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Providing Content in Canada's Official Languages

Please note that the Official Languages Act requires that government publications be available in both official languages.

In order to meet some of the requirements under this Act, the Commission's transcripts will therefore be bilingual as to their covers, the listing of CRTC members and staff attending the hearings, and the table of contents.

However, the aforementioned publication is the recorded verbatim transcript and, as such, is transcribed in either of the official languages, depending on the language spoken by the participant at the hearing.

 

 

 

 

 

 

 

              TRANSCRIPT OF PROCEEDINGS BEFORE

             THE CANADIAN RADIO‑TELEVISION AND

               TELECOMMUNICATIONS COMMISSION

 

 

 

 

             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 10, 2007                      Le 10 octobre 2007

 


 

 

 

 

Transcripts

 

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

Contents.

 

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.

 

 

 

 

Transcription

 

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

               Telecommunications Commission

 

            Conseil de la radiodiffusion et des

               télécommunications canadiennes

 

 

                 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 10, 2007                  Le 10 octobre 2007

 


- iv -

 

           TABLE DES MATIÈRES / TABLE OF CONTENTS

 

 

                                                 PAGE / PARA

 

RESUMED:  GEORGE HARITON                          321 / 2189

RESUMED:  PATRICK HUGHES

RESUMED:  JEFFREY CHURCH

 

Cross-examination by PIAC                         330 / 2263

Cross-examination by Cybersurf                    387 / 2587

Cross-examination by Xittel                       437 / 2878

 

 

AFFIRMED:  SALVATORE IACONO                       447 / 2957

AFFIRMED:  WILLIAM TAYLOR

AFFIRMED:  PAUL ANDERSON

AFFIRMED:  DENIS HENRY

AFFIRMED:  MIRKO BIBIC

AFFIRMED:  SERGE BABIN

AFFIRMED:  MARGARET SANDERSON

AFFIRMED:  PETER WATERS

 

Examination-in-chief by The Companies             448 / 2960

Cross-examination by Rogers                       452 / 3002

Cross-examination by MTS Allstream                604 / 3908

 

 

 


- v -

 

              EXHIBITS / PIÈCES JUSTIFICATIVES

 

 

No.                                              PAGE / PARA

 

CYBERSURF-1   Competition Bureau's report        398 / 2644

              entitled Merger Enforcement

              Guidelines September 2004

 

MTS-3         Information Bulletin of Merger     410 / 2728

              Remedies in Canada Competition
Bureau September 22, 2006

 

CRTC-1        U.S. ILEC data aggregate source    411 / 2739

              FCC ARMIS database report 43-02

 

CRTC-2        Document entitled "The             412 / 2740

              Communications Market, 2007",

              with excerpt from Section 4,

              "Telecommunication"

 

CRTC-3        Information bulletin of Mergers,   412 / 2742

              Remedies in Canada Competition

              Bureau, September 22, 2006

 

BUREAU-1      Document from LECG Entitled:       444 / 2926

              Access Regulation and

              Infrastructure Investment in the

              Telecommunications Sector:  An

              Empirical Investigation

 

ROGERS-2      Bell Canada's second round         479 / 3162

              submission to the

              Telecommunications Policy Review

              Panel - Regulatory Policy -

              September 15, 2005


                 Gatineau, Quebec / Gatineau (Québec)PRIVATE

‑‑‑ Upon resuming on Wednesday, October 10, 2007

    at 0830 / L'audience reprend le mercredi

    10 octobre 2007 à 0830

RESUMED:  PATRICK HUGHES

RESUMED:  JEFFREY R. CHURCH

RESUMED:  GEORGE HARITON

listnum "WP List 3" \l 12189             THE CHAIRPERSON:  Good morning.

listnum "WP List 3" \l 12190             Before we resume, may I remind the parties that we would appreciate everybody, to the extent that questions have already been asked by your colleagues, to take them out of your cross‑examination since we are under considerable time pressure and we want to make sure we can finish on time.

listnum "WP List 3" \l 12191             Secondly, Dr. Church, I wonder whether you could help me.  It struck me last night upon going home that the test that you have set out and that we discussed all day yesterday is really prospective, it is whether to designate somebody or to mandate some service or not.

listnum "WP List 3" \l 12192             Our exercise here is retrospective.  We are reviewing things and really what it is all about is are there some services that should be unmandated which are presently mandated.

listnum "WP List 3" \l 12193             So do me a favour and take your test and write it retrospectively because I tried it last night and I get ‑‑ you remember you and I had an exchange on downstream markets.

listnum "WP List 3" \l 12194             So when we start off, you say you have to have a market where there is dominance in the upstream market.  You have a downstream market that is also dominant.  However, that market has already been mandated, access has been mandated.

listnum "WP List 3" \l 12195             So therefore, the question is now should that mandating remain, should it be phased out or should it stay there forever, and in order to do that, you do what?  How do you rewrite point number 3 of your test when you apply it retrospectively?

listnum "WP List 3" \l 12196             MR. CHURCH:  Good morning, Mr. Commissioner.

listnum "WP List 3" \l 12197             I guess there are two aspects.  I mean you are right, the way we wrote the test was as if you were starting in a situation where there was no mandated access and then you would consider whether mandating access would be a good thing or a bad thing.

listnum "WP List 3" \l 12198             THE CHAIRPERSON:  Mm‑hmm.

listnum "WP List 3" \l 12199             MR. CHURCH:  Then to try and ‑‑ because we thought that starting with a principled approach was the right thing to do.

listnum "WP List 3" \l 12200             THE CHAIRPERSON:  Yes.

listnum "WP List 3" \l 12201             MR. CHURCH:  Then we recognized that, in fact, we are in an environment where there has been mandated access.

listnum "WP List 3" \l 12202             So I think that the way to go about that ‑‑ there are two things that you have to be very careful of when you look at our test.  The first is the dominance downstream, as you point out.

listnum "WP List 3" \l 12203             THE CHAIRPERSON:  Mm‑hmm.

listnum "WP List 3" \l 12204             MR. CHURCH:  It may not look like you have dominance downstream because you may have competition from service providers who are using unbundled loops.

listnum "WP List 3" \l 12205             We talked about this in our evidence when we say what you have to do is a but‑for analysis.  You have to say:  Would the firm be dominant downstream but for the access?  So if there was no access, would the firm be dominant downstream?  Would the incumbent be dominant downstream?

listnum "WP List 3" \l 12206             THE CHAIRPERSON:  Right.

listnum "WP List 3" \l 12207             MR. CHURCH:  So that is one way to do it.

listnum "WP List 3" \l 12208             THE CHAIRPERSON:  So far I am with you.

listnum "WP List 3" \l 12209             MR. CHURCH:  Okay.

listnum "WP List 3" \l 12210             THE CHAIRPERSON:  Now, come to point 3.

listnum "WP List 3" \l 12211             MR. CHURCH:  Now, point 3 is a substantial increase in competition.

listnum "WP List 3" \l 12212             If we went back to principled approach, what you would be doing is you would be saying, all right, no one else has access to the unbundled loops, so then it would be a pure prospective analysis ‑‑

listnum "WP List 3" \l 12213             THE CHAIRPERSON:  Right.

listnum "WP List 3" \l 12214             MR. CHURCH:  ‑‑ that you would be looking forward to.

listnum "WP List 3" \l 12215             In some sense, it is easier now because you have some idea about what the impact is on competition because you have mandated access, so you can go look and see what the impact on the market has been by the presence of those competitors.  So it is less of a prospective approach and you can inform what the reality has been under the current regime.

listnum "WP List 3" \l 12216             So I think you are right, is that our principles are on the prospective approach to kind of adjust it to the reality that we have had mandated access.

listnum "WP List 3" \l 12217             THE CHAIRPERSON:  Okay, revert number 3 to me retrospectively.

listnum "WP List 3" \l 12218             MR. CHURCH:  I guess what I am saying is I would want to know the way ‑‑ given that I have mandated access, do I think the presence of those competitors has resulted in a substantial increase in competition?  So that is a judgment about how effective that they have been.

listnum "WP List 3" \l 12219             THE CHAIRPERSON:  Okay.  Assume the answer is yes, but surely then the second question is:  Is that mandated access still necessary or not?

listnum "WP List 3" \l 12220             It has resulted, to use your words, in a substantial increase in competition ‑‑

listnum "WP List 3" \l 12221             MR. CHURCH:  Mm‑hmm.

listnum "WP List 3" \l 12222             THE CHAIRPERSON:  ‑‑ five years ago when we mandated it.

listnum "WP List 3" \l 12223             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12224             THE CHAIRPERSON:  Do we still require it today or not or can we now turn it off because of advances in technology and other entrants or whatever?  I don't know.  So what test do I apply at that point?  Just as simple as I put it now:  Will it continue on this basis if we turn the mandating off?  Is that what we are supposed to apply?

listnum "WP List 3" \l 12225             MR. CHURCH:  No.  I think that is a very good point.

listnum "WP List 3" \l 12226             We didn't say that you could just look at what had happened.  You kind of have to have a combination because you have to ask yourself, if we turn it off, what will happen, and that is going to be informed in part by what has happened.

listnum "WP List 3" \l 12227             I don't think that there is a silver bullet that you can get out of not doing the prospective analysis because you point out, you know, if you turn it off, you are going to have to ask what is the nature of competition now, what could happen, how could the market evolve without this mandated access.

listnum "WP List 3" \l 12228             And so you are going to have to do a little bit of this analysis and a little bit of that analysis to come to an appropriate judgment on what the effect would be.

listnum "WP List 3" \l 12229             THE CHAIRPERSON:  You are giving me what is really an analytical framework but on this point now when you apply the test retrospectively, everything so far was very clear with known concepts but now you say you have to look at all sorts of factors, et cetera.

listnum "WP List 3" \l 12230             Anyway, I thank you for your answer.  I just wonder whether you and your colleagues could do us a favour and actually rewrite your analytical framework that you suggest in a retrospective way because that is going to be the principal application that we are going to have.

listnum "WP List 3" \l 12231             Obviously, we want to use it prospectively too but the first task right now is to review the existing mandated services, and so therefore, it would be very helpful if, rather than just this informal exchange, you had some time to reflect exactly what one should look at and how one should go about it.

listnum "WP List 3" \l 12232             MR. HUGHES:  We would be happy to do that, Mr. Chairman.

listnum "WP List 3" \l 12233             THE CHAIRPERSON:  Thank you.

listnum "WP List 3" \l 12234             Then, Madame Giroux‑Girard, let us turn to our first business.

listnum "WP List 3" \l 12235             I am sorry, Helen, did you have a question?

listnum "WP List 3" \l 12236             THE SECRETARY:  Thank you, Mr. Chairman.  Good morning, everybody.

listnum "WP List 3" \l 12237             THE CHAIRPERSON:  Just a second, Commissioner del Val has a question.

listnum "WP List 3" \l 12238             COMMISSIONER del VAL:  Just to follow up.  Then is the third point of the test really in the negative, that by denying, it would substantially decrease?

listnum "WP List 3" \l 12239             MR. CHURCH:  I mean the answer is in some sense yes, right, is that they are ‑‑ you can look at this either as:  If you have access and we deny it, would there be a substantial lessening of competition?  Alternatively, if we have never mandated access and we grant it, will there be a substantial increase in competition?

listnum "WP List 3" \l 12240             As I tried to explain yesterday, in the Bureau's estimation, that substantial increase in competition and the substantial lessening in competition are the same thing, it is just a question of direction, where you started from.

listnum "WP List 3" \l 12241             MR. HUGHES:  If I may add, it is not as much in the negative.  As Mr. Chairman said, it is retrospective, and Mr. Chairman can, I am sure, remember that our abuse guidelines are very much retrospective as well.  So in some ways this fits better into our traditional abuse provisions and our traditional substantial lessening of competition than the prospective test.

listnum "WP List 3" \l 12242             THE CHAIRPERSON:  Okay.  Then, Madame Giroux‑Girard ‑‑ sorry.

listnum "WP List 3" \l 12243             COMMISSIONER CRAM:  So just to put reality to this, and it is that same interrogatory too from Primus to yourselves, you say that the non‑ILEC, non‑cable service providers have not captured a significant share.

listnum "WP List 3" \l 12244             And so if I follow your analysis through, then we would not at the residential level order mandated local unbundling?  Have I got it right?

listnum "WP List 3" \l 12245             MR. CHURCH:  I don't think that is quite right in the sense that Primus too, it talks about non‑cable and non‑ILEC.

listnum "WP List 3" \l 12246             COMMISSIONER CRAM:  Yes.

listnum "WP List 3" \l 12247             MR. CHURCH:  So that means it does not include MTS and does not include Rogers outside.  We have included them.  MTS Allstream is included in ILECs.

listnum "WP List 3" \l 12248             COMMISSIONER CRAM:  Yes.

listnum "WP List 3" \l 12249             MR. CHURCH:  Rogers non‑cable telephony customers are still included with the cable guys.  So it is referring to truly independent people like Primus ‑‑

listnum "WP List 3" \l 12250             COMMISSIONER CRAM:  Mm‑hmm.

listnum "WP List 3" \l 12251             MR. CHURCH:  ‑‑ and saying that they are a very small thing.

listnum "WP List 3" \l 12252             I might add that, unfortunately, 38, which is the paragraph that is referred to in that interrogatory, is from the Sone Report, which, of course, we have withdrawn, but I think we all understand what the facts are even without that.

listnum "WP List 3" \l 12253             COMMISSIONER CRAM:  Okay.  So we would have to put into the analysis the fact that there is also Rogers and MTS ‑‑

listnum "WP List 3" \l 12254             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12255             COMMISSIONER CRAM:  ‑‑ leasing local loops in residential?

listnum "WP List 3" \l 12256             MR. CHURCH:  That is right.

listnum "WP List 3" \l 12257             COMMISSIONER CRAM:  Okay.

listnum "WP List 3" \l 12258             MR. CHURCH:  And business for MTS.

listnum "WP List 3" \l 12259             COMMISSIONER CRAM:  Yes, of course.  Yes.  Thank you.

listnum "WP List 3" \l 12260             THE CHAIRPERSON:  Maybe third time lucky, Madame Girard‑Giroux.

‑‑‑ Laughter / Rires

listnum "WP List 3" \l 12261             THE SECRETARY:  We will pick up where we left last night.  So the Bureau of Competition will be cross‑examined by counsel Michael Janigan from the PIAC Advisory Committee, known as PIAC.

listnum "WP List 3" \l 12262             Please proceed, Mr. Janigan, with your cross‑examination.

EXAMINATION / INTERROGATOIRE

listnum "WP List 3" \l 12263             MR. JANIGAN:  Thank you, Madam Secretary.

listnum "WP List 3" \l 12264             Good morning, Mr. Chair and commissioners.  Good morning, panel.

listnum "WP List 3" \l 12265             We seek in this proceeding to represent the interests of residential consumers and in particular low‑volume residential consumers of telecommunication services, and in that light I am going to be putting you some questions to try to establish what the costs and benefits or the bottom line will be for those residential consumers.

listnum "WP List 3" \l 12266             First, I would like to briefly retrace the steps that were taken to get to this point in time through the various proceedings of the CRTC.

listnum "WP List 3" \l 12267             I would first of all like to start with Telecom Decision 94‑19.  That came about as a result of Public Notice 92‑78, which was started by the Commission to review the regulatory framework for telecom.

listnum "WP List 3" \l 12268             Is that correct?

listnum "WP List 3" \l 12269             MR. HARITON:  That's correct.

listnum "WP List 3" \l 12270             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12271             And it started out with a number of objectives from the Public Notice and then the Telecommunications Act was passed and effectively those objectives formed the basis on which the regulatory framework was reviewed?

listnum "WP List 3" \l 12272             MR. HARITON:  That's my understanding.

listnum "WP List 3" \l 12273             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12274             CRTC Decision 94‑19 concluded that the objectives set out in the Telecom Act were best achieved by reliance on market forces.

listnum "WP List 3" \l 12275             Isn't that correct?

listnum "WP List 3" \l 12276             MR. HARITON:  I don't have the ‑‑ I should get a copy of the decision.

listnum "WP List 3" \l 12277             I take your word for it.  That sounds right.

listnum "WP List 3" \l 12278             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12279             In that proceeding they indicated that to do so would require unbundling.

listnum "WP List 3" \l 12280             MR. HARITON:  Yes.  Well, they reviewed which facilities should be essential and which facilities should not be essential.

listnum "WP List 3" \l 12281             MR. JANIGAN:  I'm sorry?

listnum "WP List 3" \l 12282             MR. HARITON:  Sorry, wrong decision.

listnum "WP List 3" \l 12283             MR. JANIGAN:  Yes.  I'm getting there.  I'm getting there.

listnum "WP List 3" \l 12284             MR. HARITON:  Decision 94‑19.  Sorry, wrong decision.  I was referring to 97‑8 of course.

listnum "WP List 3" \l 12285             MR. JANIGAN:  Yes.

listnum "WP List 3" \l 12286             MR. HARITON:  Yes.

listnum "WP List 3" \l 12287             MR. JANIGAN:  But in this case they said that effectively they would require unbundling, and while there was general support for the concept of unbundling there were differences about how it would be implemented and therefore another proceeding would be necessary to sort out those differences.

listnum "WP List 3" \l 12288             MR. HARITON:  That's correct.

listnum "WP List 3" \l 12289             MR. JANIGAN:  In Decision 97‑8 the Commission sorted out these differences with respect to implementation and came up with a criteria for essential facilities?

listnum "WP List 3" \l 12290             MR. HARITON:  That's correct.

listnum "WP List 3" \l 12291             Do I need to turn to the specific criteria?

listnum "WP List 3" \l 12292             MR. JANIGAN:  No, we don't.

listnum "WP List 3" \l 12293             Once again the decision was designed to carry out and to create the conditions where market forces would protect consumers in the delivery of services and to deliver on the objectives of the Telecom Act?

listnum "WP List 3" \l 12294             MR. HARITON:  That was my understanding, yes.

listnum "WP List 3" \l 12295             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12296             Now, let's push ahead some years to the policy, what is called the policy direction, which is the Order in Council, the order issuing the direction to the CRTC implementing the Canadian Telecommunications policy objectives of December 14, 2006, and which I will refer to as "the policy direction".

listnum "WP List 3" \l 12297             MR. HARITON:  Yes, I am aware of it.

listnum "WP List 3" \l 12298             MR. JANIGAN:  Now, you would agree that the policy direction was not intended to take precedence over the objectives that are set out in the Act?

listnum "WP List 3" \l 12299             MR. HARITON:  My understanding is the Act can only be amended by Parliament.

listnum "WP List 3" \l 12300             MR. JANIGAN:  All right.  And if the objectives of the Act are frustrated or impeded by this direction in any fashion, then the direction effectively is ineffective?

listnum "WP List 3" \l 12301             MR. HARITON:  I'm being careful here.  I'm not here to speak as a lawyer or to give you legal opinion.

listnum "WP List 3" \l 12302             As a commonsense principle I think what you are saying makes sense.

listnum "WP List 3" \l 12303             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12304             Now, as I understand it, the TPR Report recommended amending the objective section of the Telecommunications Act to establish more clear lines of responsibility in hierarchy of decision‑making.

listnum "WP List 3" \l 12305             MR. HARITON:  It did another thing.  What it did, it tried to sort out what were true objectives and what were instruments to reach those objectives.

listnum "WP List 3" \l 12306             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12307             MR. HARITON:  Which was something that was not done in the '93 Act.

listnum "WP List 3" \l 12308             MR. JANIGAN:  Yes.  There have been no amendments to the Telecommunications Act along the lines of the recommendations in the TPR Report?

listnum "WP List 3" \l 12309             MR. HARITON:  No, there haven't been.

listnum "WP List 3" \l 12310             MR. JANIGAN:  All right.  So the full list of non‑prioritized objectives in section 7 remain?

listnum "WP List 3" \l 12311             MR. HARITON:  Yes.

listnum "WP List 3" \l 12312             MR. JANIGAN:  All right.

listnum "WP List 3" \l 12313             Now, the policy direction contemplates the current examination of whether mandated access to wholesale services should be phased out for services not considered to be essential.

listnum "WP List 3" \l 12314             Is that correct?

listnum "WP List 3" \l 12315             MR. HARITON:  That's correct.

listnum "WP List 3" \l 12316             MR. JANIGAN:  All right.  A note in the evidence, the supplementary evidence of the Bureau, on page 14 and paragraph 37, it notes that:

                      "In the Bureau's view the ultimate objective of end‑to‑end facilities‑based competition is implicit in the Order in Council."  (As read)

listnum "WP List 3" \l 12317             MR. HARITON:  I see that.

listnum "WP List 3" \l 12318             THE CHAIRPERSON:  What paragraph was that?

listnum "WP List 3" \l 12319             MR. JANIGAN:  I'm sorry.  It's page 14 of the supplementary evidence, which is the July evidence, and paragraph 37, at the end of that paragraph.

listnum "WP List 3" \l 12320             THE CHAIRPERSON:  All right.  Thank you.

listnum "WP List 3" \l 12321             MR. JANIGAN:  Clearly, if more competition providing, say, accessible and affordable service can be obtained by mandating the sharing of essential services, effectively because such course of action would be in furtherance of the objectives in the Telecom Act, that would likely trump the provisions of the policy direction and their implicit instruction?

listnum "WP List 3" \l 12322             MR. HARITON:  Again, and not giving you legal opinion of any kind, I think that what we would have to see is the policy direction as being an interpretation or a more precise set of instructions on how to interpret the Telecommunications Act.

listnum "WP List 3" \l 12323             MR. JANIGAN:  But if the objectives, if for example the Commission found that the objectives of providing more competition, which would provide more affordable service to Canadians, would be best pursued by mandating access, clearly pursuit of that objective would trump whatever implicit direction that the Competition Bureau sees in the policy direction?

listnum "WP List 3" \l 12324             MR. HARITON:  Yes.  My difficulty is, I don't see the policy direction so much as a list of objectives but as a list of instruments, the distinction I made a few minutes ago.

listnum "WP List 3" \l 12325             MR. JANIGAN:  Yes.

listnum "WP List 3" \l 12326             MR. HARITON:  So it's not really ‑‑ it's really going to how do you do things rather than what things you have to do.

listnum "WP List 3" \l 12327             So again, the legalities of how you sort that out I'm not here to comment on.

listnum "WP List 3" \l 12328             MR. CHURCH:  Excuse me, Counsel, if I might?

listnum "WP List 3" \l 12329             What the Bureau has proposed here with our "essential facilities" definition recognizes that there may be instances where there is a substantial increase in competition from mandated access and in those circumstances access should be mandated.

listnum "WP List 3" \l 12330             On the other hand, the Bureau's definition also respects and appreciates the fact that the best kind of competition that can happen for consumers of all income levels is that there is competition between networks.

listnum "WP List 3" \l 12331             So it's trying to determine what the balance should be between these two types of competition.  It's not saying that the mandated access type of competition should never be engaged in.  That's not what the Bureau's test says.

listnum "WP List 3" \l 12332             It says, in the third bullet, if there is a substantial increase in competition, then mandated access, given the other two bullets are also met, is the preferred direction.

listnum "WP List 3" \l 12333             MR. JANIGAN:  Dr. Church, what I was seeking to do was to try to qualify the comment with respect to the ultimate objective ‑‑

listnum "WP List 3" \l 12334             MR. CHURCH:  Right.

listnum "WP List 3" \l 12335             MR. JANIGAN:  ‑‑ as found by the Bureau in the policy direction and to make the point, of course, that the Telecom Act objectives reign supreme with respect to the pursuit of that objective.

listnum "WP List 3" \l 12336             MR. HARITON:  Obviously the legislation is what the telecommunications industry is governed under.

listnum "WP List 3" \l 12337             That said, I think there is enough room within the objectives in section 7 of the Telecommunications Act to adopt a variety of approaches.  The policy direction is merely saying we should focus on a certain approach rather than other approaches.

listnum "WP List 3" \l 12338             Now, that said, I think once again when you are looking at instruments of how you actually achieve objectives, you have to look at which ones are going to give you the best outcome, as Mr. Church has said and, again, if you can get competition in both the facilities and the services, i.e., the network and the services riding on the network, that will bring you appreciably closer, it seems to me, to whatever objective you have than if you are going to have a competition in just one layer, i.e., the service layer.

listnum "WP List 3" \l 12339             THE CHAIRPERSON:  Mr. Janigan, can you tell me where you are going with this, because this really more in the nature of submissions rather than cross‑examination.  These are not legal experts as to whether the objectives are supreme to the order or not.

listnum "WP List 3" \l 12340             I have no problem hearing from you in great length on submission, but even if you get a concession out of these witnesses it is not going to be of any use because they are not legal experts in any way.

listnum "WP List 3" \l 12341             MR. JANIGAN:  I recognize.  The point I'm attempting to make is that, effectively, the analytical framework that has been used with respect to their evidence, effectively, is qualified or is modified, of course, by any particular finding that the Commission may make with respect to the objectives of the Telecommunications Act.

listnum "WP List 3" \l 12342             THE CHAIRPERSON:  Okay, I think you have established that point.

listnum "WP List 3" \l 12343             MR. JANIGAN:  Okay.

listnum "WP List 3" \l 12344             Moving forward to the essential conclusions of the Bureau, the Bureau believes that effective competition at a retail level is most likely to come from facilities‑based providers, which would provide greater incentives for investment, innovation and cost efficiency?

listnum "WP List 3" \l 12345             MR. HARITON:  That's correct.

listnum "WP List 3" \l 12346             MR. JANIGAN:  Okay.  Now, in doing your retrospective analysis, and in terms of your assessment of the competition that's come as a result of the stepping‑stone approach, is it your belief that approach ‑‑ or let me put this in general.

listnum "WP List 3" \l 12347             Why is it that you believe that wireline competitors to the incumbent telephone companies, the ones that required mandated essential facilities, did not succeed?

listnum "WP List 3" \l 12348             MR. HARITON:  You are asking for an analysis of what happened in the industry.  I think there were a number of factors of why they did not succeed.

listnum "WP List 3" \l 12349             Partly, it may be that the market wasn't ready for them, I don't know.  Partly it was that shortly after '96, when the new entrants came in, there was something of a bubble in the telecommunications sector and it may be that there was over‑investment.

listnum "WP List 3" \l 12350             I know that certain equipment manufacturers financed equipment for new entrants on very easy terms and, as a result, some carriers may have set up that shouldn't have.

listnum "WP List 3" \l 12351             I think in some cases it may have been business plans that were not properly thought out.  And the other point, I guess, is that it may be that the technology wasn't quite ready.

listnum "WP List 3" \l 12352             So through that list, it's not clear which would get priority.

listnum "WP List 3" \l 12353             MR. JANIGAN:  Okay.

listnum "WP List 3" \l 12354             MR. CHURCH:  Yes, if I just might add that the Bureau's evidence of March 15th, at paragraph 46, we have a discussion about rationales for why this particular entry model may not have worked, and there are additional sites, I think, later on in our evidence, as well, regarding why the hybrid model may not have been as successful as first appreciated ‑‑ as was planned for.

listnum "WP List 3" \l 12355             MR. JANIGAN:  That is on page 18.  You have the lack of regulatory incentives for entrants to move from unbundled facilities to their own.  So that, in itself, would have been a reason why they would fail?

listnum "WP List 3" \l 12356             MR. CHURCH:  I think that the answer, you know, Hausman and Sidack, the people who have carried out this analysis, say, that it's a combination of those three things and they don't try and distinguish, as I recall, and I may be subject to check here.  They have those three hypotheses which they claim are reasons for why this model may not have worked very well.

listnum "WP List 3" \l 12357             In addition, in the Bureau's evidence, if you go back to an earlier paragraph, there's some paragraph we talk about all the things that had to be in place for this to work and that, you know, in retrospect, maybe is going to be a very difficult thing to have happen, because it was basically based on regulatory arbitrage.

listnum "WP List 3" \l 12358             MR. JANIGAN:  How is it they eventually get squeezed in this analysis that you have on page 18?  What happens that suddenly makes their costs increase or their revenues go down because they haven't got their own facilities?

listnum "WP List 3" \l 12359             MR. CHURCH:  You know, I don't think that's exactly what it says in that paragraph.  I think it says that there are three reasons where there may be difficulties.  You know, and the stepping stone didn't happen, because the way the incentives were set up the prices for the wholesale access were very low, as both this article makes reference to, and also the Crandall and Waverman article that's referred to earlier ‑‑ or sorry, later in the piece, which came out in, sorry, 2006, called "The Failure of Competitive Entry into Fixed‑Line Telecommunication:  Who is at Fault?".

listnum "WP List 3" \l 12360             There's a discussion in there about how this was an arbitrage play between low wholesale rates and retail rates, without recognizing that, if you had increased competition at retail, that those rates were going to fall.  So it's not a very good entry plan to be based on arbitrage between retail and wholesale rates when competition's going to affect the retail rates.

listnum "WP List 3" \l 12361             And, you know, it just may have been that the entrants' costs were too high, that there were other impediments to competition.  That would be the third bullet.

listnum "WP List 3" \l 12362             MR. JANIGAN:  Well, I'm confused.  Presumably, these entrants would have adopted a route of obtaining their facilities from the incumbent because of cost considerations.

listnum "WP List 3" \l 12363             MR. CHURCH:  Yes, but the costs that we are talking about there are also implied in why we have the third bullet, which is looking for a substantial increase in competition, is that, besides access to the essential facility, there may be other barriers to entry: they may have been inefficient, there might be other reasons which suggest that they are not going to be very effective competitors, which means that their viability is going to be an issue.

listnum "WP List 3" \l 12364             The Crandall and Waverman study that I just referred to, "The Failure of Competitive Entry into Fixed‑Line Telecommunications:  Who's at Fault?", you know, their conclusion is that, under this model, plain old telephone service is not going to be very viable, that the entrants require in this new world, have to have a wide variety of services and just providing narrow broadband ‑‑ or narrow services is not going to be ‑‑ it's not a viable business plan, in the sense that it doesn't provide enough value to consumers to allow you to compete and survive.  That's their conclusion.

listnum "WP List 3" \l 12365             So, you know, there are a variety of things that seem to have gone wrong with this model.  You know, I think that you should look at the marketshares and the competitive effect of the non‑cable, non‑ILEC companies who adopted this model.  I think it tells you something about their competitive significance.

listnum "WP List 3" \l 12366             MR. JANIGAN:  But if it was a rough go for companies that chose the low‑cost route, mainly getting facilities from the incumbent, how would it have been better for a company that actually had invested in its facilities, presumably the higher cost route, in light of increased competition?

listnum "WP List 3" \l 12367             MR. HARITON:  I would point out, Mr. Janigan, that the one entrant who seems to have done very well, who went in in the nineties, was EastLink, and they didn't go in with unbundled facilities, they went in with their own facilities.  So it may be that using your own facilities gives you a certain advantage.

listnum "WP List 3" \l 12368             The other one who lasted a long time, who also went in in the nineties, was Futureway, north of Toronto, who started by building their own facilities.  I don't know their history intimately, but I believe at some point afterwards they started using other people's facilities and they are no longer an independent company.

listnum "WP List 3" \l 12369             So, you know, it is interesting that the ones who survive, who tend to do well, are the ones who use their own facilities.

listnum "WP List 3" \l 12370             And just in passing, I noticed that we are talking about wireline, the same thing is true is wireless.  We have had some very successful entrants using their own facilities, and so there may be a lesson there for us.

listnum "WP List 3" \l 12371             MR. JANIGAN:  Okay.  And I note, Dr. Hariton, that your example with respect to the EastLink involves a cable company which, presumably, had a network in place prior to establishing its telephony service.

listnum "WP List 3" \l 12372             MR. HARITON:  It had a network in place, but it certainly had to modify it to be able to offer telephony.

listnum "WP List 3" \l 12373             MR. JANIGAN:  Okay.  And is it the belief of the Bureau that winnowing down occasions of access to incumbent service will encourage the establishment of end‑to‑end facilities?

listnum "WP List 3" \l 12374             MR. CHURCH:  I think that what the Bureau's perspective is, in terms of its "essential facilities" definition, is to, you know ‑‑ and we went through some of this yesterday ‑‑ say that there are costs of mandating access to facilities which are not essential.  Those costs show up in terms of incentives for investment and the potential for competition between networks.

listnum "WP List 3" \l 12375             There are also costs associated with not mandating access to facilities which are essential.  Those costs are the reduction in potential competition that you might have had downstream if you had mandated access to those facilities.

listnum "WP List 3" \l 12376             And then if you look at those relative costs and benefits, then you come to the conclusion that ‑‑ and this isn't the only conclusion that the Bureau comes to on those bases ‑‑ is that, you know, the costs of mandating access to things which are not essential appears to be much greater than the costs of not mandating access.

listnum "WP List 3" \l 12377             So therefore, you should have a bias towards ‑‑ in a statistical sense or a decision‑making sense, your tests should be slanted towards increasing facilities‑based competition.  But that doesn't mean that the Bureau's test won't find an essential facility in stances where an essential facility results in a substantial increase in competition.

listnum "WP List 3" \l 12378             MR. JANIGAN:  Okay.  Well, let us take a look at that evidence concerning the costs. I believe in paragraph 9 of your supplementary evidence you cite the costs and risks associated with the overly broad wholesale access regime is a substantial consideration in your view that the current conditions for mandating access should be circumscribed.  Is that correct?

listnum "WP List 3" \l 12379             DR. CHURCH:  Yes.

listnum "WP List 3" \l 12380             MR. JANIGAN:  And if we look on page 5 of your supplementary evidence, in paragraph 14, you indicate that the costs of mandating access to facilities that are non‑essential arise if mandated access undermines the incentives of the competitors to enter with their own facilities and/or incentives of the ILECs to upgrade and maintain their networks.  And that is part and parcel of that analysis?

listnum "WP List 3" \l 12381             DR. CHURCH:  Yes.

listnum "WP List 3" \l 12382             MR. JANIGAN:  Okay.  Now, in terms of the listing of the individual components, which make up your weighing of whether it is better to mandate access or to refrain from doing so, that is contained I believe in your evidence on page 6, on the top of page 6?

listnum "WP List 3" \l 12383             DR. CHURCH:  Yes.

listnum "WP List 3" \l 12384             MR. JANIGAN:  And in paragraphs 14 and 15.  And you set out four reasons here why you believe that not mandating access is a preferable course of action or presents a preferable policy bias.

listnum "WP List 3" \l 12385             DR. CHURCH:  I think what we do in that paragraph was four things; identify the nature of the costs that if you inadvertently didn't end up with competition between two networks, if you offered other things, these would be the kinds of things that you would be foregoing, so it identifies the nature of those costs.  And then what we have to do later on is think about what the magnitude of those costs might be.  There is nothing here that says anything about magnitude.

listnum "WP List 3" \l 12386             MR. JANIGAN:  Okay.  And so, for example, your first consideration; the Commission will have to continue to regulate the price in terms of access to the facility.  There is no, obviously, any quantification of what that is going to cost over time for the industry or if it is going to be passed on.

listnum "WP List 3" \l 12387             DR. CHURCH:  Yes, I mean, it will be passed on, industry doesn't pay these costs, consumers pay the costs of regulation.  But the point that is being made here is that if we had competition between two competing networks and that competition is effective, then you have competition at both retail and wholesale and therefore you could forego regulation at both retail and at wholesale.

listnum "WP List 3" \l 12388             Whereas, if you continue to have mandated access, rely on that for your competition, you might be able to deregulate at retail, but you would still have to regulate at the wholesale level.

listnum "WP List 3" \l 12389             MR. JANIGAN:  Of course, those regulatory costs would have to be set off against any advantages that may come about as a result of competition arising from mandated access?

listnum "WP List 3" \l 12390             DR. CHURCH:  Right, and that would be what we discuss in paragraph 15.

listnum "WP List 3" \l 12391             MR. JANIGAN:  Okay.  The second point, the benefits of competition are restricted to the downstream markets for which the essential facility is an input and the nature of the competition is restricted since the firms in that market share a common input in costs.  Now, is this essentially another elaboration of your point that effectively the innovations and efficiencies will come only from the incumbent?

listnum "WP List 3" \l 12392             DR. CHURCH:  No, it doesn't say it would come only from the incumbent.  We have not said that at all.  It says that if you have competition that is only downstream, which is on the same network, then some of that competition is going to be restricted in the sense that all of the firms downstream are going to have a similar cost structure to the extent they are all using the same network and paying the same costs.

listnum "WP List 3" \l 12393             And the scope for product differentiation is going to be limited and the scope to independently innovate is going to be limited, because you are all running on the same network.  And so it is just saying, if you had competition between two networks, as Mr. Hariton has pointed out earlier this morning, then you could have competition on both a network level and at the applications level.

listnum "WP List 3" \l 12394             If you have competition between, and we would expect that, both the entrant and the ILEC competing with their own networks would have incentives to innovate and invest.  And in fact, you know, that is what competition is about.  They are going to respond to each other and you are going to have, you know, races to increase capacity and provide interesting applications for the benefit of consumers.

listnum "WP List 3" \l 12395             MR. JANIGAN:  You are not suggesting that in that circumstance that the ILEC would stop innovating or stop bringing efficiencies to the network it is providing those facilities to competitors in the case of mandated access?

listnum "WP List 3" \l 12396             DR. CHURCH:  There is, with mandated access, where you have a shared access to the network, then the incentives for the incumbent to innovate and upgrade and invest in its network to the extent that those investments and those innovations end up being shared with its competitors, there certainly is a reduction in its incentives to engage in innovation and investment.

listnum "WP List 3" \l 12397             MR. JANIGAN:  The incumbent, presumably in your analysis, would also have to be aware of the risk of market entry from a facilities‑based competitor, so it would continue to try to innovate and bring efficiencies into its network, would it not?

listnum "WP List 3" \l 12398             DR. CHURCH:  Well, in some sense that depends on what the price of access is and what the terms of access are.  If you are giving access to this network to facilities which are non‑essential, then presumably the entrants are using those facilities because that is a cheaper option for them than to build their own facilities.

listnum "WP List 3" \l 12399             We had a discussion yesterday about the implications of mandated access to DNA and what it did to various firms' incentives to build their own facilities in business markets as an example of that.

listnum "WP List 3" \l 12400             MR. JANIGAN:  But these competitors that require access, these are presumably less able competitors in your analysis and the incumbent would always be aware of the threat of competitive entry from a facilities‑based competitor, would it not?

listnum "WP List 3" \l 12401             DR. CHURCH:  All right, I think that you have to understand the nature of my earlier statement.  It is a statement about incentives at the margin.  So if you hold everything else constant, whether there be a threat of competitors or not a threat of competitors, and you say to the incumbent that we are going to make you share some of your investment or some of your innovation, his incentives will go down.

listnum "WP List 3" \l 12402             MR. JANIGAN:  Now, in part 3 of your disadvantages of mandated access you indicate that the Commission has to be concerned about the potential for vertically integrated owners of essential facilities to engage in anti‑competitive practices.  Presumably, this is another restatement of your first point with respect to regulation?

listnum "WP List 3" \l 12403             DR. CHURCH:  Actually, in some sense it is just pointing out that it is not only a problem that you have to regulate the price of the wholesale facilities, but you create a system under which you are controlling if there is market power at the wholesale level.

listnum "WP List 3" \l 12404             In those situations where there is market power at the wholesale level and you are regulating and you are controlling the margin, so it is effective regulation, then we know that there are incentives for the incumbent to engage in, in particular the relevant one would be anti‑competitive what we call tying or discrimination, to favour its own operations downstream and to disadvantage its competitors.

listnum "WP List 3" \l 12405             And that is, you know, presumably why we have quality of service standards and a bunch of other things that the Commission has put into place in the existing regime to try and control that behaviour, but it is difficult to control without some sort of deterrence mechanism.

listnum "WP List 3" \l 12406             MR. JANIGAN:  So more work for the Competition Bureau, that is what you are saying?

listnum "WP List 3" \l 12407             DR. CHURCH:  Well, I am not an expert on regulated conduct, so I will turn that over to Mr. Hughes.

listnum "WP List 3" \l 12408             MR. HUGHES:  Ordinarily, that would be the mandate of the CRTC and not the Bureau.

listnum "WP List 3" \l 12409             MR. JANIGAN:  And I think we have covered item 4 about the incentives for investment and innovation.

listnum "WP List 3" \l 12410             Now, I turn to the cost of non‑mandating access.  And you indicate that it is the limitation or elimination of competition in the downstream market.  Presumably, that means potentially higher prices for consumers in the downstream market?

listnum "WP List 3" \l 12411             DR. CHURCH:  It potentially means that.

listnum "WP List 3" \l 12412             MR. JANIGAN:  Thus choice?

listnum "WP List 3" \l 12413             DR. CHURCH:  Yes, it does.

listnum "WP List 3" \l 12414             MR. JANIGAN:  And, as well, you indicated that regulation of retail rates would have to continue to protect consumers in the downstream market from the exercise of market power.  Now, what about the circumstance where consumers are in a forborne market, would that still be the case?

listnum "WP List 3" \l 12415             DR. CHURCH:  Well in fact, I mean, the timeline is such that when this was originally written, we did not know exactly what was going to happen in terms of the forbearance decisions, so that is one of the reasons why we have changed our third bullet, is that the costs of not mandating access in some sense have gone up, prospective costs have gone up because, in fact, the lost benefits from competition are no longer constrained or limited by the backstop of retail regulation in many markets.

listnum "WP List 3" \l 12416             So, that is one of the reasons why the bureau has adjusted its third bullet instead of being the increase in competition has to be sufficient to remove economic regulation, now it is the mandating access has to lead to a significant increase in competition.

listnum "WP List 3" \l 12417             MR. JANIGAN:  Effectively, if the regime is so circumscribed that it mandates the construction of facilities, but may or may not have been necessary to bring those services and options to consumers, won't consumers be paying an additional price for the construction of facilities that may not have needed to be duplicated?  That is another risk there, is it not, Dr. Church?

listnum "WP List 3" \l 12418             MR. CHURCH:  No, and actually I want to clarify something.  When I talked about a third bullet in my preceding remarks, I want to say the third bullet says a substantial increase in competition, not a significant increase in competition, and I apologize for that.  We had a discussion about that yesterday.

listnum "WP List 3" \l 12419             Coming back to this, I think that the way that the bureau's approach works is different than the way that you are interpreting it in the sense that the bureau's approach looks first to see if the incentives are there for duplication of the facilities and what the effect of those duplication of those facilities would be on competition.

listnum "WP List 3" \l 12420             So, it doesn't mandate anything in advance.  Instead, it looks and says what is the potential for competition between facilities‑based competitors.  If there is dominance downstream, dominance upstream and not much chance for competition between facilities‑based competitors, then it looks and asks if we mandated access, would we have an increase in competition that would be good for consumers.

listnum "WP List 3" \l 12421             It doesn't mandate construction of facilities.  It goes and looks and sees if there are incentives and if competition between facilities‑based networks is going to be possible because competition involves firms duplicating facilities and competing against each other, and we think that in that process, in most markets, you end up with consumers benefitting from investment and duplication of facilities because it brings about competition.  So the benefits of production get passed on to consumers in terms of lower prices.

listnum "WP List 3" \l 12422             MR. JANIGAN:  Or a competitor who has had to build needlessly duplicable facilities may in fact have to pass those costs on to consumers?

listnum "WP List 3" \l 12423             MR. CHURCH:  In fact, in competitive markets, which is what we are talking about here, firms don't pass costs on to consumers in the way that you are thinking about it.

listnum "WP List 3" \l 12424             In fact, what happens is the firms are forced to compete for business and if everyone's costs are higher, then it might be the case that prices would go up in a market, but it's really a function of demand and supply determine prices in these markets.  So you have both demand considerations and cost considerations that determine prices.

listnum "WP List 3" \l 12425             It is not like a regulated industry, if my costs go up, then automatically prices downstream go up because the regulator passes them on in a regulated price.  That is not what is going on here at all.

listnum "WP List 3" \l 12426             MR. JANIGAN:  Presumably, though, the investors in any new entrant competitor are looking to recover their costs of any facilities they build to compete?

listnum "WP List 3" \l 12427             MR. CHURCH:  They look to recover those costs and the way they recover those costs is by giving consumers a better deal than what they are getting from other people because they have to induce consumers to buy from them, which means they have to offer prices and qualities and services which would allow them to recover their costs.

listnum "WP List 3" \l 12428             Consumers are only going to take that deal from them if it is a better deal than they can get from other suppliers.  So, there's gains from trade here.  That is why the firms incur the costs, because they think they have a better deal for consumers.  If consumers can get a better deal, they will take that deal.

listnum "WP List 3" \l 12429             If you bet wrong on that, which is one of the problems that we talked about earlier with the unbundled local loop experience, as is explained in the Crandall and Waverman article, in the United States the damage was $60 billion was invested by public companies in this adventure, and at the end of it, that $60 billion was down to $5 billion.  That was investors who lost that money, not consumers.

listnum "WP List 3" \l 12430             MR. JANIGAN:  So, you don't believe there is any risk that consumers may be paying higher prices as a result of a strategy which winnows down with opportunities for competitive entry by way of mandated access?

listnum "WP List 3" \l 12431             MR. CHURCH:  As I explained earlier, the way our test works is that we go through the analysis to see at both the dominant step and the duplicability step, and then the third bullet is asking what is happening to consumers.

listnum "WP List 3" \l 12432             Our whole test is driven by the implications of mandating access or not mandating access on the welfare of consumers.

listnum "WP List 3" \l 12433             MR. JANIGAN:  So, using your analysis, your position would be, no, there is no risk associated with that?

listnum "WP List 3" \l 12434             MR. CHURCH:  As we talked about yesterday, the Commission is in a situation where they are making a decision under conditions of uncertainty and asymmetric information.  They have to look at the probabilities of these errors and the costs of these errors and, on the basis of that, recognize that there are good things that can happen and bad things that can happen and they should try and maximize the potential for the good things and minimize the potential for the bad things.  But it doesn't mean that bad things won't happen for sure.

listnum "WP List 3" \l 12435             MR. JANIGAN:  Obviously in circumstances where, for example, new entrant competitors are blocked from entry because they have to have facilities or they don't enter, the costs of that particular exercise may be borne by consumers in the short term, at least, in terms of the higher competitive prices and additional costs, I would assume?

listnum "WP List 3" \l 12436             MR. CHURCH:  I'm sorry, I lost you.  Would you please repeat that question?

listnum "WP List 3" \l 12437             MR. JANIGAN:  Yes.  In circumstances where you have the policy developed, as has in fact circumscribed access to or blocked access by a competitor that wishes to use access to mandated facilities for his entry, presumably the benefits that would have been brought to consumers by that exercise would not be able to be realized by the consumers, and they may end up paying a price which may be not competitive for at least a short period of time?

listnum "WP List 3" \l 12438             MR. CHURCH:  To respond to that, our third bullet says, if you're thinking about denial of access and they already have access to the facilities, then we are in a substantial lessening of competition situation, so we would ask would the termination of access to those facilities result in a substantial lessening of competition, and that substantial lessening of competition is based on an assessment of what happens to the welfare of consumers.

listnum "WP List 3" \l 12439             I think that the other part of what you are asking me is to say if there are non‑essential facilities and we no longer mandate access to them, then what happens.

listnum "WP List 3" \l 12440             I think the answer to that is that if there are non‑essential facilities which we terminate access to, that there is a transition period that occurs and we would expect that if they are non‑essential and the definition has been applied, that means that competitors have the incentives and the ability to duplicate them and the effectiveness of that duplication on the market has been established.

listnum "WP List 3" \l 12441             MR. HARITON:  If I may just add, Mr. Janigan, yes, there is some duplication when you build a second network, but, again, as Dr. Church has said, this is something that investors tend to cover up front.  This is why they have to raise so much money up front to be able to get into the market.

listnum "WP List 3" \l 12442             In fact, they have to be able to give prices that are as good or better or quality that is higher or better than the incumbent if they expect to be successful in the market.

listnum "WP List 3" \l 12443             Over the long term, the incumbent and the new entrant will each try to win customers by giving better service and lower prices by getting the cost down.  So that in that sense, the investor hopes to get his money back down the road.  A lot of these things are what in the jargon we call a button hook, i.e. a very significant negative cash flow for a number of years, and only turning up towards the end.

listnum "WP List 3" \l 12444             So, in that kind of situation, a lot of the risk is being borne by the investors, as we have seen, rather than by the consumer.  The consumer actually wins from this kind of thing because if things go well, he or she are going to get better prices and better quality.  If things go badly, by and large it is the investor that takes the loss.

listnum "WP List 3" \l 12445             So, in that sense, while there is always a risk of everything in this life, in this situation the chances are very strong that consumers will likely be better off.

listnum "WP List 3" \l 12446             THE CHAIRPERSON:  Just to make sure I understand your answer, Mr. Hariton, you are really talking about type 1 and type 2 errors?

listnum "WP List 3" \l 12447             MR. HARITON:  Yes, that is right.

listnum "WP List 3" \l 12448             THE CHAIRPERSON:  And you are biased as to what is type 1 errors because they are cost free for the consumer, while type 2 errors will cost the consumer in the long run?

listnum "WP List 3" \l 12449             MR. HARITON:  Not entirely cost free, but largely.  It is not black and white.

listnum "WP List 3" \l 12450             THE CHAIRPERSON:  Thanks.

listnum "WP List 3" \l 12451             MR. JANIGAN:  Thank you.

listnum "WP List 3" \l 12452             I want to return to the position of the bureau, particularly in light of the change resulting from orders for forbearance that have recently issued.  I just want to make sure that I am clear on the bureau's position.

listnum "WP List 3" \l 12453             Is the bureau's position that there still can be mandated access to essential facilities in a forborne market if it will effect a substantial increase in competition?

listnum "WP List 3" \l 12454             MR. HUGHES:  Yes.

listnum "WP List 3" \l 12455             MR. JANIGAN:  Is it the view of the bureau that a substantial increase in competition can come about by other than facilities‑based competition?

listnum "WP List 3" \l 12456             MR. CHURCH:  Yes, that is our third bullet.

listnum "WP List 3" \l 12457             MR. JANIGAN:  I just wanted to make sure that wasn't a catch 22 there.

listnum "WP List 3" \l 12458             In terms of consumers who may desire or may be willing to take up a new entrant's service that is provided but mandated access, presumably for those consumers that would take it up, the competition itself is substantial for them?

listnum "WP List 3" \l 12459             MR. CHURCH:  I think you have to be careful here.  When they make their decisions and they are comparing their decisions across all the possible alternatives that are available to them, and so it is competition in the market which determines the choices that are available to them, they have decided that that is the best choice for them in the market, but that doesn't mean that if you were to eliminate that choice they would be made worse off, because if there is competition in the market, there is likely to be lots of other alternatives.  That is what a substantial, in this case, decrease in competition or substantial lessening in competition would mean, would be to say that consumers are harmed by removing that competitive alternative because there is not sufficient competition in the market to protect them.

listnum "WP List 3" \l 12460             MR. JANIGAN:  I thought your test for substantial was based on ability to enforce a price increase, was price‑related, is it not?

listnum "WP List 3" \l 12461             MR. CHURCH:  Substantial lessening of competition would mean that as a result of some conduct or some behaviour there would be an increase in market power, and if costs remain the same, then an increase in market power, given the same cost, would result in an increase in prices.

listnum "WP List 3" \l 12462             MR. JANIGAN:  So, a flip around on that one, I guess, is that in order to be substantial, you have to, to some extent, decrease the market power of the incumbent?

listnum "WP List 3" \l 12463             MR. CHURCH:  That is right.  By mandating access to the facility, you reduce the market power of the incumbent.  Given the costs stay the same, reduction in the market power means that prices in the market should fall.

listnum "WP List 3" \l 12464             MR. JANIGAN:  What about competitive offerings that are not so sizeable as to effect the market power of the incumbent but may still be desirable?

listnum "WP List 3" \l 12465             MR. CHURCH:  In the whole context of these things there may be these things that at the margin are desirable, but there are costs and benefits to any decision.  There is always the chance of various types of errors.  So, before we decide to intervene in things, we want to make sure that the effect of our intervention is something that is substantial.

listnum "WP List 3" \l 12466             MR. JANIGAN:  Let me give you an example.  Let's say a municipality in a forborne region decides that the big players have been gouging their residents and failing to provide good service, and they may also have some social objectives that they are meeting under the Telecom Act, 7(h) in providing the service.  But to do so, they need access to some component facilities to compete.  What happens then?  Will they still get the opportunity to come into the market even if they are not going to be affecting the market power of the incumbents?

listnum "WP List 3" \l 12467             MR. CHURCH:  The answer to that is if you go through the bullets, the three bullets of the bureau's test and you find that mandating access to that municipality or whoever does not result in a substantial increase in competition, then the answer would be no, mandated access is not appropriate under the bureau's test.

listnum "WP List 3" \l 12468             MR. JANIGAN:  What about if, for example, that entry was in furtherance of some other objectives under the Telecom Act, namely, meeting the economic or social requirements of Canadians, would it still fall?

listnum "WP List 3" \l 12469             MR. HUGHES:  Can we take a moment, please?

‑‑‑ Pause

listnum "WP List 3" \l 12470             MR. HARITON:  Mr. Janigan, again it goes back to objectives versus instruments.  If you have certain social instruments, I believe that the suggestion is that you should achieve them in the most competitively neutral ‑‑ well, in the best manner you can and rely on competition to the degree you can.

listnum "WP List 3" \l 12471             But there are other techniques.  One of the objectives that the system, the Canadian system has is affordable service in high cost serving areas.  There, what we have is we have a high cost serving area fund which will subsidize both entrants and incumbents to the degree that they serve customers up there.  That is competitively neutral, technologically neutral, and, more importantly, it is sufficient.

listnum "WP List 3" \l 12472             Another way of doing it is to try to distort the entire price system for local, which is what used to be done back in the seventies and eighties and early nineties, and that was a relatively inefficient way.

listnum "WP List 3" \l 12473             So, I think that there are many ways of reaching the objectives.  It is a question of trying to figure out which one is going to be least distorting of the market forces.

listnum "WP List 3" \l 12474             MR. JANIGAN:  Dr. Hariton, I was looking beyond the affordability question to other sorts of objectives that, for example, a municipality may wish to reach by way of their construction or of the assemblage of their network of mandated access.

listnum "WP List 3" \l 12475             MR. HARITON:  Did you want to give me an example?

listnum "WP List 3" \l 12476             MR. JANIGAN:  For example, it may be that they want to provide better security.

listnum "WP List 3" \l 12477             MR. HARITON:  Yes, so they will build their own network.  Is that the suggestion?

listnum "WP List 3" \l 12478             MR. JANIGAN:  Well, let's say that it is not a doable project unless they require access, unless they obtain access.

listnum "WP List 3" \l 12479             MR. CHURCH:  I think, Mr. Counsel, the kinds of things that you are talking about here, I mean, you are talking about another level of government deciding that they have some sort of policy objective that they want to meet.

listnum "WP List 3" \l 12480             I guess what we are saying here is that our test is designed for competitors, is for private firms who want to enter.

listnum "WP List 3" \l 12481             This discussion about the other objectives is interesting, but I think it is not really what our test is about and it is kind of about, you know, some other kind of rationales for why things should be mandated.  If the Commission, the CRTC, decides that those objectives are for some other level of government to achieve some sort of social objectives that you have in mind, I think that that is not something that the bureau's evidence is about at all.

listnum "WP List 3" \l 12482             It is about entry by competing firms, and when does mandating access make sense in terms of enabling competition and making the right choice between competition between networks versus mandated access.  If there are other social objectives for certain very unique and particular suppliers who ask for mandated access, like a municipality, like another level of government, I think that is another kind of discussion.  It is interesting, but it is not something that the bureau's test is really about.

listnum "WP List 3" \l 12483             MR. JANIGAN:  It is something, of course, that the CRTC has to take into consideration under its telecom objectives though.

listnum "WP List 3" \l 12484             MR. CHURCH:  That is up to the Commission to decide.

listnum "WP List 3" \l 12485             MR. HARITON:  If I may, Mr. Janigan, the Commission circulated a possible framework just before the hearing where they categorized ‑‑ they had an attachment to a letter of October 3 and here they categorized possible mandated access.

listnum "WP List 3" \l 12486             The fifth category was public good, which would include functionalities that would not meet the criteria of the Commission's definition of essential facility but there would be general agreement that the functionalities should continue to be made available to competitors via mandatory unbundling for reasons of public benefit such as access to 9‑1‑1 call routing services.

listnum "WP List 3" \l 12487             In our comments on that we said yes, that that was certainly acceptable.

listnum "WP List 3" \l 12488             MR. JANIGAN:  And presumably that may fall within the example that I have taken?

listnum "WP List 3" \l 12489             MR. HARITON:  I think that is ‑‑ as I understand it now, that would be it.

listnum "WP List 3" \l 12490             MR. JANIGAN:  Ex ante or ex post?

listnum "WP List 3" \l 12491             MR. HARITON:  That is a good question.

listnum "WP List 3" \l 12492             I think that a lot of these things have already been established.  I can well see that a municipality might come in front or propose to the Commission a certain treatment which would reach some kind of ‑‑ or attempt to reach some kind of municipal objective and that would be open.

listnum "WP List 3" \l 12493             But I mean a lot of these things such as, for example, not breaking the pavement more than once every five years and therefore having to coordinate the build of facilities, which is something that happens north of Toronto now, would be something that would be ordered and it would be in place.

listnum "WP List 3" \l 12494             MR. CHURCH:  And of course, if I might add, if we are talking about a municipality doing something that has social objectives, it might be very much the case that the ILEC is quite willing to provide access to their facilities.

listnum "WP List 3" \l 12495             MR. HUGHES:  Just to clarify, let me note that we are coming here from a competition policy perspective and I don't think we have a position on whether those public goods should be mandated ex post or ex ante.  We really haven't considered that issue.  That is really not part of our area.

listnum "WP List 3" \l 12496             MR. JANIGAN:  Okay.  And it may well be that the public goods within the meaning of that section may not be exhaustive of all the objectives contained in the Telecom Act.  You would agree with that, Dr. Hariton?

listnum "WP List 3" \l 12497             MR. HARITON:  I believe the category is open.

listnum "WP List 3" \l 12498             MR. JANIGAN:  I just have some questions in terms of understanding some of the Bureau evidence.

listnum "WP List 3" \l 12499             On the Supplementary Evidence at page 21, paragraph 53, it is noted here:

                      "The record of competition shows that while entry by the cable companies is likely sufficient to control the market power of ILECs with respect to residential customers..." (As read)

listnum "WP List 3" \l 12500             What is the evidence that is in support of that statement that in fact the cable company entry is sufficient to control the market power?

listnum "WP List 3" \l 12501             MR. CHURCH:  I think we have an interrogatory response, Bell No. 9, and you will find the evidence is listed there.

listnum "WP List 3" \l 12502             MR. JANIGAN:  Okay.

listnum "WP List 3" \l 12503             Move on to paragraph 28, pages 10 and 11, and you have the sentence:

                      "If there is competition from the cable companies for retail telephone that is effective, then the elasticity of derived demand will be large and the input supplier of copper loops will not have significant market power.  If the analysis begins and ends by looking only at substitution alternatives of firms that demand access to the purportedly essential facility, this avenue of substitution will be missed."

(As read)

listnum "WP List 3" \l 12504             I am afraid I don't understand those sentences.  Could you dumb it down for me?

listnum "WP List 3" \l 12505             MR. CHURCH:  Yes.  So if you are asking if an owner of a facility, your telecom facility, has market power, there are two sources of substitution that can discipline its attempt to exercise market power.

listnum "WP List 3" \l 12506             So when it goes to exercise market power, that means it is raising its price above competitive levels.

listnum "WP List 3" \l 12507             What stops any firm from raising the price above competitive levels is that its consumers say or its customers say:  Sorry, I am not going to pay that higher price, I am going to go buy from some competitor, I am going to find some substitution, some substitution possibility, some sort of substitute.

listnum "WP List 3" \l 12508             So if you are looking for the market power potential for a facility upstream, there are two sources of substitution that can discipline the owner of that facility's attempt to exercise market power.

listnum "WP List 3" \l 12509             Upstream substitution occurs when suppliers in downstream markets are willing and able to easily substitute other inputs.  So I have got the upstream firm here and I have got a bunch of firms downstream that buy from him.  So when he goes to raise his price, these firms at the retail level can substitute other suppliers of the upstream input.  That is what we call upstream substitution.

listnum "WP List 3" \l 12510             Downstream substitution occurs if consumers in retail markets can easily substitute to alternative telecommunications service providers who do not use that input.  So when a downstream substitution is sufficient, then any exercise of market power upstream based on limited substitution upstream will have very limited, if any, effects on customers downstream.

listnum "WP List 3" \l 12511             So it is essentially saying ‑‑ the upstream substitution, everyone understands.  They say if there are other substitutes available upstream, then when one supplier upstream tries to raise their price, all of the firms who use that as an input will substitute to some other supplier.

listnum "WP List 3" \l 12512             But that is not the only source of substitution and potential discipline for market power on an upstream input supplier.  Perhaps the most significant one is the extent of competition in the downstream market.

listnum "WP List 3" \l 12513             So if the copper loop supplier goes to raise the price of copper loops, then the firms that use that copper loop as an input, their costs go up.  They try and pass those costs on to consumers in the downstream market.

listnum "WP List 3" \l 12514             If those downstream markets have alternatives where they can go and get their local telephony service from the cable company which doesn't use the copper loops, they can substitute that way.

listnum "WP List 3" \l 12515             Then that initial increase in market power by the copper loop supplier is going to be circumvented by the fact that he loses all of his customers downstream.  He loses all of his customers downstream because when they have higher costs and try and pass it on, they lose their customers to a competing supplier, in this case the cable company.

listnum "WP List 3" \l 12516             So that is what that paragraph is about, is saying that there are two sources of substitution and you have to consider both of them when you are looking at the market power of an upstream input supplier and that is why we have a requirement for dominance downstream.

listnum "WP List 3" \l 12517             MR. JANIGAN:  Thank you very much.

listnum "WP List 3" \l 12518             Finally, I wonder if you could, Dr. Church, touch upon the notion of joint dominance that was set out in the case of ‑‑ the Bank of Montreal case involving a consent order of the Competition Tribunal.

listnum "WP List 3" \l 12519             I think it was an essential facilities case where an electronic ‑‑ where the Interac network had to revise its governance structure and the Bureau dealt with the issue of ‑‑ or the agreement dealt with the issue of joint dominance.

listnum "WP List 3" \l 12520             I was wondering if you could comment upon the concept from that case in terms of its relevance in a market where there are two providers, cable and an ILEC.

listnum "WP List 3" \l 12521             MR. HUGHES:  Could you perhaps be a little more specific?  I understand you are addressing Interac and you are addressing the issue of joint dominance.

listnum "WP List 3" \l 12522             MR. JANIGAN:  Well, I am curious whether or not the concept of joint dominance as expressed in that decision has any relevance for us today in looking at the position of cable and ILECs in a market.

listnum "WP List 3" \l 12523             MR. HUGHES:  Thanks.  I think that is a little easier.

listnum "WP List 3" \l 12524             MR. CHURCH:  Under the Competition Act, it is possible for joint dominance, which means that the firms are coordinating their activities and it is a coordinated exercise of market power, so it is a joint control of the market.

listnum "WP List 3" \l 12525             When we talked about yesterday the unilateral versus the coordinated exercise of market power, this would be a coordinated exercise of market power.

listnum "WP List 3" \l 12526             One of the things I think you have to recognize in the Interac case ‑‑ and there are other witnesses who are going to be available to you over the course of this proceeding who are experts in the Interac case and have written extensively about the Interac case, which would be a better source to ask the relationship between joint dominance and the specifics of the Interac case than me.  But in that case you had a joint venture, a very simple level.  Interac involved the joint venture, as far as I know.

listnum "WP List 3" \l 12527             In this industry we are not talking about a joint venture where there are contractual restrictions between cable companies and incumbent local telephone carriers.  So that would be one of the ways that I would distinguish between the Interac case and what is going on here.

listnum "WP List 3" \l 12528             THE CHAIRPERSON:  Let's stay away from the Interac case.  You are not a legal expert and you are being asked a very specific question, where they kind of joint dominance between an ILEC and a cable company.  That's really what the question is.

listnum "WP List 3" \l 12529             MR. CHURCH:  That question, I think what you are really asking is what is the potential for coordinating effects.  What is the potential for them ‑‑ not with any contractual instrument or anything else ‑‑ to engage in what we would call tacit collusion or to be able to ‑‑ that is a nasty word to use the "collusion" word, but say that they can coordinate by observing how their rivals respond to what they do.  Are they able to move closer to a monopoly pricing level than when they compete against each other?

listnum "WP List 3" \l 12530             So again, if we go back to Bell Interrog No. 9 we list five characteristics in this industry and on the basis of those characteristics, along with some additional features, the Bureau would argue it makes it very unlikely that forbearance, when we have just the two competitors ‑‑ and we have forborne so we are not regulating, otherwise this discussion doesn't make any sense, but we are assuming that we have forborne what can happen ‑‑ will there be a coordinated effect?

listnum "WP List 3" \l 12531             So to understand the potential for coordinated effect, the two firms have to reach an agreement.  So they have to decide what ‑‑ they have coordinate.  That means that they have to agree to what it is that they are trying to do.

listnum "WP List 3" \l 12532             And they can't do it explicitly because they will run into problems with section 45 under the Competition Act, that is illegal, criminally illegal, and so they have to do this in a way which, you know, it's a wink‑wink, nudge‑nudge kind of thing where they communicate through their prices and it may be very difficult for them to reach a consensus on what that coordinated outcome can be.  If they can't reach a consensus on what the coordinated outcome can be, they are not going to be able to coordinate.

listnum "WP List 3" \l 12533             There are a number of reasons that the Bureau has pointed out in the local forbearance proceeding, and I think Bell in its evidence of CRA lists a bunch or reasons as well based on what the Bureau's analysis was in local forbearance which indicates why this kind of coordination would be difficult.

listnum "WP List 3" \l 12534             So I give you those references on the record and I will summarize them here.

listnum "WP List 3" \l 12535             The first this is, the cable companies and the new entrants have much smaller market shares than the incumbents and, consequently, they are not interested in cooperating, they are interested in acquiring market share and growing the customer base.

listnum "WP List 3" \l 12536             The cable companies use a very different technology and have different costs.  The cable companies have different bundles than the ILECs do.  So all of those things are going to make reaching an agreement complicated.

listnum "WP List 3" \l 12537             In addition, this is an industry where we have technological change and we have innovation occurring.  There are new products and new services being introduced.  Product innovation and reductions in costs result in market disruptions since the innovating firm is trying to make significant gains at the expense of its rival.  Those kinds of things make it very difficult to coordinate and have a nice, cosy duopoly.

listnum "WP List 3" \l 12538             Second, the focus of competition between the cable company and the ILEC will not just be one the price of local exchange services.  Right?  The world we are evolving to is that the cable company and the ILEC are going to be competing to provide broadband access.  If I get access to a particular location, then I get to provide all the services that go down the broadband pipe, right, digital telephony, television services and other kinds of things.

listnum "WP List 3" \l 12539             So you are going to have intense competition to be the provider of the pipe into a particular business or residential locations.  Again, that is going to make ‑‑

listnum "WP List 3" \l 12540             And competition to do that is going to be on many dimensions, service, reliability, quality, applications and price.  All of that is going to set up a situation where it is going to be very difficult to have coordination.

listnum "WP List 3" \l 12541             Third, I think that this is true that the cable companies and the ILECs have historically been rivals in the public policy arena.  They are not natural allies.  They don't belong to the same trade associations and the same lobby groups, so the industry structure is not naturally conducive to cooperative outcomes.

listnum "WP List 3" \l 12542             Fourth, and I think this is important, the ability to coordinate depends on is it truly a duopoly or in fact do we have other sources of competition which can disrupt that in any kind of coordinated outcome among the two?

listnum "WP List 3" \l 12543             Clearly the access independent VoIP suppliers are out there on the broadband pipes ‑‑ they could easily disrupt this ‑‑ and we have wireless as other options.

listnum "WP List 3" \l 12544             So if you put all those things together, I don't think that the concern of the Bureau is going to be about a coordinated outcome.

listnum "WP List 3" \l 12545             In fact, going back to a paper that was introduced yesterday, "Is Two Enough?" paper, if you read that paper carefully at the end of it they say that the potential for coordination is a very low risk with the two competitors in the Netherlands.

listnum "WP List 3" \l 12546             THE CHAIRPERSON:  Could I summarize it by saying theoretically possible, but highly unlikely?

listnum "WP List 3" \l 12547             MR. CHURCH:  Very highly unlikely.

listnum "WP List 3" \l 12548             MR. JANIGAN:  Is it the Bureau's belief that there has been intense price competition between cable and ILECs with respect to the delivery of broadband services to date?

listnum "WP List 3" \l 12549             MR. CHURCH:  I'm not sure that we would necessarily have a view in terms of the way that you have stated that question.

listnum "WP List 3" \l 12550             I guess our view would be to say, as in the Osborne Report, that he points to competition between the broadband as being in a situation where it looks like the duopoly outcome is acceptable compared to alternatives.

listnum "WP List 3" \l 12551             MR. JANIGAN:  The state of price competition between the two suppliers is satisfactory from the Bureau's standpoint?

listnum "WP List 3" \l 12552             MR. HUGHES:  Ordinarily we are not in the business of assessing the price competitiveness of a market unless we have a particular issue before us.  So we don't have any particular view and we don't have particular evidence, except for what we have for this proceeding.

listnum "WP List 3" \l 12553             MR. JANIGAN:  Thank you, Mr. Chair.  Those are all the questions from my panel.

listnum "WP List 3" \l 12554             I may add that it is not my intention to sit through all of this hearing when I don't have an occasion to cross‑examine.  I mean no disrespect to the panel or the witnesses.  I find that I can effectively monitor the other through the streaming broadcast or through the transcripts and will try to be available in a timely fashion when it is my turn to cross‑examine.

listnum "WP List 3" \l 12555             So I ask the Chair's indulgence for my absence.

listnum "WP List 3" \l 12556             THE CHAIRPERSON:  All right.  Thank you.

listnum "WP List 3" \l 12557             Madam Giroux‑Girard, who is next?

listnum "WP List 3" \l 12558             COMMISSIONER CRAM:  I have a question.

listnum "WP List 3" \l 12559             THE CHAIRPERSON:  Oh, did you have a question for Mr. Janigan?

listnum "WP List 3" \l 12560             COMMISSIONER CRAM:  No, no.

listnum "WP List 3" \l 12561             THE CHAIRPERSON:  We don't need Mr. Janigan for that?

listnum "WP List 3" \l 12562             COMMISSIONER CRAM:  Oh, no.  No.

listnum "WP List 3" \l 12563             THE CHAIRPERSON:  Go ahead.  If you want to follow up on something that came up during the cross‑examination, by all means, do.

listnum "WP List 3" \l 12564             COMMISSIONER CRAM:  Back to joint dominance.

listnum "WP List 3" \l 12565             What we have seen here, what's happened, at least my view of what has happened in terms of the cable entrants, is that there is competition for ‑‑ aside from Vidéotron, there is competition only for the high‑end customer and sort of the cherry‑picking.

listnum "WP List 3" \l 12566             I think Shaw was charging $60 when they first went into Alberta, somewhat less in Manitoba.  So it's not really ‑‑ it's only competition for the higher level.

listnum "WP List 3" \l 12567             Can we ever expect that ‑‑ and they are doing very well.  So if they are doing very well, can you ever expect that they would get to the point where there would be competition for local service alone or anything like that?

listnum "WP List 3" \l 12568             MR. CHURCH:  I think this is a very interesting question.  It is really a question about the cable company's entry strategy and you would expect that they would go after customers where they could make the most money first.

listnum "WP List 3" \l 12569             But the economics are right, I mean their costs are very low.  They have all the sunk costs in the network, they have the sunk costs in the ability to upgrade the network to provide broadband, they have the sunk costs in the ability to provide the telephony, the actual costs associated with actually hooking up a particular location to simple POTS is, given that the location is already wired for the cable company, is actually fairly small.  It's the truck roll out and the modem, but ‑‑

listnum "WP List 3" \l 12570             COMMISSIONER CRAM:  Actually, they didn't even come to my home.

listnum "WP List 3" \l 12571             MR. CHURCH:  Yes.  You have broadband, I take it.

listnum "WP List 3" \l 12572             COMMISSIONER CRAM:  Yes.

listnum "WP List 3" \l 12573             MR. CHURCH:  Yes.  So then they can just unplug you.  The existing modem has a bunch of places that you can plug things into.  Right?

listnum "WP List 3" \l 12574             COMMISSIONER CRAM:  Yes.

listnum "WP List 3" \l 12575             MR. CHURCH:  So as long as the revenues that they expect to get from people who just want POTS is above the cost of providing them, we would expect that would eventually happen.

listnum "WP List 3" \l 12576             One of the things ‑‑ I'm not quite sure about this and so maybe I shouldn't comment, but I think that Shaw actually has an option to just get local service without long distance bundled into it.

listnum "WP List 3" \l 12577             COMMISSIONER CRAM:  We can find out.

listnum "WP List 3" \l 12578             MR. CHURCH:  You can find that out.

listnum "WP List 3" \l 12579             COMMISSIONER CRAM:  Yes.

listnum "WP List 3" \l 12580             MR. CHURCH:  Certainly one of the phones in my house has that option and it's only $25.

listnum "WP List 3" \l 12581             COMMISSIONER CRAM:  All right.  Thank you.

listnum "WP List 3" \l 12582             THE CHAIRPERSON:  All right.  Madam Giroux‑Girard...?

listnum "WP List 3" \l 12583             THE SECRETARY:  Thank you, Mr. Chairman.

listnum "WP List 3" \l 12584             I will now ask counsel Tacit to proceed on behalf of Cybersurf.

listnum "WP List 3" \l 12585             Thank you.

listnum "WP List 3" \l 12586             MR. TACIT:  Thank you.

EXAMINATION / INTERROGATOIRE

listnum "WP List 3" \l 12587             MR. TACIT:  Mr. Chairman, Commissioners, panel members, my name is Chris Tacit.  I represent Cybersurf Corporation in this proceeding.

listnum "WP List 3" \l 12588             Seated beside me is Mr. Marcel Mercia, Chief Operations Officer of the company.

listnum "WP List 3" \l 12589             In your evidence the Bureau indicated that the competitive significance of mandated access to unbundled loops may not be that significant and perhaps even minimal.  Is that right?

listnum "WP List 3" \l 12590             MR. HUGHES:  Could you point us somewhere, please?

listnum "WP List 3" \l 12591             MR. TACIT:  Yes, paragraph 40 of your main evidence, the last sentence of the paragraph.

listnum "WP List 3" \l 12592             MR. CHURCH:  Paragraph 40 has been withdrawn because it was based on the Sone Report.

listnum "WP List 3" \l 12593             MR. TACIT:  Well, fair enough, but would you still agree with that conclusion, whether it's based on the Sone Report or anything else on the record?

listnum "WP List 3" \l 12594             MR. CHURCH:  I think the general nature of our evidence is, in fact, that we think the competitive significance of the non‑ILEC/non‑cable company people who use unbundled loops has been small.

listnum "WP List 3" \l 12595             MR. TACIT:  Okay.  Could it have been the case that part of the reason for that reduced significance is that prices for the loops were, in fact, too high, therefore blunting the use of those resources as an input?  Is it possible?

listnum "WP List 3" \l 12596             MR. CHURCH:  It's possible.  In theory, it's possible.

listnum "WP List 3" \l 12597             You know, the Bureau has pointed out earlier in its evidence that there are five requirements, as I recall, to make sure that this model works effectively.  One of them is getting the price of these things correct.  Another point in the Bureau's evidence is that is it really, really difficult to get the price correct.

listnum "WP List 3" \l 12598             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12599             Can you turn to paragraph 45 of your first‑round evidence, please?  Page 17, I believe.

listnum "WP List 3" \l 12600             In there, the Bureau states:

                      "Apart from the entry of the cable companies, the competitive landscape has changed in two other important ways that have implications for the competitive significance of competitors that make extensive use of ILEC network facilities to provide service.  The first is the development of broadband services in competition between cable and telecom networks to provide broadband access; the second is the increase in the availability and importance of bundling of voice telecommunication services, including local and long distance service, broadband and video services.  Under these circumstances, the competitive significance of entrants that provide only narrow‑band local service using unbundled ILEC network elements is unclear."  (As read)

Is that still the Bureau's evidence?

listnum "WP List 3" \l 12601             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12602             MR. TACIT:  Now, does the Bureau agree that facilities‑based broadband platforms of the ILECs and cable companies are now the predominant means by which bundles of retail, voice, Internet and video services can be delivered to consumers?

listnum "WP List 3" \l 12603             MR. HARITON:  Yes.

listnum "WP List 3" \l 12604             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12605             I want to now just briefly deal...well, perhaps not so briefly, but deal a little bit more with this notion of joint conduct and coordination, and I want to do it from a couple of different perspectives than have been discussed so far.

listnum "WP List 3" \l 12606             First of all, my understanding is that a group of firms in an industry can profitably coordinate their behaviour if they are capable of accommodating the reactions to the conduct of the other.  Is that correct?

listnum "WP List 3" \l 12607             MR. CHURCH:  So, in theory, right, we know that if they competed against each other, even in an oligopoly situation, if they just engaged in unilateral exercise of market power, so they make their best choice for them, given their anticipation of how their rivals are going to choose things, that will not lead to monopoly pricing and monopoly profits.

listnum "WP List 3" \l 12608             If, instead, they try to coordinate their thing so that they all agree that we have to move to these prices and it's only profitable for one of them to move to that higher price, if they all move to that higher price that's a coordinated exercise in market power.  That's possible.  As we have discussed earlier today, there are a great deal of difficulties involved in doing that.

listnum "WP List 3" \l 12609             MR. TACIT:  Okay, but I will get into that, so I would appreciate it if you would just give me the answers to the specific questions I'm asking.  I will give you ample opportunity to discuss the issue with me.

listnum "WP List 3" \l 12610             Can you also agree with me that this kind of coordination can be either explicit or implied?

listnum "WP List 3" \l 12611             MR. CHURCH:  Sorry, did you say implicit and implied?

listnum "WP List 3" \l 12612             MR. TACIT:  No, explicit or implied?

listnum "WP List 3" \l 12613             MR. CHURCH:  Explicit or tacit is the term I would usually ‑‑

listnum "WP List 3" \l 12614             MR. TACIT:  Yes, I was trying to avoid that word.

‑‑‑ Laughter / Rires

listnum "WP List 3" \l 12615             MR. TACIT:  Now, can you also agree that it can involve price levels, allocation of customers or territories or any other dimension of competition?

listnum "WP List 3" \l 12616             MR. CHURCH:  Can.

listnum "WP List 3" \l 12617             MR. TACIT:  Okay.

listnum "WP List 3" \l 12618             Can you please refer to Cybersurf/TELUS‑2, page 1 of 2?

listnum "WP List 3" \l 12619             MR. HUGHES:  That will take a moment.  Do you have a copy?

listnum "WP List 3" \l 12620             MR. TACIT:  We did provide copies.

listnum "WP List 3" \l 12621             THE CHAIRPERSON:  The Secretary will hand them on, just hang on a second.

listnum "WP List 3" \l 12622             MR. TACIT:  Yes.

listnum "WP List 3" \l 12623             It's the set of documents that has the circled numbers at the bottom of the right page.

listnum "WP List 3" \l 12624             Sorry, do you have that now?

listnum "WP List 3" \l 12625             MR. CHURCH:  Yes, we do, but we haven't read it.

listnum "WP List 3" \l 12626             MR. TACIT:  Okay.  You will see in that first page there was an excerpt published from an article that appeared in network letter, Decima Reports.  In here the editor states:

                      "There's something wrong with the supposedly high competitive Internet services business when one of the country's largest Internet providers can raise prices with little or no competitive pressures from its rivals.  Nonetheless, Rogers Communications plans to hike its Internet service prices.  The move was announced by VP of Finance, John Gossling, at the Bear Sterns & Co. 19th Annual Media Conference in Florida this week."  (As read)

listnum "WP List 3" \l 12627             Then towards the bottom of the next paragraph, it says:

                      "Bell will refrain from reacting because the new motto of BCE is profitable growth, a strategy championed by George Cope."  (As read)

listnum "WP List 3" \l 12628             And then at the top of the next page, there's the additional quote:

                      "The Internet service sector isn't the only market experiencing this kind of level playing field.  The mobile wireless industry is criticized for its lack of competitiveness."  (As read)

listnum "WP List 3" \l 12629             Now, what I would like to ask you is: if indeed it's true that Rogers can raise its price for Internet services in that fashion without fear of discipline from its largest competitor, Bell, does that not suggest the possibility of coordinated effects?

listnum "WP List 3" \l 12630             MR. CHURCH:  Well, you know, this is not actually a very fulsome or complete competition analysis here, right?  You often find that when prices go up there are many reasons why prices might go up, right?  It's not just because they are coordinating.  There might be a cost shock or a common cost shock or whatever.

listnum "WP List 3" \l 12631             In competitive markets, the prices of the firms are the same and move together.  In oligopolistic markets the prices of the firms are the same and move together.  So just because the prices move together and are similar doesn't tell you anything about whether they are ‑‑ the reason for that price change and the reason they move together is coordinated conduct or common cost shocks and other common conditions that you would find in a competitive industry.

listnum "WP List 3" \l 12632             That's why the nature of the analysis that's done is very different.  It's to go through the kinds of things we talked about earlier, in terms of you identify the nature of the industry, you look at the characteristics of that industry.

listnum "WP List 3" \l 12633             You look at what you know, in terms of what makes it easy to coordinate, what makes it hard to coordinate, what makes deviations easily observable so they can be punished, what makes things hard to understand when the firms haven't played along and coordinated.  You look at what makes it easy for harsh punishments versus weak punishments.

listnum "WP List 3" \l 12634             So you are looking for what are the factors that make it easier to reach an agreement, an implicit agreement, if you want to call it that, and what are the factors which make it easy to detect ‑‑ detect, punish and ‑‑ detect, punish and the profitability of deviation.

listnum "WP List 3" \l 12635             So you are looking ‑‑ stronger, swifter and more certain is George Stigler's motto for the oligopolistics ‑‑ oligopolists.  What makes punishment stronger, what makes it swifter, what makes it more certain that you will be punished, because those are the ‑‑ the stronger, swifter and more certain the punishment, the more likely it is that you are able to sustain some sort of cooperative outcome.

listnum "WP List 3" \l 12636             So you look for what are the factors that make it easy to reach an agreement, what are the factors that make it possible to enforce an agreement, and you do it in terms of industry characteristics and nature of that industry.  Because that kind of evidence is determinative, in terms of whether it's likely or not that a change in the price that is common and across firms is in fact due to coordinated behaviour and not due to some common cost shock.

listnum "WP List 3" \l 12637             So we have this basic observation problem that in all industries the prices are going to move together.  It doesn't tell you anything about whether they are moving together because it is coordinated conduct.

listnum "WP List 3" \l 12638             MR. TACIT:  I think my question was a lot simpler than that.  I think all it was, does it suggest the possibility of coordinated effects?  In other words, if you were faced with that would you want to look into it further and see if there is a possibility of coordinated effect, if that is happening in the industry?

listnum "WP List 3" \l 12639             MR. HUGHES:  We would need to know a lot more before we would be able to analyze this.  This is out of context.  We would be looking for all, on a factual basis and having information on a this complaint, the basic information behind it and ultimately to be assessing from the Competition Bureau's point of view the very factors that Dr. Church alluded to.

listnum "WP List 3" \l 12640             Because we do have to assess, again a very real issue, whether these commonality of prices or these observed price effects are merely the product of a competitive industry, of competitive markets, rather than something coordinated effects.  We agreed very early on that as a matter of theory it is always possible that there could be coordination.  And if that is where you are trying to go, we agree with that.  But this information itself adds nothing one way or the other to that comment.

listnum "WP List 3" \l 12641             MR. TACIT: Okay, well let us look at what Rogers itself had said about the matter.  There is a document that I have provided called "Consequences of Uncompetitiveness," it is a three‑paragraph article.  Could I please have that circulated?

listnum "WP List 3" \l 12642             THE SECRETARY:  Are you filing this as an exhibit, Mr. Tacit?

listnum "WP List 3" \l 12643             MR. TACIT:  I will be.

listnum "WP List 3" \l 12644             THE SECRETARY:  Okay, that will be Exhibit No. 1 for Cybersurf.

                      EXHIBIT CYBERSURF‑1:  Competition Bureau's report entitled Merger Enforcement Guidelines September 2004

listnum "WP List 3" \l 12645             MR. ABUGOV:  Mr. Chairman, excuse me for one moment.

listnum "WP List 3" \l 12646             This document was handed to us this morning just before the hearing started.  Our witnesses haven't seen it yet, it is not on the record.  The Commission's organization and conduct letter required that documents other than interrogatory responses, and this document is not an interrogatory response, should be provided to the Commission and to the parties in advance.  I think the intent of that clearly was that parties would have a chance to review it before the cross‑examination began and not during it.  And I think the Commission also wanted to expedite process here as well.

listnum "WP List 3" \l 12647             Now, this is a short document, so we are not going to object to it going on the record.  But our witnesses haven't seen it yet and they are going to need sometime to review this document, albeit a short one.  Thank you.

listnum "WP List 3" \l 12648             THE CHAIRPERSON:  What do you have to say to that?

listnum "WP List 3" \l 12649             MR. TACIT:  Well, Mr. Chairman, the cross‑examination process is dynamic and I have clearly modified my questioning so as not to duplicate what others have done, but to pick‑up on certain topics.  I completed my preparation at midnight last night and this morning when Mr. Abugov and I came to the room was my first opportunity to provide him this document and one other similar short one, which I may use.

listnum "WP List 3" \l 12650             I don't think there is much to these documents if the witnesses need a couple of minutes to look them over.  The other one can be passed out at the same time.  I have no objection to that, I don't have a problem with that.

listnum "WP List 3" \l 12651             THE CHAIRPERSON:  I do have an objection to it.  I mean, you have known the Bureau's position now for sometime and it is their expert witness.  We are not talking about effects changing rapidly, we are asking them to apply their expertise and share it with us and give us an intellectual framework.

listnum "WP List 3" \l 12652             This whole process only works if everybody plays by the rules.  I don't see why you should be allowed an exception here because it happens to be a short document.  But I mean, otherwise all sorts of new documents come and there has to be an end point.  So I am afraid you are going to have to ask them on documents that you have already notified, not some that you are just introducing now.

listnum "WP List 3" \l 12653             MR. TACIT:  Thank you, Mr. Chairman.

listnum "WP List 3" \l 12654             There was a reference in Cybersurf‑CRTC‑601.  Do you have that?

listnum "WP List 3" \l 12655             MR. HUGHES:  I don't.  Unless, is it in this stapled ‑‑

listnum "WP List 3" \l 12656             MR. TACIT:  There was a package of responses, CRTC ‑‑

listnum "WP List 3" \l 12657             MR. HUGHES:  Is it the second one stapled?

listnum "WP List 3" \l 12658             MR. TACIT:  Oh yes, sorry, it is in that package, it is page 8, the little circle at the bottom.

listnum "WP List 3" \l 12659             MR. HUGHES:  Page 8?

listnum "WP List 3" \l 12660             MR. TACIT:  Yes, of that package.

listnum "WP List 3" \l 12661             MR. HUGHES:  Page 8 doesn't have a title on it.  Are you talking about page 6?

listnum "WP List 3" \l 12662             MR. TACIT:  In the package, the one with the circled numbers at the bottom right‑hand corner.

listnum "WP List 3" \l 12663             MR. HUGHES:  Yes, I see that.

listnum "WP List 3" \l 12664             MR. TACIT:  Page 8, little circle ‑‑

listnum "WP List 3" \l 12665             MR. HUGHES:  Yes.

listnum "WP List 3" \l 12666             MR. TACIT:  ‑‑ is page 3 of 3 of Cybersurf‑CRTC‑601.

listnum "WP List 3" \l 12667             MR. HUGHES:  Yes, we have got that, thank you.

listnum "WP List 3" \l 12668             MR. TACIT:  In the middle of that there is an excerpt from the TPRP Report which concluded that the smaller number of mobile providers in Canada and the fact that all three are also owned by large telecom service providers that provide wireline services may mean that there is less competition in the Canadian market than in the U.S. market, which consequently has resulted in higher prices, less innovation, lower uptake and lower rates of usage.

listnum "WP List 3" \l 12669             Do you have any knowledge of whether this is in fact the case?  Do you agree with this, disagree with it, one way or the other?

listnum "WP List 3" \l 12670             MR. HUGHES:  I'll take a moment please.

listnum "WP List 3" \l 12671             MR. HARITON:  I wasn't involved in that part of the TPRP, Mr. Tacit, and I do remember there were discussions about that while that report was being written.  I wasn't part of them, but I do know that there is a fairly strong debate in Canada right now as to the competitiveness of wireless with some people saying it is and some people saying it isn't.  I haven't studied the subject recently.

listnum "WP List 3" \l 12672             MR. TACIT:  If in fact this were to turn out to be ‑‑ I am sorry.

listnum "WP List 3" \l 12673             DR. CHURCH:  If I might add something.  I mean, there is two issues here that you have to be careful about.  One, is that in these industries there are very large fixed costs that are sunk upfront and so, therefore, you have to be careful about how you define market power and what the meaning of that market power is.

listnum "WP List 3" \l 12674             If you are talking about a difference between price and short‑run marginal cost, well then it is going to be the case that they all have to be exercising market power or they will all be bankrupt.  And so therefore, you have to move to a broader view of what you mean by costs in terms of looking at long‑run average costs and the firms have to be able to raise prices above the long‑run average costs.

listnum "WP List 3" \l 12675             Because these markets are characterized by these large economies of scale you have to be very careful when you make comparisons between Canada and the United States because the American market is much larger and so, therefore, they are going to have larger economies of scale.  Therefore, you might expect that just on the basis of that from a theoretical perspective that their prices should be lower.

listnum "WP List 3" \l 12676             I would also point out that, and I can't find it right now, but I think there is a paragraph about this point in the Osborne Report where he cites some evidence which is contrary to what the TPRP says here.  So, you know, I guess the question is is someone out there doing the full analysis of what competitive conditions are in the wireless markets or not?  This isn't really the forum in which to do that.

listnum "WP List 3" \l 12677             THE CHAIRPERSON:  May I remind you, we are not talking about wireless.

listnum "WP List 3" \l 12678             MR. TACIT:  I understand.

listnum "WP List 3" \l 12679             THE CHAIRPERSON:  I understand you want to have general views of principle and you have got them, but let us move back to where we are, which is wireline.

listnum "WP List 3" \l 12680             MR. TACIT:  Yes.  So you would agree that in most geographic markets in Canada there are two fixed lines facilities‑based carriers providing local exchange, internet and so on.  We have already established that, correct?

listnum "WP List 3" \l 12681             MR. HUGHES:  In many markets and in residential primarily.

listnum "WP List 3" \l 12682             MR. TACIT:  Yes.  So I would like to now look at that interrogatory that was referred to before, The Bureau Companies No. 9. I think you have referred to it a number of times already.

listnum "WP List 3" \l 12683             DR. CHURCH:  Yes, we have it.

listnum "WP List 3" \l 12684             MR. TACIT:  Okay.  Now, I am looking at what is called page 4 of 5 at the top of that document which is, I guess, the second page of the actual response.

listnum "WP List 3" \l 12685             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12686             MR. TACIT:  There the Bureau says:

                      "The residential exchange service offered by the cable companies is in the same product market as the local exchange service offered by the ILEC."  (As read)

listnum "WP List 3" \l 12687             I gather you still agree with that?

listnum "WP List 3" \l 12688             MR. CHURCH:  I think actually if you read this response carefully, we said that under the local forbearance proceedings we said if these five things were true, then that was likely to be a situation where you could justify forbearance.

listnum "WP List 3" \l 12689             We put some tests in in terms of our local forbearance, some factual evidence that we would like to see.  In the paragraph at the bottom it suggests what the evidence looks like it has been.  I mean, the local forbearance discussion was in 2005.  We have now had two years to see what has gone on.  So then there is some discussion there about one of the things that the Bureau focused on in terms of making sure we were in the same product market was looking at small churn rate for digital telephony.  That seems to have been the case, that it is very suggestive that they are in the same product market.

listnum "WP List 3" \l 12690             MR. TACIT:  Would you agree with me that the high speed services of ILECs and cable companies are also in the same product market?

listnum "WP List 3" \l 12691             MR. CHURCH:  I think as an initial proposition that sounds correct, but not necessarily.  We would like to make sure that we had done the analysis to make sure they are in the same product market.

listnum "WP List 3" \l 12692             But prima facie, going in it would be our hypothesis, I suspect, that they are in the same market, but we have to do the analysis.

listnum "WP List 3" \l 12693             MR. TACIT:  Fair enough.

listnum "WP List 3" \l 12694             I suspect that your answer would be, in the case of geographic markets, that the local exchange services and internet services are provided in the same markets.  Is that correct?

listnum "WP List 3" \l 12695             MR. HUGHES:  Could you clarify that, please?

listnum "WP List 3" \l 12696             MR. TACIT:  I'm asking you if both ILECs and cable companies are providing local exchange services that are in the same geographic market and high speed services that are in the same geographic market.

listnum "WP List 3" \l 12697             MR. CHURCH:  That is not the way the competition analysis would work in the sense that we start at a particular geographic location and then we build from that geographic location, we build the nature of the geographic market.  So, we use anti‑trust market competition principles.

listnum "WP List 3" \l 12698             MR. TACIT:  I think you are trying to anticipate my line of questioning.  All I asked you was whether you think that they are in the same market or not.

listnum "WP List 3" \l 12699             MR. CHURCH:  Do you want to rephrase your question and ask it again because that is not how I interpreted what you asked us.

listnum "WP List 3" \l 12700             MR. TACIT:  Are ILECs and cable companies providing local exchange services that are in the same geographic market?

listnum "WP List 3" \l 12701             MR. CHURCH:  The same geographic market?  I mean, there are many multiple geographic markets across the country.

listnum "WP List 3" \l 12702             MR. TACIT:  And high speed services.  Your answer would be the same?

listnum "WP List 3" \l 12703             MR. CHURCH:  I said it depends on which particular location that you are looking at.

listnum "WP List 3" \l 12704             If I have high speed access provided by a cable company in Saskatoon, it is not in the same geographic market as DSL services provided in Vancouver by the ILEC.

listnum "WP List 3" \l 12705             MR. TACIT:  Would you agree that both of them tend to provide it in Saskatoon and in Vancouver and in Ottawa and in Toronto?

listnum "WP List 3" \l 12706             MR. HUGHES:  We don't know that for a fact.

listnum "WP List 3" \l 12707             We need to know what the geographic market is before we can meaningfully answer your question.

listnum "WP List 3" \l 12708             MR. TACIT:  Let me approach this slightly differently, then.

listnum "WP List 3" \l 12709             The Bureau has put out Merger Enforcement Guidelines in September of 2004 and an excerpt from those was provided to you hopefully through counsel yesterday.  Do you have that document?

listnum "WP List 3" \l 12710             MR. HUGHES:  It will take a moment.

‑‑‑ Pause

listnum "WP List 3" \l 12711             MR. HUGHES:  We have the MEGs themselves.  We don't have the particular excerpts.

listnum "WP List 3" \l 12712             MR. TACIT:  Fair enough.  I can refer to the sections.

listnum "WP List 3" \l 12713             MR. HUGHES:  Sorry, this is an excerpt.  Yes, we do have it; we do have one copy, thanks.

listnum "WP List 3" \l 12714             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12715             THE CHAIRPERSON:  Mr. Hughes, what document are you referring to?

listnum "WP List 3" \l 12716             MR. HUGHES:  Excuse me?

listnum "WP List 3" \l 12717             THE CHAIRPERSON:  Which document are you referring to right now?

listnum "WP List 3" \l 12718             MR. HUGHES:  I was handed a document that has got the words "Cybersurf EX" written on top of it.  It's the MEGs; it's the title page of the MEGs.

listnum "WP List 3" \l 12719             THE CHAIRPERSON:  Does it say MTS followed by exhibits?  Is that the one?

listnum "WP List 3" \l 12720             MR. HUGHES:  No, it says "Cybersurf EX."

listnum "WP List 3" \l 12721             THE SECRETARY:  EX stands for exhibit.  I believe the exhibits were not received, so ‑‑

listnum "WP List 3" \l 12722             MR. HUGHES:  So this is not an exhibit.  Is that what you are telling me?

listnum "WP List 3" \l 12723             THE SECRETARY:  What is the title of your document?

listnum "WP List 3" \l 12724             MR. HUGHES:  It is the front page of the Merger Enforcement Guidelines of 2004.

listnum "WP List 3" \l 12725             THE SECRETARY:  That is the copy that was provided to your lawyer in advance probably, but it was not received before the Commission.

listnum "WP List 3" \l 12726             THE CHAIRPERSON:  Mine says MTS, but I have the document.  Let's go.

listnum "WP List 3" \l 12727             MS PALUMBO:  Mr. Chairman, I do believe that MST made reference to this document yesterday during cross, but I don't know if it was actually entered as an exhibit yesterday.

listnum "WP List 3" \l 12728             MR. McCALLUM:  Mr. Chair, I believe the MTS Allstream Exhibit No. 3 is the merger guidelines, and if that is the document to which Mr. Tacit wishes to refer, that document is already on the record.

                      EXHIBIT MTS‑3:  Information Bulletin of Merger Remedies in Canada Competition Bureau September 22, 2006

listnum "WP List 3" \l 12729             MR. TACIT:  It doesn't matter to me which version we are using.

listnum "WP List 3" \l 12730             THE CHAIRPERSON:  I just wanted to follow you.  What is the title of the document you have?

listnum "WP List 3" \l 12731             MR. TACIT:  It is "Merger Enforcement Guidelines" September 2004.  That is the document.

listnum "WP List 3" \l 12732             THE CHAIRPERSON:  2004.  I have the merger information bulletin and merger remedies, which is clearly not the same document.

listnum "WP List 3" \l 12733             MR. TACIT:  That is not the same thing.

listnum "WP List 3" \l 12734             THE CHAIRPERSON:  Why don't we take a ten‑minute break here and then resume.

‑‑‑ Upon recessing at 10:16 a.m.

‑‑‑ Upon resuming at 10:34 a.m.

listnum "WP List 3" \l 12735             THE CHAIRPERSON:  Would you please take you seats so we can resume.

listnum "WP List 3" \l 12736             Counsel, you have some announcements to make.

listnum "WP List 3" \l 12737             THE SECRETARY:  Yes, Mr. Chairman.

listnum "WP List 3" \l 12738             The undertaking by the Commission yesterday was to provide to the Bureau and obviously to the room copies of the documents to which Commissioner Cram referred to yesterday.

listnum "WP List 3" \l 12739             We have copies which we will call, I guess, CRTC Exhibit 1, the U.S. ILEC data aggregate source FCC ARMIS database report 43‑02.

                      EXHIBIT CRTC‑1:  U.S. ILEC data aggregate source FCC ARMIS database report 43‑02.

listnum "WP List 3" \l 12740             MR. TACIT:  Secondly, we have excerpt    s from Ofcom's document called "The Communications Market, 2007."  It consists of four pages called "Key Points."  Then an excerpt from Section 4 Telecommunications.  So we can call that CRTC Exhibit 2.

                      EXHIBIT CRTC‑2:  Document entitled "The Communications Market, 2007," with excerpt from Section 4 Telecommunication.

listnum "WP List 3" \l 12741             THE SECRETARY:  The third document is in the process of being collated, and it will be Exhibit 3.

listnum "WP List 3" \l 12742             It is the Government Accountability Office document, the GAO document.  It is currently linked on the record in response to Rogers Primus interrogatory 12 April 07‑8 dated May 18, 2007.  That document, the GAO document, there is a link to it already on the record.  It will become Exhibit 3 when they finish collating it.

                      EXHIBIT CRTC‑3:  Information bulletin of Mergers, Remedies in Canada Competition Bureau, September 22, 2006

listnum "WP List 3" \l 12743             THE CHAIRPERSON:  Thank you.

listnum "WP List 3" \l 12744             Now, let's get back to our hearing.  We all have the Merger Enforcement Guidelines before us.  You had some questions on them.  Let's go.

listnum "WP List 3" \l 12745             MR. TACIT:  Thank you very much.

listnum "WP List 3" \l 12746             I would like to keep this going as quickly as possible, so I would very much appreciate if you would try not to anticipate my responses.  I will try to make my questions as specific as possible.

listnum "WP List 3" \l 12747             In looking at the coordinated effect section, which is in part 5 of the Merger Enforcement Guidelines, would you agree with me that product homogeneity and cost symmetries among firms are indicators that should be considered in assessing whether there are coordinated effects?

listnum "WP List 3" \l 12748             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12749             MR. TACIT:  So if the Commission finds as a fact that in certain product and geographic markets, local exchange services or broadband internet services of ILECs and cable companies are in the same product and geographic markets, then the Commission ought to turn its mind to considering this item and whether there could be any coordinated effects?

listnum "WP List 3" \l 12750             MR. CHURCH:  As we have discussed earlier, the reason that the Bureau is less concerned about coordinated effects in this case is, in fact, we have gone through the analysis here and I think that we were thinking of in particular the point I made earlier about the competition to be the pipe into the particular location and the nature of the competition is a winner take all in that pipe, that the competition will be on many dimensions:  Service, reliability, quality, applications and price, all of those kinds of things, which is going to make it difficult.  On a broad scope you can say they are in the same market, but are the services homogenous?  There is going to be some differentiation on those dimensions.

listnum "WP List 3" \l 12751             I guess what I am trying to say to you is that those considerations that are in the MEGs, those considerations that are in the industrial organization literature about going through and figuring out the check list approach in terms of thinking about whether the industry is conducive to coordination or not, that is exactly the analysis that the Bureau has done in coming to our conclusion, as we discussed earlier with Mr. Chairman, that it is a theoretical possibility.  Is it very likely?  The answer to that seems to be no.

listnum "WP List 3" \l 12752             MR. TACIT:  I think the Bureau's position is clear, but I am not asking for your position again.

listnum "WP List 3" \l 12753             I am just asking you whether, if the Commission were to find that certain local exchange services or internet services are in the same product and geographic market, that would be a factor that they should consider in looking at coordinated effects?

listnum "WP List 3" \l 12754             MR. HUGHES:  As Dr. Church was trying to clarify, that is one of many factors.

listnum "WP List 3" \l 12755             MR. TACIT:  Understood, thank you.

listnum "WP List 3" \l 12756             Would you also agree that when individual transactions are small and frequent relative to total market demand, deviations from coordinated behaviour are less profitable than when individual transactions are large and infrequent relative to total market demand?

listnum "WP List 3" \l 12757             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12758             MR. TACIT:  Would you agree with me that consumer transactions with ILECs and cable carriers are typically small and infrequent relative to total market demand?

listnum "WP List 3" \l 12759             MR. CHURCH:  I don't think I would necessarily agree because I would have to do an analysis of the way in which prices and, in particular, marketing campaigns are done to decide whether or not they are ‑‑ a marketing campaign where the price is set, whether you would consider that to be small and infrequent.

listnum "WP List 3" \l 12760             MR. HUGHES:  And, in particular, in business markets.  There can be many fact situations.  It is not a steadfast rule.

listnum "WP List 3" \l 12761             MR. TACIT:  No, but I did specifically refer to residential markets.

listnum "WP List 3" \l 12762             MR. CHURCH:  The general point is that we would look and see what the nature of the transactions are, and again, the way this approach works is that there is a whole list of things that you go through and some of them are more important than others for determining any particular fact situation.  So there is going to be a balancing weigh‑off at the end of this checklist thing.

listnum "WP List 3" \l 12763             The Bureau has already given its position in terms of how we weigh these check‑offs and these things that we think are important in the context of this industry versus implicitly the things that we don't think are so important in terms of coming to an assessment about the likelihood of coordinated effects.

listnum "WP List 3" \l 12764             MR. TACIT:  And the Commission may or may not take the same view.

listnum "WP List 3" \l 12765             MR. CHURCH:  Absolutely.

listnum "WP List 3" \l 12766             MR. TACIT:  Do you agree that when information about prices, rival firms and market conditions is readily available to market participants, it is easier to monitor coordinated behaviour, making such coordination more likely?

listnum "WP List 3" \l 12767             MR. HUGHES:  Are you going to tell me which paragraph it is in the MEGS or I just assume it is in the MEGS that you just read to me?

listnum "WP List 3" \l 12768             MR. TACIT:  It is 524.

listnum "WP List 3" \l 12769             MR. HUGHES:  Yes.  So if it is coming from the MEGS, the answer is yes.

listnum "WP List 3" \l 12770             MR. TACIT:  Okay.  So basically, I take it that you basically stand by all of the provisions relating to coordinated effects in the MEGS?  Let us just cut to the chase.

listnum "WP List 3" \l 12771             MR. HUGHES:  Of course.

listnum "WP List 3" \l 12772             MR. TACIT:  Okay, fair enough.

listnum "WP List 3" \l 12773             Would you agree with the proposition that information about ILEC and cable company prices and service offerings is readily available in the marketplace?  Again, if you want to limit it to the residential side, that is fine.

listnum "WP List 3" \l 12774             MR. CHURCH:  To the extent, I guess, that that information is available on web sites, the answer would be yes.  Interesting question.  Yes.

listnum "WP List 3" \l 12775             MR. TACIT:  And would you agree that ILECs and cable carriers account for the vast proportion of total output of local exchange in broadband internet services?

listnum "WP List 3" \l 12776             MR. CHURCH:  Again, which market are we talking about?

listnum "WP List 3" \l 12777             MR. TACIT:  Take your pick.

listnum "WP List 3" \l 12778             MR. CHURCH:  You are asking the questions.  Which ‑‑

listnum "WP List 3" \l 12779             MR. TACIT:  Let us take Ottawa‑Gatineau, your hometown.

listnum "WP List 3" \l 12780             MR. CHURCH:  So geographic or residential ‑‑ sorry, geographic or product market definition?

listnum "WP List 3" \l 12781             MR. TACIT:  It is a total output question.

listnum "WP List 3" \l 12782             MR. CHURCH:  To understand what output it is, it has to be related to a market.  For an anti‑trust analysis, I need to know in what anti‑trust market, what product dimension and what geographic market dimension you are asserting this total output is in.

listnum "WP List 3" \l 12783             MR. TACIT:  Well, in your hometown, Dr. Church, do you think that ILECs and cable carriers account for the vast proportion of total output of local exchange in broadband internet services?

listnum "WP List 3" \l 12784             MR. CHURCH:  I suspect that is the case.

listnum "WP List 3" \l 12785             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12786             Do you consider ‑‑ does the Bureau consider entry by non facilities‑based carriers to be particularly significant in the marketplace?

listnum "WP List 3" \l 12787             MR. HUGHES:  In our view, it is likely less significant than facilities‑based.

listnum "WP List 3" \l 12788             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12789             If the Commission were to find that there are coordinated effects, hypothetically speaking ‑‑ I know that is not the Bureau's position ‑‑ what would the Bureau's prescription be to deal with that?

listnum "WP List 3" \l 12790             MR. HUGHES:  We will take a moment, please.

‑‑‑ Pause

listnum "WP List 3" \l 12791             MR. HUGHES:  I would like to clarify that.  You are asking who is the person doing something in your hypothetical?

listnum "WP List 3" \l 12792             MR. TACIT:  If there were, let's say, tacit or implicit coordinated effects between an ILEC and a cable company in a specific product and geographic market, what would the Bureau's prescription be on the retail or wholesale side to deal with that situation?

listnum "WP List 3" \l 12793             MR. HUGHES:  And who are you suggesting is going to be doing something?  What are you ‑‑

listnum "WP List 3" \l 12794             MR. TACIT:  The Commission.  I am sorry, that is fair.

listnum "WP List 3" \l 12795             MR. HUGHES:  That is what I am asking.  Thank you.

listnum "WP List 3" \l 12796             MR. TACIT:  Yes.

listnum "WP List 3" \l 12797             MR. CHURCH:  If they find this as a matter of fact, that there is this coordinated exercise of market power, then the Commission has to turn to its instruments that are available to it and decide whether the cost of those instruments warrant the benefit that it would get from controlling that market power.

listnum "WP List 3" \l 12798             The Commission has two options.  They can move back to retail rate regulation or they can do something in the wholesale market.

listnum "WP List 3" \l 12799             As the Bureau ‑‑ as we discussed yesterday, the options to do things in the wholesale market, that depends on your essential facilities regime.  As the Bureau said yesterday, we would suggest that you adopt the right definition of an essential facility.

listnum "WP List 3" \l 12800             Our third bullet says if you mandated access to a particular facility and that resulted in a substantial increase in competition, which if you had the firms engaging in the kind of conduct that you are talking about, assuming that they are engaging in that, then it is likely that to the extent that mandating access would disrupt that coordination, it would result in a substantial increase in competition, that makes it more likely that facility would be found to be essential under our test.

listnum "WP List 3" \l 12801             However, we did say yesterday that if that is not the case, right, if the other two bullets or the first bullet in particular is not met, then you should be ‑‑ it is a very poor instrument choice to deal with market power downstream to either mandate access to facilities which are not essential or to have low prices to facilities which are not essential or to lower the price of facilities which are essential to try and combat market power problems in a downstream market.

listnum "WP List 3" \l 12802             So as I said yesterday, bending your wholesale market regime out of shape to try and control retail market power, whether it be unilateral effect or coordinated effect, is probably a very poor policy choice.

listnum "WP List 3" \l 12803             MR. TACIT:  Thank you.  Your evidence on that point is clear.

listnum "WP List 3" \l 12804             Now, I take it the Bureau's position is that if the owner of an essential facility is not dominant downstream, then the facility cannot be essential; is that correct?

listnum "WP List 3" \l 12805             MR. CHURCH:  Yes.

listnum "WP List 3" \l 12806             MR. TACIT:  Now, doesn't that presuppose that all the possible uses to which the essential facility might be put are know in advance?

listnum "WP List 3" \l 12807             MR. CHURCH:  I think that in any particular case when you are going to say that some facility is essential, you have to be arguing essential for what, and so that would predispose that the definition of essential facility is, in fact, tied to some downstream market, downstream product market, and so whoever is making the allegation that this facility is essential has to tie it to some downstream market.

listnum "WP List 3" \l 12808             MR. TACIT:  Well, I guess what I am getting at is one of the benefits of looking at essential facilities from the perspective of dominance in the wholesale market alone and the ability to leverage that into retail markets, I suggest to you that one of the benefits is that it allows for the possibility for those essential facilities to be used in new and innovative ways that might not otherwise develop at all.

listnum "WP List 3" \l 12809             MR. CHURCH:  Can we take a moment, please?

‑‑‑ Pause

listnum "WP List 3" \l 12810             MR. CHURCH:  Could you restate the question a little bit with a little bit more precision?

listnum "WP List 3" \l 12811             MR. TACIT:  Well, I think you know that one of the differences between the definition of essential services provided by the Bureau and definitions provided by other parties is that the Bureau has the double dominance aspect to its test, the first branch of its test, and others do not.

listnum "WP List 3" \l 12812             Others look at it and say:  If the ILEC or cable company, whoever, is dominant in the upstream market and those facilities are needed in the downstream market, there is an assumption made that the dominant firm will attempt to leverage its power in the upstream market into the downstream market.

listnum "WP List 3" \l 12813             What I am suggesting to you is that one of the benefits of that definition, as opposed to the double dominance definition, is that it does leave open the possibility of more innovation by competitors because you are not saying if this wholesale service can't be used for that specific service downstream which already exists and is provided by an ILEC, then it doesn't have to be provided.

listnum "WP List 3" \l 12814             If you are not putting that constraint on, then you leave open the possibility of greater innovation by competitors who could find innovative uses for that essential facility that ILECs or cable companies might just never think of doing or it may not be economical for them to do but it could be for the competitors.

listnum "WP List 3" \l 12815             What do you have to say about that?

listnum "WP List 3" \l 12816             MR. CHURCH:  We talked earlier about the economics of the double dominance and why when you are assessing market power upstream you have to assess market power downstream.  So it's not something that is redundant, it is something that is necessary.

listnum "WP List 3" \l 12817             The second part of your question I think is interesting, but I think you have to be very careful how you think about that and how you phrase that, because if you don't have this dominance, his downstream dominance that you are talking about, it likely implies that you have some sort of ‑‑ and as you are talking about here, have existing facilities which may be possible to be used in some new application ‑‑ for some reason the ILECs haven't figured out what this new application might be, some entrant has come along with this great idea.  Though, as we talked about yesterday, most of the great ideas, or many of the great ideas come from equipment manufacturers and so you might wonder why it is the entrant that has the idea and not the ILEC.

listnum "WP List 3" \l 12818             Anyhow, leaving that aside, if there is not dominance downstream based on something being used for these facilities, then it likely means that you actually have completing facilities.

listnum "WP List 3" \l 12819             So if you are in a situation where you have competing facilities, then we would expect that normal competition and arrangements between the suppliers of the competing facilities and whoever has this next great idea that that should be a commercial transaction, that there should be ‑‑ a wholesale market starts to develop and there should be access that can be negotiated on commercial terms.

listnum "WP List 3" \l 12820             MR. TACIT:  What if it doesn't, because the technology is disruptive to the ILEC or CLEC and there is therefore no interest on the part of the ILEC or CLEC to offer that capability to the competitor.

listnum "WP List 3" \l 12821             MR. CHURCH:  Again, these are hypothetical possibilities, but you should be asking yourselves ‑‑ and this goes back to the discussion of coordinated effects ‑‑ that if we have the competition happening between the cable company and the ILEC on their networks, right, if I am competing to get the broadband pipes into a location once the cable company ‑‑ once the ILECs pipe, I want to have all of the kinds of applications and variety and kinds of things that you can do.

listnum "WP List 3" \l 12822             So competition is what looks after the interests of consumers, and when competition is possible then these kinds of things that you are talking about I would say have a very low probability of these things not being able to get to the market because competition works.

‑‑‑ Pause

listnum "WP List 3" \l 12823             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12824             I would like to move to just a brief examination of a portion of an article that is on the record and has been discussed already.  I did provide excerpts of this to your counsel yesterday.  It's the "Failure of Competitive Entry Into Fixed‑Line Telecommunications:  Who Is At Fault?" by Crandall and Waverman.

listnum "WP List 3" \l 12825             Thank you, Madam Secretary.

‑‑‑ Pause

listnum "WP List 3" \l 12826             MR. HUGHES:  We have it.

listnum "WP List 3" \l 12827             MR. TACIT:  Do you have it?

listnum "WP List 3" \l 12828             MR. CHURCH:  Yes, we have it.

listnum "WP List 3" \l 12829             MR. TACIT:  All right.  Thank you.

listnum "WP List 3" \l 12830             Could I please direct your attention to the last paragraph:

                      "The jury is still out on the long‑term viability and social welfare consequences of unbundling for broadband purposes.  While there has been little broadband entry through use of the incumbents' loops in the United States and Canada, recent experience in Europe and Japan is more promising.  The potential is certainly brighter than for narrowband as new, innovative services are being offered and new, innovative services bundles (including TV over DSL) are emerging.  In Europe, the major entrants in a number of markets are the ISP arms of foreign incumbents that are using the domestic incumbents' local facilities to deliver broadband connectivity. This cross‑border invasion of incumbent telcos may well lead to innovative services and viable long‑term competition as long as they do not create disincentives for network investment by the home market incumbents."

listnum "WP List 3" \l 12831             Does this not suggest to you that even if ‑‑ let's assume that the Competition Bureau was right, which I am not conceding, but let's assume that it's right and there was excessive unbundling of facilities used in the provision of narrowband retail services in the past, the case for mandating access to broadband platforms is different because of the ability of those platforms to support new and emerging services and service bundles.

listnum "WP List 3" \l 12832             MR. CHURCH:  Again I'm going to come back to the third bullet of our test, right, which says that mandated access results in a significant increase in competition, which is saying that those competitors are able to do good things in the marketplace downstream to the benefit of consumer.  Then assuming the other two bullets are met the facility should be unbundled.

listnum "WP List 3" \l 12833             I think it is interesting in the context of this article to recognize that the first part of, which you didn't distribute to us, explains why the narrowband unbundling in the United States and Canada and elsewhere was not a success and it is written as a forecast of what might happen in terms of broadband unbundling in Europe.

listnum "WP List 3" \l 12834             The evidence is very sketchy at the time it was written, but I think Professor Crandall is going to be here later this week and so you could ask him that.

listnum "WP List 3" \l 12835             They do make the point that regulatory access to ISP services, in Britain in particular, was likely hindered by ‑‑ or ILEC rolling out of ADSL in Britain was likely hindered by regulatory access to ISP services.

listnum "WP List 3" \l 12836             The other point which I think is very important is that ‑‑ this is in the context of Europe, where in certain countries in Europe the cable companies have very low penetration rates and one of the successes that they point to is in France where the innovative service is ‑‑ because there is no cable television available in lots of the country ‑‑ the person who had access to the unbundled loops is providing television services.  So that is the new innovative service that they are able to do.

listnum "WP List 3" \l 12837             So again it comes from this point that if you don't have competing facilities then there may well be a case where you want to mandate access, and the Bureau doesn't disagree with that.  But what the Bureau does suggest is that you have to look and see if you have competing facilities and what the impact of unbundled access is on the potential for getting competing facilities.

listnum "WP List 3" \l 12838             MR. TACIT:  Again, the Bureau's position is clear on that.  All I'm getting at is:  Should the Commission be concerned about the possibility that the economics associated with unbundling wholesale broadband platforms could be different than in the case of the narrowband, the past unbundling that's taken place?

listnum "WP List 3" \l 12839             Could there be additional welfare gains that would justify such unbundling?

listnum "WP List 3" \l 12840             MR. CHURCH:  Our answer is that if it meets the third bullet of our test the answer to that would be yes.

listnum "WP List 3" \l 12841             MR. TACIT:  All right.

listnum "WP List 3" \l 12842             MR. CHURCH:  I'm just suggesting that in this article the actual specific things that they point to as being evidence of those additional services are TV services in areas in which there is not cable television.

listnum "WP List 3" \l 12843             MR. TACIT:  Well, it is a little more general than that.

listnum "WP List 3" \l 12844             If I could direct you to page 140 of the article, the very last paragraph there part way in reads:

                      "In narrowband markets such competition merely replaces an incumbent's services with identical services from an entrant.  The welfare gains and thus the overall prospects for revenue growth and sustainable entry are likely to be limited.  Broadband, however, is a relatively new service with a rapidly increasing number of residential subscribers in Europe.  Since broadband offers consumers the prospect of genuinely new and distinctive services, marketed and bundled for them in genuinely new and distinctive ways, the consumer welfare gains from services‑based broadband competition might be significant, thus sustaining entry."

listnum "WP List 3" \l 12845             MR. CHURCH:  Yes.  All I want to point out is the Bureau agrees if we have evidence that this kind of stuff can happen and if it results in substantial increase in competition, mandated unbundling would be fine.

listnum "WP List 3" \l 12846             But in that sentence you read the key words are "the prospect of genuinely new and distinctive services ... might be significant".

listnum "WP List 3" \l 12847             When you go later in the article and see what actual new services and new bundles they are talking about, they are talking about broadband television in areas where there is no cable TV.

listnum "WP List 3" \l 12848             MR. TACIT:  There may be others as well that we haven't thought of.

listnum "WP List 3" \l 12849             MR. CHURCH:  There may be.

listnum "WP List 3" \l 12850             MR. TACIT:  My final line of questioning is going to be very brief.  For this purpose I would ask you to look at the Bureau's response to Bureau/Cybersurf No. 2.

listnum "WP List 3" \l 12851             I did circulate yesterday a set of the Bureau's responses to the Cybersurf interrogatories.  It's a five‑page document.

‑‑‑ Pause

listnum "WP List 3" \l 12852             MR. HUGHES:  We have it, thanks.

listnum "WP List 3" \l 12853             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12854             At page 2, in response to Cybersurf No. 2, which asks for the Commission's views on whether it was likely that, in the absence of mandating ILECs ‑‑ and cable companies would continue to provide ADSL and TPIA services ‑‑ in response to Part A, the Bureau said that it's likely true that, in the upstream market for hi‑speed Internet access, ADSL and TPIA, whether the market is unregulated by the Commission or mandated but subject to independent price negotiation, as the question postulates, it's likely that access would be provided to competitors, or at least that's the way I read the response.  Is that what the response is intended to convey?

listnum "WP List 3" \l 12855             MR. HARITON:  That's right.

listnum "WP List 3" \l 12856             MR. TACIT:  Okay.  On what empirical data do you base that conclusion, if any?

listnum "WP List 3" \l 12857             MR. HARITON:  Well, it's a question of the logic of it.  If, in fact, you have an incentive to offer a service, you will.  And here it continues to say that where the market isn't regulated, what will happen is that you have independent price negotiation, as the question postulates.

listnum "WP List 3" \l 12858             What you have is a situation where there are two competing networks, where the telephone company has a network that's capable and the cable company has a network that's capable.  They, obviously would rather serve the end customer themselves, for all sorts of reasons.  But if there's going to be a third party, I mean, it's more interesting to have that third party ride on your network than ride on your competitor's network, so you will try to do that.

listnum "WP List 3" \l 12859             I mean, I know that back in the days of long distance, when a large number of resellers had set up shop, various telephone companies set up special packages to be attractive to resellers ‑‑ not ordered, not mandated by the Commission, but from their own initiative, they decided that if these resellers were going to resell it might as well be their own services.

listnum "WP List 3" \l 12860             MR. TACIT:  But that's because resale had been mandated to begin with.  Correct?

listnum "WP List 3" \l 12861             MR. HARITON:  The resale had been mandated, but the fact that you were giving lower prices to resellers ‑‑ and I do remember these packages ‑‑ lower than had been mandated is a sign that you were competing for these resellers' business.

listnum "WP List 3" \l 12862             MR. TACIT:  I'm not quibbling about price, I'm quibbling about availability here...or not quibbling, but asking about availability, and I suggest to you, Mr. Hariton, that a scenario could develop where an ILEC and a cable company, which typically have completely independent networks except for some very, very small functionalities, would both have an interest to keep other competitors out and neither of which has much of an incentive to provide access to its broadband platform if, by not doing so, they can retain the retail customers in each case.

listnum "WP List 3" \l 12863             MR. CHURCH:  Yes.  And so, again, I mean, that's a statement about the extent of wholesale competition between the two networks.  I think the Bureau's been very clear on this, that if you want to retain those customers downstream and those two networks are competing, then, if what the third party has truly is good for consumers, we would expect that, in the competition between those two networks, it would get adopted.

listnum "WP List 3" \l 12864             MR. TACIT:  At the same time, the Bureau has also made it clear that it considers those forms of competition to be less significant, does it not?

listnum "WP List 3" \l 12865             MR. CHURCH:  Well, I know, but, see, in this case, what we postulate is a commercial arrangement whereby that product gets supplied in a cooperative venture between the person who runs the network and the person who brings the product in, then, you know, that's exactly the kind of competition that we think would be facilitated by having competing networks.  Right?  And sometimes it's not two separate companies, it's going to be, you know:  as part of my package you get access to this particular service, this particular feature or this particular characteristic.

listnum "WP List 3" \l 12866             MR. TACIT:  Thank you.

listnum "WP List 3" \l 12867             Those are my questions, Mr. Chairman.

listnum "WP List 3" \l 12868             THE CHAIRPERSON:  Thank you very much.

listnum "WP List 3" \l 12869             Fellow commissioners, any questions?

listnum "WP List 3" \l 12870             Thank you very much, then.

listnum "WP List 3" \l 12871             Madam Giroux, who's our next cross‑examiner?

listnum "WP List 3" \l 12872             THE SECRETARY:  We have one last panel left.  It's a new addition.

listnum "WP List 3" \l 12873             I'm calling on Telecommunications Xittel and la Coalition Québécoise des fournisseurs d'accès à Internet.  Please step forward.

listnum "WP List 3" \l 12874             I will ask Counsel Denton to introduce himself, present his colleague.

listnum "WP List 3" \l 12875             MR. DENTON:  Good morning, Mr. Chairman and Commissioners.

listnum "WP List 3" \l 12876             My name is Timothy Denton.  I represent the Quebec Coalition of Internet Service Providers and Xittel.

listnum "WP List 3" \l 12877             To my right is François Menard, who is my assistant here, and he is from Xittel.

EXAMINATION / INTERROGATOIRE

listnum "WP List 3" \l 12878             MR. DENTON:  Good morning, panel.

listnum "WP List 3" \l 12879             My questions will be blessedly brief, and we will start with the first one.

listnum "WP List 3" \l 12880             As we know, we have been concerned about the incentives to invest when incumbents are required or mandated to share facilities, so the question I have is:  has the Competition Bureau considered the possibility of temporary monopolies to provide the necessary incentives for network investment and innovation?

listnum "WP List 3" \l 12881             MR. HUGHES:  We will take a moment, please.

listnum "WP List 3" \l 12882             MR. CHURCH:  Excuse me, sir, could you please perhaps explain to me what you mean by a "temporary monopoly"?

listnum "WP List 3" \l 12883             MR. DENTON:  A condition under which they would be able to offer the services without having to share facilities for some period and recover whatever they needed to recover in order to be profitable, and then subsequently be required to share certain essential facilities.

listnum "WP List 3" \l 12884             MR. HARITON:  Mr. Denton, I think the scenario you are painting may lead to more investment, but it would not lead to competition in facilities, and one of the things that we are looking for is the benefits of the competitive pressures.

listnum "WP List 3" \l 12885             So that while your scenario ‑‑ I would draw an analogy to a patent, I guess, and a patent is appropriate in certain cases where you give a temporary monopoly and off you go.

listnum "WP List 3" \l 12886             I think, though, that in this industry we are seeing that you are getting innovation and you are getting benefits from facilities builds without necessarily giving the equivalent of a patent over those.  So that it's open entry, everybody can build their networks, facilities, and that, in itself, I think, is a very positive benefit.

listnum "WP List 3" \l 12887             MR. CHURCH:  Excuse me, if can follow up.

listnum "WP List 3" \l 12888             And if, you know, the proposal is to say that what you are talking about is adapting a patent system some how, some way to telecom investment, I think it's important to understand that the reason we have patent laws is because, when I make that innovation, that investment that comes out ‑‑ you know, information is a public good, in the sense that everyone can use it, everyone can share in it.  And so to ensure that we get that investment in R and D and innovation, we grant, you know, specific exclusive rights to use that idea and that information in a market context.

listnum "WP List 3" \l 12889             We do that because we think that people will immediately copy it otherwise, and therefore no one would have an incentive on that, to make that investment in research and development.  It's not clear to me that same kind of market failure involving the "public good" aspect of information, in the context of the patent system, is present here in the context of investments in telecommunications facilities.

listnum "WP List 3" \l 12890             MR. DENTON:  Thank you.  Just a moment.

listnum "WP List 3" \l 12891             So then I take it that if you have not been able to determine from the analysis you provide whether ILECs and cable companies, if they were granted temporary monopolies for new substantial investments, whether it would or would not provide the necessary incentives to invest in facilities.

listnum "WP List 3" \l 12892             I take it that question has not been considered by you in the context of this proceeding?

listnum "WP List 3" \l 12893             MR. HARITON:  Not in the context of temporary monopolies, Mr. Denton, we haven't considered that question.

listnum "WP List 3" \l 12894             MR. DENTON:  Thank you.

listnum "WP List 3" \l 12895             DR. CHURCH:  However, in the context of, you know, the whole scheme of things, clearly the incentives for investment are something that we think is very important and, you know, that is the way we designed the Bureau's three bullets.

listnum "WP List 3" \l 12896             MR. DENTON:  We share that concern, we have different conclusions on the facts.  Thank you.

listnum "WP List 3" \l 12897             Thank you, Mr. Chairman.

listnum "WP List 3" \l 12898             THE CHAIRPERSON:  Thank you very much.

listnum "WP List 3" \l 12899             One last question for you, Dr. Church, before we change panels.  This morning you said you had asymmetric information that is why, you know, it is very hard for you to judge this whole sort of stepping stone approach on which the mandated service was based.  Just theoretically, if you had asymmetric information, if you had all the information you said, on the information available, you couldn't conclude whether that has been successful.

listnum "WP List 3" \l 12900             By the same token, I presume if you had all the information available is it at least theoretically possible that you could say that the stepping stone approach works?

listnum "WP List 3" \l 12901             DR. CHURCH:  I think, just to be clear, when I typically use the term asymmetric information, and I could be wrong, I typically ‑‑

listnum "WP List 3" \l 12902             THE CHAIRPERSON:  Well, I may have misunderstood you.

listnum "WP List 3" \l 12903             DR. CHURCH:  ‑‑ I mean, I typically meant that in the context of the Commission versus the firms that you regulate,  that the firms have more information than you do is typically what I meant by asymmetric information.

listnum "WP List 3" \l 12904             On the other hand, I have said that, you know, in our discussion yesterday with Commissioner Cram, is that we have some evidence, I can't remember the exact paragraph, but it related to the ‑‑ sorry.  There are two paragraphs in our evidence where we talk about the stepping stone tests that have been done, but suggest that it has not happened.  One, I think is the Hausman and Sidack and then the other one would be this Crandall and Waverman Study.

listnum "WP List 3" \l 12905             But, you know, in a specific Canadian context, to see what I suggested was that is that, you know, if we had that information, if we could track through, you know, unbundled loop now been replaced by our own facilities‑based thing, that would give us much more confidence that in fact the stepping stone was being used.  But we don't have that information.  Maybe the Commission does or certainly the parties do.

listnum "WP List 3" \l 12906             THE CHAIRPERSON:  Well, maybe we will hire you to do it on the basis of our evidence.

listnum "WP List 3" \l 12907             Thank you very much.

listnum "WP List 3" \l 12908             So we will take a five‑minute break while the next panel sets itself up.  Thank you very much for your testimony.

listnum "WP List 3" \l 12909             THE SECRETARY:  Mr. Chairman, if you allow me, I would like to summarize all the exhibits that were received before the Bureau panel to straighten up the records.

listnum "WP List 3" \l 12910             THE CHAIRPERSON:  By all means, go ahead.

listnum "WP List 3" \l 12911             THE SECRETARY:  Thank you very much.

listnum "WP List 3" \l 12912             Oral undertakings that were expressed during the cross‑examination:

listnum "WP List 3" \l 12913             CRTC No. 1, comment on U.S. data related to total plant addition and total telephone plant addition aggregated for all reporting ILECs for the period 1996 to 2006.

listnum "WP List 3" \l 12914             CRTC No. 2 undertaking, rewrite of the Bureau's proposed test for whether a service or facility is essential from a retrospective perspective rather than a prospective perspective.

listnum "WP List 3" \l 12915             DR. CHURCH:  Excuse me, am I allowed to comment on your interpretation of the undertaking?

listnum "WP List 3" \l 12916             THE CHAIRPERSON:  (off microphone)

listnum "WP List 3" \l 12917             DR. CHURCH:  Mr. Chairman, as I understood what we talked about was that we would take our third bullet this morning and explain to you how it could be applied retrospective and prospective.

listnum "WP List 3" \l 12918             THE CHAIRPERSON:  Actually, what I thought you were going to do is take the text, which is now written prospectively, and give me a version that is written retrospectively.

listnum "WP List 3" \l 12919             DR. CHURCH:  Okay.

listnum "WP List 3" \l 12920             THE SECRETARY:  MTS undertaking No. 1, require that you provide a summary of the publicly available litigation timelines of the Canada Pipe case.

listnum "WP List 3" \l 12921             The exhibits that were received before the Commission yesterday and this morning:

listnum "WP List 3" \l 12922             MTS No. 1, order varying Telecom decision CRTC‑2006‑15.

listnum "WP List 3" \l 12923             MTS No. 2, excerpt from Telecom Decision 2006‑15 2‑April‑2006, forbearance from the regulation of retail local exchange services.

listnum "WP List 3" \l 12924             MTS No. 3, information bulletin of Mergers, Remedies in Canada Competition Bureau, September 22, 2006.

listnum "WP List 3" \l 12925             Rogers Exhibit No. 1, Report on the ICN Working Group Telecommunications Service

listnum "WP List 3" \l 12926             Exhibit The Bureau No. 1, document from LECG entitled Access Regulations and Infrastructure Investment in the Telecommunications Sector.

                      EXHIBIT BUREAU‑1:  Document from LECG Entitled:  Access Regulation and Infrastructure Investment in the Telecommunications Sector:  An Empirical Investigation

listnum "WP List 3" \l 12927             CRTC Exhibit No. 1, which is a cross to undertaking CRTC No. 1, U.S. ILEC data aggregated source FCC ARMIS Report 43‑02.

listnum "WP List 3" \l 12928             CRTC Exhibit No. 2, the Communication Market 2000, excerpt of the Ofcom Report, August

listnum "WP List 3" \l 12929             CRTC Exhibit No. 3, United States General Accountability Office, Report to the Chairman, Committee on Government Reform, House of Representatives, November 2006 GAO‑07‑80.

listnum "WP List 3" \l 12930             Cybersurf Exhibit No. 1, Competition Bureau's Report entitled Merger Enforcement Guidelines, September 2004.

listnum "WP List 3" \l 12931             That is all, Mr. Chairman.

listnum "WP List 3" \l 12932             THE CHAIRPERSON:  Okay, we will take our five‑minute break now.

‑‑‑ Upon recessing at 1120 / Suspension 1120

‑‑‑ Upon resuming at 1125 / Reprise à 1125

listnum "WP List 3" \l 12933             THE CHAIRPERSON:  Will you please take your seats?

listnum "WP List 3" \l 12934             Madam Giroux‑Girard.

listnum "WP List 3" \l 12935             THE SECRETARY:  Thank you very much.

listnum "WP List 3" \l 12936             I am calling on Mr. Jonathan Daniels, counsel for the companies to introduce his witnesses.

listnum "WP List 3" \l 12937             MR. DANIELS:  Good morning, Mr. Chairman.

listnum "WP List 3" \l 12938             My name is Jonathan Daniels, and along with my co‑counsel, who I believe you have already heard from, Randall Hofley, we are counsel for the companies.

listnum "WP List 3" \l 12939             It is my pleasure to introduce the panel representing Bell Aliant, Bell Canada, SaskTel and Télébec to you this morning.

listnum "WP List 3" \l 12940             Sitting in the front row closest to the panel is Mr. Sal Iacono, Senior Vice‑President in the Enterprise Group of Bell Canada.

listnum "WP List 3" \l 12941             Sitting next to Mr. Iacono is Dr. William Taylor, Senior Vice‑President of NERA and head of its communications practice and its Boston office.

listnum "WP List 3" \l 12942             Sitting next to Dr. Taylor is Mr. Paul Anderson, Senior Director of Sales and Service for Bell Canada's Wholesale Group.

listnum "WP List 3" \l 12943             Sitting next to Mr. Anderson is Mr. Denis Henry, Vice‑President, Regulatory Affairs for Bell Aliant.

listnum "WP List 3" \l 12944             Beside Mr. Henry is Mr. Mirko Bibic, Chief Regulatory Affairs for Bell Canada.

listnum "WP List 3" \l 12945             Next to Mr. Bibic is Mr. Serge Babin, Vice‑President in the Network Operations Group of Bell Canada.

listnum "WP List 3" \l 12946             Immediately behind Mr. Henry is Mr. Peter Waters, our partner in the law firm of Gilbert and Tobin in Sydney, Australia.

listnum "WP List 3" \l 12947             Immediately behind Mr. Anderson is Ms Margaret Sanderson, Vice‑President and head of CRA's Toronto office, as well as CRA's global competition practice.

listnum "WP List 3" \l 12948             Assisting the panel today is Denise Potvin, Fritz Schmidt and Sue Dawes.  In addition, there may be additional people assisting the panel throughout the examination, if it warrants.

listnum "WP List 3" \l 12949             The CVs of our witnesses are on the record, and for brevity sake, I won't go through them all.  However, if I could just take a minute to situate the panel for you and the roles of these individuals.

listnum "WP List 3" \l 12950             Mr. Bibic is responsible for the overall design of the company's proposal and can be viewed as the Chairman of the panel.

listnum "WP List 3" \l 12951             Mr. Henry is equally qualified to speak to the proposal and will also speak to any issues directly related to Bell Aliant.

listnum "WP List 3" \l 12952             Mr. Iacono is here to speak to retail issues.

listnum "WP List 3" \l 12953             Mr. Babin is here to address any technical issues.

listnum "WP List 3" \l 12954             Mr. Anderson is here to speak to the wholesale business unit of Bell Canada.

listnum "WP List 3" \l 12955             Our experts are here to speak to their contents of their specific reports.

listnum "WP List 3" \l 12956             In our letter of September 5th, 2007, we asked parties to indicate whether they had any specific questions for Télébec and SaskTel.  None have so identified.  However, if the Commission has any specific questions for SaskTel or Télébec, we would propose to call a representative from one of those companies to stand in in that event.

listnum "WP List 3" \l 12957             Perhaps at this point I could ask that the witnesses be affirmed, Madam Secretary.

AFFIRMED:  SALVATORE IACONO

AFFIRMED:  WILLIAM TAYLOR

AFFIRMED:  PAUL ANDERSON

AFFIRMED:  DENIS HENRY

AFFIRMED:  MIRKO BIBIC

AFFIRMED:  SERGE BABIN

AFFIRMED:  MARGARET SANDERSON

AFFIRMED:  PETER WATERS

listnum "WP List 3" \l 12958             THE SECRETARY:  Thank you very much.

listnum "WP List 3" \l 12959             Counsel Daniels, do you wish to examine your witnesses?

EXAMINATION / INTERROGATOIRE

listnum "WP List 3" \l 12960             MR. DANIELS:  Can I ask all the panel members to confirm that your qualifications are correctly set out in our letter of October 4th, 2007?

listnum "WP List 3" \l 12961             MR. IACONO:  Yes, they are.

listnum "WP List 3" \l 12962             MR. TAYLOR:  Yes.

listnum "WP List 3" \l 12963             MR. ANDERSON:  Yes.

listnum "WP List 3" \l 12964             MR. HENRY:  Yes.

listnum "WP List 3" \l 12965             MR. BIBIC:  Yes.

listnum "WP List 3" \l 12966             MR. BABIN:  Yes.

listnum "WP List 3" \l 12967             MS SANDERSON:  Yes.

listnum "WP List 3" \l 12968             MR. WATERS:  Yes.

listnum "WP List 3" \l 12969             MR. DANIELS:  Mr. Bibic and Mr. Henry, were the company's evidence and interrogatory responses prepared by you or under your directions with the assistance of the panel members?

listnum "WP List 3" \l 12970             MR. BIBIC:  They were.

listnum "WP List 3" \l 12971             MR. HENRY:  Yes.

listnum "WP List 3" \l 12972             MR. DANIELS:  Are they true to the best of your knowledge and belief?

listnum "WP List 3" \l 12973             MR. BIBIC:  Yes.

listnum "WP List 3" \l 12974             MR. HENRY:  Yes.

listnum "WP List 3" \l 12975             MR. DANIELS:  Mr. Waters, did you prepare a report comparing international wholesale regulations attached in appendix 4 to the evidence entitled "International Comparison of Wholesale Regulation in Canada?"

listnum "WP List 3" \l 12976             MR. WATERS:  Yes, I did.

listnum "WP List 3" \l 12977             MR. DANIELS:  I understand you have a correction you wish to mention?

listnum "WP List 3" \l 12978             MR. WATERS:  Yes, there is a direction in relation to how the tables record forbearance which has occurred in Canada and the United States in relation to leased lines, and transposing that into the EU market framework.

listnum "WP List 3" \l 12979             In Canada, DNA forbearance was incorrectly identified as forbearance in market 12, which is, to use some American expressions, a UNE market, whereas it should have been recorded in market 7, which is a resale market.

listnum "WP List 3" \l 12980             In the United States, the tables correctly identify that there has been forbearance in UNE, but it should have indicated that that was only partial, as it is a process of deregulation and there are still some Y centres that yet to have regulation removed.

listnum "WP List 3" \l 12981             The effect is that the numbers for Canada and the United States go up, but the primary measure in the report is the quartile ranking and there is no change in the quartile ranking, and it has no impact on the CRA report because it looks only at broadband services and not at traditional interface services.

listnum "WP List 3" \l 12982             So, I apologize for that error.

listnum "WP List 3" \l 12983             MR. DANIELS:  Subject to that correction, is the report true to the best of your knowledge and belief?

listnum "WP List 3" \l 12984             MR. WATERS:  Yes, it is.

listnum "WP List 3" \l 12985             MR. DANIELS:  Ms Sanderson, with reference to the report found in appendix 3 of the company's March 15th evidence, "An International Comparison of End‑to‑End Facilities‑Base Competition In Telecommunication" and the update you filed on October 5th, 2007, did you prepare it or was it prepared under your direction?

listnum "WP List 3" \l 12986             MS SANDERSON:  Yes, they both were.

listnum "WP List 3" \l 12987             MR. DANIELS:  Is this report, including the update, true to the best of your knowledge and belief?

listnum "WP List 3" \l 12988             MS SANDERSON:  Yes, they are.

listnum "WP List 3" \l 12989             MR. DANIELS:  Dr. Taylor, with reference to the declaration found in appendices 2 and 5 of the March 15th evidence, as well as appendix 1 to the supplemental July 15th evidence, were they drafted by you or prepared under your direction?

listnum "WP List 3" \l 12990             MR. TAYLOR:  Yes, they were.

listnum "WP List 3" \l 12991             MR. DANIELS:  Are they true to the best of your knowledge and belief?

listnum "WP List 3" \l 12992             MR. TAYLOR:  Yes.

listnum "WP List 3" \l 12993             MR. DANIELS:  Mr. Chairman, before I turn the panel over for cross‑examination, there is one point I wish to offer you and your colleagues.

listnum "WP List 3" \l 12994             Yesterday Commissioner Cram raised a question with the Bureau's panel regarding the Government Accountability Office report from the U.S. which, as I understand, was already on the record of this proceeding, but I now understand is also CRTC Exhibit 3.

listnum "WP List 3" \l 12995             Commissioner Cram also raised questions regarding the 2007 Ofcom report, which now had been put on the record this morning as CRTC Exhibit 2.

listnum "WP List 3" \l 12996             On our panel today we have Dr. Taylor and Mr. Waters.  Dr. Taylor is an expert on the U.S. regulatory regime, and Mr. Waters is an expert on the U.K. regulatory regime and are intimately familiar with the GAO report and the Ofcom report respectively, and would be pleased to address the questions raised by Commissioner Cram or any other Commissioners regarding these reports.

listnum "WP List 3" \l 12997             I wanted to alert the Commission panel to that offer and I leave it to you to decide when there is an appropriate time for such a discussion.

listnum "WP List 3" \l 12998             Having said that, Mr. Chairman, the witnesses are now available for cross‑examination.

listnum "WP List 3" \l 12999             THE SECRETARY:  Thank you.

listnum "WP List 3" \l 13000             For our Webcast listeners, please note the Competition Bureau withdrew its intent to cross‑examine the companies.

listnum "WP List 3" \l 13001             I am now calling counsel Engelhart to proceed on behalf of Rogers Communications.  Thank you.

EXAMINATION / INTERROGATOIRE

listnum "WP List 3" \l 13002             MR. ENGELHART:  Thank you very much, and with me today is Suzanne Blackwell.

listnum "WP List 3" \l 13003             Good morning, Mr. Bibic, Mr. Henry, members of your panel.

listnum "WP List 3" \l 13004             MR. BIBIC:  Good morning.

listnum "WP List 3" \l 13005             MR. ENGELHART:  I would like to start by comparing with you the regulatory regime for essential facilities in the United States with the proposal that Rogers has made in this proceeding.

listnum "WP List 3" \l 13006             Would you agree with me that under both the Rogers' proposal and the FCC rules, the current FCC rules, the incumbent phone companies are required to provide unbundled loops in both the residential and business markets?

listnum "WP List 3" \l 13007             MR. BIBIC:  Based on my understanding of the U.S. regime, Mr. Engelhart, I think that is quite a simplification of the U.S. regime.

listnum "WP List 3" \l 13008             I don't believe there is any UNE regulation for traditional loops in the United States where certain cable co's compete.  So I believe for example that in Omaha, Nebraska and in Anchorage, Alaska, there is no regulation at the UNE level, and I don't believe there is regulation of fibre to the home loops for broadband or for voice.  There are other elements of the U.S. regime where there hasn't been forbearance.

listnum "WP List 3" \l 13009             MR. ENGELHART:  Let's have a look then, if we can, at TheCompanies‑Rogers12April07‑30.

listnum "WP List 3" \l 13010             MR. BIBIC:  I have it.

listnum "WP List 3" \l 13011             MR. ENGELHART:  You've got it.  I have a few spares.

listnum "WP List 3" \l 13012             MR. HOFLEY:  Mr. Chairman, could we perhaps, as counsel to Bell, get a copy of that exhibit?

listnum "WP List 3" \l 13013             THE CHAIRPERSON:  Can you speak into your mic, please?  I can't hear you.

listnum "WP List 3" \l 13014             MR. HOFLEY:  I'm sorry, Mr. Chairman.

listnum "WP List 3" \l 13015             As counsel to Bell, perhaps we could get a copy of that exhibit.  I had understood that that was going to be distributed to us.

listnum "WP List 3" \l 13016             THE SECRETARY:  We will.

listnum "WP List 3" \l 13017             MR. ENGELHART:  If you have a look at page 2 of 4, 3 of 4 and 4 of 4, that is your interrogatory response.  Does that lay out fairly completely the United States regime?

listnum "WP List 3" \l 13018             MR. BIBIC:  Yes.

listnum "WP List 3" \l 13019             MR. ENGELHART:  If we look at page 2 of 4, the first item we see is the DS‑0 loop.  Is that what we would generally consider to be an unbundled loop?

listnum "WP List 3" \l 13020             MR. BIBIC:  That is correct.  It is mentioned there just exactly as I said before.  There has been some forbearance at the UNE element level for those loops.

listnum "WP List 3" \l 13021             MR. TAYLOR:  Could we say, Mr. Engelhart, an unbundled voice grade loop.

listnum "WP List 3" \l 13022             MR. ENGELHART:  Yes.  Thank you, Dr. Taylor.

listnum "WP List 3" \l 13023             I just want to question you about something you said, Mr. Bibic.  UNE.  Why do you keep referring to UNE in this context?

listnum "WP List 3" \l 13024             MR. BIBIC:  My ‑‑ well, perhaps I will leave it to Mr. Taylor.

listnum "WP List 3" \l 13025             MR. TAYLOR:  The requirement in question, the unbundling requirement, is part of the U.S. Telecom Act of 1996, which requires the provision under certain circumstances of unbundled network elements.  That is what UNE stands for.

listnum "WP List 3" \l 13026             Under that regime, there has been forbearance in Omaha and Anchorage and there is a number of petitions before the FCC currently for forbearance in other geographic areas.

listnum "WP List 3" \l 13027             MR. ENGELHART:  So, with the exception of Omaha and Anchorage, unbundled loops have to be provided in business and residential markets everywhere in the United States.  Is that right?

listnum "WP List 3" \l 13028             MR. TAYLOR:  As we speak, unbundled DS‑0 loops have to be provided everywhere in the U.S. except for those MSAs.

listnum "WP List 3" \l 13029             MR. ENGELHART:  Let's just, while we are at it, to be sort of complete, focus for a moment on those two markets where there has been forbearance.

listnum "WP List 3" \l 13030             If I could ask you to have a look at TELUS‑Rogers‑19July07‑109 (revised), in this response, Dr. Weisman, on behalf of TELUS, talks about the Omaha and Anchorage situation.  If you take a look at part (a) of his response, Dr. Weisman says:

                      "To the best of my knowledge, the FCC has only approved two forbearance petitions, one for Omaha, Nebraska and one for Anchorage, Alaska.  There may well be other forbearance petitions pending at this time that is FCC has not yet acted on.  Moreover in both orders, the FCC indicates that these orders should not be treated as a precedent for cases that may arise, arguing in essence that it would be necessary to examine each instance on a case‑by‑case basis."  (As read)

listnum "WP List 3" \l 13031             Then if you look at paragraph (b), if you look over on page 204 revised, in about the middle of the paragraph, it is revealed that the forbearance in question is in nine of Qwest's 24 wire centres in the Omaha MSA.

listnum "WP List 3" \l 13032             In the middle paragraph on page 204 revised, it says:

                      "The FCC did not relieve Qwest of its obligations to continue to provide unbundled loops under the competitive checklist provisions contained in section 271 of the Act.  Section 271 imposes specific obligations on the RBOC, satisfaction of which is required for their re‑entry into the InterLATA long distance market.  Hence, Qwest must continue to provide unbundled loops but it may do so under a just and reasonable pricing standard rather than under the TELRIC pricing standard."

(As read)

listnum "WP List 3" \l 13033             And then over on page 3 of 4, in the first indented paragraph, it states that in Anchorage the forbearance was in five of the 11 wire centres and it says under that paragraph:

                      "In similar fashion to the Omaha order, the FCC did not relieve the incumbent provider, ACS, of its obligation to provide unbundled loops in Anchorage, Alaska, but it did allow for a less restrictive market‑based pricing standard."

(As read)

listnum "WP List 3" \l 13034             Do you believe that Dr. Wiseman's response correctly sets out the state of affairs in Anchorage and Omaha?

listnum "WP List 3" \l 13035             MR. TAYLOR:  Yes.

listnum "WP List 3" \l 13036             MR. ENGELHART:  Would you agree with me that under both the Rogers proposal and under the FCC Rules ILECs must provide competitors with DS‑1 and DS‑3 access loops in transport lines unless the wire centres are of a certain size and there are a certain number of fibre‑based co‑locators?

listnum "WP List 3" \l 13037             MR. BIBIC:  Well, Mr. Englehart, we would agree that there is a streamlined test put in place for DS‑1 and DS‑3 access and transport in the U.S. and in that respect there are some similarities between the test that Rogers has proposed and what the FCC has set out.

listnum "WP List 3" \l 13038             But the Rogers test does not go on to propose some of the other elements of the FCC's forbearance test for DS‑1 and DS‑3 access and transport such as a 12‑month transition regime, such as limitations on what can be done with those services during the transition period.

listnum "WP List 3" \l 13039             For example, the transition only applies to the embedded customer base and the CLECs cannot increase their capacity during the transition period.  Rogers, I don't believe, proposes the U.S. rule of permissible price increases during the transition period and there are also restrictions on use and capacity limits.

listnum "WP List 3" \l 13040             MR. ENGELHART:  Okay.  So let us have another look then at TheCompanies‑Rogers‑12April07‑30, and again, we will look at page 2 of 4.

listnum "WP List 3" \l 13041             So we had a look at the first box which was called Mass Market DSO Loop.

listnum "WP List 3" \l 13042             Now, we are going to have a look down at the box "Enterprise Market DS‑1 Loop."  And it says in the first sentence:

                      "Requesting carriers are impaired without access to DS‑1 capacity loops at any location within the service area of an incumbent LEC wire center containing fewer than 60,000 business lines or fewer than 4 fibre‑based co‑locators."

(As read)

listnum "WP List 3" \l 13043             So when the FCC says it is impaired, that requesting carriers are impaired without it, that means that the ILEC has to provide it on a mandated basis; isn't that correct?

listnum "WP List 3" \l 13044             MR. BIBIC:  That is correct, subject to the restrictions and limitation periods that I mentioned and when there is a ‑‑ these are streamlined tests for forbearance, as I understand it, and then when these tests are met, the ILEC can be forborne, subject again to the transition period and the operable limitations on use.

listnum "WP List 3" \l 13045             MR. ENGELHART:  So I think the qualifications you are trying to put on your response, Mr. Bibic, deal with transition periods and forbearance applications.  Are those the two limitations?

listnum "WP List 3" \l 13046             MR. BIBIC:  Correct.  So to be clear, the DS‑1 and DS‑3 access and DS‑1 and DS‑3 transport is regulated in the United States, as I understand it, until such time as these streamlined tests are met that you have been discussing, and when those tests are met, there is a transition period and limitations on use, et cetera, that apply during that transition period.

listnum "WP List 3" \l 13047             I was just pointing out that those portions or elements of the forbearance test do not seem to have been adopted by Rogers in its evidence.

listnum "WP List 3" \l 13048             MR. ENGELHART:  Okay.  But up to the point when the thresholds are met and the forbearance is granted, that is what I am interested in.  I am happy to have you explain what happens after that but up to that point, would you agree with me that both Rogers and the FCC, Rogers' proposal and the current FCC Rules, say that DS‑0s have to be provided an access and transport, DS‑1s and DS‑3s have to be provided on a mandated basis?

listnum "WP List 3" \l 13049             MR. BIBIC:  Yes.

listnum "WP List 3" \l 13050             MR. ENGELHART:  Okay.  And would you agree with me that the thresholds, the point at which the FCC says you don't have to provide them anymore and the point at which the Rogers proposal says you don't have to provide them anymore, are very similar?

listnum "WP List 3" \l 13051             MR. BIBIC:  Yes.

listnum "WP List 3" \l 13052             MR. ENGELHART:  And would you agree with me that other than those DS‑0s, DS‑1s, DS‑3s and dark fibre transport lines for certain wire centres, neither the FCC Rules nor the Rogers proposal contain any other significant essential facility requirements?

listnum "WP List 3" \l 13053             MR. BIBIC:  I am not sure I understood the question there.  You threw in DS‑0s and I thought we were talking about DS‑1s and DS‑3s, and I confess I am not sure what the rules are for DS‑0s in the United States.

listnum "WP List 3" \l 13054             MR. ENGELHART:  I think we covered that first, didn't we, that the DS‑0s were available everywhere in the United States other than those two markets that you mentioned.

listnum "WP List 3" \l 13055             DS‑0s are used sort of synonymously with the mass market loop, the voice great line.  It all means the same thing.

listnum "WP List 3" \l 13056             MR. BIBIC:  You are correct, that is right.

listnum "WP List 3" \l 13057             MR. ENGELHART:  Okay.  So would you agree with me that the Rogers proposal and the current rules in the United States are almost identical or very similar?

listnum "WP List 3" \l 13058             MR. TAYLOR:  Well, Mr. Englehart, help me with the pricing rules in the Rogers proposal.

listnum "WP List 3" \l 13059             MR. ENGELHART:  Certainly.  Let us deal first, Dr. Taylor, with the pricing rules in the FCC currently.

listnum "WP List 3" \l 13060             Would you agree with me that all those facilities that we have been talking about have to be provided under what the FCC calls TELRIC pricing?

listnum "WP List 3" \l 13061             MR. TAYLOR:  Today, with the exception of DS‑0s and a few MSAs, that is correct.

listnum "WP List 3" \l 13062             MR. ENGELHART:  With the exception of the Anchorage and Omaha, it is TELRIC pricing?

listnum "WP List 3" \l 13063             MR. TAYLOR:  Yes.

listnum "WP List 3" \l 13064             MR. ENGELHART:  And TELRIC pricing, would you agree with me, is a forward‑looking economic costing methodology that looks at total elemental long‑run incremental cost?

listnum "WP List 3" \l 13065             MR. TAYLOR:  It is forward‑looking, it is total element, and in principle, that is the theory of TELRIC pricing.

listnum "WP List 3" \l 13066             MR. ENGELHART:  Well, just so there is no confusion, take a look, Dr. Taylor, at footnote 2, please, of your evidence, Appendix 5.

listnum "WP List 3" \l 13067             MR. TAYLOR:  Appendix 5.

‑‑‑ Pause

listnum "WP List 3" \l 13068             MR. TAYLOR:  Yes.

listnum "WP List 3" \l 13069             MR. ENGELHART:  You say there:

                      "TELRIC is total element long‑run incremental costs and is the forward‑looking economic costing methodology adopted by the FCC in the pricing of unbundled network elements." (As read)

listnum "WP List 3" \l 13070             So you would agree with that?

listnum "WP List 3" \l 13071             MR. TAYLOR:  I agree with that, certainly.

listnum "WP List 3" \l 13072             MR. ENGELHART:  And Mr. Bibic or Mr. Taylor, any of you, would you agree with me that the Rogers proposal is that the facilities that we are talking about should be priced based on the CRTC's Phase II costing methodology?

listnum "WP List 3" \l 13073             MR. BIBIC:  If you say that, I believe that is the case and I'm sure you are not misstating your own test.

listnum "WP List 3" \l 13074             MR. ENGELHART:  Mr. Bibic, or any other member of the panel, would you agree with me that the CRTC's Phase II costing methodology is also a forward‑looking economic costing methodology which looks at total element long‑run incremental cost?

listnum "WP List 3" \l 13075             MR. TAYLOR:  It's been a while since I have looked at Phase 2, but my understanding is that it's likely to be quite different from U.S. TLRIC.  U.S. TLRIC is based on hypothetical forward‑looking costs of an optimally efficient network, that is rebuild the network in the most efficient way for the totality of demand for the element and calculate the changing or the incremental cost for that increment.

listnum "WP List 3" \l 13076             If that is different from Phase 2, then they are different.  If it isn't, then they are not.

listnum "WP List 3" \l 13077             MR. ENGELHART:  Would you agree with me that they are both forward‑looking ‑‑

listnum "WP List 3" \l 13078             MR. TAYLOR:  Yes.

listnum "WP List 3" \l 13079             MR. ENGELHART:  ‑‑ they are both long‑run incremental, but that TLRIC uses hypothetical costs and Phase 2 uses actual costs?

listnum "WP List 3" \l 13080             MR. TAYLOR:  That is certainly a difference that I was alert to.

listnum "WP List 3" \l 13081             MR. ENGELHART:  Are you familiar with ‑‑ I have not handed this out because I really didn't know we would be going down this path ‑‑ but are you familiar with Dr. Aron's evidence on behalf of TELUS, where she argues that hypothetical costs are inferior to the use of actual costs as a costing methodology?

listnum "WP List 3" \l 13082             MR. TAYLOR:  Yes, I have read her evidence and I agree with her conclusion.

listnum "WP List 3" \l 13083             MR. ENGELHART:  So the CRTC Phase 2 methodology, while different from the TLRIC methodology is, from a public policy perspective, preferable to that methodology.

listnum "WP List 3" \l 13084             Would you agree?

listnum "WP List 3" \l 13085             MR. TAYLOR:  Well, that method is a better method.  Whether the results are a better result is to be seen after it's cooked.

listnum "WP List 3" \l 13086             MR. ENGELHART:  Well, we generally hope that if our method is better our result is better, don't we?

listnum "WP List 3" \l 13087             MR. TAYLOR:  I will take hope, yes.

‑‑‑ Laughter / Rires

listnum "WP List 3" \l 13088             MR. ENGELHART:  All right, then.

listnum "WP List 3" \l 13089             So given that the Rogers proposal is based on Phase 2, the FCC's rules are based on TLRIC, that the two are quite similar except one uses hypothetical costs and one uses actual costs and that the actual cost method is a better method.

listnum "WP List 3" \l 13090             Would you agree with me that the Rogers proposal and the FCC rules are very similar or almost identical?

listnum "WP List 3" \l 13091             MR. BIBIC:  Which aspect of the rule are you asking about now?  The rule before we get to forbearance I suppose?

listnum "WP List 3" \l 13092             MR. ENGELHART:  Yes.

listnum "WP List 3" \l 13093             MR. BIBIC:  Yes.  I believe you have asked that and we have said they are similar.

listnum "WP List 3" \l 13094             MR. ENGELHART:  Would you give me "very similar"?

‑‑‑ Laughter / Rires

listnum "WP List 3" \l 13095             MR. BIBIC:  I can't remember the modifications you made to your numbers off the top of my head.  I think you rounded up or down.  Probably rounded up, Mr. Engelhart, but I can't remember.

listnum "WP List 3" \l 13096             MR. ENGELHART:  Let me give you a bit of assistance on that.

listnum "WP List 3" \l 13097             MR. BIBIC:  Does much turn on it?  We have already acknowledged that they are similar.

listnum "WP List 3" \l 13098             MR. ENGELHART:  Well, we are here now.

‑‑‑ Laughter / Rires

listnum "WP List 3" \l 13099             MR. ENGELHART:  Take a look, if you could, to Rogers/The Companies 19 July 74.

‑‑‑ Pause

listnum "WP List 3" \l 13100             MR. BIBIC:  You rounded up.  I was right.

listnum "WP List 3" \l 13101             MR. ENGELHART:  Yes.  So high capacity DS loops providing DS‑1 capacity for business lines; the Rogers proposal is that they are mandated at fewer than 60,000 lines in the wire centre.

listnum "WP List 3" \l 13102             For the DS‑3 Rogers proposal is they are mandated at fewer than 40,000; the FCC's rule is fewer than 38,000.

listnum "WP List 3" \l 13103             For transport facilities providing DS‑1 capacity, Rogers proposal is fewer than 40,000; the FCC fewer than 38,000.

listnum "WP List 3" \l 13104             For DS‑3 transport, 25 and 24; for dark fibre transport 25 and 24.

listnum "WP List 3" \l 13105             I think you would say those are "very similar", wouldn't you?

listnum "WP List 3" \l 13106             MR. BIBIC:  Sure.

‑‑‑ Pause

listnum "WP List 3" \l 13107             MR. ENGELHART:  Would you agree with me that the FCC's current rules amount to a virtual elimination of wholesale price controls?

listnum "WP List 3" \l 13108             MR. BIBIC:  For these services specifically?

listnum "WP List 3" \l 13109             MR. ENGELHART:  Well, take a look at Dr. Taylor's March 15, 2007 evidence ‑‑ that is Appendix 5 ‑‑ at page 52, and in particular to paragraph 117.

‑‑‑ Pause

listnum "WP List 3" \l 13110             MR. ENGELHART:  Dr. Taylor says:

                      "The U.S. is characterized by intense retail telecom communications competition, permitting the regulator to largely eliminate wholesale price controls."  (As read)

listnum "WP List 3" \l 13111             Then at paragraph 118, the last sentence reads as follows:

                      "The FCC's virtual elimination of wholesale price control is supported by these competitive developments ... by increasing ILEC and CLEC incentives to make the investment required to meet consumer demand."  (As read)

listnum "WP List 3" \l 13112             Then paragraph 119:

                      "Today, in the 21st Century, a completely new competitive dynamic has developed, offering the consumer compelling advance services in an environment of intense retail price competition.  In that marketplace the FCC has largely eliminated wholesale price controls on the grounds that they are ineffective, unnecessary and generally undermine the welfare of consumers."  (As read)

listnum "WP List 3" \l 13113             So would you agree with me that the rules that the FCC currently has in place amount to a virtual elimination of wholesale price controls?

listnum "WP List 3" \l 13114             MR. TAYLOR:  Well, of course I would agree with you and the logic of that statement is as follows, that the competition, as we say in paragraph 117‑119, is competition mostly from cable companies, but it is competition in broadband markets, and broadband markets where ILECs, Verizon and AT&T, are overbuilding their networks to provide services to compete with people like Rogers.

listnum "WP List 3" \l 13115             In those markets, which we haven't discussed, there is no unbundling requirement on ILECs, there is no price control requirement on ILECs.

listnum "WP List 3" \l 13116             The control that remains and is in the process ‑‑ there is a process in place for removing it for DS‑0s, for DS‑1s and DS‑3s, there is a process in place by which when circumstances warrant the remaining price controls ‑‑ not TLRIC cost‑based price controls but market price controls ‑‑ go away.

listnum "