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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 9, 2007 Le 9 octobre 2007
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
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Elizabeth Duncan Commissioner / Conseillère
Helen del Val Commissioner / Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
Marielle Giroux-Girard Secretary / Secrétaire
Robert Martin Staff Team Leader /
Chef d'équipe du personnel
Peter McCallum Legal Counsel /
Amy Hanley Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 9, 2007 Le 9 octobre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
AFFIRMED: GEORGE HARITON 6 / 40
AFFIRMED: PATRICK HUGHES
AFFIRMED: JEFFREY CHURCH
Examination-in-chief by the Competition Bureau 7 / 46
Cross-examination by The Companies 8 / 62
Cross-examination by Rogers Communications Inc. 25 / 211
Cross-examination by TELUS 111 / 754
Cross-examination by MTS Allstream 164 / 1121
Cross-examination by Primus / Globility 259 / 1765
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
ROGERS-1 Document entitled "Report of 73 / 525
the ICN Working Group on
MTS-1 Order Varying Decision 167 / 1153
MTS-2 Excerpt of Telecom Decision 181 / 1271
Gatineau, Quebec / Gatineau, Québec
‑‑‑ Upon commencing on Tuesday, October 9, 2007
at 0830 / L'audience débute le mardi 9 octobre 2007
LISTNUM 1 \l 11 THE SECRETARY: Please be seated.
LISTNUM 1 \l 12 THE CHAIRPERSON: Good morning. Bonjour, mesdames et messieurs, et bienvenue à cette audience sur les services essentiels.
LISTNUM 1 \l 13 Our panel today is made up, from left to right, of Commissioner del Val from B.C., Commissioner Noël from Quebec, myself, Chairman von Finckenstein, Commissioner Cram from Manitoba and Saskatchewan, and Commissioner Duncan from the Maritimes.
LISTNUM 1 \l 14 Our team will be assisted by Robert Martin, the Team Leader and Senior Manager, Essential Services; Amy Hanley and Peter McCallum as Legal Counsel; and Marielle Giroux‑Girard as Hearing Secretary.
LISTNUM 1 \l 15 This proceeding marks the first time that the Commission has held a comprehensive review of its approach to wholesale services. It also provides us with an opportunity to clearly define what constitutes an essential service. This will undoubtedly be one of the key issues in this proceeding.
LISTNUM 1 \l 16 Given that we have lots of ground to cover at this hearing, we have asked the parties in a letter of organization and conduct dated September 26th to be efficient and focused in their cross‑examinations.
LISTNUM 1 \l 17 In addition, the Commission identified, in a letter dated October 3, six categories which it would ask all parties to refer to when making arguments on the issues in question. We believe these six baskets will facilitate a more focused and informed discussion on the issues at hand. We would appreciate your diligence and cooperation.
LISTNUM 1 \l 18 Finally, as you are aware, Commissioners Noël and Cram will finish their term at the end of the month. Given their broad expertise, I have asked them to sit on this panel. This, unfortunately, means that they will be unable to participate in our final discussion.
LISTNUM 1 \l 19 However, we will benefit from their extensive experience and knowledge during the conduct of this hearing and they have kindly agreed to share with us, the remaining members, their preliminary views prior to leaving their office.
LISTNUM 1 \l 110 We have a lot of ground to cover. I would ask you all to be very short and to the point so that you can conceivably do it within the time allotted.
LISTNUM 1 \l 111 I will now turn the hearing over to our Hearing Secretary Mrs. Giroux‑Girard.
LISTNUM 1 \l 112 Madame Giroux‑Girard.
LISTNUM 1 \l 113 THE SECRETARY: Thank you, Mr. Chairman.
LISTNUM 1 \l 114 Bonjour, tout le monde.
LISTNUM 1 \l 115 As you know, all procedural matters that will apply for this hearing were provided in the Commission's organization and conduct letter issued on the 26th of September 2007.
LISTNUM 1 \l 116 For your convenience, you may get a copy of that letter on the table at the back of this room or retrieve it on our Commission's web site.
LISTNUM 1 \l 117 Aussi, nous avons mis à votre disposition une salle pour examen public, laquelle est située dans la pièce Papineau, près de la réception. Elle sera ouverte à toutes les parties et au public pour la durée de l'audience. Vous pourrez y trouver un exemplaire du dossier public de l'instance et certains services administratifs.
LISTNUM 1 \l 118 Simultaneous interpretation service is available during the hearing. Receivers are available from the commissionaires outside the hearing room. The English translation is on channel 7. L'interprétation française se trouve au canal 8.
LISTNUM 1 \l 119 All submissions heard at this public hearing will be transcribed and will form part of the public record for this proceeding. Anyone wishing to purchase a copy of the transcripts may speak with the court reporter.
LISTNUM 1 \l 120 Copies of the transcripts will be available on the Commission's web site shortly after each day of the hearing.
LISTNUM 1 \l 121 If you have not already completed a written record of appearance, please see me for copies of the form. The information is required and will allow us to contact you at all times if necessary.
LISTNUM 1 \l 122 Any parties wishing to apply for an award cost should file a request on or before November 30th, 2007, copying all other parties and parties should reply by December 7, 2007. In doing so, parties are encouraged to identify the specific amount of costs for which they wish to apply and to file with the Commission all information necessary for the Commission to fix costs.
LISTNUM 1 \l 123 Also, please be reminded when you are in the hearing room to turn off all your electronic devices.
LISTNUM 1 \l 124 Tout autre message jugé opportun vous sera communiqué pendant le déroulement de l'audience.
LISTNUM 1 \l 125 Finally, along with the staff Team Leader Robert Martin and Commission counsel Peter McCallum and Amy Hanley, on my right, I will be available throughout the hearing to assist any parties who have questions regarding practices or procedures that we follow.
LISTNUM 1 \l 126 Merci pour votre attention.
LISTNUM 1 \l 127 We will now proceed with the Competition Bureau witness panel and I'm asking Counsel Abugov to present his witnesses before their solemn affirmation.
LISTNUM 1 \l 128 Thank you.
LISTNUM 1 \l 129 MR. ABUGOV: Good morning, Mr. Chairman, Commissioners and Commission staff.
LISTNUM 1 \l 130 My name is Lorne Abugov, I am Counsel for the Bureau of Competition in this proceeding; seated to my right is my co‑counsel, Josephine Palumbo, Senior Counsel at the Department of Justice; and to my left is Mr. David Teal, Competition Law Officer at the Bureau of Competition.
LISTNUM 1 \l 131 I would like to introduce the witness panel for the Bureau, beginning with the witness closest to the Commissioners, that would be Mr. George Hariton, principal with TIA Telecom.
LISTNUM 1 \l 132 Next to Mr. Hariton, seated in the centre, is Mr. Patrick Hughes, Senior Economist at the Bureau.
LISTNUM 1 \l 133 Finally, closest to our table, is Dr. Jeffrey Church, Professor of Economics at the University of Calgary.
LISTNUM 1 \l 134 Each of the witnesses has filed their CVs with the Commission as prescribed in the org and conduct letter.
LISTNUM 1 \l 135 I would now ask the witnesses to please confirm that the evidence of the Bureau was prepared by or under your supervision.
LISTNUM 1 \l 136 THE SECRETARY: Before you do so, Mr. Abugov, I would like to affirm the witnesses.
LISTNUM 1 \l 137 MR. ABUGOV: Thank you.
LISTNUM 1 \l 138 THE SECRETARY: Please stand up.
LISTNUM 1 \l 139 Please state your name for the record.
LISTNUM 1 \l 140 MR. HARITON: George Hariton. I do.
AFFIRMED: GEORGE HARITON
LISTNUM 1 \l 141 MR. HUGHES: Patrick Hughes. I do.
AFFIRMED: PATRICK HUGHES
LISTNUM 1 \l 142 MR. CHURCH: Jeff Church. I do.
AFFIRMED: JEFFREY CHURCH
LISTNUM 1 \l 143 THE SECRETARY: Thank you very much.
LISTNUM 1 \l 144 You may proceed, Counsel Abugov.
LISTNUM 1 \l 145 MR. ABUGOV: Thank you.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 146 MR. ABUGOV: Yes, witnesses, please confirm that the Bureau evidence was prepared by or under your supervision.
LISTNUM 1 \l 147 MR. CHURCH: I do.
LISTNUM 1 \l 148 MR. HUGHES: I do.
LISTNUM 1 \l 149 MR. HARITON: I do.
LISTNUM 1 \l 150 MR. ABUGOV: Can you confirm that there are no changes at this time or updates to the Bureau evidence?
LISTNUM 1 \l 151 MR. CHURCH: Yes.
LISTNUM 1 \l 152 MR. ABUGOV: Can you confirm indeed that your CVs and qualifications were filed with the Commission?
LISTNUM 1 \l 153 MR. HUGHES: Yes.
LISTNUM 1 \l 154 MR. CHURCH: Yes.
LISTNUM 1 \l 155 MR. HARITON: Yes.
LISTNUM 1 \l 156 MR. ABUGOV: All right.
LISTNUM 1 \l 157 Mr. Chairman, I think our witnesses are ready to respond to questions.
LISTNUM 1 \l 158 Thank you.
LISTNUM 1 \l 159 THE CHAIRPERSON: All right. Who is going to lead us in cross‑examination, please?
LISTNUM 1 \l 160 MR. HOFLEY: I am, Mr. Chairman. Good morning. Good morning, Members of the Panel, good morning Commission staff.
LISTNUM 1 \l 161 My name is Randall Hofley. I am here with my co‑counsel Jonathan Daniels and our favourite economist, Mr. David Kraus. We are from "The Companies", as we have become known.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 162 MR. HOFLEY: I have a few questions for you, gentlemen.
LISTNUM 1 \l 163 I have provided you with four documents, all of which you will be very familiar with.
LISTNUM 1 \l 164 The first document is the opening statement of the Commissioner of Competition which is updated and revised to yesterday's version. That is what I'm going to be asking most of my questions on and then I will have one or two other questions.
LISTNUM 1 \l 165 In your opening statement that was received I guess yesterday, but there was another version received a few days ago, you made a change to your test for essential facilities.
LISTNUM 1 \l 166 Correct?
LISTNUM 1 \l 167 MR. CHURCH: Yes.
LISTNUM 1 \l 168 MR. HOFLEY: That change related to the third condition of your test?
LISTNUM 1 \l 169 MR. CHURCH: Yes.
LISTNUM 1 \l 170 MR. HOFLEY: Can you explain the nature of that change?
LISTNUM 1 \l 171 MR. CHURCH: Yes.
LISTNUM 1 \l 172 So the Bureau has proposed two definitions. The initial definition which was proposed in our evidence of March 15th required that mandated access would result in entry or expansion that would likely result in competition sufficient to remove economic regulation in the downstream market within a reasonable period of time.
LISTNUM 1 \l 173 This definition was proposed prior to the Variance Order and by the GIC and its implementation by the Commission.
LISTNUM 1 \l 174 In recognition of those two significant changes in the regulatory environment, the Bureau has changed its third condition, as stated in its opening written comments, to:
"... such entry or expansion as is likely to result in a substantial increase in competition in a downstream market within a reasonable period of time." (As read)
LISTNUM 1 \l 175 MR. HOFLEY: This change is in recognition of the situations in which forbearance have been granted downstream in retail markets.
LISTNUM 1 \l 176 Is that the principal reason for this change?
LISTNUM 1 \l 177 MR. CHURCH: Like I say, there are two reasons for the change, one simple and one a little bit more complicated, but both on their own we think are compelling.
LISTNUM 1 \l 178 The first is, at the very least a change was required to avoid the measure of benefits for a competitive benefits test being, in the words of some parties, virtually meaningless by the advent of widespread forbearance.
LISTNUM 1 \l 179 So as noted by some parties, the third element of the Bureau's test has been superseded by the advent of widespread forbearance.
LISTNUM 1 \l 180 I think the basic point here is that it would be hard to understand what it would need for determining whether a facility is essential if there has already been a forbearance, because the initial bullet required that granting access would result in forbearance and so if you already have forbearance it would be hard to interpret that.
LISTNUM 1 \l 181 So that was the simple reason.
LISTNUM 1 \l 182 MR. HOFLEY: Can we just stick with that for a second?
LISTNUM 1 \l 183 MR. CHURCH: Yes.
LISTNUM 1 \l 184 MR. HOFLEY: Would you agree with me that for those retail markets that have not been forborne as yet that your original test would continue to be appropriate?
LISTNUM 1 \l 185 MR. CHURCH: I mean, I guess you could do it two ways or one way, it depends.
LISTNUM 1 \l 186 You know, the question is the relationship between the significant increase in competition and what would be required for the removal of economic regulation.
LISTNUM 1 \l 187 I think that if you go back and we think a little bit about why we had our third bullet, initially with the significant ‑‑ which led to this idea that we would want to have mandated access only if it resulted in a reduction or elimination of economic regulation, I mean there was two reasons for that in that particular context.
LISTNUM 1 \l 188 One was that we wanted to avoid ‑‑ we wanted to make sure, pardon me, that the costs of mandating access were less than the benefits. We wanted to make sure the benefits where greater than the cost of mandating the access.
LISTNUM 1 \l 189 Also, we had this idea that it struck the Bureau that if you were in a situation where you had regulation at retail and regulation at wholesale that double regulation perhaps is not such a good idea and so you should be very clear that the benefits were going to be substantial of mandating access. So if it would allow you to eliminate retail regulation, then that was why we had this kind of a threshold on the test that was required for the amount of competition that would be created by mandating access.
LISTNUM 1 \l 190 MR. HOFLEY: You didn't talk about double regulation, Professor Church, in your opening statement.
LISTNUM 1 \l 191 Correct?
LISTNUM 1 \l 192 MR. CHURCH: No, we didn't.
LISTNUM 1 \l 193 MR. HOFLEY: Yes.
LISTNUM 1 \l 194 MR. CHURCH: I think in the opening statement, as I recall, there is no discussion about the nature of the change. We just made the change.
LISTNUM 1 \l 195 MR. HOFLEY: All right.
LISTNUM 1 \l 196 Would you agree that the likelihood of retail forbearance, the original test, was, in essence, a screen for determining the cost benefit threshold for determining whether or not there would be a substantial effect on competition. In this case it would be, I guess, from your standpoint, a pro‑competitive effect.
LISTNUM 1 \l 197 MR. CHURCH: Yes.
LISTNUM 1 \l 198 MR. HOFLEY: You say when you changed your threshold in your opening statement that the third condition now requires a substantial increase in competition.
LISTNUM 1 \l 199 Is that a fair ‑‑
LISTNUM 1 \l 1100 MR. CHURCH: Yes.
LISTNUM 1 \l 1101 MR. HOFLEY: Now, I just want to make sure, "substantial increase", that would be the standard competition law analysis Bureau test.
LISTNUM 1 \l 1102 Correct? "Substantial increase in competition".
LISTNUM 1 \l 1103 MR. CHURCH: Yes. The terminology is a little different than a substantial lessening. All that is designed to reflect, I guess, a minor variation in perspective. So in the tab where we use "substantial lessening of competition" we are dealing with a case where you have ex post denial.
LISTNUM 1 \l 1104 Here it is an ex ante mandating, so it's a substantial increase.
LISTNUM 1 \l 1105 MR. HOFLEY: This is the flip side?
LISTNUM 1 \l 1106 MR. CHURCH: Yes, it's the flip side, but interpretation is the same.
LISTNUM 1 \l 1107 MR. HOFLEY: But it's the same standard?
LISTNUM 1 \l 1108 MR. CHURCH: Yes. Yes.
LISTNUM 1 \l 1109 MR. HOFLEY: All right.
LISTNUM 1 \l 1110 MR. HOFLEY: Dr. Church, just a point of clarification.
LISTNUM 1 \l 1111 I'm not sure whether you agreed with me or not that in a situation such as DNA, low‑speed DSO or DS1 where there is no retail forbearance test, would you agree with me that you would use the test that you initially proposed in those circumstances?
LISTNUM 1 \l 1112 MR. CHURCH: Yes, we would use the original test.
LISTNUM 1 \l 1113 MR. HOFLEY: I would like to now take you to a different subject, and that is one that you have written about in various interrogatories and in your evidence. You first write about it in your evidence at paragraph 60. This is the so‑called weaker and stricter standards.
LISTNUM 1 \l 1114 Do you recall that? Paragraph 60 of your March 15 evidence is the ‑‑
LISTNUM 1 \l 1115 MR. HUGHES: We will just be a moment.
LISTNUM 1 \l 1116 MR. HOFLEY: You don't actually have to turn there, I just wanted to let you know where it first started.
LISTNUM 1 \l 1117 Now, I'm sorry, Mr. Chairman, I am in ‑‑
LISTNUM 1 \l 1118 THE CHAIRPERSON: Where are you in this red binder, just so I can follow your questioning?
LISTNUM 1 \l 1119 MR. HOFLEY: Okay. Is your red binder the one with the four tabs, Mr. Chairman?
LISTNUM 1 \l 1120 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1121 MR. HOFLEY: I'm not in the red binder, I am in the evidence.
LISTNUM 1 \l 1122 THE CHAIRPERSON: Yes, no, I have two things ‑‑
LISTNUM 1 \l 1123 MR. HOFLEY: Sorry.
LISTNUM 1 \l 1124 THE CHAIRPERSON: ‑‑ I have the four tabs and I have a red book here, which says "The Bureau", which I gather is the equivalent of a compendium for the purpose of this cross‑examination.
LISTNUM 1 \l 1125 MR. HOFLEY: I'm at a loss, Mr. Chairman, with respect to the red binder. I gave you the tabs.
LISTNUM 1 \l 1126 THE CHAIRPERSON: Okay. One moment, please.
LISTNUM 1 \l 1127 COMMISSIONER del VAL: Are you on the March 15th evidence?
LISTNUM 1 \l 1128 MR. HOFLEY: Yes, March 15th evidence, paragraph 60.
LISTNUM 1 \l 1129 THE CHAIRPERSON: Okay, I'm with you. Thank you.
LISTNUM 1 \l 1130 MR. HOFLEY: Thank you.
LISTNUM 1 \l 1131 As I said, I want to just make sure I understand the stricter and weaker standard which is referenced in your evidence and your interrogatory responses. I'm going to go slowly here because I'm pretty slow myself.
LISTNUM 1 \l 1132 Am I correct that under the weaker standard the Commission could determine, assuming there is market power downstream and upstream, that a facility is essential where the facility can be duplicated, but the duplication would not be of a nature to effectively discipline the exercise of market power downstream?
LISTNUM 1 \l 1133 MR. CHURCH: Yes.
LISTNUM 1 \l 1134 MR. HOFLEY: Now, under the stricter standard, the Commission could not determine that a facility is essential once it concluded that a facility can be duplicated. Correct?
LISTNUM 1 \l 1135 MR. CHURCH: Yes, or, alternatively, if it cannot be duplicated profitably, then it is an essential facility.
LISTNUM 1 \l 1136 MR. HOFLEY: Is your answer "yes" to my question, Dr. Church?
LISTNUM 1 \l 1137 MR. CHURCH: Please rephrase it.
LISTNUM 1 \l 1138 MR. HOFLEY: Well...
LISTNUM 1 \l 1139 MR. CHURCH: Or just repeat it.
LISTNUM 1 \l 1140 MR. HOFLEY: Okay.
LISTNUM 1 \l 1141 Under the stricter standard, the Commission would not determine ‑‑ we say "would not" ‑‑ that a facility is essential if it concludes that a facility can be duplicated?
LISTNUM 1 \l 1142 MR. CHURCH: Yes, where the standard for duplication is that it would be profitable for an entrant to duplicate, yes.
LISTNUM 1 \l 1143 MR. HOFLEY: Fine, thank you. That's in your evidence.
LISTNUM 1 \l 1144 MR. CHURCH: Now, is it fair to say that you would prefer, when in doubt, an approach which aired on the side of not mandating access and incenting investment?
LISTNUM 1 \l 1145 MR. CHURCH: So I guess in response to that, you know, the Bureau's perspective on this, and the way we have set things up in kind of an optimal decision‑making framework, is to look at the two types of errors that could be made. One type of error would be to mandate access to facilities which are not essential. The other kind of error would be to not mandate access to the facilities that turned out to be essential.
LISTNUM 1 \l 1146 The Bureau's view, as set out in its evidence, is that the costs of the first type of error, mandating access to stuff which is not essential, are much larger than the costs of not mandating access to things which turn out to be essential.
LISTNUM 1 \l 1147 So that kind of puts a whole tilt in saying that, you know, you should have a fairly strong test to make sure that you are not making a mistake, because we think that the costs of the one error are much larger than the costs of the other error, and so we have incorporated that, you know, in putting the three bullets together as a whole, as a package.
LISTNUM 1 \l 1148 MR. HOFLEY: In fact, you have said at your interrogatory response, which is at Tab B of the materials I gave you. Correct?
LISTNUM 1 \l 1149 It's page 3 of 3. You don't need to go there, I can read it to you.
LISTNUM 1 \l 1150 MR. CHURCH: Okay.
LISTNUM 1 \l 1151 MR. HOFLEY:
"...that the error of concern is mandating access to facilities that are not essential." (As read)
LISTNUM 1 \l 1152 MR. CHURCH: Yes.
LISTNUM 1 \l 1153 MR. HOFLEY: So is your answer "yes", Dr. Church, to my question?
LISTNUM 1 \l 1154 MR. CHURCH: My answer is yes, in the sense of the way we designed the three bullets was to reflect these relative costs of benefits for the two errors.
LISTNUM 1 \l 1155 THE CHAIRPERSON: I'm sorry, Mr. Hofley, you may be slow, I'm even slower. I still don't know what the answer to your...I understand your question, I don't understand the answer.
LISTNUM 1 \l 1156 Could you repeat that, Dr. Church? He asks you is your bias, when in doubt, on the pro‑incentive side or not, and what was the answer?
LISTNUM 1 \l 1157 MR. CHURCH: My answer is yes, and that's been incorporated in our three bullets, sir.
LISTNUM 1 \l 1158 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1159 MR. HOFLEY: Now, would you agree that if the Commission were to adopt an ex‑anti approach in this proceeding, the appropriate standard would be, given your preference, the stricter standard?
LISTNUM 1 \l 1160 MR. CHURCH: Well, I guess we would have real concerns about an ex‑anti approach in this, sorry.
LISTNUM 1 \l 1161 MR. HOFLEY: No, I understand. That's why I said "if".
LISTNUM 1 \l 1162 MR. CHURCH: If. Well, I guess we would have to see, you know, what the nature of that test was and what the errors would be between using a strict versus the weak standard. Right? We would have to evaluate.
LISTNUM 1 \l 1163 MR. HOFLEY: Would you agree with me ‑‑
LISTNUM 1 \l 1164 MR. CHURCH: But we would be concerned. We would be concerned about a weak standard on an ex‑anti basis, but that might result in more errors than a strong standard on an ex‑anti basis.
LISTNUM 1 \l 1165 MR. HOFLEY: Those are my questions, Mr. Chairman.
LISTNUM 1 \l 1166 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1167 Any other party want to examine?
LISTNUM 1 \l 1168 Okay, then, on this last point, Dr. Church, in ex‑anti and ex‑post approach, an ex‑post approach, of course, makes a lot of sense when you have some way to discipline, since, as you know, the CRTC does not have them.
LISTNUM 1 \l 1169 Doesn't that necessarily drive you to an ex‑anti approach unless there is legislative change to have a means of disciplining?
LISTNUM 1 \l 1170 MR. CHURCH: Sorry?
LISTNUM 1 \l 1171 MR. HOFLEY: Or do you see the disciplining being done all by the Competition Bureau?
LISTNUM 1 \l 1172 MR. CHURCH: Sorry, Mr. Commissioner, by "disciplining", you mean punishing for denying access?
LISTNUM 1 \l 1173 THE CHAIRPERSON: Well, if you want to put in those cool terms, yes.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1174 THE CHAIRPERSON: Usually, you don't have to go that far. Just the fact that you have the means usually encourages compliant behaviour.
LISTNUM 1 \l 1175 MR. CHURCH: I guess that, in some sense, depends on, you know, where you think, in some sense, the property rights lie, if you think that the normal course of affairs should be that entrants should have access to the facilities of the incumbent or whether you think that should be an exceptional thing.
LISTNUM 1 \l 1176 I think that the Bureau's evidence suggests that, based on our analysis of the costs of the various areas, we think mandating access should be something ‑‑ that would be exceptional and not normal course of affairs.
LISTNUM 1 \l 1177 THE CHAIRPERSON: Yes, I went on the assumption there is something that is considered essential. Right?
LISTNUM 1 \l 1178 MR. CHURCH: I guess we would want to go through the analysis before we decided that something was essential, and you need the right kind of information to do that. That's why we typically think that the ex‑post approach ‑‑
LISTNUM 1 \l 1179 THE CHAIRPERSON: Okay, and now you have gone through the analysis and you have decided something is essential, okay, and therefore you still believe it should not be an ex‑anti approach?
LISTNUM 1 \l 1180 MR. CHURCH: I see. No. So I think that the differences that we have here, perhaps, is that the way the Bureau has used ex‑anti in its evidence would say at the end of these proceedings, and the ‑‑
LISTNUM 1 \l 1181 THE CHAIRPERSON: Oh, okay.
LISTNUM 1 \l 1182 MR. CHURCH: ‑‑ Commission would have a set of rules, which they would then apply to everything, ex‑anti it.
LISTNUM 1 \l 1183 THE CHAIRPERSON: Subsequent?
LISTNUM 1 \l 1184 MR. CHURCH: Yes, subsequently?
LISTNUM 1 \l 1185 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1186 MR. CHURCH: That's what we mean by "ex‑anti".
LISTNUM 1 \l 1187 THE CHAIRPERSON: Okay, thank you.
LISTNUM 1 \l 1188 Commissioner Cram, you have some questions?
LISTNUM 1 \l 1189 COMMISSIONER CRAM: I just had two questions...well, maybe one.
LISTNUM 1 \l 1190 What is your minimum and maximum timeframes for resolving competitive complaints, anti‑competitive complaints?
LISTNUM 1 \l 1191 MR. HUGHES: I'm not sure we have thought that much in those terms. Do you mean for the CRTC to deal with them or...?
LISTNUM 1 \l 1192 COMMISSIONER CRAM: No, I mean you, people complaining ‑‑
LISTNUM 1 \l 1193 MR. HUGHES: Oh, in the Bureau.
LISTNUM 1 \l 1194 COMMISSIONER CRAM: ‑‑ finding an anti‑competitive complaint, and what are your minimum and maximum times for processing them?
LISTNUM 1 \l 1195 MR. HUGHES: The minimums, when someone comes in and we are giving some sort of advice and they are going to comply, particularly voluntarily, is relatively quick. I can't give you a number, I'm afraid, off the top of my head.
LISTNUM 1 \l 1196 COMMISSIONER CRAM: Two months? Three months?
LISTNUM 1 \l 1197 MR. HUGHES: I think there are certainly cases where matters get resolved in that sort of timeframe. Contested cases, on the other hand, take quite some time.
LISTNUM 1 \l 1198 COMMISSIONER CRAM: And what is that? Two, three years?
LISTNUM 1 \l 1199 MR. HUGHES: When you think about the court process and going even to an appeal, yes, a matter of years. That's partly outside the Bureau's control, but, yes, that is true.
LISTNUM 1 \l 1200 COMMISSIONER CRAM: So two to three years?
LISTNUM 1 \l 1201 MR. HUGHES: I think that's probably fair. It could even be longer.
LISTNUM 1 \l 1202 COMMISSIONER CRAM: And am I correct that the bill that was going to give you increased AMPs has died? Is it before Parliament? It is not before Parliament, is it, or has it passed?
LISTNUM 1 \l 1203 MR. HUGHES: I am afraid I don't know the answer to that. My apologies, I just am not prepared with that information.
LISTNUM 1 \l 1204 COMMISSIONER CRAM: So what is the maximum AMP you can impose?
LISTNUM 1 \l 1205 MR. HUGHES: To my knowledge, we don't have any right now.
LISTNUM 1 \l 1206 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1207 Thank you, Mr. Chair.
LISTNUM 1 \l 1208 THE CHAIRPERSON: If there are no other questions, we will now go over to Rogers' cross‑examination.
LISTNUM 1 \l 1209 THE SECRETARY: Thank you, gentlemen. Please, Counsel Dunbar and Counsel Englehart.
LISTNUM 1 \l 1210 THE CHAIRPERSON: Okay, go ahead.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 1211 MR. DUNBAR: Good morning, Mr. Chairman, members of the Commission and the witness panel from the Bureau. I am going to begin our cross‑examination of this panel, Mr. Chairman, and then Mr. Englehart is going to ask some additional questions.
LISTNUM 1 \l 1212 Gentlemen, I would like to begin by looking at the issue of whether it is a necessary requirement for the essential facilities definition to have dominance in the upstream market or monopoly in the upstream market.
LISTNUM 1 \l 1213 As I understand it, the first element of the Bureau's definition of essential facilities requires as a necessary condition that the firm controlling the facility in question is vertically integrated and dominant in two markets; the first relevant market being the upstream market and the second being the downstream market in which the facility is an input. Is that correct?
LISTNUM 1 \l 1214 MR. CHURCH: Yes, it is.
LISTNUM 1 \l 1215 MR. DUNBAR: And in contrast TELUS' definition states that a necessary condition for a facility to be essential is that the facility is monopoly controlled in the upstream market. And I would like to explore the interaction that there has been in the proceeding between the Bureau and TELUS on this issue.
LISTNUM 1 \l 1216 In paragraph 31 of your supplemental evidence the Bureau states that if TELUS means that monopoly control requires 100 per cent market share in the input market its definition is too restrictive.
LISTNUM 1 \l 1217 I would like you to explain, why is monopoly control in the input market too restrictive?
LISTNUM 1 \l 1218 MR. CHURCH: So the TELUS proposal, as I understand it, and you know it is based on our understanding of the record, is that they require monopoly upstream. You know, if they are defining monopoly to be 100 per cent market share in an input market where we define the market using antitrust market definition principles, right, we are taking a share of something, we have to define what it is that we are taking a share of, the Bureau is assuming we are doing that using antitrust market principle definitions.
LISTNUM 1 \l 1219 Then if you had a 100 per cent market share in that, that would be the only circumstances under which TELUS would say that there should be mandated access. I guess the Bureau's point would be that you may be ruling out instances where the ILEC or the firm that owns that facility has substantial market power. There may be other alternatives available. Where those other alternatives are weak in terms of their disciplining effect on the market power of the owner of the essential facility, so there could still be cases where you would want to mandate access because it would increase welfare downstream and that would be ruled out by using a TELUS test.
LISTNUM 1 \l 1220 MR. DUNBAR: And is it your position that the TELUS test is still too restrictive?
LISTNUM 1 \l 1221 MR. CHURCH: Yes, that is why we have a dominance requirement and not a monopoly requirement.
LISTNUM 1 \l 1222 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1223 Now, as we have discussed, the Bureau's test requires dominance in both the upstream and the downstream market. And in contrast TELUS has proposed that a facility can only be considered essential if, without it, competition downstream is prevented. In other words, the monopolist upstream is also a monopolist downstream.
LISTNUM 1 \l 1224 In paragraph 32 of your evidence you discussed this difference and you again characterized TELUS' test as problematic. You state that as with dominance upstream, it raises issues of market definition and market share. And you go on to state that if TELUS is talking in terms of 100 per cent market share, then adoption of this standard will inefficiently restrict access to facilities.
LISTNUM 1 \l 1225 Do you continue to believe that that is the case?
LISTNUM 1 \l 1226 MR. CHURCH: Yes.
LISTNUM 1 \l 1227 MR. DUNBAR: And can you explain what the problem is there?
LISTNUM 1 \l 1228 MR. CHURCH: Again, it is a similar problem that is, as we just talked about in terms of upstream, is that the TELUS test might result in situations where mandating access would be good for consumers and it is not being identified correctly by the TELUS test, whereas it would be with a dominance requirement.
LISTNUM 1 \l 1229 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1230 Now, I would like to turn next to consideration of how the Bureau's test in this proceeding or proposed definitions and tests of essential facilities would be operationalized by the Commission. And I would like to begin by referring to your opening statement, the version dated October 2.
LISTNUM 1 \l 1231 Now, on page 2 of the opening statement of October 2 the Bureau has outlined its three‑part test ‑‑
LISTNUM 1 \l 1232 MR. HUGHES: Excuse me, could you give us a moment?
LISTNUM 1 \l 1233 MR. DUNBAR: Sure.
LISTNUM 1 \l 1234 MR. HUGHES: We have got the eighth, but the second?
LISTNUM 1 \l 1235 MR. DUNBAR: We have a handout there if you don't have it.
LISTNUM 1 \l 1236 COMMISSIONER del VAL: Mr. Dunbar, it is October 2, right, the earlier version of the opening statement?
LISTNUM 1 \l 1237 MR. DUNBAR: That is correct.
LISTNUM 1 \l 1238 THE SECRETARY: We have the October 8 version, but not the October 2 version at hand.
LISTNUM 1 \l 1239 MR. DUNBAR: It is the same test, sir.
LISTNUM 1 \l 1240 MR. DUNBAR: So anyway, if we look at this test, you have a three‑part test. We have already mentioned the first part of the test requiring a vertically integrated company that is dominated in two markets. And you state that, within that definition, that a necessary condition for concluding that there is dominance in the upstream market is that it is not practical or feasible for competitors to duplicate the facility in question.
LISTNUM 1 \l 1241 Your second test requires mandating access to the facility is likely to result in competitors entering or expanding the downstream market. And your third requirement, such entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable time.
LISTNUM 1 \l 1242 I am going to come back to that opening statement, so maybe you can keep that handy. And I would like to turn to the Bureau's supplementary evidence at page 18, paragraph 47.
LISTNUM 1 \l 1243 Now here, in talking about how the Commission might apply your test to specific facilities and services, you indicate that your test has three conditions. But in implementing the test you say it should be recognized that one of the most difficult aspects is assessing whether the facility is duplicatable.
LISTNUM 1 \l 1244 MR. CHURCH: Yes.
LISTNUM 1 \l 1245 MR. DUNBAR: Hence, you say the focus should be on using the other conditions to reduce the set of potential facilities that might be essential.
LISTNUM 1 \l 1246 As I understand it, you are proposing that you look at other aspects of the test as sort of a screen that is easier to apply before going to the more difficult question of whether the facility is duplicatable.
LISTNUM 1 \l 1247 MR. CHURCH: Yes. In fact, if you look at our test in our evidence, we suggest that there are two screens that you should do. One would be to look for dominance downstream, and the second one would be to look and see if there are other impediments to competition, such that mandated access may not have the effect of leading to a substantial increase in competition.
LISTNUM 1 \l 1248 Those would be the two screens we would recommend.
LISTNUM 1 \l 1249 We would think that in most cases looking at those two things may save you having to go further in the analysis.
LISTNUM 1 \l 1250 MR. DUNBAR: So, you are doing the process of elimination here, using the easier parts of the test?
LISTNUM 1 \l 1251 MR. CHURCH: Yes. So in anti‑trust parlance, it would be called a structured rule of reason, where you try and have some screens to identify on the basis of things that you can do easily, and then it sets up a structure for how you proceed in the analysis.
LISTNUM 1 \l 1252 MR. DUNBAR: I would like to look at the first part of the screen of your structured rule of reason test and refer to the Bureau/CRTC‑103, where the Bureau has provided its views on how to assess market power dominance.
LISTNUM 1 \l 1253 That was one of the handouts.
LISTNUM 1 \l 1254 THE CHAIRPERSON: Where are you now? What document are you referring to?
LISTNUM 1 \l 1255 MR. DUNBAR: I am in Bureau/CRTC, 12 April, 103.
LISTNUM 1 \l 1256 COMMISSIONER deVAL: Mr. Dunbar, can you please give us the date of that?
LISTNUM 1 \l 1257 MR. DUNBAR: Yes, it is April 7th ‑‑ sorry, 12 April, 2007, and it is number 103.
LISTNUM 1 \l 1258 So, as I was saying, in this interrogatory response, the Bureau has provided its views on how to assess market power dominance, as I understand it, in the upstream and downstream markets. Is that correct?
LISTNUM 1 \l 1259 MR. HUGHES: Yes.
LISTNUM 1 \l 1260 MR. DUNBAR: Can you confirm that this is the same test of market power that was advocated by the Bureau in the local forbearance proceeding before the CRTC?
LISTNUM 1 \l 1261 MR. HUGHES: It is certainly the standard test we use and that was a major part of the local forbearance, yes.
LISTNUM 1 \l 1262 MR. DUNBAR: You start out under this analysis, as I understand it, in defining the appropriate geographic and product markets. Is that correct?
LISTNUM 1 \l 1263 MR. HUGHES: Yes.
LISTNUM 1 \l 1264 MR. DUNBAR: And you gather and analyze the detailed list of qualitative and quantitative information specified in the merger enforcement guidelines?
LISTNUM 1 \l 1265 MR. HUGHES: Not limited to that, but, yes.
LISTNUM 1 \l 1266 MR. DUNBAR: And you use a hypothetical monopolist test?
LISTNUM 1 \l 1267 MR. HUGHES: We use the hypothetical monopolist, of course taking into account things like the "Cellophane Trap" and matters like that.
LISTNUM 1 \l 1268 MR. DUNBAR: Would I be correct in thinking that the product definition test used to assess market power in the relevant market requires you to examine whether there are reasonable substitutes for the facilities in question?
LISTNUM 1 \l 1269 MR. HUGHES: Yes, certainly.
LISTNUM 1 \l 1270 MR. DUNBAR: And this analysis would require the regulator to assess possible substitutes in terms of functionality, quality, price, acceptability to consumers or users, among other things?
LISTNUM 1 \l 1271 MR. HUGHES: Among other things, yes.
LISTNUM 1 \l 1272 MR. DUNBAR: So, the fact that there might be an alternative access functionality available in a given geographic market might not mean that it is a suitable substitute, for example, if it was not acceptable to consumers or business users in terms of those factors such as price and quality?
LISTNUM 1 \l 1273 MR. HUGHES: Yes.
LISTNUM 1 \l 1274 MR. DUNBAR: So, for example, hypothetically, if a wireless connection was not generally acceptable to business customers who require certain quality and reliability of service, would that be a relevant type of consideration for the Commission to consider?
LISTNUM 1 \l 1275 MR. HUGHES: It is certainly relevant, and you would take it into regard, looking at the entire nature of their competitive response.
LISTNUM 1 \l 1276 MR. DUNBAR: Similarly, if residential subscribers did not consider a mobile phone to be a cost‑effective substitute for their home phone, that would be relevant?
LISTNUM 1 \l 1277 MR. HUGHES: Certainly.
LISTNUM 1 \l 1278 MR. DUNBAR: The Commission is going to have to do a significant amount of qualitative assessment to determine the relevant product market?
LISTNUM 1 \l 1279 MR. HUGHES: Yes.
LISTNUM 1 \l 1280 MR. DUNBAR: Is this the same type of analysis that the Commission must do to determine whether it is practical or feasible for competitors to duplicate the facility in question, or is that a different test?
LISTNUM 1 \l 1281 MR. HUGHES: I think once we get there, we are probably moving to another ‑‑ the first issue is to analyze the markets, and if you don't analyze the markets right, you are going to get the wrong answers.
LISTNUM 1 \l 1282 Once you have the right market, then you can look at issues like duplicability, and I have the same problem pronouncing this word as you do.
LISTNUM 1 \l 1283 MR. DUNBAR: I should have looked it up to see if it's a real word, but I didn't. It is all over the place.
LISTNUM 1 \l 1284 Thank you.
LISTNUM 1 \l 1285 MR. CHURCH: Excuse me, if I might just add something to that, to Mr. Hughes' response.
LISTNUM 1 \l 1286 You are correct in the sense that when we are looking for duplicability under either standard, our weak or our strong standard, you are trying to assess what the market conditions would be like if there was entry, and so it is going to be entry into what, and it will be entry into the relevant market.
LISTNUM 1 \l 1287 So, the same analysis is going to be required to start the duplicability analysis.
LISTNUM 1 \l 1288 MR. DUNBAR: I guess what I was wondering there, this is part of your first screen, and you said you wanted to use the first screen because it is easier to apply than the test of duplicability, and I am just wondering really whether it is that much harder, easier or whether you are really looking at the same kind of factors.
LISTNUM 1 \l 1289 MR. HUGHES: I think it would be easier in the sense that you define the market to do your dominance analysis, especially downstream, and it is a first step in a duplicability analysis, but the duplicability analysis requires you to then forecast or assess what would happen if there was entry, and that is much more difficult than just defining the market.
LISTNUM 1 \l 1290 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1291 MR. CHURCH: If I may add, I think there is probably a lot more experience and easier proxies to deal with market definition and to try to assess at least at a first pass the market power. This is something that competition authorities do a lot.
LISTNUM 1 \l 1292 Duplicability requires us to get into the business plans and really try to forecast what is going to happen in this market. It is something that we, I think, have been in a position to do. It is somewhat harder, in my opinion.
LISTNUM 1 \l 1293 MR. DUNBAR: When you are defining the market and looking at whether or not there is dominance in the two markets, when you are looking at the downstream market, are you looking solely at the level of competition there would be in the absence of an essential facility, if there is already one out there? Are you trying to isolate facilities‑base competition from non‑facilities‑base competition?
LISTNUM 1 \l 1294 MR. HUGHES: That would be a sufficient test. So, you would be worried if your conclusion was there is no market power, and the reason there is no market power is because of a player who is dependent on the facility. That would worry you.
LISTNUM 1 \l 1295 It doesn't mean that you are completely off the table, but I would feel a lot more comfortable if I knew it was a facilities‑base player.
LISTNUM 1 \l 1296 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1297 Just on that point, that is another factor the Commission would want to look at to try and isolate where the competition is?
LISTNUM 1 \l 1298 MR. HUGHES: Absolutely. Other factors might be relevant too in terms of identifying the players. Not all parties are equal necessarily as competitive forces.
LISTNUM 1 \l 1299 MR. DUNBAR: If we could turn to what I refer to your second screen, second part of your three‑part definition, this is the requirement that mandating access to the facility is likely to result in competitors entering or expanding in the downstream market.
LISTNUM 1 \l 1300 I take it from your evidence that this requires as a first step the Commission establishing that there are not any other significant impediments to competitors in the downstream market except for access to the alleged essential facility. Is that fair?
LISTNUM 1 \l 1301 MR. CHURCH: Yes. The second bullet just says that if you mandated access, then competitors will enter and expand.
LISTNUM 1 \l 1302 The third bullet is designed to assess how effective that entry and expansion would be in creating competition.
LISTNUM 1 \l 1303 MR. DUNBAR: I understood that your second test also requires you to isolate whether or not there might be other impediments to entry that might be blamed for lack of entry in order to get out of looking at whether or not there is an essential facility requirement?
LISTNUM 1 \l 1304 MR. CHURCH: I guess I was thinking about that second screen, the screen about impediments to competition. It was kind of taking the second bullet and the third bullet together and saying what you are really interested in is if I gave you access, would there be a substantial increase in competition in the downstream market, or are there other things that even if you gave me access there still would not be any competition. Therefore, why bother mandating access.
LISTNUM 1 \l 1305 MR. DUNBAR: So that would be part of the second screen because that is ‑‑
LISTNUM 1 \l 1306 MR. CHURCH: It is part of the second screen. You are trying to tie it to the two bullets or a specific bullet. I would tie it to both the second and the third bullet.
LISTNUM 1 \l 1307 MR. DUNBAR: That is fair.
LISTNUM 1 \l 1308 THE CHAIRPERSON: Can I just clarify? You are talking about impediments other than those that have the origin in the dominance of the player, because you have dealt with the dominance by mandating access. You want to see are there other impediments not related to the dominance of the player.
LISTNUM 1 \l 1309 MR. CHURCH: There may be other reasons for the dominance besides the essential facility. So, there may be other reasons why the firm might be dominant downstream besides the essential facility.
LISTNUM 1 \l 1310 THE CHAIRPERSON: Wouldn't you have taken that into account when you deal with dominance? Your second screen deals with impediments. I assumed it was impediments other than those coming from the dominance of the player.
LISTNUM 1 \l 1311 MR. CHURCH: When I think about this, you know, you are asking if I give you access to this essential facility, would you be able to enter and effectively compete against the incumbent. There may be other reasons why you can't effectively compete. Those other reasons may be contributing entry barriers downstream, which are different than the essential facility. They may support dominance for another reason besides access to the essential facility being denied.
LISTNUM 1 \l 1312 MR. DUNBAR: Can you give me some examples of what you are talking about there?
LISTNUM 1 \l 1313 MR. CHURCH: This would kind of be the standard kinds of things we would run through better found in the merger enforcement guidelines. They would be things like switching costs, brand loyalty, those kinds of things.
LISTNUM 1 \l 1314 MR. DUNBAR: So, this analysis also would follow the type of guidelines that are in the merger and the use of dominance guidelines?
LISTNUM 1 \l 1315 MR. CHURCH: Yes, we're looking at impediment analysis. That is part 6 of the merger enforcement guidelines.
LISTNUM 1 \l 1316 MR. DUNBAR: I would like to turn next to the Bureau/CRTC, 12 April, 2007, 101. I would like to refer to, on that particular handout, page 3, it says 3 of 36, page 3 in the third paragraph on the page.
LISTNUM 1 \l 1317 I believe this is where you get to the issue of whether duplication is practical or feasible. At the bottom in that paragraph, second to last from the bottom, near the end of it, you said:
"The third step reached only after the first two have not eliminated the possibility of an essential facility is to identify whether duplication is practical or feasible." (As read)
LISTNUM 1 \l 1318 Then you say:
"Unfortunately, the analysis required to determine if entry is profitable and, if profitable, effective is fact intensive. The analysis required to assess the incentives and effective entry is very similar to the analysis required to determine if entry is sufficient to prevent a horizontal merger having anti‑competitive effects." (As read)
LISTNUM 1 \l 1319 I wonder if you could explain that concept to me?
LISTNUM 1 \l 1320 MR. CHURCH: Sorry, could you be more precise about which concept you would like me to explain?
LISTNUM 1 \l 1321 MR. DUNBAR: You say that the analysis required to assess the incentives and effective entry is very similar to the analysis required to determine if entry is sufficient to prevent a horizontal merger from having anti‑competitive effects.
LISTNUM 1 \l 1322 I wonder if you could just explain why that is the case?
LISTNUM 1 \l 1323 MR. CHURCH: In the merger enforcement guidelines and in a merger context, if there are not substantial barriers to entry, if we think that entry is easy, then even though there might be a merger, we are not worried about a substantial lessening of competition from that merger in response to any kind of market power that might be created by the merger. It is disciplined by entry.
LISTNUM 1 \l 1324 So, to figure out if there is the potential for a discipline from entry, we do an analysis, the Bureau does an analysis of entry barriers to determine whether entry is sufficient, timely and likely to discipline any market power which might be created by the merger. So, that is a discussion of entry barriers. That is part 6 of the merger enforcement guidelines.
LISTNUM 1 \l 1325 The discussion about duplicability is kind of the same thing. This goes back to what we talked about earlier, is that I am trying to forecast if an entrant was to come in and duplicate the facility, what would be the outcome?
LISTNUM 1 \l 1326 So, under the strong standard you are asking whether it would be profitable. That corresponds very nicely to likely and timely in the merger enforcement guidelines.
LISTNUM 1 \l 1327 Also, if you are looking at the weak standard, which is asking what the competitive effects would be, then that is the inverse of sufficient to control the market power.
LISTNUM 1 \l 1328 That same kind of analysis here, when you are addressing duplicability, in the Bureau's estimation, that is very similar to a discussion of what the entry barriers are and what the effects of entry might be post‑merger.
LISTNUM 1 \l 1329 MR. DUNBAR: That is what I was wondering because it seems that we keep going back to part 6 of the MEGs on each of these tests, and I just wonder are each time the Commission is running these tests we are really doing it on a different issue even though we are applying part 6? You said we apply part 6 to the second part of the test; we apply the guidelines to the first part of the test. We seem to be keep re‑applying them.
LISTNUM 1 \l 1330 I am just wondering is it a separate issue each time?
LISTNUM 1 \l 1331 MR. CHURCH: In the definition of our essential facilities, there are two entry analyses that are required, right?
LISTNUM 1 \l 1332 There is one which is to ask about duplication. So, you are asking could it be duplicated, which is you are asking could an entrant come in upstream and duplicate the essential facility? To answer that, you need some apparatus to decide whether or not the entrant could come in. That is one analysis that is required.
LISTNUM 1 \l 1333 There is a second entry analysis which is required, which is to say, given that you mandate access to the upstream essential facility, would there be entry and what would the effect of that entry be from the mandated access in the downstream market. Again, that is an entry question, so there are two possible ways in which entrants can come in to the market. They can come in by duplicating the upstream facility, or they could come in by having mandated access.
LISTNUM 1 \l 1334 In both cases you want to know what the effect of that entry is. Part 6 of the merger enforcement guideline shows you how to analyze the potential for entry and the effects of the entry.
LISTNUM 1 \l 1335 MR. DUNBAR: Would I be correct in saying that even after we have gone through these screens and we have looked at them, as I understand it, the screen we applied on part 2 of the test would only address part of the issue. Would we still have to go back and consider whether mandating access is likely to result in competitors entering or expanding in the downstream market? Is that an issue you have to go back to?
LISTNUM 1 \l 1336 MR. CHURCH: I am not sure what it means to go back to but it is part of our test and that is part of our screen.
LISTNUM 1 \l 1337 MR. DUNBAR: Does that analysis come after the screens are applied or is it part of the screen?
LISTNUM 1 \l 1338 MR. CHURCH: It would be part of the screen.
LISTNUM 1 \l 1339 MR. DUNBAR: Okay. And then we still need to address the third test to determine whether entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable period of time?
LISTNUM 1 \l 1340 MR. CHURCH: That is the second screen, I think. I mean we are doing it at the same time.
LISTNUM 1 \l 1341 If you are going to identify whether there are impediments or not to competition, you are really asking if I have access to that central facility, would I be able to bring about a substantial increase in competition, and in order to answer that, you would have to know whether there are other impediments or not. So they are the same kind of thing.
LISTNUM 1 \l 1342 MR. DUNBAR: When we looked at your opening statement, that seemed to be the third test:
"Such entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable period of time." (As read)
LISTNUM 1 \l 1343 That is the third test, not the second.
LISTNUM 1 \l 1344 MR. CHURCH: It is the third bullet but it is the second screen.
LISTNUM 1 \l 1345 MR. DUNBAR: Okay.
LISTNUM 1 \l 1346 MR. HUGHES: I think it is important to look at this test as a unified ‑‑ and there will be some duplication of what falls under which bullet.
LISTNUM 1 \l 1347 At the end of the day, the question is really ‑‑ can be put fairly simply. Is there a problem ‑‑ and here I am talking about a problem that is going to affect consumers and it is going to affect the market in a substantive way ‑‑ and is there a solution?
LISTNUM 1 \l 1348 And you are right to say that we are doing a couple of things here because we have to do both the merger analysis to see whether there is a problem and the remedy analysis to see whether this solution is going to work.
LISTNUM 1 \l 1349 So it is a little bit more demanding but it is really not fundamentally very different and it is not any more duplicative except for the fact that you need to find out if there is a problem and find out whether this solution is going to work.
LISTNUM 1 \l 1350 THE CHAIRPERSON: But if either one of those tests is negative, then you don't mandate something as essential?
LISTNUM 1 \l 1351 MR. HUGHES: Right, because then you have concluded there is no problem, so you don't have to worry about whether this solution is going to work.
LISTNUM 1 \l 1352 THE CHAIRPERSON: But let us assume you find yes, there is dominance ‑‑
LISTNUM 1 \l 1353 MR. HUGHES: Yes.
LISTNUM 1 \l 1354 THE CHAIRPERSON: ‑‑ but you find that mandating access to this particular service is not likely to create entry ‑‑
LISTNUM 1 \l 1355 MR. HUGHES: Correct.
LISTNUM 1 \l 1356 THE CHAIRPERSON: ‑‑ then you say you have a problem but this is the wrong solution, so therefore, don't worry, don't mandate?
LISTNUM 1 \l 1357 MR. HUGHES: That is our position.
LISTNUM 1 \l 1358 THE CHAIRPERSON: Notwithstanding that one is purely based on prospective assumptions while the other one is actually based on existing fact? I mean whether there is dominance or not is something you can establish.
LISTNUM 1 \l 1359 MR. HUGHES: Yes.
LISTNUM 1 \l 1360 THE CHAIRPERSON: Whether there is entry or not is prospective and is based on a whole set of assumptions which may or may not turn out to be true.
LISTNUM 1 \l 1361 MR. HUGHES: And I think that is a fair consideration to take into account when you are doing your risk analysis of where you want to shade the answer ‑‑
LISTNUM 1 \l 1362 THE CHAIRPERSON: Mm‑hmm.
LISTNUM 1 \l 1363 MR. HUGHES: ‑‑ but we think this is the right framework and then you have to sort of take these into account.
LISTNUM 1 \l 1364 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1365 MR. CHURCH: If I might just follow up, sir.
LISTNUM 1 \l 1366 I mean we are worried about costs mandating access to facilities which are not essential and so we want to be very sure that in fact the remedy to the dominance downstream is going to be solved by this.
LISTNUM 1 \l 1367 And so, as Mr. Hughes has said, we want to ‑‑ you know, we will take into account that it is prospective and that we are going to make assumptions but we are still going to be fairly tough on them or we would recommend you be tough on them.
LISTNUM 1 \l 1368 THE CHAIRPERSON: Mr. Dunbar, I interrupted your cross, please go on.
LISTNUM 1 \l 1369 MR. DUNBAR: There is no problem, Mr. Chairman.
LISTNUM 1 \l 1370 You said in that case you might find a dominance in the market but that mandating essential services is not necessarily the answer even if you have gone through the three tests.
LISTNUM 1 \l 1371 What would you propose that the Commission do in that circumstance? Would you propose that they regulate the service?
LISTNUM 1 \l 1372 MR. CHURCH: Yes. I mean if there is a market power issue in the downstream markets and solving it with mandated access doesn't solve it, mandated access is not the solution and they are worried about market power downstream, the answer should be to regulate at retail.
LISTNUM 1 \l 1373 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1374 I would like you to turn, finally, to paragraph 33 of the Bureau's Supplementary Evidence of July 5th and in particular the bottom of page 12, paragraph 33.
LISTNUM 1 \l 1375 THE CHAIRPERSON: What was the paragraph number?
LISTNUM 1 \l 1376 MR. DUNBAR: It is paragraph 33, Supplementary Evidence.
LISTNUM 1 \l 1377 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1378 MR. DUNBAR: Down at the bottom of page 12, paragraph 33.
LISTNUM 1 \l 1379 Here you say that:
"The Bureau's test for an essential facility consists of three necessary conditions. In addition to these necessary conditions, before mandating access, the Commission should consider whether there are efficiencies that would be lost from mandating access and/or costs that would be incurred to implement access to a facility found to be essential." (As read)
LISTNUM 1 \l 1380 So I take it from this that even if you pass all three tests you want the Commission to embark on some sort of cost‑benefit analysis?
LISTNUM 1 \l 1381 MR. CHURCH: Yes, because there may well be substantial costs incurred by consumers by mandating access which are not necessarily captured by those three bullets.
LISTNUM 1 \l 1382 So we would add that, I think, in most applications ‑‑ and again, remember that paragraph 33 was written in the context of the old third bullet.
LISTNUM 1 \l 1383 The new third bullet requires a substantial increase in competition, which we have already said today is the same as a substantial lessening of competition in terms of what it means.
LISTNUM 1 \l 1384 And so you might want to take into account the efficiencies either there in determining whether you had a substantial increase in competition or if there are other things that arise, you might want to take them into account later.
LISTNUM 1 \l 1385 But ultimately, what the Commission should be interested in is does this mandating access result in an increase in welfare for consumers in downstream markets.
LISTNUM 1 \l 1386 MR. DUNBAR: So would you say the Commission should assume if there is a benefit involved that there is a significant increase in competition but they would still have to look at costs?
LISTNUM 1 \l 1387 MR. CHURCH: My earlier point was it depends. You can either do it when you consider a substantial increase in competition or you can do it later but if there are significant costs involved, then you should take those costs into account at some point in the analysis.
LISTNUM 1 \l 1388 MR. DUNBAR: And what type of costs would those be?
LISTNUM 1 \l 1389 MR. CHURCH: Well, it may be the case that mandating access involves large costs being incurred by the incumbents to make their facilities available to entrants. So that would be one example of potential costs that should be looked at. In some cases those costs may be small, in other cases they may be extensive.
LISTNUM 1 \l 1390 Usually in an essential facilities discussion there is some idea about how practical or feasible it is to allow access to those facilities. This would be one of those considerations that should be taken into account.
LISTNUM 1 \l 1391 There may also be some vertical efficiencies that are involved in terms of when the ILEC is vertically integrated and is involved in both the upstream and the downstream and those vertical efficiencies, whatever they might be, might be impaired by mandating access. That would be something I am sure that the ILECs would be very happy to come forward and tell us about.
LISTNUM 1 \l 1392 MR. DUNBAR: Now, I take it from your evidence and the Merger Enforcement Guidelines that the tests you are proposing do rely to a significant extent on having the necessary data available. The Bureau has asked questions in this proceeding, and in parts of its evidence it states it is unable to draw conclusions as to such things as market definitions due to lack of information.
LISTNUM 1 \l 1393 Would you agree with that?
LISTNUM 1 \l 1394 MR. CHURCH: Yes. I think the Bureau's point here in its Supplementary Evidence is that in terms of considering proxy rules which would involve market definition and the duplicability and the whole bit, without access to the information on the questions that we have asked, we are not in any position to say that proxy rules are possible or whether the ones that might be possible are good or bad.
LISTNUM 1 \l 1395 MR. DUNBAR: So without that kind of data though, the Commission couldn't apply your tests either, could it?
LISTNUM 1 \l 1396 MR. CHURCH: Well, that is the second question, right? I mean any definition is going to imply certain things that you want to check for and those certain things you want to check for should be reflected in the proxy rule that you design. So a proxy rule designed for definition A might not work very well for definition B.
LISTNUM 1 \l 1397 MR. DUNBAR: Yes, but it seems to me that the rules you are proposing or the tests you are proposing in this proceeding involve quite a number of steps and each step requires a significant amount of information.
LISTNUM 1 \l 1398 What I am suggesting is if the Commission does not gather that information and utilize it in the manner you are suggesting, which is a significant amount of information, then your test isn't going to be very practical for the Commission to work with or it won't produce the right results.
LISTNUM 1 \l 1399 MR. HUGHES: It may well depend on how it is applied. If it is a question of looking for an across‑the‑board solution across the country in all markets, for those kind of ex‑ante rules or proxies our position is we don't have sufficient information right now to make a responsible recommendation.
LISTNUM 1 \l 1400 The Commission does have some of this information. It is on the confidential record. We haven't seen it, so we don't know. There may be scope to streamline this to some degree.
LISTNUM 1 \l 1401 If that is not the case, which is, I think, where you are going, and you are looking at a fairly fact‑insensitive analysis, what we have in mind is something a little different process‑wise, is almost a test case. Focus in on one or two or three specific areas where admittedly the information is fairly detailed, but it is only on one market, it is only on one issue. You should be able to nail down these important factual and important evidentiary elements somewhat easier than trying to do it across the board.
LISTNUM 1 \l 1402 Then, if that is appropriate and it works, then perhaps that can be applied across the board. So if you have one medium‑size city and you can delve down into the facts and get the right answer, then maybe you can apply that. Unless someone shows the facts are different in their city. The same thing for a large city or maybe a rural area.
LISTNUM 1 \l 1403 That's more of what we have in mind then an omnibus collection of all the relevant market information for the whole country.
LISTNUM 1 \l 1404 MR. CHURCH: Right. So if I might just add something to Mr. Hughes comments?
LISTNUM 1 \l 1405 I guess we have in mind that in ex post proceedings would be that there would be a number of these cases that would come along and that the Commission would learn and eventually we would evolve into a situation where we would have proxy rules that would implement the Bureau's definition.
LISTNUM 1 \l 1406 I think we have to be very careful here, is that it's fine to have administrative cost savings by having a nice easy, simple approach, but the nice, easy simple approach may result in very large errors in terms of your decision‑making process.
LISTNUM 1 \l 1407 So the Commission is going to have to trade off the ease of administrative cost ‑‑ of administratability versus the cost of an error that an easy rule brings about.
LISTNUM 1 \l 1408 MR. DUNBAR: Thank you very much.
LISTNUM 1 \l 1409 Those are my questions, Mr. Chairman.
LISTNUM 1 \l 1410 Mr. Englehart will have a few.
LISTNUM 1 \l 1411 CHAIRPERSON: Before he does, can we just follow up on this last point, because if I understood you correctly in response to Mr. Dunbar's questioning you really were suggesting that we do a merger analysis on each and every service, including an efficiency trade‑off at the end in the area which is, as you well know, fraught with difficulties and not easy to apply in mergers let alone in this kind of scenario.
LISTNUM 1 \l 1412 Do you really think that's practical?
LISTNUM 1 \l 1413 Everything is fact‑intensive when you do merger analysis. Everything is driven by the fact of why are you ‑‑ I know, Doctor, you suggested we should do a test case and then apply the cost.
LISTNUM 1 \l 1414 Why would that be feasible here? You don't do it in mergers. You don't do it in competition. Why could we do it here?
LISTNUM 1 \l 1415 Wouldn't there be a huge outcry of people saying, "You know, just a second, it may be true in your test case but it doesn't apply to me."
LISTNUM 1 \l 1416 I think Mr. Dunbar brought out the practicality of doing this. It may be conceptually logical to do it, but to do it for each service and for five different companies or something like this is going to be a massive task.
LISTNUM 1 \l 1417 MR. CHURCH: Right.
LISTNUM 1 \l 1418 Mr. Chairman, in responding to that I don't think it is quite so bleak, in the sense that if you thought about a sector ‑‑ and so when the Bureau does a merger analysis in a sector ‑‑ so if we have five forestry mergers, we learn something from the first one that informs the second one informs the third one informs the fourth one, and by the end of it those analyses can be done fairly simply.
LISTNUM 1 \l 1419 I think that's the kind of thing that the Bureau would see evolving up from an ex post rule, would be that in similar geographic regions for similar services you would learn something through time so that you would end up with a proxy rule where you had a nice trade‑off between the administrative cost savings and the errors that you might make, as opposed to this other approach which is, you know, if you have a bunch of proxy rules ex ante they are likely to be susceptible to substantial errors in terms misclassification of facilities.
LISTNUM 1 \l 1420 THE CHAIRPERSON: On the efficiency trade‑off you actually suggest we go through two screens on whether there is dominance and whether there are other impediments, we find that both of those there are none and we still would not, at least theoretically, mandate access because the efficiencies are not there? The cost of providing the service would outweigh the consumer benefit?
LISTNUM 1 \l 1421 MR. CHURCH: Again, I think I would look at the Telecommunications Act which looks at competition sufficient to protect the interest of users. So in terms of what kind of standard you are choosing that seems to me to suggest that it should be a consumer welfare standard that you are looking at.
LISTNUM 1 \l 1422 When there is a conflict between, as you well know, between total surplus and consumer surplus, if there is a conflict it suggests that you should look for a consumer welfare standard. As we know, the consumer welfare standard is much easier to administer than a total surplus standard.
LISTNUM 1 \l 1423 THE CHAIRPERSON: All right.
LISTNUM 1 \l 1424 Commissioner Cram, you had a question?
LISTNUM 1 \l 1425 COMMISSIONER CRAM: If I could follow up on that, Dr. Church? I was going to ask you anyway about ultimately the issue is an increase in the benefits for consumers and that has to be examined.
LISTNUM 1 \l 1426 I'm going to put a question to you: What's better, if costs go up for a consumer or if there is a reduction of a CAPEX?
LISTNUM 1 \l 1427 MR. CHURCH: I guess I would want to know a little bit more information about the reduction in CAPEX and whose investment it is that's going down and what would have been the benefits from that.
LISTNUM 1 \l 1428 COMMISSIONER CRAM: Well, you were referring in page 8 of 36 in the interrogatory, a copy of which Mr. Dunbar just gave us ‑‑ 8 of 36 is an attachment. I can't tell you. It's the one before 18 may the Bureau/CRTC 12 April 07. Oh, it is 102, sorry.
LISTNUM 1 \l 1429 MR. HUGHES: "Geographical extent" are the first two words on the page.
LISTNUM 1 \l 1430 Is that correct?
LISTNUM 1 \l 1431 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1432 There is a reference there to:
"... a rollout of facilities by CLECs in Canada being reduced by the availability of CD&A at low prices." (As read)
LISTNUM 1 \l 1433 I'm going to ask you: If the ultimate result would then be an increase in costs for consumers, what would be more important?
LISTNUM 1 \l 1434 If you say that's the ultimate test, the ultimate test is consumer welfare, if the costs go up then shouldn't we then say we should mandate that facility as essential, notwithstanding the reduction in capital expenditures?
LISTNUM 1 \l 1435 MR. CHURCH: Right.
LISTNUM 1 \l 1436 I guess when the Bureau has put together its test and is thinking about these three bullets and ultimately this test at the end that says ultimately what you do should be to the benefit of consumers, I guess the Bureau looks at the experience in the cable companies in competition at residential markets and the Bureau looks and says "If we can have situations where we can have competing networks, really competing networks against each other, if that's possible that's the best thing for consumers because then we are going to get price competition and we are going to get innovation and we are going to get product differentiation, we are going to get ‑‑ you know, there is an increase in capacity on one network then the other network is going to be in a situation where it is forced to respond, it comes up with something new, then the other one has to respond."
LISTNUM 1 \l 1437 If we can have that situation, that, in the Bureau's estimation, would be the best for consumers. It may take some time for that to happen.
LISTNUM 1 \l 1438 COMMISSIONER CRAM: But we are not in Utopia, so what is more important, the consumer benefit or increasing CAPEX in Canada?
LISTNUM 1 \l 1439 MR. CHURCH: Well, I guess my point would be to say that there may well be a trade‑off here that the Commission has to make in terms of assessing are we in a situation where we can have the two competing networks or are we going to opt for competition on a single network?
LISTNUM 1 \l 1440 COMMISSIONER CRAM: So is your answer you don't know and it's up to us?
LISTNUM 1 \l 1441 MR. HUGHES: I think that my answer is that it depends on the particular fact circumstances and what you are going to do.
LISTNUM 1 \l 1442 COMMISSIONER CRAM: All right.
LISTNUM 1 \l 1443 Mr. Hughes, you used of the term "facilities‑based".
LISTNUM 1 \l 1444 Now, we have a particular problem here in that if you look at the directive to us overturning forbearance ‑‑ have you seen that at all?
LISTNUM 1 \l 1445 MR. HUGHES: Yes, I have.
LISTNUM 1 \l 1446 COMMISSIONER CRAM: Yes. It includes a mix of resale and facilities‑based.
LISTNUM 1 \l 1447 MR. HUGHES: Yes, I am aware of that.
LISTNUM 1 \l 1448 COMMISSIONER CRAM: Which could mean it could be 99 per cent revenue from resale and 1 per cent from their own facilities.
LISTNUM 1 \l 1449 So when you say you are less concerned if there was facilities‑based competition, do you mean end‑to‑end facilities‑based competition?
LISTNUM 1 \l 1450 MR. HUGHES: Yes, I do.
LISTNUM 1 \l 1451 COMMISSIONER CRAM: Thank you very much.
LISTNUM 1 \l 1452 Now, duplicability. I want to talk about this because telephone companies need scale in order to make money and to be sustainable.
LISTNUM 1 \l 1453 MR. HUGHES: Yes.
LISTNUM 1 \l 1454 COMMISSIONER CRAM: So if I used a test of duplicability ‑‑ you know, being duplicated ‑‑ based on the fact, well ‑‑ I'm going to use something very silly. Well, based on the fact that a certain item has been duplicated in one market, let's use DSO, DS1, DS3 ‑‑
LISTNUM 1 \l 1455 MR. HUGHES: Yes.
LISTNUM 1 \l 1456 COMMISSIONER CRAM: ‑‑ that it has been duplicated in some markets but not in others, you say look at the business case. So do I look at an individual business case, or do I look at the fact that it has been done before so it can be done again, or do I look at the fact that for a company to be sustainable it has to have a whole bunch of them?
LISTNUM 1 \l 1457 MR. HUGHES: I think we can see two extremes here. One is to look exactly at that particular market.
LISTNUM 1 \l 1458 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1459 MR. HUGHES: ‑‑ one is to look broadly. And that's, I think, where proxy rules are going to come in because ‑‑ the answer I'm most confident in is look at the particular market. That's a relevant geographic market that I'm comfortable with.
LISTNUM 1 \l 1460 Close to there, learning from other markets. I think that has some merit. The mere fact that it's duplicated one or two or three places that may be very different don't give me any comfort at all.
LISTNUM 1 \l 1461 So I guess somewhere in between. I don't know if I have answered your question or not.
LISTNUM 1 \l 1462 COMMISSIONER CRAM: Okay. So what you are rejecting is the very simple ‑‑
LISTNUM 1 \l 1463 MR. HUGHES: Correct.
LISTNUM 1 \l 1464 COMMISSIONER CRAM: ‑‑ duplicability test that, if it's been done before, it can be done again?
LISTNUM 1 \l 1465 MR. HUGHES: Yes.
LISTNUM 1 \l 1466 COMMISSIONER CRAM: Okay. And it's something more than that ‑‑
LISTNUM 1 \l 1467 MR. HUGHES: Yes.
LISTNUM 1 \l 1468 COMMISSIONER CRAM: ‑‑ but less than ‑‑ because when you are looking at the business ‑‑ you said, Look at the business case. I would be looking at a whole proposed competitor ‑‑
LISTNUM 1 \l 1469 MR. HUGHES: Yes.
LISTNUM 1 \l 1470 COMMISSIONER CRAM: ‑‑ and seeing how many DS1s ‑‑ DSOs he would need in order to be sustainable, in order to have a good business plan. Would that be ‑‑ you think that's too much?
LISTNUM 1 \l 1471 MR. HUGHES: Whether you would need it per se, certainly you would look at it. At the end of the day, we need an entrant to come in, we need that competition to be protecting consumers. That's what we are after, at the end of the day ‑‑
LISTNUM 1 \l 1472 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1473 MR. HUGHES: ‑‑ and we are trying to look at their business plans or whatever other kind of information we can to try to get an indication whether that kind of competition is going to come to that market. Exactly how you do it, it's a bit of a judgment call, I guess, is the best answer I think I can give you.
LISTNUM 1 \l 1474 Do you have something to add to it?
LISTNUM 1 \l 1475 COMMISSIONER CRAM: You guys have left it up to judgment calls to us the whole way.
LISTNUM 1 \l 1476 Thank you.
LISTNUM 1 \l 1477 MR. HARITON: Well, just to mention that if you are looking at a service provider, and you may be looking at a specific geographic market, but you have to look at the scope and scale of that entrant because that's what brings unit costs down in all of the markets that they are going to be supplying.
LISTNUM 1 \l 1478 So that you cannot look at the market ‑‑ you have to look at the market, but you can't look at the market in isolation ‑‑
LISTNUM 1 \l 1479 COMMISSIONER CRAM: In isolation.
LISTNUM 1 \l 1480 MR. HARITON: ‑‑ you have got to look at what's happening elsewhere.
LISTNUM 1 \l 1481 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1482 MR. HARITON: Similarly on the demand side, it may be that the customer is ‑‑ sorry, that the supplier is serving a customer who has multiple locations, so you cannot look at that in isolation. The demand side may also be across different geographic locations, as well.
LISTNUM 1 \l 1483 COMMISSIONER CRAM: Yes, like the contract with the Royal Bank or something.
LISTNUM 1 \l 1484 MR. HARITON: That's exactly right.
LISTNUM 1 \l 1485 The other thing I just wanted to add very briefly is some of the costs that are ‑‑ you mentioned the trade‑offs between the short‑run benefits of having a new service ‑‑ what I call a service‑level entrant using unbundled loops and investing in plant and so on, and we have seen that in the long run it's investing in plants that will actually establish stable competitors and will actually bring innovation, which is a very great consumer benefit, as well as lower prices.
LISTNUM 1 \l 1486 Lower price is only one thing. Innovation and better service is also very important.
LISTNUM 1 \l 1487 COMMISSIONER CRAM: And I do want ask that about what is innovation? Is it not primarily at the applications level? No?
LISTNUM 1 \l 1488 MR. HARITON: Innovation will happen at every level. If you look at, though, communications over the last 50 years, many of the great innovations actually happened in the network itself, moving from analogue to digital and putting fibre in, which means you have a lot of capacity ‑‑
LISTNUM 1 \l 1489 COMMISSIONER CRAM: Yes, but now.
LISTNUM 1 \l 1490 MR. HARITON: ‑‑ mobile. It's hard to know where the innovation is going to come over the next five years.
LISTNUM 1 \l 1491 COMMISSIONER CRAM: Do you think there's going to be a new network innovation?
LISTNUM 1 \l 1492 MR. HARITON: I think it's certainly possible. I think that what we are seeing is that we are seeing different media for transmission.
LISTNUM 1 \l 1493 One of the more interesting things that happening right now ‑‑ and stop me if I'm getting too technical ‑‑ is on the wireless side. On the mobile side, we used to have one antenna per car or per receiver. Somebody had the bright idea of putting multiple antennas per car, and now we have a much better ‑‑ we have capabilities we didn't have before. You can get higher speeds when you are driving along at 60 kilometres an hour. You can get 1 meg, and probably more now.
LISTNUM 1 \l 1494 So that's really a change in the network, because what you need is you need coordination between different antennas ‑‑
LISTNUM 1 \l 1495 COMMISSIONER CRAM: Yes. Mr. Hariton, we are in Utopia again. Today, where is the majority of the innovation?
LISTNUM 1 \l 1496 MR. HARITON: Today, the majority ‑‑ well, innovation is happening everywhere. It's happening both at the application level, but it's also happening in the network.
LISTNUM 1 \l 1497 COMMISSIONER CRAM: Is that wireless, primarily?
LISTNUM 1 \l 1498 MR. HARITON: A lot of it is happening in wireless. We have had innovations in the actual wireline network. We have seen a move from circuit switched to packet switched, and that's not finished. There's a lot of circuit‑switched equipment still out there. So that's something which is going on.
LISTNUM 1 \l 1499 COMMISSIONER CRAM: Okay, so circuit to packet. Okay, now ‑‑
LISTNUM 1 \l 1500 MR. HARITON: That's a huge ‑‑ to my mind, that's a huge change. It's not finished.
LISTNUM 1 \l 1501 COMMISSIONER CRAM: Okay.
LISTNUM 1 \l 1502 MR. HARITON: And even in the packet switched, we are getting a lot of different protocols, which make the quality better.
LISTNUM 1 \l 1503 So that you can have an application which is extremely innovative and wonderful, but if the network won't support it because it doesn't have the capacity or the control on the delays and the jitter, then your application will not work. You have got to have the application working with the network. You can't isolate them.
LISTNUM 1 \l 1504 COMMISSIONER CRAM: Okay. Thank you.
LISTNUM 1 \l 1505 Thank you, Mr. Chair.
LISTNUM 1 \l 1506 THE CHAIRPERSON: Commissioner del Val.
LISTNUM 1 \l 1507 COMMISSIONER del VAL: Mr. Hariton, just to follow up on Commissioner Cram's question, do you think that the emphasis on facilities‑based will be somewhat at the expense of innovation at the application layer and as the emphasis is placed on the network layer?
LISTNUM 1 \l 1508 MR. HARITON: As we said before, forecasting is difficult to do, but I think that what you are going to have is that ‑‑ to get innovation, what you really need is you really need people coming at a market from a slightly different slant.
LISTNUM 1 \l 1509 In other words, in my experience, in my opinion, head‑to‑head competition seldom leads to a lot of innovation. If you want innovation, what you want is somebody coming at a market from a slightly different angle.
LISTNUM 1 \l 1510 An excellent example, if I may, since we have got Rogers in front of us, is where you use a network which was built for one purpose, and then you say, "Ah, I can use it for another purpose". And that's wonderful. That's the kind of innovation which is really, really helpful.
LISTNUM 1 \l 1511 Similarly, to your point, if I'm looking at the applications alone, I will be able to come up with a lot of innovation, but, at the end of the day, it's the interaction between the applicational level and the other levels.
LISTNUM 1 \l 1512 And I know that we try to talk about them as if they were separate layers, and to some degree they are, but they do interact. The applications drive the network and the network empowers the applications.
LISTNUM 1 \l 1513 So I don't really see the conflict. Maybe in the very short run, but in the long run I think they reinforce each other.
LISTNUM 1 \l 1514 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 1515 THE CHAIRPERSON: Okay, Mr. Engelhart, back to you.
LISTNUM 1 \l 1516 MR. ENGELHART: Thank you, Mr. Chair.
LISTNUM 1 \l 1517 Good morning, panel.
LISTNUM 1 \l 1518 I notified your counsel on Friday that I would be referring to a document which is the "Report of the ICN Working Group on Telecommunication Services".
LISTNUM 1 \l 1519 Do you have a copy of that with you?
LISTNUM 1 \l 1520 MR. HUGHES: We do, and I will just take a half second to get organized here.
LISTNUM 1 \l 1521 MR. ENGELHART: Thank you.
LISTNUM 1 \l 1522 THE SECRETARY: Are you filing this as an exhibit, counsel?
LISTNUM 1 \l 1523 MR. ENGELHART: Yes.
LISTNUM 1 \l 1524 THE SECRETARY: Okay, it will be Exhibit No. 1, obviously.
LISTNUM 1 \l 1525 MR. ENGELHART: Thank you very much.
EXHIBIT ROGERS‑1: Document entitled "Report of the ICN Working Group on Telecommunication Services".
LISTNUM 1 \l 1526 MR. HUGHES: We have got it, thank you.
LISTNUM 1 \l 1527 MR. ENGELHART: Thank you.
LISTNUM 1 \l 1528 This is an international group of competition authorities that are particularly interested in telecommunications matters. Is that correct?
LISTNUM 1 \l 1529 MR. HUGHES: Yes, it is.
LISTNUM 1 \l 1530 MR. ENGELHART: And one of the three co‑chairs of the group is Sheridan Scott, the Commissioner of the Canadian Competition Bureau?
LISTNUM 1 \l 1531 MR. HUGHES: That is correct.
LISTNUM 1 \l 1532 MR. ENGELHART: Would it be fair to say that this report represents the consensus view of the members of the ICN Working Group on Telecommunication Services, including Canada?
LISTNUM 1 \l 1533 MR. HUGHES: As all international reports would be, yes.
LISTNUM 1 \l 1534 MR. ENGELHART: Take a look, if you could, please, at the executive summary, and in particularly the sixth bullet. The sixth bullet reads:
"Competition is enhanced when an effective access regime is in place." (As read)
LISTNUM 1 \l 1535 Do you agree with this statement?
LISTNUM 1 \l 1536 MR. HUGHES: Excuse me, I'm now confused. This is the beginning part?
LISTNUM 1 \l 1537 MR. ENGELHART: Yes. If you take a look at the executive summary, there's a bunch of bullets. It's right after the table of contents.
LISTNUM 1 \l 1538 THE CHAIRPERSON: Madam Secretary, why don't you give her copy of what you have given?
LISTNUM 1 \l 1539 MR. ENGELHART: Oh, yes, sorry.
LISTNUM 1 \l 1540 And the sixth bullet says:
"Competition is enhanced when an effective access regime is in place." (As read)
LISTNUM 1 \l 1541 Do you agree with that?
LISTNUM 1 \l 1542 MR. CHURCH: Yes, Mr. Englehart, we would agree if it is understood that effective access regime means that it is balancing off the potential for competition from mandated access versus the potential for competition from competing networks.
LISTNUM 1 \l 1543 MR. ENGLEHART: And have a look at the heading, 5.6 Access and Interconnection Issues. And there it says at the beginning of that section:
"Difficulties in achieving access and interconnection have been ranked by many countries as the single most important impediment to advancing competition within the telecommunications sector. Few countries have attempted to rely exclusively on a competition law approach to resolving interconnection and access issues. Such an approach would generally entail letting companies privately negotiate terms and conditions and intervening, for example, generally through the use of either refusal to deal remedies with the essential facilities doctrine only where negotiations fail. Accordingly, access and interconnection issues are still largely under the ambit of sector‑specific regulation." (As Read)
LISTNUM 1 \l 1544 Would you agree with that paragraph?
LISTNUM 1 \l 1545 MR. HUGHES: Certainly, different countries have different perspectives and it is probably more true for some than others, but yes, I would agree with that as a principle.
LISTNUM 1 \l 1546 MR. ENGLEHART: And then let us have a look at paragraph 16 to the first complete paragraph halfway through, beginning with the words "possible advantages."
"Possible advantages to local loop unbundling include: reducing barriers to entry thus accelerating competition; encouraging innovation and upgrading since new entrants can combine new technologies with components of existing networks; avoiding unnecessary duplication of network components which, in turn, eliminates the need for public disruptions due to construction; facilitating access to rights‑of‑way by new entrants; and providing new sources of revenue the incumbent. Possible disadvantages include: reducing the incentives for both the incumbent and competitors to construct new and innovative network facilities and requiring regulatory intervention and technical coordination. It has generally been found that the advantages of unbundling outweigh the disadvantages." (As Read)
LISTNUM 1 \l 1547 Would you agree with that statement?
LISTNUM 1 \l 1548 MR. CHURCH: Yes. Mr. Englehart, I think when you are looking at this paragraph and looking at this report it is also important to flip back to page 5 and read the last paragraph on page 5, which gives some perspective about where this report comes from and, in particular, the nature of the competition in the countries which are represented in this group.
LISTNUM 1 \l 1549 And what the paragraph at the bottom of page 5 indicates is that in many of these countries there is only a single network. And so if you were in a situation where you only have a single network, then the conclusions which are found, it has generally been found that the advantages of unbundling outweigh the disadvantages, that will in fact be true. If you only have one network, then it is likely the case that unbundling is a good thing.
LISTNUM 1 \l 1550 The Bureau's perspective on this is that there may be instances where you are not going to have just one network, you may be able to have multiple networks. And if you are in a situation where you can have multiple networks, that is where you are going to get true competition and you should design your access regime to take that into account.
LISTNUM 1 \l 1551 MR. ENGLEHART: So in the Canadian context then, in the residential marketplace where we have duplicate networks, that is one thing. But then in the business market where we don't, as I think you phrased your answer, Dr. Church, the issue is whether we could have duplicate networks?
LISTNUM 1 \l 1552 MR. CHURCH: Yes, that is right.
LISTNUM 1 \l 1553 MR. ENGLEHART: Well, let us take a look then next at the residential marketplace in Canada.
LISTNUM 1 \l 1554 I understand from your evidence that you think it is unlikely that we need mandated essential facilities for the Canadian residential marketplace where there is cable television network‑based telephony, is that correct?
LISTNUM 1 \l 1555 MR. CHURCH: So the third bullet of our test would require that mandated access resulted in substantial increase in competition. The Bureau is sceptical that that would be the case where you already have competition between the cable company and the ILEC in digital telephony because of what the Bureau would characterize, I guess going back to the local forbearance submissions, that in that instance the competition between the duopoly in those circumstances, which are discussed and described in the response to The Companies number 9, the five conditions are listed there.
LISTNUM 1 \l 1556 Given those five structural characteristics then it is likely that you are going to have fairly vigorous competition between the two and that would appear to be the situation now, you know, two years on.
LISTNUM 1 \l 1557 MR. ENGLEHART: So I don't want to challenge that scepticism as you described it, we are all here to try and get out of here by a week from tomorrow. So I want to just have you assume that someone didn't accept your scepticism and that we do have mandated facilities in the residential telephone market in Canada.
LISTNUM 1 \l 1558 And now, I want to explore with you the costs of that decision. And I want to have you have a look, if you could, to your opening remarks, which Mr. Dunbar has already distributed. And, in particular, have a look at footnote 5 of your opening remarks.
LISTNUM 1 \l 1559 And there you say:
"The potential costs of mandated access are decreased incentives for investment in competing networks, decreased incentives for investment in innovation in the networks to which access is mandated and ultimately and most importantly the preclusion of end to end facilities‑based competition." (As Read)
LISTNUM 1 \l 1560 Would that be a fair summary of what you view as the costs associated with mandating facilities where those facilities are not truly essential?
LISTNUM 1 \l 1561 MR. CHURCH: That would be many of them. I guess I would add two more. One of them would be that there is the cost of regulation, there is the cost of implementing the wholesale mandated access regulation scheme.
LISTNUM 1 \l 1562 MR. ENGLEHART: You said two more?
LISTNUM 1 \l 1563 MR. CHURCH: I am just checking to make sure my other one is not already listed here, sir. Yes I am sorry, it is only one more.
LISTNUM 1 \l 1564 MR. ENGLEHART: Let us have a look at the first of those costs, again concentrating on the residential telephone marketplace in Canada.
LISTNUM 1 \l 1565 You say that one of the costs is decreased incentives for investment in competing networks. Would you agree with me that in most residential markets in Canada where cable television companies operate that the cable company has entered or will soon enter to provide telephony?
LISTNUM 1 \l 1566 MR. CHURCH: Yes.
LISTNUM 1 \l 1567 MR. ENGLEHART: Do you believe that if unbundled loops are mandated in these residential markets that they cable companies will withdraw their telephony operations or fail to enter?
LISTNUM 1 \l 1568 MR. CHURCH: Probably not.
LISTNUM 1 \l 1569 MR. ENGLEHART: So would you ‑‑
LISTNUM 1 \l 1570 MR. CHURCH: Excuse me. I might add, it might depend on what the price is which those loops are unbundled at.
LISTNUM 1 \l 1571 MR. ENGLEHART: Say the current price?
LISTNUM 1 \l 1572 MR. CHURCH: Then that, you know, we already know the answer to that because they have entered.
LISTNUM 1 \l 1573 MR. ENGLEHART: So would you agree with me that mandating unbundled loops in residential areas in Canada would not decrease incentives sufficiently to prevent cable companies from entering this market?
LISTNUM 1 \l 1574 MR. CHURCH: They have entered.
LISTNUM 1 \l 1575 MR. ENGLEHART: Would you agree with me that mandating unbundled loops in residential neighbourhoods in Canada is unlikely to preclude end to end facilities‑based competition in Canada?
LISTNUM 1 \l 1576 MR. CHURCH: I would.
LISTNUM 1 \l 1577 MR. ENGLEHART: Then let us have a look at the decreased incentives for innovation and investment by the incumbents, in other words in the network to which access is mandated. I wonder if you could have a look, for that purpose, at an interrogatory, TheCompanies‑TELUS‑12April07‑7. And copies have been distributed for the Commission. I have got a copy if it is easier for you.
LISTNUM 1 \l 1578 MR. ABUGOV: Excuse me, Mr. Chairman, could we have that interrogatory number again?
LISTNUM 1 \l 1579 MR. ENGELHART: Yes, Mr.Abugov. It is TheCompanies‑TELUS‑12April07‑7.
LISTNUM 1 \l 1580 If I could just read the question for you:
"Please refer to paragraph 49 of the declaration of Dr. Taylor. Are the costs associated with providing traditional telephone voice service sunk; are there or should there be incentives for continued investment in network infrastructure for the provision of these services? Explain." (As read)
LISTNUM 1 \l 1581 The following answer is provided by Dr. Taylor:
"Some costs for facilities required to provide traditional voice telephone service are sunk. There are currently incentives for continued investment in this infrastructure and those incentives are affected by the regulation of the services those facilities provide.
Paragraph 49 of my declaration identifies a matter of degree, that the basic network infrastructure for next generation access services may not currently be sunk so that the investment in modernization disincentives for mandated access to those facilities are much more severe than similar disincentives for the current network infrastructure." (As read)
LISTNUM 1 \l 1582 As you may be aware, in the United States the FCC has stated that where the incumbents invest in residential networks to provide new technologies, which Dr. Taylor refers to as next generation access, such as fibre to the home or fibre to the node, the competitors cannot obtain access to the next generation elements of these networks.
LISTNUM 1 \l 1583 The competitors can only get access to a DS‑0 in order to provide traditional services. Are you familiar with that American rule?
LISTNUM 1 \l 1584 MR. HARITON: Yes, I am, Mr. Engelhart.
LISTNUM 1 \l 1585 MR. ENGELHART: Are you familiar with the fact that the Rogers' proposal for the residential market in Canada is the same?
LISTNUM 1 \l 1586 MR. HARITON: I am aware that as far as access to loops and transport facilities and so on, the Rogers' proposal is modeled on the FCC. I understand there are a few differences, but in general it is modeled on that.
LISTNUM 1 \l 1587 MR. ENGELHART: If we had a rule like that, which said that you can get a DS‑0, but you don't get access to the IP functionality or any of the next generation functionality, where an incumbent invests in a next generation residential network, if we had a rule like that, do you believe the incumbents would continue to be incented to invest in their residential networks in Canada?
LISTNUM 1 \l 1588 MR. HARITON: I think that what we are seeing in the States, Mr. Engelhart, the model that I see is Verizon, who is rolling out fibre to the home at a tune of, I think it is $23 billion or something of that sort.
LISTNUM 1 \l 1589 That network, some call it a next generation network, is going to replace both the fundamental ‑‑ the basic telephone service and a lot of other services. It will enable a lot of other services that will hopefully be offered. So that a distinction between basic telephony and all of these new services, this new world, is going to fade away.
LISTNUM 1 \l 1590 One of the difficulties, as I understand it ‑‑ I am not involved with Verizon ‑‑ but as I understand it, one of the difficulties going forward is that as you roll out fibre to the home, it becomes difficult to carve out a single DS‑0 and offer that as a copper loop, which is typically what has been required. I recall seeing that there has been some discussion of that in the States: How do you continue to offer unbundled loops when your whole network is becoming fibre based?
LISTNUM 1 \l 1591 I know that some of that discussion has been happening in Canada, for example, as the traditional telephone companies have been upgrading their networks and driving fibre closer to the home, you know, putting remotes, putting fibre carriers, the remotes and copper down after that, and using integrated remotes, it is becoming increasingly more difficult to provide the actual copper loop that is the subject of discussion, and they have to find alternative ways of doing that.
LISTNUM 1 \l 1592 Whether the fact that they have to continue to provide copper loops or the equivalent of copper loops as they go forward is a restraint or is a factor which slows down the roll‑out, I don't know. I would imagine, though, that there is a cost to it.
LISTNUM 1 \l 1593 MR. CHURCH: Excuse me, could I add something, please?
LISTNUM 1 \l 1594 MR. ENGELHART: Sure.
LISTNUM 1 \l 1595 MR. CHURCH: I would like to follow‑up with two things on this question about the incentives for the investment by the incumbent telephone companies in their existing networks.
LISTNUM 1 \l 1596 The first is, and Mr. Hariton may want to amplify on this because he is the expert we have on pricing, but I am sure there is an issue of the price that is being paid and whether that price is covering the ILEC's cost and giving incentives to maintain, let alone upgrade, but maintain the network. That is an issue.
LISTNUM 1 \l 1597 The second point, which is kind of more general, is in this evolving world which we are seeing, the nature of the market is going to change substantially. We are moving away from a POTS provider to pipes going into the house, which provide broadband access, and on that broadband access, provide a great variety of services, including digital telephony.
LISTNUM 1 \l 1598 Coming back to your original point, which is to say there is no cost associated with unbundling these local loops in residential neighbourhoods, because there is not going to be any effects on the incentives for the ILECs to make their investments, that might not be the case because of the pricing issue. There might be these difficult technical problems in terms of untangling basic POTS service from the broadband access and the increased capacity, but you might wander what the competitive significance of it will be to have a narrow voice band provider using unbundled loops competing in a world where the competition is between the cable company, the incumbent cable company and the incumbent telephone company offering bundles of services down a broadband.
LISTNUM 1 \l 1599 So, there are costs going to be involved under regulation and these other things. There might be difficulties with getting the price right. It is not clear to me that your conclusion necessarily follows that the benefits are going to be greater than the costs because the benefits might be very small.
LISTNUM 1 \l 1600 MR. ENGELHART: We have to stay a little bit focused here or it is going to take too long.
LISTNUM 1 \l 1601 As I explained in my question, we are not talking about the benefits. We are not going to have that debate.
LISTNUM 1 \l 1602 We are talking about the costs. I identified three costs and, Dr. Church, you added a fourth, which we haven't come to yet. We have dealt with two of those costs. The first one is the decreased incentive for investment in competing networks.
LISTNUM 1 \l 1603 We also dealt with a second cost, which is the preclusion of end‑to‑end facilities‑base competition.
LISTNUM 1 \l 1604 Now we are dealing with a third cost, which is decreased incentives for investment and innovation in the networks to which access is mandated.
LISTNUM 1 \l 1605 I want to stay on that issue. In the United States, it is my understanding that whatever difficulties there are in getting DS‑0 capability from a loop that has fibre in it, the FCC has mandated it. Is that your understanding too, Mr. Hariton?
LISTNUM 1 \l 1606 MR. HARITON: That is my understanding.
LISTNUM 1 \l 1607 MR. ENGELHART: You describe the fact that Verizon is spending $23 billion upgrading their networks to next generation architecture. Would you say that it doesn't appear that that FCC rule has prevented Verizon from making the investments in upgrading its existing network?
LISTNUM 1 \l 1608 MR. HARITON: That is certainly true. However, I would say that there are several points which are important here.
LISTNUM 1 \l 1609 So far Verizon is the only one who is doing this. It is widely seen as a gamble by various parties.
LISTNUM 1 \l 1610 But more importantly is that the impact of the various access rules I think may have to do more with the timing of when this happens than whether it happens at all.
LISTNUM 1 \l 1611 A lot of these things are going to happen, in my view, some day. What we are talking about is whether the various rules slow down what is happening or whether it does not. Slowing down is a huge cost.
LISTNUM 1 \l 1612 I am certainly not privy to the cable companies entry into the local telephony market and their decision behind that. One of them at least entered in the late nineties. A lot of them waited until 2005‑2006.
LISTNUM 1 \l 1613 I don't know whether unbundling had anything to do with the delay or not, or whether it was purely the technological problem.
LISTNUM 1 \l 1614 MR. ENGELHART: I just don't think this is that complicated. If you say to an incumbent phone company, if you invest in a new‑fangled network that has all sorts of new‑fangled capabilities, then the competitors can't get the new‑fangled capability; they can just get the old fashioned capability; they can just get a loop or the equivalent of a loop, if you say that, don't you think that it leaves the incumbent with the incentive to invest in the new‑fangled network?
LISTNUM 1 \l 1615 MR. HARITON: The difficulty is that the new‑fangled network is not separate from the existing network. That is really my difficulty. You don't invest in the new‑fangled network separately from the existing one.
LISTNUM 1 \l 1616 I am back to the idea of driving fibre to the home. You are investing in your network; you are investing in your local network, but you are investing in your new‑fangled network at the same time. It is not an either/or. It is a let's invest in this network.
LISTNUM 1 \l 1617 MR. ENGELHART: I just wanted to question you about one thing you said about Verizon.
LISTNUM 1 \l 1618 Verizon is the one going all the way to the home, but would you agree with me that all the American phone companies, the incumbents, are driving fibre closer and closer to the home?
LISTNUM 1 \l 1619 MR. HARITON: That is my understanding, just as in Canada, Mr. Engelhart. Again, it is a question of speed and how quickly they are going to do it and how many resources they will put into it.
LISTNUM 1 \l 1620 MR. ENGELHART: I want to turn to Dr. Church's fourth issue, which is cost, the regulatory cost.
LISTNUM 1 \l 1621 Would you agree with me, Dr. Church, that in the case of unbundled loops in Canada we have the tariffs, we have the dispute resolution mechanism, we have the rules, we have the regulations. We have even got the co‑location facilities. We have the unbundled loops. It is a business that is up and running. So that when you are weighing the cost, the regulatory cost of setting up a regime like that, given that the regime already exists in Canada and has been perfected or honed for some, well, ten years, would you agree with me that the regulatory costs associated with that are less of a factor as you are doing your cost benefit analysis?
LISTNUM 1 \l 1622 MR. CHURCH: You are right in the sense that we have had some learning, so we have incurred some of these costs and they are sunk. But I look around the room today and it clear to me that we are still incurring costing in terms of this regulation.
LISTNUM 1 \l 1623 I have to come back, right, to the fundamental question about this is a system, and after ten years, according to the CRTC's latest numbers, there are 350,000 loops on an unbundled basis across the whole country. I can't remember exactly how many of those are in territories where there is an incumbent cable company, but I know that Rogers has indicated that they will move their unbundled loops, their CallNet customers that they inherited off of those unbundled loops on to their network. So that number is likely to go down.
LISTNUM 1 \l 1624 In some sense there is very little benefits. You might argue that there is very little costs, but it is strikes me that the default here should be to say that mandated access is something that is exceptional.
LISTNUM 1 \l 1625 MR. ENGELHART: I said at the beginning I wasn't going to challenge your scepticism on the demand side. We were having a look at the cost side.
LISTNUM 1 \l 1626 MR. CHURCH: I want to say we have been going on for ten years, we have had costs. It is likely if you continue this, we will continue to have costs that are incurred. Why have those costs incurred without looking at what the benefits are, and our contention is that those benefits are not a substantial increase in competition, though they might well be, if you can make that case. We just don't think that that case has been made by the applicants.
LISTNUM 1 \l 1627 MR. ENGELHART: I would like to have a look now at the business market in Canada.
LISTNUM 1 \l 1628 THE CHAIRPERSON: Mr. Engelhart, how much longer are you going to be?
LISTNUM 1 \l 1629 MR. ENGELHART: Twenty minutes to half an hour.
LISTNUM 1 \l 1630 THE CHAIRPERSON: In that case, I suggest we take a 15‑minute break. Thank you very much.
‑‑‑ Recessed at 1025 / Suspension à 1025
‑‑‑ Resumed at 1047 / Reprise à 1047
LISTNUM 1 \l 1631 THE SECRETARY: Please be seated.
LISTNUM 1 \l 1632 And just note when we get copies of documents, any extras are going back at the distribution table. Thank you.
LISTNUM 1 \l 1633 THE CHAIRPERSON: Let us resume with you, Mr. Engelhart.
LISTNUM 1 \l 1634 I just would like to tell the witnesses, I know you feel very passionate about this subject but we really have a lot of territory to cover, so if you could just answer the question precisely and refrain from overtalk or flourishes or argument, it would be appreciated. Thank you.
LISTNUM 1 \l 1635 Mr. Engelhart.
LISTNUM 1 \l 1636 MR. ENGELHART: Thank you, Mr. Chair.
LISTNUM 1 \l 1637 So we are looking now at the Canadian business telecommunications market, and Mr. Dunbar has already reviewed your test with you and reviewed how it operates in practice, so I am just going to deal with those three tests as described in your opening statement.
LISTNUM 1 \l 1638 I want to deal first with the dominance requirement, which is your first test.
LISTNUM 1 \l 1639 Am I correct that you apply a but‑for test to determine dominance in the downstream market, that is, you consider whether the ILECs would be dominant but for the presence of competitors using mandated facilities?
LISTNUM 1 \l 1640 MR. HUGHES: It is a market power test but it does use that concept.
LISTNUM 1 \l 1641 MR. ENGLEHART: And could you have a look for me at paragraphs 66 and 67 of your March 15th, 2007 evidence.
LISTNUM 1 \l 1642 MR. ENGLEHART: Now, in paragraph 66, you state that:
"Entry by the cable companies is likely to be sufficient to control the market power of the ILECs in the residential market." (As read)
LISTNUM 1 \l 1643 But in paragraph 67, you state as follows:
"The Bureau recognizes that the current competitive situation in markets for business services is likely very different. The competitive significance of competing networks providing business services currently appears much less important than in residential markets, although this may change as cable companies expand into business markets or technologies develop that allow for the entry of new facilities base providers, e.g., fixed wireless networks." (As read)
LISTNUM 1 \l 1644 Now, as you discussed with Mr. Dunbar, you need a whole lot of data to do that analysis and you don't have the data to do it and you discussed with Mr. Dunbar the various steps that would be needed to do the analysis. We are not going to go through that analysis right now.
LISTNUM 1 \l 1645 So I wonder if you would make an assumption for me. If you assume that entry by cable companies and fixed wireless networks, as you referred to in this paragraph, and I suppose others such as municipal electric utilities, if you assume that the entry by those players would not be timely, likely and sufficient to restrain the ILECs' market power, would that lead you to conclude that the ILECs are dominant in the business telecommunications markets?
LISTNUM 1 \l 1646 MR. HUGHES: That would be a strong indication, certainly, as a first look.
LISTNUM 1 \l 1647 MR. ENGLEHART: Well, then let us have a look at the second part of your test, which is that mandating access will lead to competitive entry.
LISTNUM 1 \l 1648 Given that the CRTC has already mandated the facilities and given that they are used by Rogers, MTS Allstream and Primus, among others, are you of the view that the second element of your test has been satisfied?
LISTNUM 1 \l 1649 MR. CHURCH: Yes, the second element would be satisfied.
LISTNUM 1 \l 1650 MR. ENGELHART: Now let us have a look at the third part of your test, which is that entry would lead to a substantial increase in competition within a reasonable period of time, which, as has already been discussed this morning, replaces your original third test, which was that entry would be sufficient to lead to forbearance.
LISTNUM 1 \l 1651 As we have discussed, in the voice market the Cabinet has already deregulated the business markets in certain circumstances or perhaps in all circumstances simply because of the presence of unbundled facilities.
LISTNUM 1 \l 1652 Would you agree with me then that the federal government, the Cabinet, is of the view that entry using unbundled facilities is sufficient to lead to forbearance and that the federal Cabinet is of the view that entry using these unbundled facilities would be substantial within a reasonable period of time?
LISTNUM 1 \l 1653 MR. HUGHES: It is not clear to me that you can read that into that conclusion. They made a policy decision to have this occur, that is a policy decision and I can't comment on what the basis of it is.
LISTNUM 1 \l 1654 MR. ENGLEHART: If the entry by Rogers and MTS Allstream and Primus and others, using those essential facilities, is not sufficient to restrain the ILECs' market power in the business market, then the Cabinet has made a mistake, haven't they?
LISTNUM 1 \l 1655 MR. CHURCH: Yes.
LISTNUM 1 \l 1656 MR. ENGLEHART: Now, in your exchange with Commissioner ‑‑ in your discussion with Commissioner Cram, you talked about a couple of elements in which ‑‑ a couple of ways in which mandated access to facilities might actually increase the likelihood of facilities‑based or end‑to‑end competition.
LISTNUM 1 \l 1657 One way would be if that gave the new entrant or the competitor scale and another way would be if it gave the entrant the ability to satisfy the demands of customers who have a demand for one‑stop shopping for multiple locations.
LISTNUM 1 \l 1658 If the provision of mandated access to facilities increased the likelihood of end‑to‑end competition or accelerated the development of end‑to‑end competition, would you agree with me that the third part of your test would be satisfied?
LISTNUM 1 \l 1659 MR. CHURCH: Yes, but it is an awfully big if.
LISTNUM 1 \l 1660 MR. ENGLEHART: Those are my questions. Thank you very much.
LISTNUM 1 \l 1661 THE CHAIRPERSON: Commissioner Cram, you have a question?
LISTNUM 1 \l 1662 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1663 First, Dr. Hughes, I was remiss in calling you Mr. Hughes and I am sorry for that.
LISTNUM 1 \l 1664 I wanted to go back to the four reasons, four costs of mandating, and the first one being a reduction in investments in networks by competitors.
LISTNUM 1 \l 1665 I have to ask you what competitor in their right mind would totally work on a resale basis forever? Because the margins are small, the possibility of higher profits is caused by owning your own network.
LISTNUM 1 \l 1666 MR. HUGHES: Go ahead.
LISTNUM 1 \l 1667 MR. CHURCH: Yes, Commissioner Cram, I think it is a question of the margin of the balance between what components are your own and what components you lease from an incumbent and so it is a question of the margin about what the relative size of the network might be.
LISTNUM 1 \l 1668 And in anticipation of a question from Rogers on the ICM thing, we were able to locate on the weekend a study that has just come out in September of '07 where they look at the distinction between investment in your own facilities versus unbundled local loops in Europe.
LISTNUM 1 \l 1669 They point out that if you lower the price of the unbundled loops by 10 percent it leads to a reduction in investment by the competitors, the competitor cable companies in this context, of 18 percent. They substitute on the buy or lease margin. They move away from the buy margin to the lease margin.
LISTNUM 1 \l 1670 COMMISSIONER CRAM: Mm‑hmm.
LISTNUM 1 \l 1671 MR. CHURCH: The Bureau is quite happy to provide that study as an exhibit.
LISTNUM 1 \l 1672 COMMISSIONER CRAM: And are you aware of the Canadian statistics about investments by CLECs?
LISTNUM 1 \l 1673 MR. HARITON: Just generally.
LISTNUM 1 \l 1674 COMMISSIONER CRAM: And are you aware that in the early 2000 to 2002 there were fairly substantial investments by CLECs?
LISTNUM 1 \l 1675 MR. HARITON: Yes.
LISTNUM 1 \l 1676 COMMISSIONER CRAM: I can tell you what they were in 2002. They were $4.7 million. No, maybe I am wrong. I am sorry.
LISTNUM 1 \l 1677 MR. HARITON: I hope you have a few more zeros in there, Ms Cram.
LISTNUM 1 \l 1678 COMMISSIONER CRAM: Billion, yes.
LISTNUM 1 \l 1679 MR. HARITON: Thank you.
LISTNUM 1 \l 1680 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1681 MR. HARITON: There was a number of things that happened in the period ‑‑
LISTNUM 1 \l 1682 COMMISSIONER CRAM: No. Are you aware? That was the question.
LISTNUM 1 \l 1683 MR. HARITON: Yes, I am aware. I am aware of that.
LISTNUM 1 \l 1684 COMMISSIONER CRAM: And are you aware that a large majority of these individuals who built the facilities and spent a whole bunch of capital went under?
LISTNUM 1 \l 1685 MR. HARITON: Yes, indeed.
LISTNUM 1 \l 1686 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1687 THE CHAIRPERSON: Commissioner Noël.
LISTNUM 1 \l 1688 COMMISSIONER CRAM: Oh! I had more questions.
LISTNUM 1 \l 1689 THE CHAIRPERSON: Oh! I am sorry.
LISTNUM 1 \l 1690 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1691 I have one more question and you actually answered it, Dr. Church, that you ‑‑ no, maybe not ‑‑ that another cost of mandating is a reduction in investment by the ILECs.
LISTNUM 1 \l 1692 MR. CHURCH: Yes.
LISTNUM 1 \l 1693 COMMISSIONER CRAM: Do you have any data showing other jurisdictions?
LISTNUM 1 \l 1694 MR. CHURCH: I think that we refer in our evidence to some studies that were done on that, yes.
LISTNUM 1 \l 1695 COMMISSIONER CRAM: And would you expect given that the United States is largely deregulated that it would be happening there?
LISTNUM 1 \l 1696 MR. CHURCH: I think that is where our evidence is based, is on American studies.
LISTNUM 1 \l 1697 COMMISSIONER CRAM: Subject to check, the information provided us through the FCC is totally different.
LISTNUM 1 \l 1698 MR. CHURCH: The information I was referring to, Commissioner Cram, was found in our evidence at paragraphs 46‑47 and the cites are studied there.
LISTNUM 1 \l 1699 COMMISSIONER CRAM: And that is from FCC numbers?
LISTNUM 1 \l 1700 MR. CHURCH: No, no. I am sorry, they are academic studies that have been done.
LISTNUM 1 \l 1701 COMMISSIONER CRAM: Yes, okay.
LISTNUM 1 \l 1702 And in reality, have you looked at the FCC numbers?
LISTNUM 1 \l 1703 MR. CHURCH: I have not.
LISTNUM 1 \l 1704 MR. HARITON: We would be pleased to look at the numbers you have.
LISTNUM 1 \l 1705 COMMISSIONER CRAM: I have them.
LISTNUM 1 \l 1706 MR. HARITON: If you were to give us a reference, we would be pleased to look at them and give comments.
LISTNUM 1 \l 1707 COMMISSIONER CRAM: If you could, that would be great.
LISTNUM 1 \l 1708 MR. HARITON: That is fine. I assume I will get a reference from the secretary or somebody.
LISTNUM 1 \l 1709 THE CHAIRPERSON: Commissioner del Val.
LISTNUM 1 \l 1710 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 1711 I just want to clarify in your third branch of the test that such entry or expansion is likely to result in a substantial increase in competition. I would like to understand better how you would interpret "substantial."
LISTNUM 1 \l 1712 The reason I ask this is that I know that originally you talked about substantial lessening or prevention of competition, and then in your supplemental material, I believe it is paragraphs 24 and 25, you explained the subtle difference between ‑‑ and those were your words ‑‑ the test of substantially lessening or prevention of competition under the abuse of dominance provisions. Then you go on to say, in paragraph 25:
"This is not appropriate for determining whether the Commission should mandate access to facility ..." (As read)
LISTNUM 1 \l 1713 Instead, then you say that:
"The Bureau has proposed that access should only be mandated at regulated prices if it results in a significant increase in competition." (As read)
LISTNUM 1 \l 1714 Then throughout that document whenever you talk about increase in competition downstream you use "significant" rather than "substantial".
LISTNUM 1 \l 1715 So, one, I don't understand how you want "substantial" to be interpreted.
LISTNUM 1 \l 1716 Second, I don't know really whether the standard you are proposing is "substantial" but interpreted to mean "significant", or does "significant" mean what Rogers proposed as "non‑trivial"?
LISTNUM 1 \l 1717 Could you please clarify that?
LISTNUM 1 \l 1718 MR. HUGHES: Just one moment, please.
LISTNUM 1 \l 1719 MR. CHURCH: Yes. Thank you, Commissioner del Val.
LISTNUM 1 \l 1720 In the supplementary material I guess our perspective there had been that we were trying to be helpful to the Commission in terms of providing some guidance on what we meant by "significant", which was in our original third bullet, would be that the increase in competition, whether you call it "substantial" or "significant" I don't think really matters, because what we tried to do is, we tried to put a minimum threshold on that by saying that if it was enough that you could deregulate or forebear at retail, then you would know that you have a substantial amount of competition that was being created by that.
LISTNUM 1 \l 1721 We have since moved away from that because, as I indicated earlier, events have passed us by and that third bullet has now been changed and now we are back to a substantial lessening of competition. That substantial lessening of competition is the same as our substantial increase in competition.
LISTNUM 1 \l 1722 Substance is what we are talking about here and it is the same thing.
LISTNUM 1 \l 1723 The subtle difference that we indicated earlier was just to indicate kind of the "but for" and the conduct were very different under the Competition Act as opposed to under the Telecommunications Act.
LISTNUM 1 \l 1724 COMMISSIONER del VAL: So "substantial" is different from "significant". It is something of substance is what you are saying.
LISTNUM 1 \l 1725 Can you comment on Rogers proposal that "substantial" means not in a trivial manner?
LISTNUM 1 \l 1726 Is that the same standard?
LISTNUM 1 \l 1727 MR. CHURCH: By it's very nature the word "substantial" is going to involve a judgment call.
LISTNUM 1 \l 1728 The Competition Tribunal has had to make this judgment call and so we can look at the precedents from the Competition Tribunal to decide when either an abuse of dominance case when the particular behaviour at issue has led to a substantial lessening of competition.
LISTNUM 1 \l 1729 They don't have a necessary definition. I can't tell you what's necessary, but I can tell you in those precedents that they do have a "sufficient" definition, which is if a substantial lessening of competition, if the effect of the ‑‑ in these abuse cases, if the effect of the anti‑competitive practice was required to find dominance, then they had a sufficient amount of substantial lessening.
LISTNUM 1 \l 1730 So in the absence of the Act you weren't dominant and the Act makes you dominant, then they say that's enough. That is a sufficient condition for the substantial lessening. But we don't really know. You know, it's a judgment call about what is necessary and whether non‑trivial versus substantial. I don't know the answer to that. I mean, that would be a judgment call on the Commission's part.
LISTNUM 1 \l 1731 But we do have this information about a sufficient ‑‑ what is sufficient which would be sufficient for dominance.
LISTNUM 1 \l 1732 COMMISSIONER del VAL: Then do you see any practical difference ‑‑ do you see that there will be a facility that would have met the standard of being essential if we use the threshold of non‑trivial, but would no longer meet the criterion of being essential had we used the threshold of substantial?
LISTNUM 1 \l 1733 MR. CHURCH: Well, excuse me, I don't know what "non‑trivial" means. We know what "substantial" has meant because we have competition law and we know how to work with that. I'm less uncertain what "non‑trivial" means.
LISTNUM 1 \l 1734 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 1735 Thank you, Mr. Chairman.
LISTNUM 1 \l 1736 THE CHAIRPERSON: All right. Thank you very much.
LISTNUM 1 \l 1737 We will go on to the next. I gather TELUS is next.
LISTNUM 1 \l 1738 COMMISSIONER CRAM: Can I just say something?
LISTNUM 1 \l 1739 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1740 COMMISSIONER CRAM: For the record, I misread the monitoring report. The number is different in terms of expenditures by CLECs.
LISTNUM 1 \l 1741 MR. HARITON: Would you like us to still comment on the numbers that you have?
LISTNUM 1 \l 1742 COMMISSIONER CRAM: All I was talking about was a history of the fact that there was large investments and then ending in lesser competition.
LISTNUM 1 \l 1743 MR. HARITON: All right.
LISTNUM 1 \l 1744 COMMISSIONER CRAM: That's all. Thank you.
LISTNUM 1 \l 1745 MR. HARITON: Thank you.
LISTNUM 1 \l 1746 THE SECRETARY: I am now introducing the cross panel for TELUS, counsel Rogers, Schmidt and Mr. Lowe.
LISTNUM 1 \l 1747 I'm sorry, you forgot your name plate.
LISTNUM 1 \l 1748 MR. ROGERS: Phil Rogers, counsel for TELUS. I'm assisted today by Professor Denis Weisman.
LISTNUM 1 \l 1749 Just on a procedural point, in the last discussion that we were just listening to, there was reference to an LECG report in Europe which is 2007 that I think you felt was quite relevant. You offered to put it into the record and it was referred to a couple of times in your evidence. It seems to me that it forms part of the references that you were making. It would make sense to have it introduced as an exhibit.
LISTNUM 1 \l 1750 THE CHAIRPERSON: Does the Bureau want to introduce it into evidence? Please, do so.
LISTNUM 1 \l 1751 MR. HUGHES: We would be happy to do that.
LISTNUM 1 \l 1752 THE CHAIRPERSON: All right.
LISTNUM 1 \l 1753 Continue.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 1754 MR. ROGERS: Thank you, Mr. Chairman.
LISTNUM 1 \l 1755 Gentlemen, I would like to start by asking you to turn to the opening statement of the Commissioner. The version is the document that was revised yesterday I think. In particular, the revisions which appear in Appendix A to the document.
LISTNUM 1 \l 1756 You conveniently provided a marked up version and that is the version that I am looking at.
LISTNUM 1 \l 1757 Do you have that document?
LISTNUM 1 \l 1758 MR. HARITON: We do.
LISTNUM 1 \l 1759 MR. ROGERS: This is essentially the mark up by the Bureau of the Commission's six‑part framework which was set out in the Commission's letter of October 3rd.
LISTNUM 1 \l 1760 Correct?
LISTNUM 1 \l 1761 MR. HARITON: That's correct.
LISTNUM 1 \l 1762 MR. ROGERS: I would like to look at condition 4. You have marked it up at the end.
LISTNUM 1 \l 1763 If you go to the mark up at the end, essentially this establishes an end period for which such services ‑‑ these are conditional non‑essential services ‑‑ an end period for which those services would be mandated.
LISTNUM 1 \l 1764 It is governed by two factors or scenarios. One is fixed and the other is a conditional upon certain things happening.
LISTNUM 1 \l 1765 I would first of all like you to explain in your own words what those two factors are and then why you chose to add those as the terminating point for mandated access.
LISTNUM 1 \l 1766 MR. HARITON: Yes. The important thing from our point of view is that there be a hard stop. In other words, that the transition period for non‑essential, mandated non‑essential facilities come to a hard stop, and that should send a signal to everybody participating in the marketplace so that they can make appropriate plans and that will give them the appropriate incentives.
LISTNUM 1 \l 1767 The two aspects to that would be, first of all, the fact that there is this time period that will come to an end. That in itself is very helpful. But we also believe that along the way it may well be that conditions may have changed and you don't need those facilities any more.
LISTNUM 1 \l 1768 So that would be the second part of it.
LISTNUM 1 \l 1769 MR. ROGERS: By the second scenario you were just describing you were referring to people will make other arrangements. There will be investments made.
LISTNUM 1 \l 1770 MR. HARITON: That's correct.
LISTNUM 1 \l 1771 THE CHAIRPERSON: Could you explain that again?
LISTNUM 1 \l 1772 I'm sorry, I didn't catch your clarification, Mr. Rogers.
LISTNUM 1 \l 1773 MR. ROGERS: I was trying to make sure that I understood Mr. Hariton's last comment.
LISTNUM 1 \l 1774 If I have understood ‑‑ and he will correct me ‑‑ the first is a hard stop which is a period of time and the second is you wanted to also recognize that there can be changes over time in the form of investments or other commercial arrangements that would be made that obviate the need for the mandating.
LISTNUM 1 \l 1775 MR. HARITON: That's correct.
LISTNUM 1 \l 1776 THE CHAIRPERSON: So effectively shortening the period?
LISTNUM 1 \l 1777 MR. HARITON: Yes, the period could be shortened.
LISTNUM 1 \l 1778 MR. ROGERS: Just to be clear, Mr. Hariton and Members of the Panel, you have indicated that the termination comes at the sooner of the two?
LISTNUM 1 \l 1779 MR. HARITON: That's right.
LISTNUM 1 \l 1780 MR. ROGERS: Gentlemen, in your discussion with Rogers' counsel just a few minutes ago, there was a reference to the current unbundling rules and cable's entry into the residential markets. You indicated, if I recall your discussion with their counsel properly, that the current rules may not have decreased incentives for facilities‑based entry by cable.
LISTNUM 1 \l 1781 Is that ‑‑ we can go back. Of course, we don't have the transcript in front of us.
LISTNUM 1 \l 1782 MR. HARITON: Yes. I think the thing I was trying to stress was one of timing, that we did have ‑‑ we certainly have had entry by cable in 2005. Unbundled loops were mandated in 1996, so they weren't immediately available, they were available shortly after. So what we did see was that, in fact, there was a long delay.
LISTNUM 1 \l 1783 Now, what caused that long delay is still a speculation, but certainly the unbundling decision did not seem to help.
LISTNUM 1 \l 1784 MR. ROGERS: Well, that discussion, as I recall it, was whether or not it delayed or incented or disincented entry by cable, but what you weren't asked was whether or not the current mandated unbundling rules may have decreased the incentives for other entrants.
LISTNUM 1 \l 1785 MR. HARITON: Yes, and I think the ‑‑
LISTNUM 1 \l 1786 MR. ROGERS: I would like your response on that.
LISTNUM 1 \l 1787 MR. HARITON: Yes, the answer is I think there is a significant amount of evidence that the rules for mandated access have discouraged building out of facilities by other parties.
LISTNUM 1 \l 1788 We have that document in our evidence. At certain places, I see that there are other parties to this proceeding that have put evidence on the record that supports that view, as well.
LISTNUM 1 \l 1789 MR. ROGERS: Fine, thank you, Mr. Hariton.
LISTNUM 1 \l 1790 I would like you to turn now to paragraph 14 of the supplemental material filed by the Bureau. That's your July material.
LISTNUM 1 \l 1791 Do you have that?
LISTNUM 1 \l 1792 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 1793 MR. ROGERS: And that paragraph is a discussion of two possible errors that could be made, in terms of setting up a mandated access regulatory system.
LISTNUM 1 \l 1794 And these came up earlier. I think, Dr. Church, you were referring to them. These are the type 1 and type 2 errors. They are mandating something which is not essential or failing to mandate something which is. Those are the two types of errors.
LISTNUM 1 \l 1795 MR. CHURCH: Yes.
LISTNUM 1 \l 1796 MR. ROGERS: And after describing each of those errors, in paragraph 16, if you turn to that, in the third sentence, you indicate, the Bureau indicates:
"The costs of mandating access to facilities that are not essential appears to be higher than the costs of not mandating access to facilities that are." (As read)
LISTNUM 1 \l 1797 Do you see that statement?
LISTNUM 1 \l 1798 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 1799 MR. ROGERS: It's essentially a statement that, in your view, the costs of type 1 errors appear to be greater than the costs of type 2 errors?
LISTNUM 1 \l 1800 MR. CHURCH: Yes. Assuming your type 1 and type 2 are defined the way we have defined them there, yes.
LISTNUM 1 \l 1801 MR. ROGERS: Right.
LISTNUM 1 \l 1802 And then continuing on, in paragraph 16, just immediately following:
"On the basis of that assessment of the relative costs..."
‑‑ the Bureau concludes at paragraph 16 ‑‑
"...a restrictive definition of 'essential facilities'..."
‑‑ and in bracket ‑‑
"...(and accordingly a narrower access regime) is appropriate." (As read)
LISTNUM 1 \l 1803 MR. CHURCH: Yes.
LISTNUM 1 \l 1804 MR. ROGERS: Much of the Bureau's discussion in evidence that's been filed involves a consideration of the weighing of the costs and the benefits of various approaches to mandating access. Would you agree with that?
LISTNUM 1 \l 1805 MR. CHURCH: Yes.
LISTNUM 1 \l 1806 MR. ROGERS: In fact, I understand that your third criterion in both versions ‑‑ it's been revised, but the third criterion that you have proposed as part of your test is really a benefits test or a market effects test. Is that fair?
LISTNUM 1 \l 1807 MR. CHURCH: Yes.
LISTNUM 1 \l 1808 MR. ROGERS: Of course, originally, it was entry sufficient to warrant forbearance, but you have now changed it. I'm not going to get into that change, but you agreed with me earlier it was a benefits cost test. And it's still true. Even with the revised test that you have got, that's still a benefits test or a market effects test. Correct?
LISTNUM 1 \l 1809 MR. CHURCH: Yes, it is.
LISTNUM 1 \l 1810 MR. ROGERS: I would like you to consider a hypothetical scenario in which an input facility has, in fact, already been duplicated in a market by a major new entrant, but not yet widely.
LISTNUM 1 \l 1811 Would you say in that case that it's particularly important that the Commission very carefully weigh the costs and benefits before mandating access?
LISTNUM 1 \l 1812 The scenario is there has been some facilities‑based duplication in the market by a major new entrant, but not yet widely. I'm asking whether in the those circumstances is it particular important for the Commission to very carefully weigh the costs and the benefits?
LISTNUM 1 \l 1813 MR. CHURCH: Yes, I think that we need to be very careful about what we mean by "the market".
LISTNUM 1 \l 1814 MR. ROGERS: And just to understand why you say "yes", I think what you are alluding to is you are probably concerned about discouragement of further investment?
LISTNUM 1 \l 1815 MR. CHURCH: That's correct. In a well defined market, yes.
LISTNUM 1 \l 1816 MR. ROGERS: Let's talk about one market which, I think we would agree, is not characterized by little or no entry, facilities‑based entry, and that's the access facility to the residential market. I think we would be on fairly common ground that that's not a market that has been characterized by little or not entry.
LISTNUM 1 \l 1817 MR. CHURCH: That's correct.
LISTNUM 1 \l 1818 MR. ROGERS: In fact, there's been extensive duplication.
LISTNUM 1 \l 1819 Would you say that the business access market is one market where there is or has been duplication, but relative to the residential market it may be at an earlier stage?
LISTNUM 1 \l 1820 MR. CHURCH: I guess, you know, one of the things that the Bureau asked a number of interrogatories from various parties to this proceeding is to try and get a handle on how extensive, you know, duplication and investment in their own networks had been. You know, some of that information was supplied in confidence to the Commission ‑‑
LISTNUM 1 \l 1821 MR. ROGERS: Right, right.
LISTNUM 1 \l 1822 MR. CHURCH: ‑‑ some of it was not supplied. So, you know, there are some networks being built out there. TELUS said that they had a network ‑‑
LISTNUM 1 \l 1823 MR. ROGERS: Right.
LISTNUM 1 \l 1824 MR. CHURCH: ‑‑ so, you know, there has been some duplication.
LISTNUM 1 \l 1825 I note that in the most recent monitoring report, 41 percent of the business lines are now provided by owned loops ‑‑
LISTNUM 1 \l 1826 MR. ROGERS: Yes.
LISTNUM 1 \l 1827 MR. CHURCH: ‑‑ which is a substantial increase over the 27 percent in 2005. So there is some investment, obviously, going on in business markets.
LISTNUM 1 \l 1828 MR. ROGERS: Right, right.
LISTNUM 1 \l 1829 I guess where I'm going with this is I would like to explore with you, given that investment that has occurred or is occurring, what should that tell the Commission about its regulatory approach to any mandating in that market?
LISTNUM 1 \l 1830 In that regard, I would ask you to turn to your March 15 evidence and have a look at paragraph 71.
LISTNUM 1 \l 1831 Do you have that section, gentlemen?
LISTNUM 1 \l 1832 MR. CHURCH: Yes.
LISTNUM 1 \l 1833 MR. ROGERS: I'm looking in particular at small Roman number ii in that. The entire paragraph talks about business services, and it says:
"The Bureau observes the following..."
and in small Roman ii, it says:
"...a broad access regime in business markets may adversely affect the incentives for facilities‑based providers to enter business markets. Any regulatory framework that negatively impacts the incentives for entry of facilities‑based networks should be avoided." (As read)
LISTNUM 1 \l 1834 Now, that certainly lends a perspective to the kind of evidence that we were talking about earlier, where you acknowledged ‑‑ and others have ‑‑ that there is some duplication that is occurring, some investment in actual facilities in the business market.
LISTNUM 1 \l 1835 So I'm just suggesting to you that factual basis matches well the statement, the caveat or the caution that you are observing here in this piece.
LISTNUM 1 \l 1836 MR. CHURCH: Yes.
LISTNUM 1 \l 1837 MR. ROGERS: With that in mind, and when you refer to the kind of negative impacts in the quotes that I just read to you, I expect that some of you on the panel, certainly Mr. Hariton, would be aware of the criticisms of the Commission's past decisions in CDN and CDNA by certain parties, such as Vidéotron, in fact they referred to it in this proceeding. Those decisions by the Commission, in their view, adversely affected their own new‑entrant investments in facilities.
LISTNUM 1 \l 1838 Would that be an illustration, gentlemen, of the possible negative effects of a broad access regime on incentives to construct in the business community?
LISTNUM 1 \l 1839 MR. HARITON: That is right, Mr. Rogers, I had alluded to that very briefly. But Videotron has said in public several times that it had slowed down their facilities build. I also remember at the time of the second price cap hearing that GT Group Telecom said that if certain services were mandated their business would disappear. And indeed, I noticed that GT Group Telecom went into insolvency soon afterwards. So that seems to have had a huge impact on that market.
LISTNUM 1 \l 1840 MR. ROGERS: All right. Continuing with the issue of incentives, I would ask you to turn to your supplemental evidence at paragraph 8. I will give you a moment to turn that up.
LISTNUM 1 \l 1841 Do you have that?
LISTNUM 1 \l 1842 MR. CHURCH: Yes, we do.
LISTNUM 1 \l 1843 MR. ROGERS: And right at the end of that paragraph your discussion is essentially on the subject, service providers that control their own end‑to‑end networks have greater incentives for investment innovation and cost efficiency, presumably greater than those that rely on the ILECs network.
LISTNUM 1 \l 1844 And what I would ask you to do is when you look at that statement about service providers that control their own end‑to‑end networks have greater incentives, presumably that statement applies both to new entrants and to incumbents, correct?
LISTNUM 1 \l 1845 MR. CHURCH: Yes, it does.
LISTNUM 1 \l 1846 MR. ROGERS: And more broadly speaking, apart from that division of the market, it applies for innovation and efficiencies in any of the telecom markets, whether it be residential local or business local or business high speed, the statement would apply with respect to all those markets?
LISTNUM 1 \l 1847 MR. CHURCH: Yes it would, because when you have mandated access then there is going to be some sharing of facilities at some level and that is going to restrict what firms are able to do.
LISTNUM 1 \l 1848 MR. ROGERS: Right.
LISTNUM 1 \l 1849 MR. CHURCH: And they will have a common cost factor as well.
LISTNUM 1 \l 1850 MR. ROGERS: And we have a table full of economists here, so I will draw on that. When you say efficiencies and innovation you are thinking both in terms, I think, of static efficiency gains as well as dynamic efficiencies?
LISTNUM 1 \l 1851 MR. CHURCH: Yes.
LISTNUM 1 \l 1852 MR. ROGERS: And the dynamic efficiencies would be, if I understand them correctly, the motivation to not just invest in the same old thing, but to invest in something which does something more or better or is enhanced, that is the innovative side, it is a structural change that occurs in the marketplace as a result of something new, a new way of doing things?
LISTNUM 1 \l 1853 MR. CHURCH: Yes. I think the famous quote from Schumpeter is it doesn't matter how many locomotives you put end to end, you don't get an airplane.
LISTNUM 1 \l 1854 MR. ROGERS: All right. Are you a Schumpeterian?
LISTNUM 1 \l 1855 MR. CHURCH: I have been known to dabble.
LISTNUM 1 \l 1856 MR. ROGERS: Okay. It is not a religious question.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1857 MR. ROGERS: All right, that is fine.
LISTNUM 1 \l 1858 Another discussion in your evidence that I would like you to draw your attention to and that is paragraph 79 of your March 15 evidence. I will give you a moment to turn that up.
LISTNUM 1 \l 1859 Do you have that?
LISTNUM 1 \l 1860 MR. HARITON: Yes I do, Mr. Rogers.
LISTNUM 1 \l 1861 MR. ROGERS: And that, just to put it into context, paragraph 79 and the paragraphs immediately precede it and follow it, is in the context of the discussion of pricing. And I don't want to talk to you about pricing now, but the language that is used in this paragraph that begins with the word "four" does deal with incentives and I will just focus on those words.
"A mark‑up that is too low may not provide sufficient incentives to the incumbents to innovate and invest in the wholesale facilities in question." (As Read)
And you go on from there.
LISTNUM 1 \l 1862 So I take that that is further confirmation of the statements that you made just a few minutes ago, that the incentives and dynamics that we are talking about in terms of investment and innovation apply equally to the incumbents?
LISTNUM 1 \l 1863 MR. HARITON: That is correct.
LISTNUM 1 \l 1864 MR. ROGERS: Gentlemen, there are those in this proceeding who would argue that the incentives for efficiency and innovation don't apply to the incumbent local access networks. Their view is it is all paid for, this is the argument, that the wires are in the ground, there can't possibly be any impact on the incentives and investments and innovation of the incumbents.
LISTNUM 1 \l 1865 Does that square with the kind of dialogue that we have just been having form your own testimony?
LISTNUM 1 \l 1866 MR. HARITON: Well, I don't agree, Mr. Rogers, that the wires are all in the ground. I know that there is a construction program each year. I don't know how big it is right now. At a minimum, there is green fields where you have to build out new wires and new facilities into new developments. There is replacement, because that is always happening to you. And, as I said, there is upgrading of the network. Some say that there is no technical or no innovation in the loops and so on. I disagree. I think we have seen quite a number of innovations over the last number of years and I expect that to continue.
LISTNUM 1 \l 1867 MR. ROGERS: So the Schumpeterian effect that we were talking about applies just as much for incumbents?
LISTNUM 1 \l 1868 MR. HARITON: Oh yes.
LISTNUM 1 \l 1869 MR. ROGERS: Fine. I would like to talk very quickly with you about transition period, because whatever definitions we end up deciding on, and including looking at the framework, the six‑part framework which was advanced in the Commission's analysis, it all includes or at least assumes that there is some sort of transition. So we should spend a minute or two discussing what that should be and what its effects are.
LISTNUM 1 \l 1870 As I understand the Bureau's evidence, the Bureau takes no specific position on the appropriate length of a transition period, is that correct?
LISTNUM 1 \l 1871 MR. HARITON: That is correct.
LISTNUM 1 \l 1872 MR. ROGERS: But you are not opposed to having a transition period?
LISTNUM 1 \l 1873 MR. HARITON: No, we recommend a transition period for the reasons we have discussed earlier.
LISTNUM 1 \l 1874 MR. ROGERS: Right. You would be aware that the proposals in this proceeding range from one year to five years and, in certain specific cases, no transition period at all because there is nothing to transition to? You are aware of that kind of range?
LISTNUM 1 \l 1875 MR. HARITON: Yes, I am aware of that.
LISTNUM 1 \l 1876 MR. ROGERS: If the Commission adopts a definition of essential facilities that is based on sound competition law principles, the kind that you are advocating, the current scope of mandated access will be, and I am using your words from paragraph 9 of your evidence, circumscribed considerably.
LISTNUM 1 \l 1877 MR. HARITON: If you could give me a chance to turn to that?
LISTNUM 1 \l 1878 MR. ROGERS: Sure, paragraph 9 of your supplementary evidence. You used the words "circumscribed considerably." It also appears in your March 15 evidence at paragraph 20.
LISTNUM 1 \l 1879 MR. HARITON: Yes.
LISTNUM 1 \l 1880 MR. ROGERS: So you are saying that the outcome of the proceeding, whatever it may be in precise details, the current mandating will be circumscribed considerably. If that in fact is the outcome of the proceeding, there will likely be some who would argue that there will be adverse effects on certain new entrants in some markets.
LISTNUM 1 \l 1881 Would the Bureau consider a transition period as one means of responding to such concerns? In other words, sound competition law principles should determine the definition of essential facilities and then we can help to deal with the impact and mitigate the impact of the result by establishing a reasonable transition period for all participants.
LISTNUM 1 \l 1882 MR. HARITON: Yes, that is right. I won't elaborate, it is in our evidence and you have said it fairly well.
LISTNUM 1 \l 1883 MR. ROGERS: Right. And when we talk about affecting all participants in the market, would you agree that every participant would be, at least to some extent, affected, including the incumbents, since all are purchasers of facilities in one region or another?
LISTNUM 1 \l 1884 MR. HARITON: Yes, this is a very interdependent industry, Mr. Rogers.
LISTNUM 1 \l 1885 MR. ROGERS: Do you have any views as to whether the length of the transition period should be the same for all types of facilities?
LISTNUM 1 \l 1886 MR. HARITON: I believe we have said that it should not. You should distinguish facilities. Clearly, it is quite a different situation if what you are talking about is changing a piece of software, than it is if you have to build certain structures or so on.
LISTNUM 1 \l 1887 MR. ROGERS: So that suggests that where you are talking about physical network structures, perhaps access, it might be a little longer?
LISTNUM 1 \l 1888 MR. HARITON: That is right. I mean, I would distinguish where you actually have to build outside plant ‑‑
LISTNUM 1 \l 1889 MR. ROGERS: Right.
LISTNUM 1 \l 1890 MR. HARITON: ‑‑ where you would have perhaps to change out transmission or other central office equipment and where you have to change software systems or things like that.
LISTNUM 1 \l 1891 Sorry, I don't want to downplay the difficulty of changing software, but the problems are of a different magnitude.
LISTNUM 1 \l 1892 MR. ROGERS: Switching topics now, Professor Church, you're from Alberta, I believe. When the Commission developed the concept ‑‑ I am just going to jump ahead here.
LISTNUM 1 \l 1893 Being from Alberta, you would be at least broadly familiar, I think, with the SuperNet in Alberta in general terms?
LISTNUM 1 \l 1894 MR. CHURCH: Yes.
LISTNUM 1 \l 1895 MR. ROGERS: And you have looked at it, at least in some respects, in fact I believe you testified before the Parliamentary committee, the Standing Committee on Industry, Science and Technology on February the 27th, and while you talked about many things, there was at least a passing reference somewhere in there to SuperNet. I am not going to go into any of your details, but I just want to introduce my topic with regard to SuperNet.
LISTNUM 1 \l 1896 Is it true that that is a network which extends broadband service into rural regions of Alberta?
LISTNUM 1 \l 1897 MR. CHURCH: Yes, my understanding is that the government contracted with Bell to provide broadband access to most provincial governments in most small towns in Alberta.
LISTNUM 1 \l 1898 MR. ROGERS: From your observation of the SuperNet, have you seen any signs of a policy or a practice by SuperNet to discriminate in granting access to new entrants? I am thinking of ISPs or CLECs or something.
LISTNUM 1 \l 1899 MR. CHURCH: I have no knowledge one way or the other of that.
LISTNUM 1 \l 1900 MR. ROGERS: I thought one of the things that it was intended to do was to allow remote and rural ISPs and others to have a broadband access link out of a rural community?
LISTNUM 1 \l 1901 MR. CHURCH: I think what I am comfortable saying is that I think that has happened. Whether there are complaints about discrimination between some carriers and others, I don't know.
LISTNUM 1 \l 1902 MR. ROGERS: I will go back to the concept of ‑‑ I would like to return to the Commission's original concepts of essentiality. This is the decision 97‑8. We don't actually need to turn up the decision because I think I am going to speak in very general terms about it.
LISTNUM 1 \l 1903 When the Commission developed the concept of near‑essential facilities, that was part of that decision, near‑essential as opposed to purely‑essential. It originally developed a sunset provision, five years. Do you recall that? Certainly Mr. Hariton, I think, you would recall that.
LISTNUM 1 \l 1904 MR. HARITON: Yes, I do.
LISTNUM 1 \l 1905 MR. ROGERS: That period was made indefinite. Right?
LISTNUM 1 \l 1906 MR. HARITON: Yes. I believe that was in 2001.
LISTNUM 1 \l 1907 MR. ROGERS: Right. When the Commission considers the issue of a transition period in this proceeding, is it important, in your view, that the Commission send a clear signal that it does not intend to extend the transition period? In other words, if it says it is going to be three years, then people should understand that it is a firm three years.
LISTNUM 1 \l 1908 MR. HARITON: Yes, as far as we are concerned, the fact that it is a firm stop is more important than the actual length of the period.
LISTNUM 1 \l 1909 MR. ROGERS: I would like now to turn to a discussion of market power, which is a major subject in the submissions of many parties in this proceeding. I would like to refer you to paragraph 30 of the Bureau's supplementary material.
LISTNUM 1 \l 1910 Do you have that, gentlemen?
LISTNUM 1 \l 1911 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 1912 MR. ROGERS: The paragraphs around here, including that paragraph, discuss the difference between dominance upstream and monopoly upstream. You will recall, it came up in your discussions earlier this morning, that TELUS has proposed monopoly control as one of its criteria.
LISTNUM 1 \l 1913 I would like to draw your attention to paragraph 30, the first sentence, in which the Bureau is commenting on this. The sentence reads:
"Requiring monopoly rather than dominance may in fact not be overly different in substantive terms." (As read)
LISTNUM 1 \l 1914 MR. CHURCH: I see that.
LISTNUM 1 \l 1915 MR. ROGERS: I am wondering if you could explain ‑‑ this is clearly a comment on the difference between monopoly and dominance. You are saying in practice, as I read it, it may not be that different. Can you explain?
LISTNUM 1 \l 1916 MR. CHURCH: I see. Well, I guess, you know, when we wrote this we were a bit uncertain about what TELUS meant by monopoly. The jurisprudence, I think ‑‑ I am not a lawyer and not a legal expert, but I have some anti‑trust background ‑‑ would suggest that the courts in the United States, using anti‑trust market definition principles to define the market, typically don't recall 100 per cent market share defined in a section 2 violation of the Sherman Act, defined monopolization.
LISTNUM 1 \l 1917 In fact, our concept of dominance in Canada and the American jurisprudence concept of monopoly in broad section 2 cases are very similar. That is the point here.
LISTNUM 1 \l 1918 But it has never been clear to us how TELUS uses the term "monopoly" and how TELUS would identify what a monopolist was. Our only point here was to say that perhaps the difference between monopoly and dominance was not so broad if what TELUS meant was a monopoly according to section 2 under the Sherman Act in the United States.
LISTNUM 1 \l 1919 MR. ROGERS: The Bureau in its criteria, its three criteria, explains or at least clarifies its first criterion by stating that a necessary condition for dominance in the upstream market is that it is not feasible for the competitors to duplicate the facility. Correct?
LISTNUM 1 \l 1920 MR. CHURCH: That is correct.
LISTNUM 1 \l 1921 MR. ROGERS: So, if there is evidence of actual duplication or likely duplication of the facility in the upstream market, then is it fair to say the first criterion of the Bureau's test fails?
LISTNUM 1 \l 1922 MR. CHURCH: I am sorry, could you repeat that?
LISTNUM 1 \l 1923 MR. ROGERS: Yes. My question was if there is evidence of actual duplication by a reasonable competitor or likely duplication of the facility in the upstream market, then the first criterion fails?
LISTNUM 1 \l 1924 MR. CHURCH: Again, it is very clear that when you say "actual duplication" you mean the exact same facility.
LISTNUM 1 \l 1925 MR. ROGERS: I would qualify that by saying that facility or a facility which provides the same functionality for use in the downstream market.
LISTNUM 1 \l 1926 MR. CHURCH: I guess if we are going to start talking ‑‑ see, this is the reason for my clarifying question. Then we are starting to talk about some differential inputs, right, but they may not be identical inputs. They may be differentiated. So then we talk about market definition upstream, so if you had duplication of inputs which may be similar but they are not identical, then the question becomes do they actually constrain the market power; do we have dominance upstream or not?
LISTNUM 1 \l 1927 MR. ROGERS: Why don't we make it simpler by assuming we are talking about exactly the same facility.
LISTNUM 1 \l 1928 MR. CHURCH: If we are talking about exactly the same facility and the market has been clearly defined, then the Bureau's position would be that you would not have dominance upstream in a well‑defined anti‑trust market, both product and geographic dimensions.
LISTNUM 1 \l 1929 MR. ROGERS: In order to reach that conclusion, you only need, as I understand it, one other supplier that has gone into the market and reproduced or duplicated that facility. One is sufficient?
LISTNUM 1 \l 1930 MR. CHURCH: One is likely sufficient in most cases, but, again, I would caution that it is very important that we are using anti‑trust market definition principles on the geographic and the product side to come to that conclusion.
LISTNUM 1 \l 1931 MR. ROGERS: Right. But there is no a priori reason for you to say that you require two or three or four entrants before the test fails?
LISTNUM 1 \l 1932 MR. CHURCH: No. I mean, for lots of reasons, the Bureau in the local forbearance proceeding put forward the proposition that in these instances, in these markets, what is important is if someone tried to raise prices could consumers easily switch to the facilities of the other firm, in which case if you have two people with the exact same facilities, the proper market share analysis, they each had 50 per cent market share, it is unlikely that in those circumstances you are going to have a dominant firm.
LISTNUM 1 \l 1933 MR. ROGERS: In the paragraph that immediately follows this one that we are looking at, paragraph 31, you again go on to discuss, this is your analysis of the TELUS monopoly control test. In the sentence at the end, there are some qualifying words I would like you to look at.
LISTNUM 1 \l 1934 The sentence at the end reads:
"This possibility is precluded under the TELUS definition and, to the extent it is empirically relevant, is problematic." (As read)
LISTNUM 1 \l 1935 I understand you are saying it is problematic. You have just explained that. But I am wondering what you mean by this qualifying phrase "to the extent it the empirically relevant." Does that mean that in actual practice there may not be that much difference?
LISTNUM 1 \l 1936 MR. CHURCH: Yes, the definition that we are talking about at the end of that sentence is the definition that begins at the beginning of the paragraph where it says:
"If instead TELUS means that monopoly or control requires 100 market share on the input market, this definition is too restrictive." (As read)
LISTNUM 1 \l 1937 That is what we mean by that definition.
LISTNUM 1 \l 1938 The distinction here that is being drawn in this paragraph in 31 is between the Bureau's weak and strong standards of duplicability. It is an open question, I guess, about which one of those standards we would be opting for at the beginning of the hearing.
LISTNUM 1 \l 1939 I think, you know, the Bureau has some views on this at the end of the hearing, where we have reached the stage now in a discussion of proxy versus ex‑post approach.
LISTNUM 1 \l 1940 One of the things that we tried to figure out is whether this in fact would matter empirically. We don't have that evidence. That evidence would come forth in an analysis of the data which was supplied to the Commission by the parties.
LISTNUM 1 \l 1941 THE CHAIRPERSON: Mr. Rogers, I think the panel would find it helpful to follow this discussion if you would give us the answer to what Dr. Church asked: Does TELUS talk monopoly in terms of the Sherman Act or does it talk about 100 per cent?
LISTNUM 1 \l 1942 MR. ROGERS: Mr. Chairman, we filed our evidence, and our witnesses will be coming soon to explain that in great detail.
LISTNUM 1 \l 1943 THE CHAIRPERSON: I am sure they will, but presumably you were involved in filing the evidence. If you can help us at this point in giving us a short answer.
LISTNUM 1 \l 1944 MR. ROGERS: I think what I have heard is sufficient for my purposes to understand the first sentence of paragraph 30. I think Dr. Church has done a good job on that and I am prepared to move on.
LISTNUM 1 \l 1945 THE CHAIRPERSON: I take it you are not willing to answer my question?
LISTNUM 1 \l 1946 MR. ROGERS: I prefer to let our witnesses speak to that, Mr. Chairman.
LISTNUM 1 \l 1947 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1948 MR. ROGERS: Gentlemen, when you consider the issue of market power, which has been considered throughout this proceeding by many parties, would you agree that an assessment of whether or not an input is monopoly controlled is at least a relevant part of assessing market power? Is it one aspect of the test?
LISTNUM 1 \l 1949 MR. CHURCH: I am sorry, which market are we assessing market power in?
LISTNUM 1 \l 1950 MR. ROGERS: Let's look at the upstream market. The question was: Is an assessment of whether or not an input is monopoly controlled, is that a relevant part of an analysis of market power?
LISTNUM 1 \l 1951 MR. CHURCH: I am sorry, I am having a hard time understanding the question.
LISTNUM 1 \l 1952 MR. ROGERS: Well, let me put it to you this way.
LISTNUM 1 \l 1953 You have done a lot of competition law analysis?
LISTNUM 1 \l 1954 MR. CHURCH: I have.
LISTNUM 1 \l 1955 MR. ROGERS: And competition economics. Market power is a broad term. It means a lot of things in different circumstances. There are many ways of analyzing that.
LISTNUM 1 \l 1956 I would have thought that if you are looking at monopoly control, that is at least one step towards the broader analysis that you would call an analysis of market power.
LISTNUM 1 \l 1957 MR. CHURCH: This is a basic problem that I think the Bureau has with the TELUS evidence is that when you say monopoly controlled, I don't know what you mean by monopoly. For me to figure out what a monopoly is, I have to define the market and then go and look and see if there is significant market power in that market.
LISTNUM 1 \l 1958 You can't say monopoly controlled tells me something about market power because in the way the competition policy is usually done, that is circular.
LISTNUM 1 \l 1959 MR. ROGERS: In continuing this analysis of monopoly power, the distinction from monopoly is there is no monopoly. So, if you have one other supplier that is supplying the relevant facility into the relevant market, that is also part of an analysis of the market power, isn't it?
LISTNUM 1 \l 1960 MR. CHURCH: I think maybe the way to answer this is to say that monopoly depends on market definition. Market definition depends on what you include in the market and what you exclude from the market.
LISTNUM 1 \l 1961 The second point to note is that in anti‑trust circles, monopoly does not mean 100 per cent market share of a well‑defined anti‑trust market.
LISTNUM 1 \l 1962 MR. ROGERS: Gentlemen, I would like you to turn to paragraphs 48 and 49 of your supplemental evidence. In those paragraphs you discuss the analysis required to identify whether duplication is practicable or feasible. In those paragraphs, paragraph 49, you describe the analysis as fact intensive. Correct?
LISTNUM 1 \l 1963 MR. CHURCH: Yes.
LISTNUM 1 \l 1964 MR. ROGERS: In paragraphs further down below, 53 and 54, you describe the type of information that the Bureau would require to do such an analysis.
LISTNUM 1 \l 1965 Then in paragraph 55, which I would ask you to turn to, the Bureau makes the following statement:
"Without access to this information requested in the interrogatory process, the Bureau is not in a position to determine if the development of ex ante proxy rules that are relatively accurate is possible for business markets in Canada." (As read)
LISTNUM 1 \l 1966 You see that statement?
LISTNUM 1 \l 1967 MR. CHURCH: Yes.
LISTNUM 1 \l 1968 MR. ROGERS: Given that the Bureau, at least at this point, is not in a position to say if it is even possible to develop ex ante proxy rules, if it were possible to, assume it is possible or would be possible, they would have to be based on market conditions in Canada, wouldn't they?
LISTNUM 1 \l 1969 MR. CHURCH: Yes.
LISTNUM 1 \l 1970 MR. ROGERS: You would not condone simply importing proxy rules from another jurisdiction?
LISTNUM 1 \l 1971 MR. CHURCH: We would suggest that proxy rules that are appropriate for Canada should be based on regularities observable in Canada.
LISTNUM 1 \l 1972 MR. ROGERS: Given the lack of information that you require, there are some exceptions noted in paragraph 57 as to what you are prepared to endorse, but is it fair to say that the Bureau is not in a position at this time to approve any specific set of ex ante proxy rules?
LISTNUM 1 \l 1973 MR. CHURCH: The only exception to that would be I guess in 57, not proxy rules, those facilities we would be prepared to endorse, but no specific proxy rule.
LISTNUM 1 \l 1974 MR. ROGERS: Right. Apart from the 57 ones which are things like support structures, leaving those aside, you are not in a position to endorse any specific proxy rule set today?
LISTNUM 1 \l 1975 MR. CHURCH: That is correct.
LISTNUM 1 \l 1976 MR. ROGERS: Given that you can't propose any specific proxy rule set today, I take it it logically follows that you couldn't a priori say that a specific set of proxy rules should entail or should include a requirement for three or four independent suppliers?
LISTNUM 1 \l 1977 MR. CHURCH: Yes, that is correct.
LISTNUM 1 \l 1978 MR. ROGERS: Continuing with the discussion of duplicability, we have an exhibit from the Cogeco submission which has been provided here. Copies will be given to you.
LISTNUM 1 \l 1979 I should mention, Mr. Chairman, that we have also provided copies at the back of the room for those generally in attendance.
LISTNUM 1 \l 1980 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1981 MR. ROGERS: The paragraph that I will draw your attention to is paragraph 61 of that evidence, Cogeco's evidence. As a preliminary point, would you agree with me that in regard to telecom services, Cogeco is a new entrant. Mr. Hariton?
LISTNUM 1 \l 1982 MR. HARITON: That is correct.
LISTNUM 1 \l 1983 MR. ROGERS: Cogeco is discussing in paragraph 61 an indicator of whether or not a facility can be duplicated and, thus, non‑essential.
LISTNUM 1 \l 1984 Cogeco suggests in that paragraph that:
"If a facilities‑based functional alternative exists in one geographic market, then in similar exchanges...
And I emphasize the word "similar,"
"...elsewhere, the Commission should conclude that the input can be economically or technically duplicated." (As read)
LISTNUM 1 \l 1985 Do you see that statement by Cogeco?
LISTNUM 1 \l 1986 MR. HARITON: Yes, I do. I stress with you the word "similar."
LISTNUM 1 \l 1987 MR. ROGERS: I am not going to ask you to endorse every word but do you think that the analytical approach being suggested by Cogeco is a useful way of looking at the question of duplicability?
LISTNUM 1 \l 1988 MR. HUGHES: Could we have a moment, please?
LISTNUM 1 \l 1989 MR. ROGERS: Sure.
LISTNUM 1 \l 1990 MR. HUGHES: One point of clarification. It says "exchanges" and it is not clear to us that these are necessarily relevant geographic markets. So that would be a qualifier there.
LISTNUM 1 \l 1991 MR. CHURCH: So if the markets were defined similarly and had similar characteristics, then you might be able to construct a proxy rule for duplicability based on looking at entry in one versus the other. But the economic conditions, both the cost and demand, across exchanges might vary substantially and so entry in one exchange may not tell you anything about the prospects for entry in a second exchange.
LISTNUM 1 \l 1992 MR. ROGERS: But directionally, what I think you are saying is that if you get the markets properly defined in terms of geography and other economic characteristics, it is possible then to learn something about entry that has occurred in one in terms of the prospects for entry in another similar geographic market?
LISTNUM 1 \l 1993 MR. CHURCH: Yes.
LISTNUM 1 \l 1994 MR. HARITON: Yes, sir.
LISTNUM 1 \l 1995 MR. CHURCH: In fact, if we just tie that back to our discussion earlier that we had this morning, I guess in some sense that is how the Bureau sees the administrative process of dealing with this administrative cost narrowing, is that as the Commission does these through time they will learn about what the relevant factors are in given geographic areas and be able to come up with the kind of proxy rules that you are suggesting.
LISTNUM 1 \l 1996 MR. ROGERS: Right. Well, I am not actually suggesting proxy rules but I am looking at ‑‑
LISTNUM 1 \l 1997 MR. CHURCH: It is a form.
LISTNUM 1 \l 1998 MR. ROGERS: I am looking at efficiencies in terms of getting the right answer and what I think you are suggesting is that you can learn something about similar geographic markets, markets properly defined, in terms of the prospects for entry by the similar technology?
LISTNUM 1 \l 1999 MR. CHURCH: Yes.
LISTNUM 1 \l 11000 MR. ROGERS: Yes, okay.
LISTNUM 1 \l 11001 THE CHAIRPERSON: I presume all these markets are in Canada, are they?
LISTNUM 1 \l 11002 MR. ROGERS: Yes.
LISTNUM 1 \l 11003 THE CHAIRPERSON: Cogeco's submission doesn't say in Canada but I assume that we can presume that is what they are talking about?
LISTNUM 1 \l 11004 MR. ROGERS: Well, I certainly read it that way and I suppose we could ask them when they get here.
LISTNUM 1 \l 11005 I would like to finish up by asking you, gentlemen, about the famous stepping stones, a phrase that I know all of you are very familiar with.
LISTNUM 1 \l 11006 You will be certainly familiar, I know you have all looked at the TPR report, some of you more than others, and that report, of course, discussed the current wholesale regime and the stepping stone theory.
LISTNUM 1 \l 11007 You may not have to go to the TPR report ‑‑ you may have a copy with you ‑‑ I don't plan to refer to it extensively other than to read one quote from the TPR report and I know it is a quote which many of you have read probably many times.
LISTNUM 1 \l 11008 It is from page 3‑35 of the TPR final report and it is just a couple of lines. It says:
"There is no evidence in Canada that the CRTC's stepping stone strategy has provided effective transition to greater reliance by entrants on their own facilities. There is, on the other hand, reason to believe these policies have distorted the behaviour and incentives of new entrants in Canadian telecommunications markets." (As read)
LISTNUM 1 \l 11009 You will certainly recall that statement.
LISTNUM 1 \l 11010 MR. HARITON: I recall it distinctly.
LISTNUM 1 \l 11011 MR. ROGERS: In paragraphs 19 and 20 of the Bureau's March 15 evidence ‑‑ you may want to turn to that.
LISTNUM 1 \l 11012 MR. HARITON: I see that, Mr. Rogers.
LISTNUM 1 \l 11013 MR. ROGERS: There is in that section an assessment of the current wholesale regime and the Bureau concludes ‑‑ this is in paragraph 20:
"In the Bureau's view, the current wholesale access regime is not conducive to achieving the objective of facilities‑based competition." (As read)
LISTNUM 1 \l 11014 And finally, at paragraph 84, near the conclusion of your text, the very last sentence of that paragraph talks about the current regime. Again, it is an assessment by the Bureau and it says, in effect, that regime has not been a stepping stone in the creation of new networks.
LISTNUM 1 \l 11015 I would like to ask you, gentlemen, is there anything since the release of the TPR final report or the filing of the Bureau's evidence in March or supplementary evidence in July that persuades you that the stepping stone theory is in fact working to achieve the objective of facilities‑based competition?
LISTNUM 1 \l 11016 MR. HARITON: No, Mr. Rogers.
LISTNUM 1 \l 11017 MR. ROGERS: You are aware, no doubt, that in this proceeding we have opening statements from a number of parties. One that comes to mind immediately is Primus and their statement says ‑‑ on page 2, it expressly says:
"The stepping stone approach is working with regard to network facilities." (As read)
LISTNUM 1 \l 11018 I take it that from everything you have said ‑‑
LISTNUM 1 \l 11019 MR. HUGHES: Could we have a moment?
LISTNUM 1 \l 11020 MR. ROGERS: Sure, you can have a look at it.
LISTNUM 1 \l 11021 MR. HUGHES: Where is it?
LISTNUM 1 \l 11022 MR. ROGERS: The Primus opening statement ‑‑
LISTNUM 1 \l 11023 MR. HUGHES: Yes, I have that.
LISTNUM 1 \l 11024 MR. ROGERS: ‑‑ at page 2 ‑‑
LISTNUM 1 \l 11025 MR. HUGHES: Yes.
LISTNUM 1 \l 11026 MR. ROGERS: ‑‑ at the bottom.
LISTNUM 1 \l 11027 MR. HUGHES: At the bottom.
LISTNUM 1 \l 11028 MR. ROGERS: Third bullet up.
LISTNUM 1 \l 11029 MR. HUGHES: Yes, I have it now, thank you.
LISTNUM 1 \l 11030 MR. ROGERS: And it says:
"The stepping stone approach is working with regard to network facilities." (As read)
LISTNUM 1 \l 11031 And I just draw it to your attention by way of contrast with the statements you just made and I think you indicated that there is no evidence that you see since TPR or since your filing of your own evidence that persuades you that the stepping stone theory is working.
LISTNUM 1 \l 11032 MR. HARITON: I have not seen such evidence. The major event since the TPR was written ‑‑ not issued but written ‑‑ was the entry of the cable companies and the cable companies, as I understand it, came in through their own facilities, they did not gradually build up through use of other facilities.
LISTNUM 1 \l 11033 MR. ROGER