of the time", perhaps not for Regina and Saskatoon, I'm not sure, but in many areas it is bigger than one exchange"
2874 Why doesn't that make sense to you? Why do you want to go bigger than that?
2875 MR. PEIRCE: Ron could talk about what it is like in the business market. That is, frankly, not how customers generally surface in the business market.
2876 COMMISSIONER LANGFORD: Okay.
2877 MR. McKENZIE: Yes. The way I would describe is it is not so much the calling area because of their desire to call within.
2878 If you take Enterprise customers and you start with what I will call the mid‑market ‑‑ and you can take the CRTC definition of mid‑market and above ‑‑ and typically on average if you follow the D&B databases they average a minimum of three locations. So a typical mid‑market Enterprise customer will have three, some will have larger depending upon how they are geographically dispersed.
2879 In many cases, those are businesses that are not within one calling area for the most part. They may have divisions. They may have one in the west, one in central, one in the east.
2880 So in those scenarios you are typically not all served by just the incumbent to that business in one area. What happens is ‑‑ and that is certainly why you see the incumbents, Telus, moving to the east and Bell West moving to the west, to certainly try and provide for those business customers, similar to us where we are the number two competitor in every market.
2881 What we find when we talk to the customer is it is not so much the local calling they are looking for these particular exchange areas, it is the, "What is the service you are going to provide me and show me how you are going to provide something that is unique or differentiated" or "How are you going to reduce my operating costs?"
2882 I would argue that it is more a case of how we reduce their operating costs rather than a physical location of geography that is the test, therefore, it is more that ability to leverage those services. This is where, I think, under an open market of forbearance and local, the incumbents will have an unbelievable decided advantage because what they will be able to do is bundle in local services along with other services that they offer and control both the migration and the supply.
2883 So I think it is more an area of the services that you offer, because that is what customers are looking for rather than a physical geography discussion. That is why I wouldn't want to be pulled into a belief that geography is going to protect or give me a method to decide when to forbear and when not to forbear.
2884 COMMISSIONER LANGFORD: And on the residential side?
2885 MR. McKENZIE: Residential, most people, one house. They might have a cottage or something of that nature.
2886 The other thing I think came up early, though, residential for the most part ‑‑ and comments have been made by others ‑‑ is typically where the cable plant is located. It is one of the things that is unique about the business marketplace.
2887 For the most part cable is a residential offer. I think we started to make some foray into the strip malls in some of the outlying areas that are near their network within residential communities, but within the core downtown areas and things of that nature the incumbents are really the only choice to get access to that building.
2888 So the business market I would certainly put forth is decidedly different than residential. Residentially, you are going to have geographic limitations depending on where the plants are located and there may be a desire for a certain segment of the market that may have family in other parts of Canada that they want to have effectively the equivalent of local calling, but I would argue that where the LD prices are falling, especially with Bell offering a $5.00 bundle, that is half a cent a minute, and at half a cent a minute who cares where the exchanges are? It is darn near free at that point. They gave it away.
2889 MR. PEIRCE: Yes, I think we would say ‑‑
2890 COMMISSIONER LANGFORD: I think we have gone off the rails a little here, though, haven't we. Is it possible we have gone off the rails a little? It is interesting information.
2891 MR. PEIRCE: As between the local exchange and the local calling area.
2892 COMMISSIONER LANGFORD: Yes, if I could bring you back to that. I don't want to gainsay what you have said. It is interesting information, but if we could come back to that?
2893 MR. PEIRCE: I don't think we would say there is a lot to differentiate between local exchange and local calling area except for its size. You would not see impairment of market power at one of those levels versus the other, except for one is a little bigger area.
2894 I don't think there is anything as a competitor we would say, if we were in either the residential or business we are in, or watching Shaw enter, that there is a magic one between the two. It is just we get to respond earlier in Manitoba if we are MTS with one versus the other.
2895 COMMISSIONER LANGFORD: We heard from some parties that one of the problems with local calling areas as a scheme, some say it is too small, as you have said, and other say, maybe it is not a bad size but there are overlap problems in the exchanges and that they don't necessarily make a lot of sense in that way.
2896 Are there ways to fix that or is the local calling area just simply a dream that can't ‑‑ you know, kind of an easy solution that, like a lot of easy solutions, won't work?
2897 Cybersurf, for example, has said that the problem of overlapping can be solved by making the LCAs more symmetrical. We will get a chance to talk to them about what precisely that means, but do you see a way of improving the local calling area and making it a better, more appropriate geographic market for competition?
2898 MS GRIFFIN‑MUIR: No, actually, I don't.
2899 I think it is a question of if you were to decide the local calling area is the area you are going to look at, a lot of the other issues are somewhat extraneous, like there is overlapping or not overlapping. It is really the degree of competition that you are talking about and how much power the incumbent provider has or doesn't have as a result of somebody entering their market, taking customers from them on what is more or less a sustainable basis, so that you can see that there is kind of a continuation, which, even for us in Manitoba, obviously you don't want that.
2900 So it really is a question of balancing the two because obviously in the smaller area you will lose more the bigger the area gets. But then you are also thinking about who has the opportunity to have a competition over a broader area where no one can behave pre‑emptively, that if it happens too soon over a larger or smaller area, that I can target customers.
2901 It is less likely that somebody else can expand, even a cable company, out to another area because everything is predicated on a business case that I will obtain a certain amount of market share as the entrant. So I can sustain any kind of investment I make. Even if it is not physical I will incur a lot of costs to bill, to actually augment my plant in a certain way that I can offer voice service or to purchase plant from somebody.
2902 So when you are looking at it very narrowly, particularly if you are looking at it narrowly with a very low threshold, it will be pre‑empted. There is no two ways about it.
2903 If you look at it more broadly, you lessen the likelihood, but I don't think it is a question of really saying, "I have to redefine should it be an LIR, should it be a local calling area, should it be an exchange?" It is really a question of saying where really ‑‑ and truly, it is an economic question, I mean in a financial sense ‑‑ when will it be that I don't have the sufficient wherewithal that I really have to think about targeting customers because it will cost me something now and I'm not sure that I can sustain that. Maybe it is worth losing the customer as opposed to incurring the cost of retaining the customer.
2904 So that how you decide over the area, not so much like does this fit perfectly one way or another. Our submission was, it is a broader area.
2905 MR. PEIRCE: And you get past a lot of the difficulties of the conundrum you are putting forward of how you properly define the area. If you are using a broader area, holding out the necessity and the necessity for providers, the benefit for users of competition over a broader area because you need entry in the broader area before forbearing completely, you are balancing that with a loosening of constraints on the incumbent provider for some of those things that an incumbent would complain about now along the way. Perhaps you take some of the sting out of not being forborne from an incumbent perspective and some of the risk out of what the last point of forbearance means for the new entrant.
2906 COMMISSIONER LANGFORD: I think if you were being cross‑examined by, perhaps Mr. Grieve or Mr. Bibic or one of the other ILECs, they might say to you that what you are saying has more of a ring of truth to it for the world of telephony the way it was before VoIP and the cable rollout than it does now.
2907 Without meaning to be critical ‑‑ and I did read your submissions, I didn't find as many references to VoIP as I thought I might.
2908 I wonder how you react to some of the things that the other ILECs have said about how having a near ubiquitous network of their own and the power to provide attractive bundles and, in fact, without forbearance the power to bundle in ways that that ILEC cannot, they would argue that this really is a new ballgame.
2909 Perhaps they may be being slightly alarmist in their predictions about how fast they will lose customer base, but it is arguable that they are being realistic in what they face from a technological point of view, that this is a new battle that they are fighting because never before ‑‑ they have always had the Allstreams of the world coming into town and maybe they could kind of skate them off the ice in different ways through access problems or whatever, but with the cable companies this is a new game for them.
2910 I wonder why you spoke so little about the whole new world of cable and telephony in your various submissions.
2911 MR. PEIRCE: Well, we are happy with a VoIP decision, but in terms of cable, you know, we are a TV entrant in Manitoba against ‑‑ well, before Shaw's launch of voice in Manitoba. I think we would be able to speak about gains that are attractive, also the challenges of that shift in technology in terms of offering a different service to the customer.
2912 Outside of Manitoba, that Ron will talk about, we are the telecom interface for a number of smaller cable providers and we absolutely don't gainsay the challenge for a cable provider to actually make that step into a voice offering world.
2913 In terms of IP, with the way that flow will go from platform to platform for a customer, our experience in the business market is that the incumbent advantage remains there to the point that Ron was speaking about earlier in terms of now data and voice are merged and now with the decisions that have been made about things like next generation access to this point it makes it doubly difficult for a competitor because the incumbent has that customer trapped and they will migrate them over at their pace and in a way that a competitor can't.
2914 Take as a most recent example the federal government Centrex contract: 177,000 lines, the largest local user in the country, perhaps the continent. They are ready to sole source that contract to Bell Canada.
2915 On this one Willie would be on my side, a thing that we took to the CITT where because of the constraint they have they are able to take that business and in their time migrate it over to their new platform in a way that they won't let any other competitor access. So you will find yourself five or six years down the road and, yes, things will have merged onto an IP platform and you will have exactly the same dominance that you have today.
2916 COMMISSIONER LANGFORD: What about on the residential side though? There must be a cable in almost every home in Winnipeg or at least passing it, that you pass.
2917 Do you have the same reaction on the residential side?
2918 MS GRIFFIN‑MUIR: I think when you talk a whole new world, just to back up a little bit, I think you have to think about it hasn't actually happened.
2919 You haven't seen, other than EastLink, any ‑‑
2920 COMMISSIONER LANGFORD: Which is an old world in a way.
2921 MS GRIFFIN‑MUIR: Apparently, yes.
2922 You haven't really seen what that outcome will be. What Chris was suggesting, our experience in the TV market, sure there have been gains and sure we are happy. I mean we would like more. It is a struggle against the incumbent. I think the flip is true. That's residential. I mean the cablecos are residential.
2923 The same with VoIP. I would have to say we didn't talk a lot about VoIP because we consider it the same. It is local service, local voice service. Clearly, wherever the competition comes from for local voice service, that's just part of the mix and, yes, if companies like Videotron and Cogeco and Rogers and Shaw are very successful, that will start to demonstrate itself in fact as opposed to I am on the threshold of something.
2924 I think what we are suggesting is you have to balance what actually happens versus ‑‑ just because it is a different technology doesn't mean all of a sudden all the rules of gaining a customer are thrown out the window or all the challenges associated with taking something from somebody who has everything, and that is the case. Frankly, you don't want to lose everything. That is a natural tendency you have.
2925 So it is a bit of a conundrum to get a competitive ILEC.
2926 COMMISSIONER LANGFORD: Essentially, this proceeding is premature, is what you are saying.
2927 MS GRIFFIN‑MUIR: To a certain extent.
2928 MR. PEIRCE: In terms of establishing a bright‑line test now that will govern, yes, absolutely. We would say that is not a question you should be feeling yourselves compelled to answer.
2929 You know, if you take a judge's classic response, you don't answer questions you don't have to answer until you have a real situation in front of you that actually presents the facts and gives you the appropriate chance to balance the puts and takes to a decision. You really don't have that yet in terms of ‑‑ you have perhaps the promise of it in a way that you haven't had before, but you don't have it in front of you yet.
2930 COMMISSIONER LANGFORD: It is a little tough for us to practice judicial economy though when we ask the questions. But anyway, I take your point.
2931 MS GRIFFIN‑MUIR: I think too a transitional regime does speak to that, because if you were to say in this decision, yes, there is a certain relaxation of existing regulation ‑‑ I know we all run to Winback and I would have to say that in Manitoba we run to Winback too because it is a very effective tool, so you have to balance putting in place what I would say and what was demonstrated actually through Call‑Net's submissions that Winback does make a difference in what happens to you, especially in the residential market.
2932 So you don't necessarily have to start with the number one thing everybody wants and then go to de‑averaging because frankly you are right on the threshold. You are almost stepping over to be forborne.
2933 Between here and there there are a number of things that can be made available to the ILEC which do offer more pricing flexibility without being preemptive, without squashing competition before it starts, because unfortunately you have to lose market share if you are holding all the market share. It is a question of obviously you don't want that.
2934 COMMISSIONER LANGFORD: I would like you to review for us some of those things that we could do just to make sure we have them on this record as well and talk about them, and that will be my last major area.
2935 Before we do, there is a question I have put to a couple of the ILECs at least and I'm, to be frank, less than satisfied with some of the answers I have gotten so I will put it to you.
2936 I am sceptical of the statements that I have heard in here over the last day and a half about how tightly the hands of the ILECs are tied and how little they can do to proactively market their own products to sort of cut off at the pass anybody trying to steal their clients, steel their subscribers. As you are an ILEC when you have one of your hats on, how hamstrung are you by the promotions, Winback and the need to make tariff applications for some of your products?
2937 It seems to me intuitively that though no doubt those are handicaps, I mean that is precisely what they are designed to be and that is what they are, but I'm trying to figure out just how much weight each jockey is carrying in this race ‑‑ and if that isn't a mix of metaphors I don't know what is ‑‑ but perhaps you could give me some help on that before we get to Ms Muir's sort of transitional kind of a notion.
2938 MR. PEIRCE: In a business market obviously we would say that the incumbent is extremely well positioned to keep and to take back customers that either are considering leaving or have left. That is because ‑‑ I think one of the points that Ron was trying to make is local voice is really a sweet spot in terms of hanging on to or persuading a customer to hang on to that incumbent for a variety of their communications solutions and the local voice lock is so tough to break for any competitor and hence the market share numbers that look like anything in a number of smaller provinces across the country.
2939 In terms of the residential market, you know, I think in Manitoba MTS would experience all the exasperation upfront about the things they would like to do and can't do and look across the fence at cable and say: How come they can do that and we can't? That was clearly the reason for the TV entry.
2940 So what has that led to? What has that competitive threat led to? It has led to innovation. That is what drives an incumbent to innovate and offer new services is the threat or the reality of competition.
2941 In terms of are our incumbents in Canada well positioned to craft solutions that work for customers in that world, absolutely.
2942 So they have responded well. They have responded exceedingly well to competition since competition has been introduced in Canada through all the technological change up until now. The cable companies have been there through most of that time but only now are talking again about some entry and I think I would be confident, certainly I think Manitoba and MTS is confident, of being able to meet that competitive threat and respond.
2943 And will take all the flexibility the regulator gives it to respond. But there absolutely are ways, whether it is new service offerings or pricing of forborne services or bundling that which you can bundle, that I don't think amount to shackles for the incumbents today.
2944 COMMISSIONER LANGFORD: Thank you very much.
2945 Ms Muir, do you want to take us through sort of some of your transitional ideas in narrative form? They are very clear but I think they are different and they are worth getting on the record here.
2946 I think that will end my questions this afternoon.
2947 MS GRIFFIN‑MUIR: Sure.
2948 Actually, there are a number of things the Commission could do in terms of: first, offering more flexibility by removing bundles from under the cap; removing calling features from under the price cap which gives a little more pricing flexibility; reducing the period from a year to something less than a year to eventual elimination of winback; changing the duration of time a promotion can run for or removing the requirement for there to be an imputation test on a promotion.
2949 So there are a number. They are actually at the beginning of our submission of June 22nd. But all those things offer some sort of way to respond to the market creatively actually. What Chris is saying is very true. The more boxed in you are in terms of just being able to go out and grab that customer back, better still before they actually leave you, the more creative you become in what you actually offer the customer but also the more efficient you become.