ARCHIVED - Transcript
This page has been archived on the Web
Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.
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 29, 2007 Le 29 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 29, 2007 Le 29 octobre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
RESUMED: BRENT MOONEY 2380 /14397
RESUMED: JOHN MACDONALD
RESUMED: TERESA GRIFFIN-MUIR
RESUMED: KELVIN SHEPPARD
RESUMED: RON ROUT
RESUMED: PAUL BRISBY
RESUMED: LEE SELWYN
Cross-examination by TELUS 2381 /14404
AFFIRMED: DR. DEBRA ARON 2466 /14962
AFFIRMED: DR. DENNIS WEISMAN
AFFIRMED: PROF. GLEN ROBINSON
AFFIRMED: DR. ROBERT CRANDALL
Examination-in-chief by TELUS 2466 /14966
Cross-examination by The Competition Bureau 2470 /15006
Cross-examination by MTS Allstream 2496 /15220
Cross-examination by Primus 2567 /15717
Cross-examination by PIAC 2593 /15914
Cross-examination by MTS Allstream 2614 /16049
Cross-examination by Cybersurf 2648 /16272
Cross-examination by Xittel 2684 /16484
SEQ CHAPTER \h \r 1AFFIRMED: DR. KEVIN HICKEY 2697 /16556
AFFIRMED: TED CHISLETT
AFFIRMED: JOE BOUTROS
RESUMED: DR. LEE SELWYN
Examination-in-chief by Primus 2697 /16560
Cross-examination by The Companies 2698 /16577
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
TELUS-5 Ofcom - Valuing copper access - 2382 /14418
Final Statement - Date of
publication: 18 August 2005
MTS-15 List re: (Facilities-Based) 2459 /14913
Parties' pre-hearing evidence on
the Impact of the CDN Decision
on Facilities Construction
Construction or Capital
Expenditure Programs
CRTC-6A CRTC Undertaking register of 2459 /14913
CRTC version updated 29-10-2007
BUREAU‑6 Article by Robert W. Crandall 2496 /15210
entitled: Competition and Chaos,
U.S. Telecommunications since
the 1996 Telecom
BUREAU‑7 Topics in Economic Analysis & 2496 /15210
Policy, Volume 4, Issue 1, 2004,
Article 14 re: Do Unbundling
Policies Discourage CLEC
Facilities-Based Investment
MTS‑16 Alternate Scenario 1 re: 2518 /15396
Significant Price Increase -
Modest Demand Increase due to
reduced ILEC incentives to
innovate & Alternate Scenario 2
re: Price Decrease - Demand
Increase due to increased
competition and innovation
CYBERSURF-7 Excerpt from the Communications 2638 /16204
Act of 1934
Gatineau, Quebec / Gatineau (Québec)
‑‑‑ Upon resuming on Monday, October 29, 2007
at 0805 / L'audience reprendre le lundi
29 octobre 2007 à 0805
1LISTNUM 1 \l 1 \s 43964396 THE CHAIRPERSON: Madam Secretary, who do we have this morning?
1LISTNUM 1 \l 14397 THE SECRETARY: We have this morning the TELUS Panel cross‑examining MTS.
RESUMED: BRENT MOONEY
RESUMED: JOHN MACDONALD
RESUMED: TERESA GRIFFIN‑MUIR
RESUMED: KELVIN SHEPPARD
RESUMED: RON ROUT
RESUMED: PAUL BRISBY
RESUMED: LEE SELWYN
1LISTNUM 1 \l 14398 THE CHAIRPERSON: Go ahead.
1LISTNUM 1 \l 14399 MR. LOWE: Thank you, sir.
1LISTNUM 1 \l 14400 John Lowe on for TELUS. With me is Dr. Levine.
1LISTNUM 1 \l 14401 Mr. Chairman, I have no questions for Dr. Selwyn today. I would like to reserve the right to talk to him on the Primus Panel.
1LISTNUM 1 \l 14402 THE CHAIRPERSON: Okay.
1LISTNUM 1 \l 14403 MR. LOWE: We will move along a little quicker than I originally thought when I provided my time estimates.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 14404 MR. LOWE: Mr. Brisby, you assisted MTS Allstream in its telecom policy review submission, didn't you?
1LISTNUM 1 \l 14405 MR. BRISBY: That's correct, yes.
1LISTNUM 1 \l 14406 MR. LOWE: And that was on August 15, 2005, subject to check?
1LISTNUM 1 \l 14407 MR. BRISBY: That sounds correct, yes.
1LISTNUM 1 \l 14408 MR. LOWE: And that was right around the time of the Ofcom strategic review, wasn't it?
1LISTNUM 1 \l 14409 MR. BRISBY: The Ofcom review was ongoing at that time, yes.
1LISTNUM 1 \l 14410 MR. LOWE: Sorry, was what?
1LISTNUM 1 \l 14411 MR. BRISBY: The Ofcom review was ongoing at that time, yes.
1LISTNUM 1 \l 14412 MR. LOWE: Thank you.
1LISTNUM 1 \l 14413 Perhaps we could turn to Tab 11 of the book of documents, which you should have. This is a document from Ofcom, entitled "Valuing Copper Access". It is dated August 18, 2005.
1LISTNUM 1 \l 14414 Do you have that?
1LISTNUM 1 \l 14415 MR. BRISBY: I have that, yes.
1LISTNUM 1 \l 14416 MR. LOWE: I would like to turn to paragraph 1.3 of the Summary.
1LISTNUM 1 \l 14417 THE SECRETARY: Please record this document as Exhibit No. 5 for TELUS.
1LISTNUM 1 \l 14418 MR. LOWE: Thank you.
EXHIBIT TELUS‑5: Ofcom ‑ Valuing copper access ‑ Final Statement ‑ Date of publication: 18 August 2005
1LISTNUM 1 \l 14419 MR. LOWE: In the last part of paragraph 1.3 it says:
"Ofcom does not believe the cable companies will significantly increase their coverage in the near future. This means that for a large number of U.K. homes and businesses, BT is the only provider of local access to them and that this is unlikely to change in the near future. This lack of effective competition means that it is important to ensure that the price that other companies, and ultimately consumers, pay for using BT's network is not too high."
1LISTNUM 1 \l 14420 Was the cable coverage in the U.K. at the time this was written about 45 per cent?
1LISTNUM 1 \l 14421 MR. BRISBY: At this time digital broadband enabled cable was approximately 45 per cent and non‑digital solely TV enabled cable would have covered an extra 5 per cent.
1LISTNUM 1 \l 14422 So yes, 45 to 50 per cent sounds about right.
1LISTNUM 1 \l 14423 MR. LOWE: Thank you.
1LISTNUM 1 \l 14424 Then turning to Tab 14, sir ‑‑ and this is an Ofcom 2007 report. Do you have it?
1LISTNUM 1 \l 14425 MR. BRISBY: I have that.
1LISTNUM 1 \l 14426 MR. LOWE: We have extracted page 51 from this report. In the second paragraph under the heading "Digital Cable" it says ‑‑ and this is the second sentence:
"The cable platform has less extensive coverage than either satellite or terrestrial television; 45 per cent versus 98 per cent and 73 per cent."
1LISTNUM 1 \l 14427 Do you see that?
1LISTNUM 1 \l 14428 MR. BRISBY: Yes.
1LISTNUM 1 \l 14429 MR. LOWE: So we are still looking at about 45 per cent coverage in the U.K.?
1LISTNUM 1 \l 14430 MR. BRISBY: Yes, the data are pretty much unchanged. So Ofcom's view that further network build was unlikely has in fact transpired at this time, yes.
1LISTNUM 1 \l 14431 MR. LOWE: Thank you.
1LISTNUM 1 \l 14432 Then further in the paragraph it says:
"It was the first to pioneer dual play services which bundled fixed line telephony and television subscription services."
1LISTNUM 1 \l 14433 Do you see that?
1LISTNUM 1 \l 14434 MR. BRISBY: Yes, I see that.
1LISTNUM 1 \l 14435 MR. LOWE: Is it the case that some U.K. cable companies that pass homes only provide telephony service and don't also provide broadcasting service?
1LISTNUM 1 \l 14436 MR. BRISBY: Some customers will choose only to buy telephony services from the cable company. Some will choose to buy a bundle and indeed some will choose just to buy cable TV.
1LISTNUM 1 \l 14437 MR. LOWE: What are the rough percentages of people who would just buy telephony?
1LISTNUM 1 \l 14438 MR. BRISBY: I don't have those data, I'm afraid.
1LISTNUM 1 \l 14439 MR. LOWE: Picking up on your observation ‑‑ and I think you said it's trite that what works in one market might not work in another ‑‑ perhaps we could turn to Tab 10.
1LISTNUM 1 \l 14440 This is a press release entitled "EU Considers Telecom Super Regulator". I would like to turn you to the second page, if I could.
1LISTNUM 1 \l 14441 MR. BRISBY: I see the document. I'm not exactly sure what the source of the document is.
1LISTNUM 1 \l 14442 Is it a press release or a press article?
1LISTNUM 1 \l 14443 MR. LOWE: It's a press article.
1LISTNUM 1 \l 14444 MR. BRISBY: Okay. And I wasn't sure what it was a press article from.
1LISTNUM 1 \l 14445 MR. LOWE: The publication?
1LISTNUM 1 \l 14446 MR. BRISBY: Yes. I saw the exhibit and I read it, but I couldn't exactly see where it was sourced from.
1LISTNUM 1 \l 14447 I'm happy to answer questions about it. I was just interested.
1LISTNUM 1 \l 14448 MR. LOWE: No, that's fair enough. I just don't have that information handy, but we can probably get that and put it on the record as part of the exhibit list, if it's helpful.
1LISTNUM 1 \l 14449 On page 2 what I was interested in was this quote from the European Commissioner of Telecommunications, Viviane Reding. This is the fourth‑last paragraph and she is reported to say:
"Functional separation will be out of the question in companies where effective competition for infrastructure already exists."
1LISTNUM 1 \l 14450 Do you see that?
1LISTNUM 1 \l 14451 MR. BRISBY: I do see that, yes.
1LISTNUM 1 \l 14452 MR. LOWE: "But where effective
infrastructural competition has little prospect of taking root over the medium to long term, national regulators could, in close agreements with the Commission, make use of this new remedial measure."
1LISTNUM 1 \l 14453 Do you see that?
1LISTNUM 1 \l 14454 MR. BRISBY: I see that as well. I think it is an interesting quotation, isn't it.
1LISTNUM 1 \l 14455 MR. LOWE: Does that sound like something that the European Commissioner might say?
1LISTNUM 1 \l 14456 MR. BRISBY: I don't know. I'm seeing her on Wednesday. I'll ask her.
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 14457 MR. BRISBY: I think the interesting piece here is what this phrase "effective competition for infrastructure" means.
1LISTNUM 1 \l 14458 In the countries that have looked at functional separation, it has obviously been looked at in the U.K. and it has been implemented in the U.K. The U.K. by European standards has fairly high levels of cable penetration, levels of homes passed by digitally enabled cable; other countries in Europe not so much.
1LISTNUM 1 \l 14459 A country like The Netherlands, for example, is unusual. It has more cable coverage than the U.K.
1LISTNUM 1 \l 14460 In The Netherlands they looked very hard at functional separation ‑‑ well, they looked at functional separation and ultimately decided not to go for it.
1LISTNUM 1 \l 14461 They have done it in New Zealand as well, which is a country without much cable coverage.
1LISTNUM 1 \l 14462 But the U.K. is kind of in the middle and, of course, it is important to note that functional separation and the Offcom measures applied equally in areas with cable coverage and in areas without.
1LISTNUM 1 \l 14463 MR. LOWE: Well, maybe we could flip to Tab 13, which is a press release of the European Commission, and it is entitled "Two‑speed broadband: Europe underlines regulatory problems to be addressed through reform."
1LISTNUM 1 \l 14464 Do you see that?
1LISTNUM 1 \l 14465 MR. BRISBY: I see that, yes.
1LISTNUM 1 \l 14466 MR. LOWE: And it starts out in the bolded headnote, second sentence:
"Lack of competition and regulatory weaknesses are cited as the main obstacles to broadband growth." (As read)
1LISTNUM 1 \l 14467 And then it goes down, I think, to your point in the third last paragraph, last sentence:
"In the best performing countries, Denmark (37.2 percent) and the Netherlands (31 percent), roughly one‑third or more of the population has broadband with a substantial proportion using an infrastructure other than the incumbents." (As read)
1LISTNUM 1 \l 14468 And that is your point, that the Netherlands has more cable coverage than the U.K. and they have that head‑to‑head infrastructure competition?
1LISTNUM 1 \l 14469 MR. BRISBY: Well, that is not my point exactly. The Netherlands, of course, has benefited from regulation of local loop unbundling as well. In fact, they have benefited from ‑‑ so they have therefore benefited from multi‑platform competition.
1LISTNUM 1 \l 14470 I think everyone thinks that lots and lots of competing access networks is a great idea. It is a question of how realistic it is to expect people to build them.
1LISTNUM 1 \l 14471 So the Netherlands, for example, which has pretty high population density, I think certainly substantially higher than Canada, probably quite a lot higher than the U.K., does have quite high cable coverage but it has benefited also from competition through local loop unbundling as well.
1LISTNUM 1 \l 14472 MR. LOWE: Well, in the U.K., has BT made any movements towards bringing fiber to the home yet?
1LISTNUM 1 \l 14473 MR. BRISBY: Yes, they have built out in Ebbsfleet and Kent, which will deliver fiber to the premises to something like ‑‑ I am talking off the top of my head but I think it is something like 20,000 premises there.
1LISTNUM 1 \l 14474 MR. LOWE: And those are new areas, not existing areas?
1LISTNUM 1 \l 14475 MR. BRISBY: That is a new development, yes.
1LISTNUM 1 \l 14476 MR. LOWE: Yes.
1LISTNUM 1 \l 14477 And then perhaps you could turn to Tab 12, which is Dr. Crandall's evidence.
‑‑‑ Pause
1LISTNUM 1 \l 14478 MR. BRISBY: This is the TELUS supplementary material; is that right?
1LISTNUM 1 \l 14479 MR. LOWE: That is right and it is page 13 I was interested in.
1LISTNUM 1 \l 14480 MR. BRISBY: Just bear with me while I rearrange my papers slightly.
1LISTNUM 1 \l 14481 Page ‑‑ which one, sorry?
1LISTNUM 1 \l 14482 MR. LOWE: Thirteen.
1LISTNUM 1 \l 14483 MR. BRISBY: Yes, I have that.
1LISTNUM 1 \l 14484 MR. LOWE: And paragraph 28:
"Rather than increase its spending on its network significantly, BT has recently announced a $2.5 billion pound buyback of its stock over the next two years." (As read)
1LISTNUM 1 \l 14485 Do you see that?
1LISTNUM 1 \l 14486 MR. BRISBY: Yes, I see that.
1LISTNUM 1 \l 14487 MR. LOWE: And is that stock buyback program of BT still going on?
1LISTNUM 1 \l 14488 MR. BRISBY: I don't know about the stock buyback program, I am afraid.
1LISTNUM 1 \l 14489 MR. LOWE: All right. Well then, in your evidence on page 12, and this is your original evidence, and it is the second sentence, and I am just trying to clarify something. It says:
"We understand that in Canadian price‑setting exercises an allowance is made for a 'profit' at 15 percent." (As read)
1LISTNUM 1 \l 14490 I was wondering where you gained that understanding, that under the Canadian price‑setting exercise there is a profit at 15 percent.
1LISTNUM 1 \l 14491 MR. BRISBY: Well, I certainly don't claim to be an expert on Canadian regulation directly. I gained that knowledge through my discussions with MTS Allstream.
1LISTNUM 1 \l 14492 MR. LOWE: Oh! So the company would have provided you with that information?
1LISTNUM 1 \l 14493 MR. BRISBY: That is right.
1LISTNUM 1 \l 14494 MR. LOWE: Thank you.
1LISTNUM 1 \l 14495 Well, with that, perhaps I could turn to the company witnesses. Thank you, Mr. Brisby.
1LISTNUM 1 \l 14496 MR. BRISBY: Thank you.
1LISTNUM 1 \l 14497 MR. LOWE: Good morning, panel. We will start with some meet‑and‑greet questions.
1LISTNUM 1 \l 14498 I provided with you under Tab 15 some equity research on MTS.
1LISTNUM 1 \l 14499 Do you have that?
1LISTNUM 1 \l 14500 MR. MOONEY: Yes.
1LISTNUM 1 \l 14501 MR. LOWE: Just to kind of get a sense of who you are, MTS has a market cap of about $3.2 billion; is that right?
1LISTNUM 1 \l 14502 MR. MOONEY: Yes.
1LISTNUM 1 \l 14503 MR. LOWE: And then the enterprise business is about a quarter of that amount?
1LISTNUM 1 \l 14504 MR. MOONEY: In terms of value, that could be right. I am not sure.
1LISTNUM 1 \l 14505 MR. LOWE: Okay. Well, if we turn to page 22 of the document, Exhibit 17 ‑‑ this isn't a CRTC exhibit, it is just entitled Exhibit 17 in the document ‑‑ it has the consumer less wireless value at $1.7 billion, enterprise at $850 million and wireless at $1.239 billion.
1LISTNUM 1 \l 14506 Do you see that?
1LISTNUM 1 \l 14507 MR. MOONEY: Yes, but just to be clear, this is an analyst document, it is not a document that is put out by our company. It is based on whoever the author of the report's views are relative to our financial performance and what we do and what their prospects or their view of the prospects of the company going forward.
1LISTNUM 1 \l 14508 So I am not in a position to say that I agree or disagree with what this individual's views are on our valuation.
1LISTNUM 1 \l 14509 MR. LOWE: No, and I am not trying to get it down to the penny but just rough and ready about a quarter of the asset value of MTS Allstream is the enterprise business; is that reasonable?
1LISTNUM 1 \l 14510 MR. MOONEY: Well, I just said I am not sure I am prepared to say that. That is what this report is saying. I am prepared to say that that is what is on that page 22.
1LISTNUM 1 \l 14511 But in terms of the value, we look at it ‑‑ perhaps we look at it differently, that is all I am saying.
1LISTNUM 1 \l 14512 MR. LOWE: Perhaps we could turn to page 2 of the document then and this is under the heading "Investment Thesis."
1LISTNUM 1 \l 14513 The heading is "FCF..." ‑‑ that is free cash flow, I take it ‑‑ "...generation and a hefty dividend."
1LISTNUM 1 \l 14514 Do you see that?
1LISTNUM 1 \l 14515 MR. MOONEY: Sorry, just ‑‑ yes, on page ‑‑ sorry, which page?
1LISTNUM 1 \l 14516 MR. LOWE: Page 2.
1LISTNUM 1 \l 14517 MR. MOONEY: Page 2, yes.
1LISTNUM 1 \l 14518 MR. LOWE: Right at the top of the page.
1LISTNUM 1 \l 14519 MR. MOONEY: Yes.
1LISTNUM 1 \l 14520 MR. LOWE: And is that still essentially the investment story in MTS or are you saying this is just the view of the analyst?
1LISTNUM 1 \l 14521 MR. MOONEY: Yes. I don't use the word "hefty" whenever I talk about our company under any sense. That is this person's view of our dividend.
1LISTNUM 1 \l 14522 I would like to think that our dividend is reasonable and I would suggest if you want a good definition of our dividend you should talk to our shareholders.
1LISTNUM 1 \l 14523 MR. LOWE: Thank you.
1LISTNUM 1 \l 14524 MR. MOONEY: They would probably tell you it is very reasonable as well.
1LISTNUM 1 \l 14525 MR. LOWE: Thanks.
1LISTNUM 1 \l 14526 And then maybe we could turn to page 12 and that has a bit of an analysis of Allstream.
1LISTNUM 1 \l 14527 Under the heading "Allstream was acquired in 2004 for $1.6 billion," do you see that?
1LISTNUM 1 \l 14528 MR. MOONEY: Yes.
1LISTNUM 1 \l 14529 MR. LOWE: And then it says that:
"MTS amalgamated three operating divisions, MTS Communications, MTS Media and Allstream Corp., to form a new company under the name MTS Allstream Inc." (As read)
1LISTNUM 1 \l 14530 And then below that:
"The Enterprise Solution Division operates under the Allstream brands nationally and is a leader in business and wholesale markets." (As read)
1LISTNUM 1 \l 14531 Do you see that?
1LISTNUM 1 \l 14532 MR. MOONEY: Yes, I see that.
1LISTNUM 1 \l 14533 MR. LOWE: I would like to just focus in on the Enterprise Solutions Division for a moment.
1LISTNUM 1 \l 14534 I take it that is ‑‑ the space the Enterprise Solutions Business is in is wholesale and enterprise?
1LISTNUM 1 \l 14535 MR. MOONEY: Yes, wholesale, enterprise mid‑market.
1LISTNUM 1 \l 14536 MR. LOWE: Okay. And then it says in the paragraph above:
"Allstream continues to transition from legacy business issues." (As read)
1LISTNUM 1 \l 14537 It says:
"The company currently has a roughly 8‑10 percent market share across Canada but with a larger concentration of this in Toronto, roughly a 20 percent share." (As read)
1LISTNUM 1 \l 14538 Do you see that?
1LISTNUM 1 \l 14539 MR. MOONEY: Yes, I see that.
1LISTNUM 1 \l 14540 MR. LOWE: Does that sound about right or...?
1LISTNUM 1 \l 14541 MR. MOONEY: Yes, that sounds about right.
1LISTNUM 1 \l 14542 MR. LOWE: And the analysis probably would have gained that understanding through discussions with the company?
1LISTNUM 1 \l 14543 MR. MOONEY: Yes or on our quarterly investor call, something like that, sure.
1LISTNUM 1 \l 14544 MR. LOWE: Okay.
1LISTNUM 1 \l 14545 And then under this heading, the second last paragraph on the page:
"The strategy going forward..." (As read)
1LISTNUM 1 \l 14546 And again, this is the enterprise business, I take it.
"...is for a more market‑focused strategy that highlights Allstream's high capacity network..." (As read
1LISTNUM 1 \l 14547 And that is this 24,000‑kilometre network, I take it.
"...and also its superior customer focus." (As read)
1LISTNUM 1 \l 14548 Do you see that?
1LISTNUM 1 \l 14549 MR. MOONEY: Yes.
1LISTNUM 1 \l 14550 MR. LOWE: And so the value proposition that you have is your network and your customer focus, right?
1LISTNUM 1 \l 14551 MR. MacDONALD: It is much more than that. I mean, certainly we would say it is a mix that includes the fact that we have we believe a very competitive service offering. For example, we believe that we have got the best MPLS service offering in Canada which, in large measure, is due to the fact that we have been able to use CDN and other alternative access arrangements that actually support access to that network.
1LISTNUM 1 \l 14552 Along with that, we think we are more of a human scale company relative to the competition. So we think that we can move a little bit more quickly in terms of responding to the various needs in the marketplace. And at the end of the day, we like to use our people as probably the best measure in terms of differentiation. And we measure and we ask our customers about that, and they think that we do have people that actually listen to what their problems are and develop solutions for those problems.
1LISTNUM 1 \l 14553 MR. LOWE: Thank you. And then turning the page to page 13, and the third last paragraph from the bottom it says:
"On December 13, 2006 MTS announced the completion of a strategic review and related business plans. As part of this review, MTS announced a key priority going forward will be to increase cash distributions to shareholders. More specifically, MTS plans to distribute 70 to 80 per cent of its annual distributable cash flow." (As Read)
1LISTNUM 1 \l 14554 Do you see that?
1LISTNUM 1 \l 14555 MR. MOONEY: Yes.
1LISTNUM 1 \l 14556 MR. LOWE: Now, this is clearly the analyst's view, but is that still the company's strategic plan?
1LISTNUM 1 \l 14557 MR. MOONEY: As far as I know, it is, yes.
1LISTNUM 1 \l 14558 MR. LOWE: Thank you. And turning to page 14, this is the second paragraph from the bottom:
"Tax yields through to 2014 has a value in DCF."
And it says:
"With the acquisition of Allstream in June 2004 MTS has eliminated cash taxes on earnings as a result of utilizing tax losses from Allstream." (As Read)
1LISTNUM 1 \l 14559 And I take it that tax yield will be effective until 2014, is the current thinking in any event? Is that right?
1LISTNUM 1 \l 14560 MR. MOONEY: Well, I don't know if there is anything that has changed since recently on that. But to my knowledge, yes, it was somewhere in the 2013, 2014 timeframe.
1LISTNUM 1 \l 14561 MR. LOWE: Okay. And ‑‑
1LISTNUM 1 \l 14562 MR. MOONEY: I am sorry, what was that?
1LISTNUM 1 \l 14563 MR. LOWE: No, that is fine, I was just waiting for you.
1LISTNUM 1 \l 14564 And all other things being equal, if you are not taxable you are less sensitive to the incentives in the income tax system to invest, isn't that right?
1LISTNUM 1 \l 14565 MR. MOONEY: I wouldn't say that at all. In fact, we are very aware of what is available under the Income Tax Act and we take advantage of it. Specifically, if you are talking about R&D tax credits, we invest in a lot of things that are eligible for those tax credits, irrespective of our cash tax position.
1LISTNUM 1 \l 14566 MR. MacDONALD: The other thing too, is when you look at the return to shareholders, either via dividends or share buybacks. The share buybacks are actually funded through discreet transactions such as the sale of our directory business, et cetera.
1LISTNUM 1 \l 14567 It has no impact on our capital expenditures relative to ‑‑ so, for example, running the enterprise operating division, if anything, my Cap‑ex over the past few years has gone up. So there is nothing to do with saying that what we are doing is returning this money to the shareholders and starving for capital. I don't see that at all. As a matter of fact, we continue to invest in our core network in terms of new services.
1LISTNUM 1 \l 14568 And once again to reiterate, a large part of that investment is actually fuelled by virtue of the fact that we have cost effective access to our customers. And as far as dividend policy, the dividend policy is dictated, to a large measure, by exactly what our shareholders expect relative to the risk profile of our company compared to alternative investment opportunities that they might have.
1LISTNUM 1 \l 14569 But to suggest that we are not spending money on network is not the reality. And to suggest that we would take the money that was going to dividends or share buybacks and invest in network that was uneconomic, I mean, that does just doesn't hunt. I mean, to take money that is being generated by the business and investing it in uneconomic approaches is not going to work. I mean, we have tried that, we have invested $4 billion in our history in trying to do that and trying to replicate the incumbent networks and that doesn't happen.
1LISTNUM 1 \l 14570 MR. LOWE: All right. Well, you see the tax‑free status until 2014 as an advantage then, it gives you more cash flow and you have more spending money, is that what you are saying?
1LISTNUM 1 \l 14571 MR. MacDONALD: I wasn't commenting directly in terms of the tax status of the company. It is part of the overall investment profile of the company in terms of whether we are paying taxes or not. In terms of whether it constrains, we think it constrains our ability to invest in capital, absolutely not the case.
1LISTNUM 1 \l 14572 As a matter of fact, one of the things as we continue to invest in capital, we do generate the capital cost allowance and capital cost allowances, you know, we can actually use in terms of deferring taxes in the future as well, like everybody else does, like our competitors.
1LISTNUM 1 \l 14573 MR. LOWE: Oh sure, sure. And the depreciation, the CCA that you get from investing you can use it, but you can't use it until after 2014, right, so you ‑‑
1LISTNUM 1 \l 14574 MR. MacDONALD: Yes, but you can use it though.
1LISTNUM 1 \l 14575 MR. LOWE: You can use it eventually. So it is not as sharp as an incentive?
1LISTNUM 1 \l 14576 MR. MacDONALD: It is not as sharp. But it doesn't, in terms of our decision to deploy capital and investing in network, I can't recall any decision that we have taken in terms of putting together a profile in terms of capital investment that would take that directly into account.
1LISTNUM 1 \l 14577 MR. LOWE: So the tax tail doesn't wag the business in other words?
1LISTNUM 1 \l 14578 MR. MOONEY: No, not at all, because basically the metric that everybody looks at in the telecommunications industry is the EBITDA metric, which is your operating cash flow before tax. And it is out of that operating cash flow that you find your capital program. So tax doesn't even come into the calculation.
1LISTNUM 1 \l 14579 MR. LOWE: All right. And so these ‑‑
1LISTNUM 1 \l 14580 MR. MOONEY: Which is really one of the inconsistencies or one of the issues when you read a report like this. You know, as Mr. MacDonald pointed out previously, the buyback program that is referred to in here was the result of a business review that was conducted by ‑‑ MTS started a couple of years ago that lead to the disposal of some non‑core assets that the company no longer needed and the decision was made to return that money to shareholders.
1LISTNUM 1 \l 14581 To my knowledge, it has been done at Bell and it has been done at TELUS in the past as well. So I don't understand why it plays into this discussion at all.
1LISTNUM 1 \l 14582 MR. LOWE: Well, on page 21 of the document, in the second‑last paragraph or even the middle of the paragraph, it says:
"Second, we value the Allstream EBITDA.."
as you say, that is the major metric for telecom investors,
"..at five times, which is a slight premium to valuations in the enterprise telco space which appear to be closer to 4.5 times currently. However, we believe that MTS has some room on executing its strategy with Allstream to argue that a conservative multiple on 2008 EBITDA might not adequately reflect value." (As Read)
1LISTNUM 1 \l 14583 Do you see that?
1LISTNUM 1 \l 14584 MR. MacDONALD: One of the issues, of course, when I read this is, and this is this analyst's opinion, as Mr. Mooney has said, I don't know who else they are referring to to end up with a comparable, because there is very few of us actually in this space.
1LISTNUM 1 \l 14585 You know, when I look at the number of folks outside from Bell and TELUS that actually could justify this kind of multiple I don't know who it would be.
1LISTNUM 1 \l 14586 MR. LOWE: Well, first, does that multiple sound about right for this kind of business?
1LISTNUM 1 \l 14587 MR. MOONEY: I would say that this multiple is this person's opinion. I don't really want to comment on whether I agree with it or not, I don't know. It is his opinion, I would have to understand how this person came up with that multiple.
1LISTNUM 1 \l 14588 MR. LOWE: And then could you comment on whether it is a premium to others in the space or do you just say that you just don't know, you don't know what the comparables are ‑‑
1LISTNUM 1 \l 14589 MR. MOONEY: You know, I don't know the basis that this individual who wrote this report came up with this multiple. You know, perhaps if I sat and talked to the person then I could understand where they are coming from, but right now I don't.
1LISTNUM 1 \l 14590 MR. LOWE: All right, that is fair enough.
1LISTNUM 1 \l 14591 MR. MacDONALD: And it is somewhat speculative, because if you could find a pure play I suppose of the enterprise space you might have something that you could benchmark against. But once again, there is not many of us left in the enterprise space.
1LISTNUM 1 \l 14592 MR. SHEPPARD: I think I would suggest as well this is one analyst. There is probably a dozen analysts and they all have their own views and a range, I am not sure what the range on the enterprise valuation is, but you would have to look at the full range and then probably some are high and some are low and you would have to form your own conclusion as an investor.
1LISTNUM 1 \l 14593 MR. LOWE: All right. Now, turning to tab 16, and this is moving onto the discussion of that Newfoundland cable facility that has been raised a couple of times in the proceeding. And tab 16 is Decision 2005‑16, it is a CRTC decision issued back in March of 2005 before the TPR report came out, before the policy direction was issued. And one of the main issues in that case was whether Aliant's submarine fibre optics line from Halifax to St. John's was an essential facility under the 97‑8 test.
1LISTNUM 1 \l 14594 And if you look at paragraph 29 of the decision it says:
"Call‑Net argued that Aliant Telecom's IX digital transport facility between Halifax and St. John's met all the conditions of an essential facility.." (As Read)
and then it goes on and it cites the three requirements. Do you see that?
1LISTNUM 1 \l 14595 MR. MacDONALD: Yes, we do.
1LISTNUM 1 \l 14596 MR. LOWE: And that test set out by Call‑Net is essentially the test established by Commission in Decision 97‑8?
1LISTNUM 1 \l 14597 MS GRIFFIN‑MUIR: Yes, that is correct.
1LISTNUM 1 \l 14598 MR. LOWE: In paragraph 23 of the decision:
"MTS Allstream supported Call‑Net's position that competitors would be unable to economically duplicate the facility in question, given the significant costs of construction and limited demand." (As Read)
1LISTNUM 1 \l 14599 Do you see that?
1LISTNUM 1 \l 14600 MR. MacDONALD: Yes.
1LISTNUM 1 \l 14601 MR. LOWE: And then paragraphs 48 and 49, the CRTC denied the application, they looked at other submarine builds and took the view that a new IX line would be economically feasible and they said that it is not an essential facility. Do you see that?
1LISTNUM 1 \l 14602 MR. MacDONALD: Yes, we do. And, by the way, I still hold to the comments that we made in terms of it being not economic.
1LISTNUM 1 \l 14603 The circumstance under which the facility was built was unusual, insofar as you ended up with a situation where three companies actually came together along with a government subsidy that was quite significant to basically justify the expenditure.
1LISTNUM 1 \l 14604 MR. LOWE: All right. Well, let's flash forward then to 2007, today.
1LISTNUM 1 \l 14605 And I take it that a consortium of carriers and the Government of Newfoundland are going to pay some, what is it, $53‑million to build the line?
1LISTNUM 1 \l 14606 MR. MacDONALD: The actual total ‑‑ the total build I believe is on the ‑‑ just through public documents. Ron, maybe I can hand it over to you.
1LISTNUM 1 \l 14607 MR. ROUT: Yeah. The entire build, both the submarine cable and the terrestrial portions we understand is $82‑million of which 52‑, 53‑million was for the submarine portion alone.
1LISTNUM 1 \l 14608 MR. LOWE: And then the Government of Newfoundland is buying an indefeasible right of use for 15‑million; is that the way the deal works on the submarine part of it?
1LISTNUM 1 \l 14609 MR. MacDONALD: The government contributed to the tune of about $15‑million to that construction and in return for that, one of the benefits they get is I believe an IRU.
1LISTNUM 1 \l 14610 MR. ROUT: Yes, that's right.
1LISTNUM 1 \l 14611 MR. LOWE: All right. And then do you have that press release, it's Tab 17, the Government of Newfoundland press release?
1LISTNUM 1 \l 14612 MR. MacDONALD: Yes, we have it.
1LISTNUM 1 \l 14613 MR. LOWE: And let me ask you first, is this an economic project for MTS Allstream?
1LISTNUM 1 \l 14614 MR. MacDONALD: Relative to the prices we were paying to Aliant for leasing that facility, absolutely.
1LISTNUM 1 \l 14615 And, by the way, it gives you some indication of some of the difficulties that we're faced with in terms of looking at, you know, a more cost effective reach to 'The Rock', as we call it.
1LISTNUM 1 \l 14616 And I only wish, if you look at generalizing this kind of approach to the rest of the marketplace, that we would end up with a situation that in servicing the needs of our customers we coincidentally would have two other partners as well as government money to assist in the deployment of network.
1LISTNUM 1 \l 14617 MR. LOWE: Well, let's talk about the government money for a moment. And in the press release, this is a news release of the Government of Newfoundland dated August 27th, 2007, the third last paragraph:
"Based on an external independent assessment by EWA, it is conservatively estimated that the Province will recover its investment within five years through cost savings on current and future telecommunications contracts." (As read)
1LISTNUM 1 \l 14618 Do you see that?
1LISTNUM 1 \l 14619 MR. MacDONALD: Yeah.
1LISTNUM 1 \l 14620 MR. LOWE: And so I don't think the Government of Newfoundland would agree with you that this was a subsidy?
1LISTNUM 1 \l 14621 MR. MacDONALD: The government had a complex mix in terms of looking at their participation in this. One of the issues that they had was a survivability issue, like a diversity in terms of there was some incidents that had occurred, unfortunately, in terms of the existing networks that was driving this.
1LISTNUM 1 \l 14622 There was also a concern that, you know, perhaps the prices were too high relative to the cost of accessing Newfoundland and perhaps that was constraining economic development.
1LISTNUM 1 \l 14623 They were getting a fair bit of pressure in terms of various services and about how they were priced in Newfoundland versus other areas.
1LISTNUM 1 \l 14624 And from our standpoint, we looked at simply the costs that we were paying to Aliant versus the opportunity to participate.
1LISTNUM 1 \l 14625 Now, if we were doing this individually, or Persona was doing it individually ‑‑ now East Link ‑‑ or Rogers was doing it individually, this would not have happened.
1LISTNUM 1 \l 14626 But it just so happened that we had the unique alignment to the stars that allowed us to actually participate, all four parties, in terms of getting it constructed.
1LISTNUM 1 \l 14627 And the interesting thing is that it seems that since it was constructed, in our just some recent negotiations with Aliant that the price points magically seem to have dropped on what the cost to get to Newfoundland actually has been.
1LISTNUM 1 \l 14628 Ron, maybe you could talk to that.
1LISTNUM 1 \l 14629 MR. ROUT: Yeah, that's right.
1LISTNUM 1 \l 14630 You know, post ‑‑ even before the build is complete we've seen action that would suggest at least 20 per cent drop in the price for that route.
1LISTNUM 1 \l 14631 The other thing that's really important to us, I mean, the Newfoundland build for us was sort of, from our perspective, a bold and significant investment.
1LISTNUM 1 \l 14632 But I want to highlight another factor which is the importance for us going forward with this build for the people of Newfoundland and those, and the cities that we can now get much closer to is, again, the requirement for us to be able to get Ethernet and other accesses at the right cost point, because even with this investment we still need to be able to get access to Ethernet in order to provide service to these customers.
1LISTNUM 1 \l 14633 MR. LOWE: Okay. Well, just back to the Government of Newfoundland's perspective, Mr. MacDonald.
1LISTNUM 1 \l 14634 And I accept that there were these other considerations that they had about economic development, but still they looked at what the pay back was and they said, "Look, we're going to get a five‑year pay back over this, it's economic", didn't they?
1LISTNUM 1 \l 14635 MR. MacDONALD: They expect that the existence of a competing build, and as I mentioned earlier is actually turning out to be the case, will result in lower prices on that particular route.
1LISTNUM 1 \l 14636 MR. LOWE: All right.
1LISTNUM 1 \l 14637 MR. MacDONALD: Now, but at the end of the day, when you look at the total volume of traffic that is actually originating and terminating in Newfoundland, is that this basically was an uneconomic build. I mean I was involved, I worked at Aliant at the time when the link went in. I mean, there was no additional requirement for capacity to the Island.
1LISTNUM 1 \l 14638 So, of the 50‑million bucks on the submarine cable in particular and the $80‑million in total, as to whether that represented a good economic deployment of investment resources, I'm not so sure that would have been the case.
1LISTNUM 1 \l 14639 The government on the other hand has a different set of requirements. They anticipate that there is going to be lower pricing in terms of accessing Newfoundland and that will have all sorts of positive economic development benefits from their standpoint, perhaps more in terms of survivability, an alternative route to the Island.
1LISTNUM 1 \l 14640 All of those went into their decision, but I can't speak directly in terms of what their expectations are, I can only assume based on their particular quote.
1LISTNUM 1 \l 14641 MR. LOWE: All right. And, but what happened was a bunch of carriers got together and on the circumstances of the Aliant prices that were being charged, it was an economic investment with the Government of Newfoundland?
1LISTNUM 1 \l 14642 MR. MacDONALD: Only in the context of looking at what we were paying.
1LISTNUM 1 \l 14643 MR. LOWE: Yes, yes, yes. Agreed.
1LISTNUM 1 \l 14644 And then, of course, now that there are two lines there, it's easier for other folks to get over to 'The Rock' too; isn't it?
1LISTNUM 1 \l 14645 MR. MacDONALD: When you say easier, I'm not sure what you mean.
1LISTNUM 1 \l 14646 MR. LOWE: Less expensive perhaps.
1LISTNUM 1 \l 14647 MR. MacDONALD: Well, at the end of the day this is typically what happens, is that you end up with ‑‑ basically you price to the market. So, a lot depends on upon how this ‑‑ it's still early days, actually the service I don't believe, Ron, is actually in operation quite yet.
1LISTNUM 1 \l 14648 MR. LOWE: All right. Now, I don't know if I really want to get mired down in this particular question, I'm just going to put it to you that if the CRTC had applied your test for an essential facility back in 2005, they probably would have declared the Aliant line to be an essential facility; right?
1LISTNUM 1 \l 14649 MR. MacDONALD: Yeah, I think it was an essential facility and it is an essential facility. It's not going to when the second route goes in place, but that's an uneconomic deployment of resources.
1LISTNUM 1 \l 14650 I don't know what it's bringing, aside from the fact that we now have a competitive route there that can result in lower prices in terms of developing a different array of network services, et cetera.
1LISTNUM 1 \l 14651 And this is our point, is that when we're looking at innovation in the telecom market space, I don't think this is moving the ball forward.
1LISTNUM 1 \l 14652 MR. LOWE: Well, let's just go through the big picture, the steps here.
1LISTNUM 1 \l 14653 Step one, the CRTC is asked to declare the Aliant line an essential facility on the grounds that it's uneconomic to duplicate. Step two, the CRTC denies the application. Step three, the market comes forward with a build; right?
1LISTNUM 1 \l 14654 MR. MacDONALD: That is ‑‑ well, I'm not sure that it all follows that particular way, but at the end of the day this is an uneconomic build and you have the convergence of four parties, including public money, to subsidize the deployment of an uneconomic facility that's driven by high prices.
1LISTNUM 1 \l 14655 MR. LOWE: All right. Well, you say it's an uneconomic facility, but it's economic for all the investors; isn't it?
1LISTNUM 1 \l 14656 MR. MacDONALD: Only relative to the extremely high prices, exorbitant prices that were being charged by the incumbent.
1LISTNUM 1 \l 14657 MR. LOWE: All right. Well, I'm going to ‑‑
1LISTNUM 1 \l 14658 MR. MacDONALD: That I used to work for, by the way, but...
1LISTNUM 1 \l 14659 MR. LOWE: I'm going to end up doing it. Did you price it?
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 14660 MR. LOWE: The CRTC holds true to the essential facilities test, the market finds a solution, plans get built, there's more opportunities for other folks to get in on the wholesale market.
1LISTNUM 1 \l 14661 Isn't the future friendly, Mr. MacDonald?
1LISTNUM 1 \l 14662 MR. MacDONALD: But I wish ‑‑ I kind of wish you could generalize this. I mean, if it turned out that for, you know, all of the various ‑‑ our access requirements across the country that there happened to be, you know, in going to, you know, whether it's retail outlets or bank branches, whether we happen to have, you know, multiple investors and government money that was supporting the deployment of last mile access into those facilities, I don't think I'd be sitting here.
1LISTNUM 1 \l 14663 MR. LOWE: All right. So, there's only so far we can take the parable of Newfoundland you say. That's fair enough.
1LISTNUM 1 \l 14664 THE CHAIRPERSON: If I understand you correctly, the Government of Newfoundland investment was incremental. Without that 50‑million the line would not have been built?
1LISTNUM 1 \l 14665 MR. MacDONALD: Well, the line was primed by Persona.
1LISTNUM 1 \l 14666 THE CHAIRPERSON: Yes.
1LISTNUM 1 \l 14667 MR. MacDONALD: And Rogers and ourselves were participants in this.
1LISTNUM 1 \l 14668 But, you know, thinking back to some of the deliberations ‑‑
1LISTNUM 1 \l 14669 THE CHAIRPERSON: No, but as a former government lawyer, you know, normally government doesn't put in money unless it determines to its own satisfaction that this will not go forward without the government contribution.
1LISTNUM 1 \l 14670 MR. MacDONALD: And I think that's a fair assessment.
1LISTNUM 1 \l 14671 THE CHAIRPERSON: On its own it's not economic, and that is what you are saying here, that is what happened here.
1LISTNUM 1 \l 14672 MR. MacDONALD: Yes, I think that's a fair assessment.
1LISTNUM 1 \l 14673 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 14674 MR. LOWE: Well, on that point, did you ask TELUS if they wanted to invest in the line?
1LISTNUM 1 \l 14675 MR. MacDONALD: It wasn't up to us to do the asking because Persona actually owns the facility, and so...
1LISTNUM 1 \l 14676 MR. LOWE: Because they're the operator?
1LISTNUM 1 \l 14677 MR. MacDONALD: Pardon me?
1LISTNUM 1 \l 14678 MR. LOWE: They're the operator?
1LISTNUM 1 \l 14679 MR. MacDONALD: That's correct.
1LISTNUM 1 \l 14680 MR. LOWE: And do you know if TELUS was asked?
1LISTNUM 1 \l 14681 MR. MacDONALD: I honestly don't know. I know that TELUS was in that cross‑section obviously, but I'm not sure whether TELUS specifically was asked.
1LISTNUM 1 \l 14682 MR. LOWE: All right. Now, I'd like to turn now ‑‑
1LISTNUM 1 \l 14683 MS GRIFFIN‑MUIR: But just in respect of that, the SFT referred to in this decision, that generates some million annually, TELUS actually got a different SFT because we did actually ask TELUS if they wanted to sublease on this SFT and Aliant offered them something better.
1LISTNUM 1 \l 14684 So, I think that had a lot to do with whether TELUS participated or not.
1LISTNUM 1 \l 14685 MR. LOWE: And, so, are you saying you saw this SFT that TELUS got and you got miffed and you didn't invite them at the table ‑‑
1LISTNUM 1 \l 14686 MS GRIFFIN‑MUIR: No, no, no, no.
1LISTNUM 1 \l 14687 MR. LOWE: ‑‑ and they were on the other side of the candy store looking in, is that ‑‑
1LISTNUM 1 \l 14688 MS GRIFFIN‑MUIR: No, actually what I'm saying is that when we ‑‑ because we are the company that was actually leasing the facilities under the SFT ‑‑ what we had decided to make it economic for us to lease was to sublease, which we did to Call‑Net, subsequently Rogers, but in the instance where we were actually negotiating with TELUS, Aliant approached them to make sure they did not sublease from us but leased from Aliant instead, so offered them something better.
1LISTNUM 1 \l 14689 MR. LOWE: This is before the line was built?
1LISTNUM 1 \l 14690 MS GRIFFIN‑MUIR: Absolutely, because it became less economic for us to continue if Aliant wasn't going to allow us to sublease as well.
1LISTNUM 1 \l 14691 MR. LOWE: Well, it's a different story now, and if TELUS comes and wants to get on your new line, you are not going to say no, are you? You are not going to hold it against TELUS, are you?
1LISTNUM 1 \l 14692 MR. MacDONALD: Oh, no, no, absolutely. I mean, one of the issues we have got is that TELUS buys precious little from us and we buy a huge amount from them. If they were only willing to buy something from us, we would be more than willing to sell it.
1LISTNUM 1 \l 14693 MR. LOWE: Well, you got something now.
1LISTNUM 1 \l 14694 So I would like to turn now to the direction, and it's Tabs 18, 19 and 20 of the binder, and also if you have handy your opening statement. And I don't know if we will get into it, but a copy of the direction might come in handy, as well, and there is one in PIAC Exhibit No. 2.
‑‑‑ Pause
1LISTNUM 1 \l 14695 MR. LOWE: Now, MTS Allstream was a major participant in the Telecom Policy Review process, right?
1LISTNUM 1 \l 14696 MS GRIFFIN‑MUIR: Well, we were a participant, but it's nice to think we were major.
1LISTNUM 1 \l 14697 MR. LOWE: Well, you filed a comprehensive submission and reply and you had expert evidence from Towerhouse Consulting and you had, I think, a Washington D.C. Lawyer to provide views on U.S. regulation.
1LISTNUM 1 \l 14698 Does that sound about right?
1LISTNUM 1 \l 14699 MS GRIFFIN‑MUIR: Yes, that's correct.
1LISTNUM 1 \l 14700 MR. LOWE: Thanks. And that was May 15th, 2007 those submissions were filed...or I'm sorry, 2005 those submissions were filed.
1LISTNUM 1 \l 14701 MS GRIFFIN‑MUIR: Right, okay. Yes.
1LISTNUM 1 \l 14702 MR. LOWE: Now, turning to Tab 19...and this is page 81 of your August 15th, 2005 submission to the Telecom Policy Review Panel, do you have that?
1LISTNUM 1 \l 14703 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14704 MR. LOWE: You set out three objectives, and the second objective (b) was:
"To create and maintain conditions under which market forces can govern the provision of telecommunication services by fostering all forms of competition." (As read)
1LISTNUM 1 \l 14705 Do you see that?
1LISTNUM 1 \l 14706 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14707 MR. LOWE: And then at the bottom of the page, you say:
"In addition, the government should use its powers of direction to require the CRTC to adopt a policy that proactively and boldly implements these objectives without fear for what form competition will take as a result." (As read)
1LISTNUM 1 \l 14708 Do you see that?
1LISTNUM 1 \l 14709 MS GRIFFIN‑MUIR: Yes. I think that's in reference to the fact that "form" meaning not only facilities‑based or end‑to‑end facilities based, not to try predetermine the nature that choice has brought to customers and innovation has brought to the market.
1LISTNUM 1 \l 14710 MR. LOWE: And so you wanted the direction to say, "To create and maintain conditions under which market forces can govern by fostering all forms of competition", that's what you wanted to see in the direction?
1LISTNUM 1 \l 14711 MS GRIFFIN‑MUIR: Well, that's what we proposed, yes.
1LISTNUM 1 \l 14712 MR. LOWE: All right. And it's fair to say that's not what came out of the Telecom Policy Review recommendations?
1LISTNUM 1 \l 14713 MS GRIFFIN‑MUIR: Well, I'm not sure that's not what came out. That's a little bit of a generalization. There's a lot that came out. Some of it we agreed with and some of it we didn't.
1LISTNUM 1 \l 14714 Certainly, the government wants to encourage competition and innovation, and certainly that's what the policy direction also says. I guess the government also came out in the policy direction that was derived from the Telecom Panel Review they want a reliance on market forces, and I guess it's, in our opinion, a question of those market forces being competitive.
1LISTNUM 1 \l 14715 So it goes to the interpretation of what is meant by "market forces", and, in our view, that's competitive market forces. So I wouldn't say in its totality that the panel report didn't ‑‑ the government didn't adopt recommendations that don't agree with what we are saying here.
1LISTNUM 1 \l 14716 MR. LOWE: All right. We can talk about this tomorrow, but it's just this "create and maintain conditions" part, I didn't see that in the TPR's proposed direction and I don't see that in the direction that was actually issued.
1LISTNUM 1 \l 14717 MS GRIFFIN‑MUIR: The precise wording, no, but obviously the direction that was issued is meant to offer choice to consumers and promote competition.
1LISTNUM 1 \l 14718 In fact, if you read the wording in the analysis and if you read some of the press releases of the industry minister at the time, I mean that's precisely what he wanted to encourage: innovation, investment and choice for customers.
1LISTNUM 1 \l 14719 MR. LOWE: Well, maybe we could turn to Tab 20, which is an excerpt from the Telecom Policy Review final report.
‑‑‑ Pause
1LISTNUM 1 \l 14720 MR. LOWE: On the first page, second‑last paragraph, there's discussion of the two objectives, "foster increased reliance on market force" and "to enhance the competitiveness and efficiency of Canadian telecommunications"; and then the last paragraph on the page, they talk about "conflicting interpretations are frequently presented in submissions to the CRTC"; and then I want to flip over to the next page, and it says:
"The two objectives have been used to justify both a laissez‑faire approach to economic regulation and an interventionist approach to support the increased regulation of essential facilities." (As read)
1LISTNUM 1 \l 14721 Do you see that?
1LISTNUM 1 \l 14722 MS GRIFFIN‑MUIR: Actually, no, I don't. Can you tell me exactly where you are on the page?
1LISTNUM 1 \l 14723 MR. LOWE: It's page 10‑7, at the top. Tab ‑‑
1LISTNUM 1 \l 14724 MS GRIFFIN‑MUIR: In item (f)?
1LISTNUM 1 \l 14725 MR. LOWE: Item (f) is the next page. It's the page before.
1LISTNUM 1 \l 14726 MS GRIFFIN‑MUIR: Oh, okay.
1LISTNUM 1 \l 14727 MR. LOWE: It's not the text of the direction, this is just the discussion as they introduced the direction.
1LISTNUM 1 \l 14728 Do you see it?
1LISTNUM 1 \l 14729 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14730 MR. LOWE: And so the panel is saying, Well, look, there's these objectives in the act and people have used them to justify a laissez‑faire approach to economic regulation and an interventionist approach, which supports the increased regulation of essential facilities and the deregulation of them.
1LISTNUM 1 \l 14731 And then in the next paragraph it says:
"As discussed in Chapters 2 and 3, the panel is recommending a separation of the policy objectives from the consideration of the means that can be used to achieve them. A greater reliance on market forces is the means to achieving these policy objectives and reliance on regulation only when market forces are unlikely to achieve the telecommunications policy objective within a reasonable timeframe." (As read)
And then it says:
"The panel is also recommending a decreased reliance on mandated wholesale rates for essential facilities and a decreased use of ex ante regulation of retail telecommunications' market prices and service conditions." (As read)
1LISTNUM 1 \l 14732 Do you see that?
1LISTNUM 1 \l 14733 MS GRIFFIN‑MUIR: Yes, I see that, but I think between this and the final policy direction certain amendments were made.
1LISTNUM 1 \l 14734 First, at the behest of many competitors who intervened in the consultation process that led to the ultimate policy direction, the wording of the policy direction was changed for that particular part of it that dealt precisely with this proceeding to include other considerations, in particular to look at exactly what prompts innovation and investment and to make a determination on that basis.
1LISTNUM 1 \l 14735 So between the issuance of the panel's report and the actual ultimate policy direction, there was a lot of discussion and consultation that came about and, then, ultimately, ended up in a different recommendation.
1LISTNUM 1 \l 14736 MR. LOWE: Okay, okay. Well, that kind of takes me where I was trying to get to.
1LISTNUM 1 \l 14737 The TPR Report, and I'm going to put it to you ‑‑ and I'm just talking about the TPR report, we will get to the direction later ‑‑ but the TPR report looks at the two paths you could take, an interventionist approach with increased mandated unbundling or a more laissez‑faire free‑market approach, and they unequivocally took the right path, the way I'm sitting, in any event, and said, We are going to rely on market forces to the maximum extent feasible and we are going to see a phase‑out of mandated facilities.
1LISTNUM 1 \l 14738 I hear what you are saying about that's not how you read the direction, but at least that's what the TPR report found.
1LISTNUM 1 \l 14739 MR. MacDONALD: Yes, the TPR said other things in other areas that I'm not sure everybody agrees with either, in terms of wireless competition, et cetera, but to pick and choose specifically as an input to the formulation of government policy, the TPR says what the TPR says.
1LISTNUM 1 \l 14740 What's really relevant, though, is what the ultimate policy direction that came out through the Order‑in‑Council, in terms of going forward, which is the result of other inputs to the process, as well. Respecting, of course, that we had an esteemed panel that actually came up with these recommendations, it is just one input.
1LISTNUM 1 \l 14741 MR. LOWE: All right. And then turning to your opening statement, then...and I suspect through this line of cross we will disagree on the weight that should be given the TPR recommendations in interpreting the direction, but, in any event, in your opening statement, in the fourth line, you say:
"The government's goal is to create a competitive telecommunications market in Canada." (As read)
1LISTNUM 1 \l 14742 Do you see that?
1LISTNUM 1 \l 14743 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14744 MR. LOWE: And this "creationism" business, this seems to harken back to the objective that you had in the Telecom Policy Review submission, isn't it? I mean, aren't you talking about the same thing?
1LISTNUM 1 \l 14745 MS GRIFFIN‑MUIR: Yes, and also the policy direction speaks of creating ‑‑ or increasing incentives for innovation and investment and increasing reliance on market forces, where "market forces" can only be interpreted as competitive market forces. So that, obviously, the overriding goal has to be to have competition.
1LISTNUM 1 \l 14746 MR. LOWE: Yes, okay. Then on your opening statement still, the next paragraph, the second sentence ‑‑ this is after the words "almost 15 years ago" ‑‑ it says:
"The government's recent policy direction affirms the desire to rely as much as possible on market forces to regulate a..."
1LISTNUM 1 \l 14747 And then I didn't know "a what"? Is it regulate an ILEC, a cable company?
1LISTNUM 1 \l 14748 MS GRIFFIN‑MUIR: Actually, that's a typo but thanks for pointing that out.
1LISTNUM 1 \l 14749 It should just say "in the least interventionist manner".
1LISTNUM 1 \l 14750 MR. LOWE: Okay.
1LISTNUM 1 \l 14751 MS GRIFFIN‑MUIR: And then when it is taking into account the consideration of what is the least interventionist manner, it has to take into consideration the principles of technological and competitive neutrality, the potential for incumbents to exercise market power in the wholesale and retail markets for the services in the absence of mandated access to wholesale services and the impediments faced by new and existing carriers seeking to develop competing network facilities.
1LISTNUM 1 \l 14752 MR. LOWE: Okay. Getting back to the sentence:
"The government's recent policy direction affirms the desire to rely as much as possible on market forces to regulate..."
1LISTNUM 1 \l 14753 I mean, really, isn't the direction saying that we want to rely on market forces to the maximum extent feasible? It is not relying on market forces to regulate, is it?
1LISTNUM 1 \l 14754 MS GRIFFIN‑MUIR: Well, I think actually they say the same thing. You are talking about regulating market power to the maximum extent feasible. So to the extent that we can rely on market forces, and in particular in the downstream or retail market, because there are competing alternatives for customers, then it would regulate the market power of the incumbent service providers.
1LISTNUM 1 \l 14755 MR. LOWE: So you interpret the direction to say rely on market forces to the maximum extent feasible to regulate, in order to achieve competition.
1LISTNUM 1 \l 14756 Is that right?
1LISTNUM 1 \l 14757 MS GRIFFIN‑MUIR: Yes ‑‑ well, to regulate market forces as opposed to having the Commission regulate in the downstream.
1LISTNUM 1 \l 14758 So what we are suggesting is that if you have a robust essential facilities or wholesale regime coming out of this proceeding, that regime will be able to discipline market forces to the extent possible, such that in the downstream or retail market customers will have choice. There will be the proper incentives for continuing investment from competitors.
1LISTNUM 1 \l 14759 THE CHAIRPERSON: You mentioned before that there was typo in the sentence.
1LISTNUM 1 \l 14760 I actually thought the sentence was supposed to read "to rely as much as possible on market forces and" ‑‑ the word "and" is missing ‑‑ "and to regulate in a least interventionist manner".
1LISTNUM 1 \l 14761 Isn't that what you meant to say?
1LISTNUM 1 \l 14762 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14763 THE CHAIRPERSON: As counsel pointed out, market forces don't regulate. The sentence doesn't make sense then.
1LISTNUM 1 \l 14764 Therefore, I assumed there was an "and" missing between those two words.
1LISTNUM 1 \l 14765 MS GRIFFIN‑MUIR: Yes, you could read it that way.
1LISTNUM 1 \l 14766 MR. LOWE: Let's go back to the Telecommunications Policy Review Panel Final Report, Tab 20, page 3‑36.
1LISTNUM 1 \l 14767 This is this Recommendation 3‑19 made by the panel.
1LISTNUM 1 \l 14768 It says:
"The regulatory framework should continue to require owners of essential wholesale facilities to make them available to competitors at regulated wholesale rates. Regulatory requirements to provide non essential wholesale services or facilities should be phased out in order to provide increased incentives for innovation, investment and more widespread construction of competing network facilities."
1LISTNUM 1 \l 14769 Do you see that?
1LISTNUM 1 \l 14770 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14771 MR. LOWE: In the context here, the TPR panel is talking about essential facilities as defined in Decision 97‑8.
1LISTNUM 1 \l 14772 Is that how you read that part?
1LISTNUM 1 \l 14773 MS GRIFFIN‑MUIR: Just beneath there, yes.
1LISTNUM 1 \l 14774 MR. LOWE: I would like to get your views on the top paragraph on page 3‑36. This is where they introduce this recommendation to phase out non essential facilities, phase out the mandated access to non essential facilities.
1LISTNUM 1 \l 14775 It says:
"The panel recognizes that a broader scope of mandated wholesale access may reduce barriers to entry in the market for services or applications. This may result in more innovation at the service and applications layer by allowing for more market participants and by creating pressure for the timely introduction of new technologies."
1LISTNUM 1 \l 14776 And then it goes on:
"However, these benefits may be outweighed by the dramatic reduction in competition at the physical and network layers. Further, in the long run, innovation at the service or application layers may depend on capabilities and innovations at the physical or network layers and continuation of significant market power at these levels may impede innovation at higher layers as well. A broad scope of mandated wholesale access may thus undermine long run opportunities and incentives for innovation at all levels."
1LISTNUM 1 \l 14777 Do you see that?
1LISTNUM 1 \l 14778 MR. MacDONALD: I see it but I disagree with it.
1LISTNUM 1 \l 14779 One of the issues that we are faced with is it's kind of a theoretical discussion. I think I understand the argument that is being used here, but the practical reality of the situation is to suggest that in many cases, particularly for not just the existing definition of essential services but for next generation essential services that are required to deploy services into the Enterprise space, that competing networks are going to be built or alternative sources of supply will exist is ludicrous.
1LISTNUM 1 \l 14780 The situation ‑‑ and I will use the example of last week where we had a financial institution with a thousand branches, and just the cost to deploy ‑‑
1LISTNUM 1 \l 14781 MR. LOWE: Was that CIBC, by the way?
1LISTNUM 1 \l 14782 MR. MacDONALD: Don't I wish. Don't I wish.
1LISTNUM 1 \l 14783 No. It's a much more enlightened financial institution that selected us as the service provider.
1LISTNUM 1 \l 14784 When we looked at the cost to actually deploy to all of those 1,050 branches, it was $2.3 billion in a 236‑year payback interval at the market based rates.
1LISTNUM 1 \l 14785 And do you know what I'm really concerned about? The next time that contract comes up for renewal, where the customer is going to be looking for higher and higher speed services, is that we are not going to be able to participate in that particular piece of business.
1LISTNUM 1 \l 14786 Now this academic argument that we are going to magically be able to justify the deployment of uneconomic facilities across the country, it ain't going to happen.
1LISTNUM 1 \l 14787 We tried that: at least $4 billion worth of assets in terms of trying to replicate the local access network that our company has spent, having gone through a CCAA and restructuring and managed to survive that and come out of it quite strong.
1LISTNUM 1 \l 14788 But what really fuels investment ‑‑ and the TPR report is talking about at the application and service level. Ultimately, that is going to be the real source of innovation for Enterprise customers. But it is a necessary condition that we have cost effective access to all of the various serving points within that network.
1LISTNUM 1 \l 14789 MR. LOWE: Well, I see you had a productive weekend.
1LISTNUM 1 \l 14790 Back to your opening statement, on page 2 you set out the facts. As I read through these facts, there is the 97‑8 experience, there is the dot.com bubble. All of these facts were before the Telecommunications Policy Review, weren't they?
1LISTNUM 1 \l 14791 Essentially, this is all history, isn't it?
1LISTNUM 1 \l 14792 And the Telecom Policy Review is saying no, we have to look forward. We have to take the long run view forward for Canada.
1LISTNUM 1 \l 14793 MS GRIFFIN‑MUIR: Again, I think you keep missing the actual purpose of this proceeding.
1LISTNUM 1 \l 14794 I mean, there was the Policy Review Panel and that was followed by a preliminary proposed Order in Council that had certain suggestions with respect to essential facilities, which was subsequently revised and finalized to take into consideration a wider array of factors, such as the dominance of the incumbents in the wholesale and retail markets, as well as other factors that would affect competitors in terms of how and when they can make investment.
1LISTNUM 1 \l 14795 So I'm not entirely sure what facts actually the TPRP considered at the time. It's not apparent from any of the panel report.
1LISTNUM 1 \l 14796 But even if they did take them into consideration, subsequently the government issued a policy direction that outlined precisely what we should be looking at in terms of this proceeding.
1LISTNUM 1 \l 14797 The fact is in making a decision as to what essential facilities or wholesale regime should prevail, it's a little naive to ignore what has gone on before and what we have learned from our experience of the last 15 years in trying to get competition into the market, particularly the business market.
1LISTNUM 1 \l 14798 MR. LOWE: So what you are saying is: Look, the TPR had this history before them and they made a determination that you disagree with. And you are saying but that's okay because it's the direction that we should look at. The TPR is an exercise that we kind of went through and we all made submissions, and the panel went and talked to other regulators and made some recommendations. But that's all in the past and now you just look at the direction in isolation.
1LISTNUM 1 \l 14799 Is that right?
1LISTNUM 1 \l 14800 MR. MacDONALD: It was an input to a process. There were other inputs to that particular process.
1LISTNUM 1 \l 14801 What is germane to this particular discussion is the final policy direction from the government, however.
1LISTNUM 1 \l 14802 MR. LOWE: You asked for a policy direction based on your recommendations in the TPR report, didn't you?
1LISTNUM 1 \l 14803 We have established that already. Right?
1LISTNUM 1 \l 14804 MS GRIFFIN‑MUIR: I can't recall if we asked for a policy direction. We asked that they recommend a revision, I guess, to the objectives.
1LISTNUM 1 \l 14805 MR. LOWE: Well, if you did ask for a policy direction in line with your directives, if you did say that in your submission, you meant to live with it, didn't you?
1LISTNUM 1 \l 14806 MS GRIFFIN‑MUIR: Well, we, I guess, have no alternative but to live even with this policy direction.
1LISTNUM 1 \l 14807 So again, I mean the policy direction has come down and the proceeding is under way, and as Mr. MacDonald was saying, there is one input ‑‑ I mean if you are suggesting we didn't get everything we wanted or the government didn't do everything we wanted or say everything we wanted, that is entirely true. They also didn't say everything other parties wanted either, including TELUS.
1LISTNUM 1 \l 14808 MR. LOWE: No, I think that is probably true, nobody got everything they wanted and it is one of these processes where the review panel looks at everything and comes out with something that they think is the best move for Canada going forward and then that is implemented into a policy direction and then in turn, the Commission is called upon to implement that policy set by the Government of Canada and, in fact, I think you say at page 4 of your opening statement that the CRTC should be implementing an essential facilities regime which you say should be robust.
1LISTNUM 1 \l 14809 So my question to you is: Is the CRTC's role to implement government policy as set out in the Policy Direction and in the context of the Telecom Policy Review or rather are we on to a free ranging review here to see what is the right path for Canada?
1LISTNUM 1 \l 14810 MR. MacDONALD: I don't know why you keep on going back to the TPR as an input to the process, a valuable input that I think ultimately led to the Policy Direction but the Policy Direction is what the Policy Direction is, regardless of the TPR.
1LISTNUM 1 \l 14811 MR. LOWE: Don't you think that it is wrong to ignore the Policy Direction when you are trying to interpret ‑‑ or wrong to ignore the Telecom Policy Review Report recommendations when you are trying to interpret the direction?
1LISTNUM 1 \l 14812 And I am just asking. If you say it is totally irrelevant and we put it aside ‑‑
1LISTNUM 1 \l 14813 MR. MacDONALD: I didn't say it was totally irrelevant, I said it was an input amongst other inputs to it that ultimately led to the Policy Direction. That is what is relevant, is the Policy Direction.
1LISTNUM 1 \l 14814 MR. LOWE: And inputs can be ignored, can't they?
1LISTNUM 1 \l 14815 MR. MacDONALD: I am not suggesting it should be ignored, I am saying it is an input, it is what it is.
1LISTNUM 1 \l 14816 MR. LOWE: All right. An input that should be given significant weight?
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 14817 MR. LOWE: Perhaps we are getting into argument. Those are my questions, Mr. Chairman, and thank you, panel.
1LISTNUM 1 \l 14818 THE CHAIRPERSON: Thank you very much.
1LISTNUM 1 \l 14819 Who is next, Madam Secretary?
1LISTNUM 1 \l 14820 THE SECRETARY: It is supposed to be PIAC but I haven't seen Mr. Janigan yet.
1LISTNUM 1 \l 14821 MR. LOWE: They are up.
1LISTNUM 1 \l 14822 THE SECRETARY: They are up? Okay, so it will be PIAC.
1LISTNUM 1 \l 14823 THE CHAIRPERSON: Okay, Mr. Janigan.
1LISTNUM 1 \l 14824 COMMISSIONER CRAM: I have a question.
1LISTNUM 1 \l 14825 THE CHAIRPERSON: Yes, sure. Okay. So go ahead, Commissioner Cram.
1LISTNUM 1 \l 14826 MR. SCHMIDT: No, PIAC is not examining. I spoke to them this morning. They are not examining this panel.
1LISTNUM 1 \l 14827 THE SECRETARY: Therefore, we will change panel. I believe this finishes the MTS cross‑examination.
1LISTNUM 1 \l 14828 THE CHAIRPERSON: Hang on. Before we change panel, Commissioner ‑‑ if this was the last one to cross‑examine, I have some questions for the panel and so does Commissioner Cram. So go ahead.
1LISTNUM 1 \l 14829 COMMISSIONER CRAM: Thank you. Yes, you are not going to get away with ‑‑
1LISTNUM 1 \l 14830 Mr. MacDonald, you were talking a while ago about real innovation being at the application level but in order to do that you need access and I think you said at effective rates.
1LISTNUM 1 \l 14831 MR. MacDONALD: Excuse me, at cost‑effective rates.
1LISTNUM 1 \l 14832 COMMISSIONER CRAM: Cost‑effective rates. And would you say cost‑effective rates could be Phase II plus 25 percent?
1LISTNUM 1 \l 14833 MR. MacDONALD: Oh! My God. I would say that the lower the mark‑up the better. Obviously, you have to ensure that the service provider is going to realize a reasonable rate of return on that but as to whether it is what the actual figure is, you would ask me as a business person, I would say the lower the mark‑up the better.
1LISTNUM 1 \l 14834 Cost plus 15, obviously, would be preferable to cost plus 25 but certainly cost plus 800 percent or cost plus 1000 percent is a bit of a problem.
1LISTNUM 1 \l 14835 COMMISSIONER CRAM: Okay. So if the essential services were costed at Phase II plus 25 percent, would we lose Allstream from the business market?
1LISTNUM 1 \l 14836 MR. MacDONALD: We would have to ‑‑ you see, we intend to be around for a long period of time. I get very concerned that if we end up narrowing the definition of essential facilities ‑‑ because the way I look at it, I have a very simple engineering view of how networks get built.
1LISTNUM 1 \l 14837 Access is access, and to the extent that we are now at the mercy of incumbent players to actually negotiate forms of access that are not overseen by the CRTC, then I get very concerned about the degree of competition, particularly in the enterprise space.
1LISTNUM 1 \l 14838 I think it is quite a bit different perhaps in the consumer space where we have an alternative facility that can be used for providing access.
1LISTNUM 1 \l 14839 But I think a diminishment of competition from an enterprise perspective is a distinct possibility unless we continue with a regime that recognizes the fact that having ‑‑ a regime where we have cost‑effective access to reach our customers.
1LISTNUM 1 \l 14840 And to suggest that we are going to be able to duplicate all of this in any sort of reasonable time frame ‑‑ and I want to reiterate something we said last Friday, is that it is in our best interest to actually find alternative sources of supply and we continuously try and do just that.
1LISTNUM 1 \l 14841 We are not shy about investing and deploying the capital where there is an economic case to do so but we think that there is a big advantage that our competitors have in terms of the infrastructure that they have deployed, access that can be used not just for providing traditional dial tone and voice services but can be leveraged to provide Ethernet services and MPLS services.
1LISTNUM 1 \l 14842 I think at the end of the day this is a very, very complex system that we have and I worry that looking for very simple approaches and making a bunch of decisions that on the surface may seem reasonable and there is reliance on market forces and whatever, which I am a strong proponent of, but this is a complex system and making a few decisions can lead to unanticipated results.
1LISTNUM 1 \l 14843 I think we have seen some examples of that with what has happened in the United States and other areas as well. So just a caution.
1LISTNUM 1 \l 14844 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 14845 Now ‑‑ and I don't know your name, I am sorry, and I am too short ‑‑ Mr. Brisby, you were asked at the time of the Offcom Review about cable digital penetration but in the business market there wouldn't have been that ‑‑ in the business market in the U.K. cable wouldn't be available to business; would it?
1LISTNUM 1 \l 14846 MR. BRISBY: Cable does serve some small businesses but it is predominantly targeted at some residential markets. Where the cable company serves businesses, it will do that sometimes on its own network but it will also buy regulated inputs from British Telecom as well.
1LISTNUM 1 \l 14847 COMMISSIONER CRAM: Mm‑hmm. So the business market would be similar to Canada?
1LISTNUM 1 \l 14848 MR. BRISBY: In business markets there has been alternative fiber network rollout, particularly in business centres like the City of London, like London Docklands and in other city centres, in some cases, fairly extensive network rollout. So as you would expect, the City of London has multiple competing fiber networks.
1LISTNUM 1 \l 14849 COMMISSIONER CRAM: Yes.
1LISTNUM 1 \l 14850 MR. BRISBY: Does that answer your question?
1LISTNUM 1 \l 14851 COMMISSIONER CRAM: Yes, thank you.
1LISTNUM 1 \l 14852 Thank you, that's all my questions.
1LISTNUM 1 \l 14853 MR. BRISBY: Sorry, Commissioner ‑‑
1LISTNUM 1 \l 14854 THE CHAIRPERSON: Commissioner del Val.
1LISTNUM 1 \l 14855 COMMISSIONER CRAM: Oh! Wait.
1LISTNUM 1 \l 14856 MR. BRISBY: Sorry, Commissioner, I have been advised it would be sensible to clarify what I mean by the City of London because it may not be apparent to everyone necessarily.
1LISTNUM 1 \l 14857 The City of London is the financial centre in London and it is an area ‑‑
1LISTNUM 1 \l 14858 THE CHAIRPERSON: I think you can assume the panel knows this. Thank you.
1LISTNUM 1 \l 14859 MR. BRISBY: Okay. I apologize, Mr. Chair.
1LISTNUM 1 \l 14860 THE CHAIRPERSON: Commissioner del Val.
1LISTNUM 1 \l 14861 COMMISSIONER del VAL: Dr. Selwyn, this is a question for you.
1LISTNUM 1 \l 14862 I don't think you would need to refer to your paper, that is, Appendix A to the March 15th evidence of MTS.
1LISTNUM 1 \l 14863 You said in your paper that:
"The implosion of competitive telecommunications in the U.S. demonstrates that failure to ensure cost‑based wholesale access to components of the ILECs' local exchange networks undermines the ability of competing carriers to build their customer base and over time to make new investments in network infrastructure." (As read)
1LISTNUM 1 \l 14864 I think if I look back on the Commission decisions, back 10 years, say, back to '97, there has been talk of encouraging facilities‑based competition.
1LISTNUM 1 \l 14865 So I was just wondering when you referred to "over time," how much time do you think we should expect to give the competitors? Ten years have passed and how much more time do you think would be reasonable?
1LISTNUM 1 \l 14866 DR. SELWYN: Commissioner, I think that, first of all, there is no condition that in my view would lead to a total replication.
1LISTNUM 1 \l 14867 We first began to see the construction of competitive fiber in the business market in the U.S. actually in the mid‑1980s when Teleport began to wire up the New York financial district with fiber.
1LISTNUM 1 \l 14868 And yet ‑‑
1LISTNUM 1 \l 14869 COMMISSIONER del VAL: Dr. Selwyn, I think you need to take the other mike, please. I don't think your mike is working.
1LISTNUM 1 \l 14870 DR. SELWYN: Sorry.
1LISTNUM 1 \l 14871 And yet, at its height just prior to its merger with SBC, AT&T was serving approximately 186,000 enterprise customers at the DS‑1 level or higher and only about 6,000 of those locations were on net.
1LISTNUM 1 \l 14872 In other words, AT&T was still reliant primarily on the ILECs for something close to 175,000 to 180,000 locations and it is simply unrealistic to ever expect anything close to the kind of overbuild that would eliminate that dependence.
1LISTNUM 1 \l 14873 I would note also that Mr. MacDonald mentioned mark‑ups of 800 or 1000 percent over incremental cost. If there were any realistic prospect of competitive overbuilds, given those kinds of economic pricing, of uneconomic pricing or excessive pricing, you would expect that competitors would be able to respond.
1LISTNUM 1 \l 14874 The very fact that incumbent LECs are able to sustain prices of that magnitude for an extended period of time, apparently indefinitely, certainly suggests that it is just unrealistic to ever expect this process to somehow transition to a full overbuild.
1LISTNUM 1 \l 14875 COMMISSIONER del VAL: So, Dr. Selwyn, you are saying this is as good as it will ever get?
1LISTNUM 1 \l 14876 DR. SELWYN: Well, you know, there is always some small degree of construction as new demands come up. A few hundred, perhaps even, you know, around a thousand buildings might conceivably be connected to competitor networks by competitor facilities on an annual basis. But we are talking about a process that simply has no realistic expectation of ever happening.
1LISTNUM 1 \l 14877 And if the policy of the Canadian Government is to rely on that as an outcome, as suggested in the passage from the TPR report that we were just looking at, I think there is an immense risk that would limit innovation, limit competition at the application and service levels simply because of the potential for uneconomic pricing on the underlying service.
1LISTNUM 1 \l 14878 COMMISSIONER del VAL: So time isn't going to do the trick, is it?
1LISTNUM 1 \l 14879 DR. SELWYN: No.
1LISTNUM 1 \l 14880 COMMISSIONER del VAL: Okay, thank you.
1LISTNUM 1 \l 14881 DR. SELWYN: You have to look for triggers in the market are not time dependant. Just simply the passage of time ‑‑ the disease is not going to be cured simply if you wait long enough ‑‑
1LISTNUM 1 \l 14882 COMMISSIONER del VAL: Thank you.
1LISTNUM 1 \l 14883 DR. SELWYN: ‑‑ and that is really the essence of it.
1LISTNUM 1 \l 14884 THE CHAIRPERSON: Mr. MacDonald, I would like to take you back to your testimony on Friday.
1LISTNUM 1 \l 14885 The transcript from Friday, I don't know whether you have it or not, but at line 13,157 you say, "retail trumps wholesale," that is the result of your 30‑year experience. That means that we talk about all sorts of alternative sources of supply and what I believe to be a very simple‑minded approach that in the instance of one can be generalized in to an instance of many in terms of this notion of duplicability, which I find completely ludicrous in terms of practical implementation of networks.
1LISTNUM 1 \l 14886 What is your non‑ludicrous suggestion? I mean, you know, we are here to look at these various services to determine whether they are essential or not. And one of the notions that everybody brings forward, all the academics, et cetera, is you have to look at whether it is duplicable, both technical and economically. Now, how do it, not being ludicrous, but using a MacDonald approach?
1LISTNUM 1 \l 14887 MR. MacDONALD: Well, my very simple MacDonald approach is access is access, right. And, you know, I believe that a lot of the benefits that the incumbents have realized in terms of, you know, the number of customers that they serve on a particular access route, the ability of those customers to support incremental investment into the next generation technologies, be they either Ethernet or DSL, et cetera, to me leads to a conclusion that, you know, it is somewhat independent of whether it is going to be an access used for voice or an access that is used for Ethernet or an access used for DSL. It is the access itself that becomes critical.
1LISTNUM 1 \l 14888 I think that, you know, left to our own devices we will try our best to ensure that where we have economic business cases to support it we will deploy capital in the access network. And we have a significant concentration of customers, we will do that.
1LISTNUM 1 \l 14889 But at the end of the day, what I was alluding to there, is that the value of the network is the total number of connections that actually are attached to that network. As Kelvin pointed out to me, it is actually a forum they call Metcalfe's law where the value of the network is in direct proportion of the square of the number of access points.
1LISTNUM 1 \l 14890 And so when we talk about an end‑to‑end network or we talk about a fibre that is going through the streets of Ottawa and it seems, you know, on its face to be obvious that just to have a lateral from that fibre into a building is not such a big thing. But, in effect, it is a very big thing. When you multiply that across a network on a wide‑area basis, it becomes a very big thing.
1LISTNUM 1 \l 14891 THE CHAIRPERSON: I understand that, but operationalize that for me in terms of what we are about here, looking at specific services that have been mandated, now having been told by the government, look at all of those services and see whether they still have to be mandated or not.
1LISTNUM 1 \l 14892 MR. MacDONALD: See my argument, Mr. Chairman, would be is that you actually should be expanding. And I know that is swimming upstream relative to some of the conventional wisdom that you are hearing. But when we look at the full policy direction and all of the various attributes that the government has asked the Commission to consider, we think at the end of the day what is important, not just at a point in time to evaluate what is essential versus what has been essential, but actually to take a forward look.
1LISTNUM 1 \l 14893 Because increasingly, to have buggy whips ‑‑ I think is a term that was used recently ‑‑ to be classified as essential is neither here nor there ultimately.
1LISTNUM 1 \l 14894 THE CHAIRPERSON: And in that same testimony on Friday you said the other thing is that, and I've heard it in many cases during this proceeding, one of the intentions is to encourage investment, that is by establishing high wholesale prices we will be encouraging investment, which I think does not apply as well. Encouraging I think is probably the wrong word. I mean, the idea is it always give negative incentives that, because prices are going up, you will invest and.. You don't think that works I gather?
1LISTNUM 1 \l 14895 MR. MacDONALD: No, I don't think it works, because right now if there is an economic case to invest and there is a variety of reasons why, you know, if the case is there and my CFO will let me do it, is that if I can put a case together then the money will be there.
1LISTNUM 1 \l 14896 The issue of course is that the case does not exist. And I keep on coming back to that example where we looked at the deployment to that financial institution, in a 206‑year payback it will be considered to be market price, the price that the customer has actually paid.
1LISTNUM 1 \l 14897 We actually took it one step forward, because when the engineer showed me the figures I said, that can't be. And so we said, well, we will only build in those situations less than 160 kms. If the branch is greater than 160 kms from an access point, then we will lease. That cut it in half, that brought it down from $2 billion to, I believe, about $1 billion. But the payback interval was still about 200 years.
1LISTNUM 1 \l 14898 THE CHAIRPERSON: This concept here which has been mentioned by many parties is really tied into the phase out. I think TELUS suggested there should be a five‑year pace or phase out for everybody and there should be sort of payout by price increases so as to sort of lend a sense of urgency, you had better cut a deal or you build. Because it is going to be out and it is becoming more expensive each year. And I gather you don't buy this theory either?
1LISTNUM 1 \l 14899 MR. MacDONALD: I don't really buy it, Mr. Chairman, because I don't think we have any leverage in that negotiation. Because I think that the incumbents know is that the case to actually build and the amount of money that is going to be required to build and duplicate the network were our customers are, you know, it is not as if there is, you know, you have this building where you have a concentration of customers and you serve the majority of customers in that building.
1LISTNUM 1 \l 14900 We have to go where our customers are located, whether it is a bank branch or it is a retail outlet, and they are right across the country by definition, where people are. And for us to actually go and invest the capital to actually duplicate that network, I mean, the incumbents know that that is not a viable alternative. And therefore, we have no leverage in any sort of negotiation and that concerns me. And the point that I raised last week as well, is that you have to look within the context in the enterprise space of longer‑term contracts.
1LISTNUM 1 \l 14901 THE CHAIRPERSON: I guess where we are stuck, you are sort of the lone outsider, everybody else before us, all the economists, everybody has ‑‑
1LISTNUM 1 \l 14902 MR. MacDONALD: Yes, I understand.
1LISTNUM 1 \l 14903 THE CHAIRPERSON: ‑‑ put forward quite a different theory, as you know.
1LISTNUM 1 \l 14904 MR. MacDONALD: Yes.
1LISTNUM 1 \l 14905 THE CHAIRPERSON: And I'm asking you, because you describe yourself as a grizzled veteran of the industry. I have known you for many years in many different companies and in different positions, so obviously I pay so me heed to what you are saying. And I find it strange that the TPR representative's point of view, it has been echoed by the various academics and economists and yet you believe this is just misguided.
1LISTNUM 1 \l 14906 MR. MacDONALD: Well, I don't believe that they are misguided. I understand it is very well intended, I just disagree with the result. But I have a track record of doing that from my days back east at NBTel.
1LISTNUM 1 \l 14907 But my concern, as I mentioned earlier, Mr. Chairman, is that we end up with a set of decisions that on the face seem perfectly reasonable and, you know, follows conventional wisdom. But at the end of the day it is not going t be a good day in terms of competitive alternatives in the enterprise space specifically. That is my big concern.
1LISTNUM 1 \l 14908 THE CHAIRPERSON: Professor Selwyn, we will deal with you after you have been cross‑examined by ‑‑
1LISTNUM 1 \l 14909 DR. SELWYN: (off microphone)
1LISTNUM 1 \l 14910 THE CHAIRPERSON: I really think I should give counsel a chance to cross‑examine you before we do it, okay. Thank you.
1LISTNUM 1 \l 14911 So we will now take a five‑minute break while we set‑up the next panel.
1LISTNUM 1 \l 14912 THE SECRETARY: I do have a little something to say please. I need to present two exhibits that were brought to my attention just recently.
1LISTNUM 1 \l 14913 That will be MTS Exhibit 15, it is a table related to parties' pre‑hearing evidence on the impact of the CDN decision. At the same time we will distribute CRTC Exhibit 6A, which is the undertaking register, updated version.
EXHIBIT MTS‑15: List re: (Facilities‑Based) Parties' pre‑hearing evidence on the Impact of the CDN Decision on Facilities Construction Construction or Capital Expenditure Programs
EXHIBIT CRTC‑6A: CRTC Undertaking register of CRTC version updated 29‑10‑2007
1LISTNUM 1 \l 14914 Furthermore, Mr. Chair, if you can allow us a little bit more than five minutes, because it is a big ‑‑
1LISTNUM 1 \l 14915 THE CHAIRPERSON: However long you take, you let us know when you are ready. Okay?
1LISTNUM 1 \l 14916 THE SECRETARY: Thank you.
1LISTNUM 1 \l 14917 MS SONG: Mr. Chairman.
1LISTNUM 1 \l 14918 THE CHAIRPERSON: Ms Song.
1LISTNUM 1 \l 14919 MS SONG: I do apologize, Mr. Chairman. I believe that counsel for Bell would like to address Exhibit 15. It has to do with a matter that was dealt with on Friday's cross‑examination by counsel for Bell et al. And I believe that he would like to speak briefly to it, as would I. It should take no more than a few minutes.
1LISTNUM 1 \l 14920 THE CHAIRPERSON: Okay, by all means go ahead. Mr. Hofley or Mr. Daniels?
1LISTNUM 1 \l 14921 MR. DANIELS: It is Mr. Daniels, yes.
1LISTNUM 1 \l 14922 It has been brought to my attention, I am looking at reference of something that I had said during my cross‑examination of MTS Allstream at page 2,220 of Friday's transcript where I had made the statement.
"Now, Bell's put forward in this proceeding the proposition that the creation of CDN and lowering of rates for CDN access in 2005 undermined other parties' incentive to invest, at least in the access facilities."
1LISTNUM 1 \l 14923 And skipping down I said that there were:
"... at least seven parties including Atria, NMAX, Hydro One, QMI, SCBN, Telecom Ottawa and TELUS, not to mention The Companies, state that they spent less on access as a result of CDN decisions."
1LISTNUM 1 \l 14924 And skipping down to line 13,314:
"But throughout the interrogatory process, MTS is the only party to claim the contrary who's actually building facilities."
1LISTNUM 1 \l 14925 Now, it has been brought to my attention by counsel of MTS Allstream that the term "contrary" could suggest, and I think this is right ‑‑ it's a possible way to read it, a fair reading ‑‑ that I was suggesting that other parties ‑‑ that no other party had said it had ‑‑ CDN had no impact on their ability.
1LISTNUM 1 \l 14926 There are some parties who have said, a number of the Telcos have said, some other parties have said that the introduction of CDN had no impact one way or another.
1LISTNUM 1 \l 14927 That wasn't the intention of my statement. The intention of my statement was to say that MTS is the only party who was building access facilities who claimed that CDN helped them build access facilities.
1LISTNUM 1 \l 14928 And that's what I meant when I said contrary to that statement.
1LISTNUM 1 \l 14929 So, I think there's two ways to read the term contrary. It's been brought to my attention that MTS counsel, I think rightly, says that there's two ways and I wish to clarify that statement.
1LISTNUM 1 \l 14930 Having made that clarification, I hope that satisfies my colleagues.
1LISTNUM 1 \l 14931 THE CHAIRPERSON: Ms Song.
1LISTNUM 1 \l 14932 MS SONG: Yes. Mr. Chairman, thank you. And thank you, Mr. Daniels for that retraction.
I will simply say that that retraction is acceptable to MTS Allstream.
1LISTNUM 1 \l 14933 The table which we prepared over the weekend provides an actual summary of the parties' pre‑hearing evidence on the issue of the impact of the CDN decision.
1LISTNUM 1 \l 14934 Counsel for Bell have asked that they be provided ‑‑ that they will come forward and indicate whether there is any information on this table that they disagree with, but the table is self explanatory and contains all relevant references to the record that are provided.
1LISTNUM 1 \l 14935 MTS Allstream notes that certain major cable companies such as East Link, Persona, Rogers and Shaw were not asked by Bell, et al what the impact of the CDN decision was on them whereas, as the table shows, certain other cable companies and municipal and electrical utilities were asked those types of questions.
1LISTNUM 1 \l 14936 So, in the interest of time we will not walk the Commission through the table.
1LISTNUM 1 \l 14937 However, contrary to Mr. Daniels' assertions on Friday, a review of the parties' evidence and the interrogatory responses shows that apart from Bell and TELUS, only Atria, SCBN and Hydro One provided unequivocal evidence that they had identified a direct causal negative impact from the CDN decision.
1LISTNUM 1 \l 14938 Thank you.
1LISTNUM 1 \l 14939 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 14940 We will take a break now.
‑‑‑ Recessed at 0938 / Suspension à 0938
‑‑‑ Resumed at 0952 / Reprise à 0952
1LISTNUM 1 \l 14941 THE SECRETARY: Please be seated.
‑‑‑ Pause
1LISTNUM 1 \l 14942 THE CHAIRPERSON: Madam Secretary, who is next?
1LISTNUM 1 \l 14943 THE SECRETARY: Counsel Rogers will introduce the new panel for TELUS, the expert witnesses.
1LISTNUM 1 \l 14944 MR. ROGERS: Good morning, Mr. Chairman, Phil Rogers for TELUS. Again, I'm assisted by Mr. Steven Schmidt.
1LISTNUM 1 \l 14945 It's my pleasure to introduce to you the TELUS expert panel. I will introduce them from my left to right.
1LISTNUM 1 \l 14946 Sitting in the front row closest to me is Dr. Debra Aron. Dr. Aron is a Director of the Economics and Competition consulting firm, LECG, LLC and adjunct Professor of Communications Studies, Northwestern University.
1LISTNUM 1 \l 14947 Dr. Aron has extensive experience in telecommunications pricing and appears regularly before state regulators and the FCC regarding pricing, costing, competition issues and ILEC mergers.
1LISTNUM 1 \l 14948 Dr. Aron has developed pricing principles and recommendations for TELUS.
1LISTNUM 1 \l 14949 Sitting next to Dr. Aron is Mr. Willie Grieve, TELUS Vice‑President, Telecom Policy and Regulatory Affairs who has already appeared in this proceeding.
1LISTNUM 1 \l 14950 Next is Dr. Dennis Weisman who is Professor of Economics at Kansas State University. Dr. Weisman is an expert in the economics of telecommunications regulation and deregulation.
1LISTNUM 1 \l 14951 Dr. Weisman was asked to identify the economic principles that should guide the Commission in its policy regarding mandatory unbundling of essential facilities.
1LISTNUM 1 \l 14952 And sitting next to Dr. Weisman is Professor Glen Robinson. Professor Robinson is the David A. and Mary Harrison Professor of Law at the University of Virginia Law School. Professor Robinson is one of the leading authorities on the law of the essential facilities doctrine and the application of that doctrine.
1LISTNUM 1 \l 14953 I would note that Professor Robinson and Dr. Weisman have overlapping expertise in law and economics in respect of the definition of essential facilities.
1LISTNUM 1 \l 14954 Next is Dr. Robert Crandall. Dr. Crandall is a Senior Fellow at the Brookings Institution in Washington, D.C. and a founder of criterion economics.
1LISTNUM 1 \l 14955 Dr. Crandall has conducted extensive empirical research on the effects of unbundling and other regulatory policies on incentives and investment.
1LISTNUM 1 \l 14956 Next to Dr. Crandall is Mr. John Fleiger, Vice‑President Global Sourcing Solutions for TELUS Partner Solutions Business Unit. Mr. Fleiger leads the TELUS team responsible for managing supplier relationships and carrier matters. Mr. Fleiger has previously appeared in this proceeding.
1LISTNUM 1 \l 14957 Finally, in the second row, and continuing to assist the panel is Mr. Mark Morikami, a TELUS Director in Partner Solutions and Mr. Eric Adora, Senior Regulatory Advisor.
1LISTNUM 1 \l 14958 The CVs of the witnesses have already been filed on the record.
1LISTNUM 1 \l 14959 At this point I would ask that the TELUS expert witnesses be affirmed. Mr. Grieve and Mr. Fleiger are already under oath.
1LISTNUM 1 \l 14960 THE SECRETARY: Thank you very much.
1LISTNUM 1 \l 14961 I'm asking the new witnesses that are not under oath yet to please stand up.
1LISTNUM 1 \l 14962 Thank you.
AFFIRMED: DR. DEBRA ARON
AFFIRMED: DR. DENNIS WEISMAN
AFFIRMED: PROF. GLEN ROBINSON
AFFIRMED: DR. ROBERT CRANDALL
1LISTNUM 1 \l 14963 THE SECRETARY: Thank you very much.
1LISTNUM 1 \l 14964 You wish to examine your witnesses.
1LISTNUM 1 \l 14965 MR. ROGERS: Yes, very briefly.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 14966 MR. ROGERS: I would now like to ask each of the expert panel members to confirm individually that your qualifications are correctly set out in the TELUS letter filed with your qualifications dated October 2nd, 2007.
1LISTNUM 1 \l 14967 DR. ARON: They are.
1LISTNUM 1 \l 14968 DR. WEISMAN: They are.
1LISTNUM 1 \l 14969 PROF. ROBINSON: Yes, they are.
1LISTNUM 1 \l 14970 MR. CRANDALL: Yes, they are.
1LISTNUM 1 \l 14971 MR. ROGERS: Thank you.
1LISTNUM 1 \l 14972 Turning now to Dr. Aron. Dr. Aron, did you prepare your statement entitled: Pricing Principles for Wholesale Services in the Canadian Telecommunications Industry, Appendix "C" to TELUS evidence?
1LISTNUM 1 \l 14973 DR. ARON: I did.
1LISTNUM 1 \l 14974 MR. ROGERS: Are there any corrections you wish to make?
1LISTNUM 1 \l 14975 DR. ARON: No, there are not.
1LISTNUM 1 \l 14976 MR. ROGERS: Is this statement true to the best of your knowledge and belief?
1LISTNUM 1 \l 14977 DR. ARON: Yes, it is.
1LISTNUM 1 \l 14978 MR. ROGERS: Dr. Weisman, did you prepare your statement: Economic Principles Underlying the Essential Facilities Doctrine in Canadian Telecommunications, and a second statement: Regulatory Rate‑Making Versus Competition Enabling Policies in Canada Telecommunications, Appendix "B" to the supplementary evidence?
1LISTNUM 1 \l 14979 DR. WEISMAN: Yes, I did.
1LISTNUM 1 \l 14980 MR. ROGERS: Are there any corrections you wish to make?
1LISTNUM 1 \l 14981 DR. WEISMAN: No, there are not.
1LISTNUM 1 \l 14982 MR. ROGERS: Are these statements true to the best of your knowledge and belief?
1LISTNUM 1 \l 14983 DR. WEISMAN: They are.
1LISTNUM 1 \l 14984 MR. ROGERS: Professor Robinson, did you prepare your statement: The Role of Essential Facilities Doctrine in Competition and Regulatory Policy, and a second statement: Consistency and Clarity in Competition and Regulatory Policy, attachments to the TELUS evidence?
1LISTNUM 1 \l 14985 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 14986 MR. ROGERS: Are there any corrections you wish to make?
1LISTNUM 1 \l 14987 PROF. ROBINSON: No.
1LISTNUM 1 \l 14988 MR. ROGERS: Are these statements true to the best of your knowledge and belief?
1LISTNUM 1 \l 14989 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 14990 MR. ROGERS: Dr. Crandall, did you prepare your statement: Response to Lee Selwyn, Appendix "C" to TELUS supplementary evidence, and a statement prepared with Dr. Alan Ingraham, The Relevance of Recent United Kingdom Telecommunications Policy to the Policy Choices in Canada?
1LISTNUM 1 \l 14991 MR. CRANDALL: I did.
1LISTNUM 1 \l 14992 MR. ROGERS: Are there any corrections you wish to make to either of those statements?
1LISTNUM 1 \l 14993 MR. CRANDALL: None, except for the correction that was submitted in regard to one table, one chart in the testimony which resulted in a very minor change in that chart.
1LISTNUM 1 \l 14994 MR. ROGERS: And that was previously filed ‑‑
1LISTNUM 1 \l 14995 MR. CRANDALL: Yes.
1LISTNUM 1 \l 14996 MR. ROGERS: ‑‑ with the Commission? Are these statements true to the best of your knowledge and belief?
1LISTNUM 1 \l 14997 MR. CRANDALL: Yes.
1LISTNUM 1 \l 14998 MR. ROGERS: Mr. Chairman, the witnesses are now available for cross‑examination.
1LISTNUM 1 \l 14999 THE CHAIRPERSON: Thank you very much.
1LISTNUM 1 \l 15000 I guess we are starting with the Competition Bureau.
1LISTNUM 1 \l 15001 MS PALUMBO: Yes, that's right.
1LISTNUM 1 \l 15002 THE CHAIRPERSON: Go ahead.
1LISTNUM 1 \l 15003 MS PALUMBO: Good morning, Mr. Chairman, Commissioners and members of the TELUS panel.
1LISTNUM 1 \l 15004 Josephine Palumbo here for the Competition Bureau with the assistance of Mr. George Hariton to my right. I will be seeking to obtain information on the impact of mandatory unbundling on investments by ILECs and CLECs in network facilities.
1LISTNUM 1 \l 15005 This is an area, Members of the Commission, that TELUS experts and, in particular, Dr. Crandall have addressed in their evidence.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 15006 MS PALUMBO: And, so, I'll begin with you, Dr. Crandall.
1LISTNUM 1 \l 15007 Dr. Crandall, you're here as an expert on regulation of telecommunications; isn't that correct?
1LISTNUM 1 \l 15008 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15009 MS PALUMBO: And you have examined the empirical impact of various forms of regulation on the industry; isn't that right?
1LISTNUM 1 \l 15010 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15011 MS PALUMBO: And in fact you've published a number of books on the subject.
1LISTNUM 1 \l 15012 MR. CRANDALL: Yes, over the years I have.
1LISTNUM 1 \l 15013 MS PALUMBO: Okay. And in July of 2005 you published a book entitled: Competition and Chaos, U.S. Telecommunications Since the 1996 Telecom Act. That's a 2005 publication.
1LISTNUM 1 \l 15014 You're familiar with that text book?
1LISTNUM 1 \l 15015 MR. CRANDALL: Yes, of course.
1LISTNUM 1 \l 15016 MS PALUMBO: And that book has been the subject of some discussion at this hearing, Dr. Crandall, and I'll be asking you a few questions in relation thereto just so that we can assist the Commission in getting a good understanding of what your conclusions were in that text book.
1LISTNUM 1 \l 15017 MR. CRANDALL: Mm‑hmm.
1LISTNUM 1 \l 15018 MS PALUMBO: Now, in this publication you discuss the U.S. experience with mandated access to various unbundled network elements, including local loops; isn't that correct?
1LISTNUM 1 \l 15019 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15020 MS PALUMBO: Thank you. And that discussion included the link between unbundled network elements and investment by incumbent telephone companies; correct?
1LISTNUM 1 \l 15021 MR. CRANDALL: Yes, yes.
1LISTNUM 1 \l 15022 MS PALUMBO: And would you say you are an expert therefore on this topic?
1LISTNUM 1 \l 15023 MR. CRANDALL: Well, I've studied it. I don't know ‑‑ this is an evolving literature and an evolving phenomenon, so I certainly have studied it.
1LISTNUM 1 \l 15024 MS PALUMBO: You've dabbled in it quite a bit?
1LISTNUM 1 \l 15025 MR. CRANDALL: Well, yes, quite a bit, yes.
1LISTNUM 1 \l 15026 MS PALUMBO: Okay, thank you. And could you assist the Commission, sir, by summarizing the conclusions in your book on the impact of mandatory unbundling on investments by CLECs in their networks and the basis for those conclusions?
1LISTNUM 1 \l 15027 MR. CRANDALL: Well, the conclusions in the book, of course, were completed by late 2004, early 2005 and what I concluded there was that the sharp decline in ILEC spending was due in part, not entirely, but in part to the uncertainty and the continuing expansion of the unbundling regime in the United States.
1LISTNUM 1 \l 15028 Since that time though that unbundling regime, of course, has been changed and a substantial amount of investment has occurred among the U.S. ILECs, particularly Verizon.
1LISTNUM 1 \l 15029 MS PALUMBO: Perhaps, Madam Secretary, we could have copies of the text book circulated.
1LISTNUM 1 \l 15030 MR. CRANDALL: I've got a copy ‑‑ oh, I see.
1LISTNUM 1 \l 15031 MS PALUMBO: But for the other members of the Panel.
1LISTNUM 1 \l 15032 This would be the text book entitled: Competition and Chaos, U.S. Telecommunications Since the 1996 Telecom Act.
‑‑‑ Pause
1LISTNUM 1 \l 15033 MR. TACIT: Mr. Chairman, while this is happening ‑‑ it's Chris Tacit from Cybersurf ‑‑ I don't want to interrupt my colleague prematurely, but I know that the subject matter of what she's cross‑examining on I'm not disputing is relevant, but it appears, at least on its face, that it's more in the nature of an examination‑in‑chief than a cross‑examination.
1LISTNUM 1 \l 15034 I will let it go for the time being, but, you know, it strikes me that this may not be pure cross‑examination going on at the moment.
1LISTNUM 1 \l 15035 THE CHAIRPERSON: Well, when you feel she has crossed the line, make your objection.
1LISTNUM 1 \l 15036 MR. TACIT: Thank you.
1LISTNUM 1 \l 15037 MS PALUMBO: Mr. Chair, actually, there will be a tie‑in, a link‑in here as to why we are asking Dr. Crandall these questions. We have some evidence on the record ‑‑
1LISTNUM 1 \l 15038 THE CHAIRPERSON: Ms Palumbo, I didn't call you to task, so you don't have to defend yourself.
1LISTNUM 1 \l 15039 MS PALUMBO: Thank you, I won't.
1LISTNUM 1 \l 15040 Do we have copies now of the textbook?
1LISTNUM 1 \l 15041 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15042 MS PALUMBO: And I would like you, in particular, to turn to page 37 specifically. You present evidence that is inconsistent with the stepping‑stone hypothesis at page 37.
1LISTNUM 1 \l 15043 You note that, and I'm quoting here your words:
"Since 2000, the facilities‑based lines of non‑cable company entrants remain constant. Thus, it appears that non‑cable entrants stopped the investing in their own facilities." (As read)
1LISTNUM 1 \l 15044 Those are your words. Do you see that?
1LISTNUM 1 \l 15045 MR. CRANDALL: Now, where are you reading, I'm sorry?
1LISTNUM 1 \l 15046 MS PALUMBO: I'm at page 37.
1LISTNUM 1 \l 15047 MR. CRANDALL: Yes. Oh, yes. Okay, fine, I got it.
1LISTNUM 1 \l 15048 MS PALUMBO: Do you see that?
1LISTNUM 1 \l 15049 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15050 MS PALUMBO: And you note that this may have been because of the adverse outcomes for those who did so before the 2000 collapse on LECG's stock values, but, you say:
"Also, because the environment created by regulators provided passive resellers of incumbent services, for example CLECs that use UNE‑P, more attractive returns that did investing in their own switches or even their own complete networks." (As read)
1LISTNUM 1 \l 15051 Do you see that?
1LISTNUM 1 \l 15052 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15053 MS PALUMBO: And then you also say, at page 37:
"There is no evidence that the entrants who use the entire UNE‑P, such as MCI, AT&T, TalkAmerica and Z‑Tel, were doing so to obtain a toehold before launching facilities‑based entries." (As read)
1LISTNUM 1 \l 15054 So your prediction was that with the withdrawal of UNE‑P, they would be more likely to withdraw from local service than to invest. Isn't that right?
1LISTNUM 1 \l 15055 MR. CRANDALL: I think that's a logical deduction, yes.
1LISTNUM 1 \l 15056 MS PALUMBO: Okay.
1LISTNUM 1 \l 15057 Now, I understand that you also coauthored a separate paper in 2004 entitled, "Do Unbundling Policies Discourage CLEC Facilities‑Based Investment?".
1LISTNUM 1 \l 15058 This, Mr. Chair, members of the Commission, is already on the record. It was cited in the Bureau's evidence, March 15th, at footnotes 15 and 43.
1LISTNUM 1 \l 15059 So Dr. Crandall, back to you, you did coauthor this ‑‑
1LISTNUM 1 \l 15060 MR. CRANDALL: That was the Crandall, Ingraham, Singer paper you are talking about, I believe?
1LISTNUM 1 \l 15061 MS PALUMBO: That is correct.
1LISTNUM 1 \l 15062 MR. CRANDALL: Okay. Because the dates, I don't remember the dates, I'm sorry.
1LISTNUM 1 \l 15063 MS PALUMBO: Yes, that's correct.
1LISTNUM 1 \l 15064 Again, the results of that study found:
"The share of CLEC lines that are facilities‑based is lower in states where unbundled network elements (UNE) rental rates are lower." (As read)
which suggests that unbundling decreases facilities‑based competition in the short term.
1LISTNUM 1 \l 15065 Do you remember ‑‑
1LISTNUM 1 \l 15066 MR. CRANDALL: Yes, specifically, the driving force was the ratio of the unbundled loop rate to the cost of building in that state, as measured by two separate estimates we had of the cost of building, and we found that ratio was very significant in the choice of whether to build or not.
1LISTNUM 1 \l 15067 MS PALUMBO: Okay. Could you summarize your results in this paper and comment specifically on the implications for the stepping‑stone hypothesis?
1LISTNUM 1 \l 15068 MR. CRANDALL: Well, what that paper does is to look across the states for which there are data in the United States for a two‑year period and to look at what drove the share of UNE lines to actual facility‑based lines from the competitive local carriers at that time, and it showed that the lower the unbundled loop rate the more they would rely upon unbundled facilities and not build their own facilities.
1LISTNUM 1 \l 15069 This does not go dispositively to the question, however, that whether they would eventually have built facilities, that's the stepping‑stone hypothesis, but I would observe that few of them ever did.
1LISTNUM 1 \l 15070 MS PALUMBO: I believe Madam Secretary has distributed the second document, if I'm not mistaken, and this is, again, going back to the 2004, this 2004 article ‑‑ or paper, I should say.
1LISTNUM 1 \l 15071 In fact, if you turn to page 20 ‑‑
1LISTNUM 1 \l 15072 MR. CRANDALL: Twenty of...?
1LISTNUM 1 \l 15073 MS PALUMBO: Of this second article ‑‑ or paper.
1LISTNUM 1 \l 15074 MR. CRANDALL: Oh, the article.
1LISTNUM 1 \l 15075 MS PALUMBO: Yes.
1LISTNUM 1 \l 15076 MR. CRANDALL: I don't it.
1LISTNUM 1 \l 15077 MS PALUMBO: "Do Unbundling Policies Discourage CLEC..." ‑‑
1LISTNUM 1 \l 15078 MR. CRANDALL: I don't have it in front of me. Oh, here we are. Okay, yes.
1LISTNUM 1 \l 15079 MS PALUMBO: Do you have that?
1LISTNUM 1 \l 15080 MR. CRANDALL: Yes. Yes, I do.
1LISTNUM 1 \l 15081 MS PALUMBO: At page 20.
1LISTNUM 1 \l 15082 You say at page 20:
"But that notion, that is the notion that low UNE rates stimulate future facilities‑based investment..."
‑‑ you concluded ‑‑
"...appears to be undermined by other results." (As read)
1LISTNUM 1 \l 15083 MR. CRANDALL: Oh, I see, yes. Yes, I got you.
1LISTNUM 1 \l 15084 MS PALUMBO: And you say there, and in particular you suggested:
"A regression of the change in facilities‑based investment over time indicates that facilities‑based lines' growth relative to UNE growth was faster in states where the cost of UNEs was higher relative to the cost of facilities‑based investments." (As read)
1LISTNUM 1 \l 15085 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15086 MS PALUMBO: And based on that initial evidence, you and your coauthors concluded that you believe:
"The burden or proof should now shift to the competitive local exchange carriers. If there is no evidence that low UNE rates stimulate facilities‑based CLEC investments in future periods, then the entire unbundling experiment should be reconsidered." (As read)
were your conclusions.
1LISTNUM 1 \l 15087 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15088 MS PALUMBO: Right?
1LISTNUM 1 \l 15089 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15090 MS PALUMBO: Have you reviewed the literature since 2005, since your book was published, on the impact of unbundling in CLEC investments?
1LISTNUM 1 \l 15091 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15092 MS PALUMBO: You have?
1LISTNUM 1 \l 15093 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15094 MS PALUMBO: Yes. Thank you.
1LISTNUM 1 \l 15095 MR. TACIT: Mr. Chairman, I think now counsel for the Bureau is now really eliciting new evidence out of the witness, as opposed to testing his evidence.
1LISTNUM 1 \l 15096 THE CHAIRPERSON: I assume she's leading up to something, Ms Palumbo.
1LISTNUM 1 \l 15097 MR. CRANDALL: That is correct.
1LISTNUM 1 \l 15098 THE CHAIRPERSON: Well, how about asking the question, because we now know enough of the background. Let's ask him something rather than walking him through his past studies.
1LISTNUM 1 \l 15099 MS PALUMBO: Well, we know that he has reviewed recent literature.
1LISTNUM 1 \l 15100 Can you tell me whether you are familiar with Dr. Waverman's publication entitled, "Access Regulation and Infrastructure Investment in the Telecommunications Sector"?
1LISTNUM 1 \l 15101 MR. CRANDALL: Yes. I believe it's Waverman and about three coauthors. A report published by LECG. Correct?
1LISTNUM 1 \l 15102 MS PALUMBO: Right.
1LISTNUM 1 \l 15103 MR. CRANDALL: Yes, I guess I am.
1LISTNUM 1 \l 15104 MS PALUMBO: Okay.
1LISTNUM 1 \l 15105 And, in fact, that is, Mr. Chair, an exhibit that has been entered by the Bureau at Exhibit 1.
1LISTNUM 1 \l 15106 Would you agree with me that the results of that 2007 Waverman study on the impact of access regulation on facilities investments are generally consistent with the results of your own 2004 study on the same topic?
1LISTNUM 1 \l 15107 MR. CRANDALL: They are generally consistent, but they are in a completely different environment.
1LISTNUM 1 \l 15108 Ingraham, Singer and I were looking at the choice between using a local loop and building your own facility to deliver, basically, voice services.
1LISTNUM 1 \l 15109 The Waverman study, as I recall, looks at Europe and the choice ‑‑ the effect of unbundled loop rates on the growth of alternative platforms to deliver broadband and finds that the lower the local loop rate, the less construction of alternative facilities and the fewer subscribers on alternative platforms.
1LISTNUM 1 \l 15110 So it's slightly different, but it's in the same spirit.
1LISTNUM 1 \l 15111 MS PALUMBO: But both documents found the impact on investment to be negative, isn't that correct?
1LISTNUM 1 \l 15112 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15113 MS PALUMBO: Okay. Therefore, can we conclude that, based on your writings and based on your literature, the impact of mandatory unbundling on CLEC investment is negative?
1LISTNUM 1 \l 15114 MR. CRANDALL: I think that's what the literature shows to this point. Those of us who have engaged in these studies find that. Obviously, this is an evolving literature, but I think that is certainly a reasonable conclusion to draw from it at that this point.
1LISTNUM 1 \l 15115 MS PALUMBO: Thank you, Dr. Crandall. I will move on now to another area.
1LISTNUM 1 \l 15116 You are also familiar with Dr. Willig's publication entitled, "Stimulating Investment in the Telecommunications Act of 1996"?
1LISTNUM 1 \l 15117 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15118 MS PALUMBO: And in fact, you do cite this paper in your textbook 2005, "Competition and Chaos"?
1LISTNUM 1 \l 15119 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15120 MS PALUMBO: And, in essence, would you agree with me that Dr. Willig concluded that the ILEC investment increased with decreasing access prices to mandated facilities? That was his conclusion.
1LISTNUM 1 \l 15121 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15122 MS PALUMBO: And you were critical of those findings. Is that correct?
1LISTNUM 1 \l 15123 MR. CRANDALL: Correct.
1LISTNUM 1 \l 15124 MS PALUMBO: Could you explain to us why you were critical, Dr. Crandall?
1LISTNUM 1 \l 15125 MR. CRANDALL: Well, the basic reason on a priori grounds, to be critical, is that Willig and associates ‑‑ again, this was a multi‑author study ‑‑looked at investment in the ILECs cumulated over, as I recall, without going back to the actual document, '96, '97, '98, '99, 2000, 2001, 2002, as a function of a number of variables that all of us would put in such an equation, but then the UNE‑P rate in 2001.
1LISTNUM 1 \l 15126 Since the UNE‑P didn't even get started until 1999, it would have taken incredible foresight, on the part of the ILECs, to know that there would be a UNE‑P, and what the UNE‑P rates would be across states, to drive their '96, '97, '98, '99, 2000 investment. So on a priori grounds, it turns out, I think, you have to be sceptical.
1LISTNUM 1 \l 15127 I then went and re‑estimated his results, breaking down the periods, looking at the earlier period and the late period, and I found that the result is strongest in the earlier period, that is '96, '97, '98 and '99, which would suggest something else is going on here.
1LISTNUM 1 \l 15128 And my conclusion, ultimately was ‑‑ or tentative conclusion, I wouldn't say that I would claim that it couldn't be rebutted, but my tentative conclusion was that what was happening was that in those states in which the ILECs invested most, they obtained, subsequently, the lowest UNE‑P rates, perhaps because their networks are most efficient in the arbitration process that weighed on them and got them a lower UNE‑P rate, so that the causation may have been running from investment to UNE‑P rate, not from UNE‑P rate back to investment in some historical period.
1LISTNUM 1 \l 15129 MS PALUMBO: Thank you for that.
1LISTNUM 1 \l 15130 Are you aware of any other studies, other than Willig's report, which you have just refuted, that have found a positive relationship between ILEC investment and decreasing access prices?
1LISTNUM 1 \l 15131 MR. CRANDALL: Well, there were a couple of things done by a place called the Phoenix Centre, but I don't think they were very well done either.
1LISTNUM 1 \l 15132 MS PALUMBO: You don't think they were very well done?
1LISTNUM 1 \l 15133 MR. CRANDALL: No, no, no.
1LISTNUM 1 \l 15134 MS SONG: Mr. Chairman, I think it's MTS's turn to interject at this point.
1LISTNUM 1 \l 15135 I listened very carefully to the first series of questions addressed by counsel for the Bureau. It did not lead to any question in relation to Dr. Crandall's actual evidence in this proceeding, nor did it test any of the conclusions or statements made by Dr. Crandall.
1LISTNUM 1 \l 15136 She is now taking Dr. Crandall through yet new and further evidence not filed by himself in this proceeding, and we really question whether or not this is a true cross‑examination in the spirit of what a true cross should be.
1LISTNUM 1 \l 15137 MS PALUMBO: I'm sorry, Mr. Chairman, I thought cross‑examination was an exercise to elicit information to assist the Commission in coming to a complete and thorough understanding of the issues.
1LISTNUM 1 \l 15138 We have heard some evidence from other parties in relation to Dr. Crandall's textbooks and publications, and I think it is only correct that the Commission have a full understanding of what Dr. Crandall meant.
1LISTNUM 1 \l 15139 In fact, I believe one of my colleagues from Bell initiated a cross‑examination exercise of Dr. Ware particularly on Dr. Crandall's findings.
1LISTNUM 1 \l 15140 Dr. Crandall is here and is able to now clarify those findings.
1LISTNUM 1 \l 15141 MS SONG: I think that counsel has aptly actually stated what the problem is. She said that her first line of questioning had to do with the impact of mandated access on decisions to invest. I note that the Bureau did not choose to actually examine the parties to this proceeding on that very issue and is now leading this panel through something akin to examination in‑chief.
1LISTNUM 1 \l 15142 THE CHAIRPERSON: Mr. Rogers?
1LISTNUM 1 \l 15143 MR. ROGERS: Mr. Chairman, very briefly.
1LISTNUM 1 \l 15144 A fair reading of the record of this proceeding, going back to the beginning, the original statements, would lead anyone to conclude that there are some fundamental differences between the approach recommended by the Bureau and that recommended by TELUS.
1LISTNUM 1 \l 15145 If you look at the definitions of the central facility, and so on, the two parties have not started in the same place at all and that was explored through the record.
1LISTNUM 1 \l 15146 Through the examination being conducted by the Bureau, in my view it is perfectly reasonable to test the boundaries and find out where there are limits, where there is commonality and where the parties cannot agree. All of that will go into the recommendations that will be made into final argument.
1LISTNUM 1 \l 15147 It seems to me it is perfectly appropriate for the Bureau to explore that.
1LISTNUM 1 \l 15148 THE CHAIRPERSON: I tend to agree with you. This is cross‑examination and obviously you can ask leading questions.
1LISTNUM 1 \l 15149 On the other hand, Ms Palumbo, maybe what you can do is tie it into what your own experts brought out. Rather than asking him what he stands for, you can say, "Our witness Dr. Ware said so‑and‑so. Do you agree with it or not?" And find out the relevance rather than doing something which sounds, I must say, very akin to direct examination.
1LISTNUM 1 \l 15150 So try to tie it back to your expert evidence.
1LISTNUM 1 \l 15151 MS PALUMBO: Dr. Crandall, the Bureau has taken the position that the impact on investment in facilities is a consideration that must go to cost‑benefit analysis when the Commission is determining whether or not to mandate access to particular facilities.
1LISTNUM 1 \l 15152 Do you agree with that?
1LISTNUM 1 \l 15153 MR. CRANDALL: I certainly agree that in telecommunications it is very important to stimulate investment in new technologies and new competitive platforms in order to provide consumer benefits. Investment is very important, yes.
1LISTNUM 1 \l 15154 MS PALUMBO: One final question for you.
1LISTNUM 1 \l 15155 Dr. Ware summarizes your view that you expressed in your textbook entitled "Competition in Chaos", and this is what he says in regard to your book.
1LISTNUM 1 \l 15156 He says:
"Crandall 2005 reviewed all of the empirical studies to date and concluded that when carefully analyzed, none of the studies supported the view that mandatory access rates had influenced the level of capital spending by Bell companies."
1LISTNUM 1 \l 15157 Do you agree with that characterization?
1LISTNUM 1 \l 15158 MR. CRANDALL: I do agree with that, yes.
1LISTNUM 1 \l 15159 MS PALUMBO: Thank you very much, Dr. Crandall.
1LISTNUM 1 \l 15160 Those are my questions, Mr. Chairman.
1LISTNUM 1 \l 15161 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 15162 Commissioner Cram, you had some questions?
1LISTNUM 1 \l 15163 COMMISSIONER CRAM: Dr. Crandall, how then would you explain the Canadian experience?
1LISTNUM 1 \l 15164 We have had local loop rates, initially I think at Phase 2 plus 25 per cent, and then we reduced it in 2005 to Phase 2 plus 15 per cent.
1LISTNUM 1 \l 15165 Our monitoring report shows in 2006 that the ‑‑ it is the 2006 monitoring report, which I believe is an exhibit here.
1LISTNUM 1 \l 15166 Maybe somebody can get a copy of that; and 2007.
1LISTNUM 1 \l 15167 In the 2006 it is Figure 4.2.5 and in 2007 it is Figure 4.2.2.
1LISTNUM 1 \l 15168 In the 2007 it is at page 46. And I don't have a page because this is out of the Web for the 2006.
‑‑‑ Pause
1LISTNUM 1 \l 15169 COMMISSIONER CRAM: Do you have it?
1LISTNUM 1 \l 15170 In the very times that we reduced the margin, in the 2006 report for 2005 we had 27 per cent owned facilities by alternate telecom service providers. And in the next year it increased from 27 per cent to 41 per cent.
1LISTNUM 1 \l 15171 Now can you tell me how I should interpret that?
1LISTNUM 1 \l 15172 MR. CRANDALL: I don't know because I haven't tried ‑‑ first of all, I understand there is some dispute about the numbers. But presuming the numbers are right, I don't know where that is coming from. I don't know to what extent that is coming from perhaps cable extending into small businesses at the time when they are obviously offering a lot of VoIP telephony. There has been a huge increase in cable telephony.
1LISTNUM 1 \l 15173 So I simply don't know where that is coming from.
1LISTNUM 1 \l 15174 I don't think anything in that comparison, though, refutes the notion that providing very low cost access to incumbents' facilities at the margin reduces the incentive to invest.
1LISTNUM 1 \l 15175 There is investment going on. There is no doubt about it. It has been a prosperous time.
1LISTNUM 1 \l 15176 In your model explaining investment, you want to take into account the degree of prosperity, yes.
1LISTNUM 1 \l 15177 COMMISSIONER CRAM: You do agree with me that it is, I guess, the exact opposite of the American experience then.
1LISTNUM 1 \l 15178 MR. CRANDALL: No, I'm not sure it is the exact opposite of the American experience.
1LISTNUM 1 \l 15179 First of all, we have no evidence at this point from our Federal Communications Commission about what has happened in the last year or so to local access lines. They haven't published the data for some reason or another.
1LISTNUM 1 \l 15180 What I was referring to earlier was mostly to the mass market. Here I think you are looking entirely at the business market.
1LISTNUM 1 \l 15181 COMMISSIONER CRAM: I am, yes.
1LISTNUM 1 \l 15182 MR. CRANDALL: Yes. So it does not run counter to the United States. The United States has had a huge amount of building of alternative facilities to reach Enterprise customers and business customers as well. Whether we have had that kind of an increase in a year, as I say, I simply don't know because we don't have the numbers.
1LISTNUM 1 \l 15183 COMMISSIONER CRAM: So notwithstanding price then you have had increases, you think?
1LISTNUM 1 \l 15184 MR. CRANDALL: I don't know what has happened recently. We had enormous building of alternative facilities back in the bubble period obviously seeking to connect customers on the basis that there was going to be enormous growth in Internet traffic.
1LISTNUM 1 \l 15185 So there are other things that drive investment besides unbundled loop rates.
1LISTNUM 1 \l 15186 At this juncture I think unbundled loop rates would be very important.
1LISTNUM 1 \l 15187 COMMISSIONER CRAM: You said that ILEC Capex was down in 04‑05 because of the regulatory uncertainty.
1LISTNUM 1 \l 15188 I think it's CRTC Exhibit 1 that shows the ILEC Capex as reported by the FCC.
1LISTNUM 1 \l 15189 Can that document be given to Dr. Crandall? I have it.
1LISTNUM 1 \l 15190 It's the one from the FCC. Or do you in fact have that?
1LISTNUM 1 \l 15191 MR. CRANDALL: I don't have it with me now, sorry.
‑‑‑ Pause
1LISTNUM 1 \l 15192 COMMISSIONER CRAM: Here, I can give you this one. I can just read off it.
1LISTNUM 1 \l 15193 You said it went up after 2004‑2005. From what I'm looking, it went up marginally.
1LISTNUM 1 \l 15194 Would you agree with that?
1LISTNUM 1 \l 15195 MR. CRANDALL: Over what period are you talking?
1LISTNUM 1 \l 15196 COMMISSIONER CRAM: You said at the end of 2004‑2005 Capex was down because of regulatory uncertainty. But Capex, really from 2005 on, has not sky‑rocketed at all. In fact, it looks to me like there is ‑‑ is that $2 billion increase in both plant ‑‑ well, plant additions?
1LISTNUM 1 \l 15197 It's not a big number.
1LISTNUM 1 \l 15198 MR. CRANDALL: Okay. You are looking at the column "Total Plant Additions" as opposed to "Telephone Plant Additions".
1LISTNUM 1 \l 15199 COMMISSIONER CRAM: Yes.
1LISTNUM 1 \l 15200 MR. CRANDALL: Well, both of them show a decline until 2003 ‑‑ 2004, I'm sorry, and then a recovery. The one shows about a 40 per cent increase 2004 to 2006, and the other one shows about a 22 per cent or so increase.
1LISTNUM 1 \l 15201 I think that is a rather substantial increase.
1LISTNUM 1 \l 15202 By the way, if you extend this now out to 2007, I think you will see it is continuing to grow because of the enormous amount being spent by Verizon and its fibre rollout.
1LISTNUM 1 \l 15203 COMMISSIONER CRAM: Yes, fibre to the home.
1LISTNUM 1 \l 15204 So you think this increase is significant.
1LISTNUM 1 \l 15205 MR. CRANDALL: Yes, I think the turnaround is significant and I think that it is driven very much by investment in new technology, namely, fiber to the home. Yes.
1LISTNUM 1 \l 15206 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 15207 THE CHAIRPERSON: Okay, thank you.
1LISTNUM 1 \l 15208 MR. McCALLUM: Mr. Chair?
1LISTNUM 1 \l 15209 THE CHAIRPERSON: Yes.
1LISTNUM 1 \l 15210 MR. McCALLUM: Miss Palumbo can correct me if I am wrong but I believe the two documents that she distributed have only been referred to in footnotes and so I would propose to make the "Competition and Chaos" document Bureau Exhibit 6 and the second one, "Do Unbundling Policies Discourage CLEC Facilities‑Based Investment?" as Bureau Exhibit 7.
EXHIBIT BUREAU‑6: Article by Robert W. Crandall entitled: Competition and Chaos, U.S. Telecommunications since the 1996 Telecom
EXHIBIT BUREAU‑7: Topics in Economic Analysis & Policy, Volume 4, Issue 1, 2004, Article 14 re: Do Unbundling Policies Discourage CLEC Facilities‑Based Investment
1LISTNUM 1 \l 15211 MS PALUMBO: That is fine.
1LISTNUM 1 \l 15212 THE CHAIRPERSON: Okay. Thank you, Miss Palumbo.
1LISTNUM 1 \l 15213 THE SECRETARY: Thank you very much.
1LISTNUM 1 \l 15214 I am calling on the Shaw panel, counsel Milton.
‑‑‑ No response / Aucune réponse
1LISTNUM 1 \l 15215 THE SECRETARY: We have been notified that she withdrew her intention to cross‑examine.
1LISTNUM 1 \l 15216 Therefore, we can move perhaps to the next panel.
1LISTNUM 1 \l 15217 THE CHAIRPERSON: Okay.
1LISTNUM 1 \l 15218 THE SECRETARY: MTS Allstream, please Mr. Koch.
‑‑‑ Pause
1LISTNUM 1 \l 15219 THE CHAIRPERSON: Okay, Mr. Koch.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 15220 MR. KOCH: Good morning, Mr. Chairman, commissioners. Good morning, panel.
1LISTNUM 1 \l 15221 Dr. Crandall, perhaps I could just start with a couple of questions on the exhibits that were just entered.
1LISTNUM 1 \l 15222 The first exhibit was the excerpt from your book. Now, as I understand it, this book deals with the effect of the wholesale unbundling regime on incumbent spending; correct?
1LISTNUM 1 \l 15223 MR. CRANDALL: The book deals with the effect of the '96 Act on U.S. telecommunications. The effect on incumbents is part of it.
1LISTNUM 1 \l 15224 MR. KOCH: Okay. These excerpts though that have been introduced deal with incumbents?
1LISTNUM 1 \l 15225 MR. CRANDALL: Yes. Yes. I believe so, yes.
1LISTNUM 1 \l 15226 MR. KOCH: And you fairly ‑‑
1LISTNUM 1 \l 15227 MR. CRANDALL: No ‑‑ wait a minute, let me look at this. The last set of questions in that appendix dealt with incumbents. Other aspects of this deal with the entrants.
1LISTNUM 1 \l 15228 MR. KOCH: Okay. But the portions that Miss Palumbo read to you, for example, at 37 and 69 ‑‑ well actually at 69, the heading is, at the top of the page, "Effect of the 1996 Act on Incumbent Local Companies"; correct?
1LISTNUM 1 \l 15229 MR. CRANDALL: I think ‑‑ let me just check one thing.
‑‑‑ Pause
1LISTNUM 1 \l 15230 MR. CRANDALL: Page 69 is an excerpt from a chapter entitled "Effect on the Local Incumbent Companies," yes.
1LISTNUM 1 \l 15231 MR. KOCH: Okay. And the second paragraph under the heading "Capital Expenditures" says:
"How far the wholesale unbundling regime affected Bell Companies' incentives to invest is the subject of lively debate." (As read)
1LISTNUM 1 \l 15232 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15233 MR. KOCH: And it continues to be, does it not? I mean, in fairness, you indicated that the literature is evolving in this area.
1LISTNUM 1 \l 15234 MR. CRANDALL: It does not continue to be much of a source of debate in the United States. Now, it has turned to sort of the international arena and the effect of unbundling and line sharing arrangements on capital spending to deliver broadband.
1LISTNUM 1 \l 15235 MR. KOCH: Okay. Now, you said that there was a ‑‑ my note says that you indicated there was a sharp decline in ILEC spending due in part to expansion of the unbundling regime.
1LISTNUM 1 \l 15236 What period of time were you speaking of there?
1LISTNUM 1 \l 15237 MR. CRANDALL: The decline begins around 2000. The expansion of the unbundling regime in late '99 to the UNE‑P, I think, could arguably be said to have had some impact on that.
1LISTNUM 1 \l 15238 MR. KOCH: Arguably said to have some impact?
1LISTNUM 1 \l 15239 MR. CRANDALL: Yes. Yes. Yes.
1LISTNUM 1 \l 15240 MR. KOCH: Okay. And there are other factors at play, correct?
1LISTNUM 1 \l 15241 MR. CRANDALL: Oh! Certainly. The bursting of the telecom bubble in the stock market certainly had an effect.
1LISTNUM 1 \l 15242 MR. KOCH: Okay, thank you.
1LISTNUM 1 \l 15243 The other article that Miss Palumbo referred you to, Topics in Economic Analysis and Policy, this dates it around the same time as your book, is that correct, 2004?
1LISTNUM 1 \l 15244 MR. CRANDALL: Yes, it is published a little earlier than the book.
1LISTNUM 1 \l 15245 MR. KOCH: Okay. And the analysis that you do in this paper is really based on a regression analysis; is that correct?
1LISTNUM 1 \l 15246 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15247 MR. KOCH: So you take a number of factors and you try and draw inferences or correlations between those factors?
1LISTNUM 1 \l 15248 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15249 MR. KOCH: And from that you draw whatever conclusions you do or do not draw in your paper; correct?
1LISTNUM 1 \l 15250 MR. CRANDALL: Correct.
1LISTNUM 1 \l 15251 MR. KOCH: Okay. Now, if I could ask you to turn to page 1 under the introduction, you indicate here ‑‑ there is a long paragraph. It is the second paragraph under the heading "Introduction."
1LISTNUM 1 \l 15252 You indicate, about seven or eight lines from the bottom:
"Proponents of mandatory unbundling argued that unbundled loops by themselves could generate facilities‑based investments in the future but we are unaware of any data that supports the stepping stone hypothesis. In particular, they argue that unbundled network elements would in some situations serve as a transitional arrangement until fledgling competitors could develop a customer base and complete construction of their own networks." (As read)
1LISTNUM 1 \l 15253 As I understood ‑‑ and you will have to appreciate I only have those excerpts, those parts of the article that Miss Palumbo produced today.
1LISTNUM 1 \l 15254 But as I understand it from the brief description of your regression analysis, you did a regression analysis that compares the loops that are leased under the various unbundling arrangements and the loops that are built by competitors; correct?
1LISTNUM 1 \l 15255 MR. CRANDALL: Right.
1LISTNUM 1 \l 15256 MR. KOCH: Okay.
1LISTNUM 1 \l 15257 MR. CRANDALL: It is the ratio of the two, yes.
1LISTNUM 1 \l 15258 MR. KOCH: Right. So you do not deal then ‑‑ that regression analysis does not deal then with the argument that my client, among others, are making that by making the physical layer available, there will be investment and innovation at other layers in the network; correct?
1LISTNUM 1 \l 15259 MR. CRANDALL: We do ‑‑ as Miss Palumbo indicated, we do a little analysis of what has happened to the change in facilities‑based investment over time but it is for a limited period and I would agree with you that we do not have dispositive results of whether after our period those people using unbundled loops might have built their own facilities.
1LISTNUM 1 \l 15260 I think the evidence coming out of the United States is that they did not though.
1LISTNUM 1 \l 15261 MR. KOCH: Doctor ‑‑ is it Professor Robinson or Dr. Robinson?
1LISTNUM 1 \l 15262 PROF. ROBINSON: It is professor.
1LISTNUM 1 \l 15263 MR. KOCH: Professor Robinson, welcome. Welcome to Canada.
1LISTNUM 1 \l 15264 THE CHAIRPERSON: Excuse me.
1LISTNUM 1 \l 15265 Could you just repeat what you just said, Mr. Crandall, your last statement?
1LISTNUM 1 \l 15266 MR. CRANDALL: I am sorry?
1LISTNUM 1 \l 15267 THE CHAIRPERSON: Could you repeat your last statement?
1LISTNUM 1 \l 15268 MR. CRANDALL: My very last statement was that I do not believe the evidence coming from the United States would show that those people who used either the UNE‑P, the total unbundled network platform, or loops have moved into providing their own facilities.
1LISTNUM 1 \l 15269 I mean there may be some exceptions to this among small regional players in the business market and maybe even one or two national players but I don't think ‑‑ unfortunately, we don't have the data past June 2006 but I think it is going to show that most of the facilities‑based competition in the United States for telephony is coming from the cable companies, not from people building loops who were once using the UNE‑P or UNE loops.
1LISTNUM 1 \l 15270 THE CHAIRPERSON: But doesn't that undermine the central premise of your thesis that you should not mandate these services in order to encourage investment?
1LISTNUM 1 \l 15271 MR. CRANDALL: I am not saying you should not. What we were doing is looking at the effects of unbundled loop rates on investment. I am not concluding you shouldn't do it at all.
1LISTNUM 1 \l 15272 I think you should continue to look at the effects on investment. If you find the effects on investment are sufficiently negative, it ought to cause you to be very cautious in requiring any such unbundling.
1LISTNUM 1 \l 15273 THE CHAIRPERSON: When I said you, I guess I meant your client. I mean your client TELUS, for whom you are the expert witness, is in this proceeding suggesting to us that we should not mandate anything, that essentially there are no essential services and we should only take an ex post facto approach if there is a problem somewhere and part of the reason being advanced is that mandating discourages investment.
1LISTNUM 1 \l 15274 MR. CRANDALL: Yes. Yes, and that is what I am here to testify about. I am not here to ‑‑ I haven't really spent much time with their specific proposal.
1LISTNUM 1 \l 15275 Over time, that which is an essential facility certainly must be declining and I am certainly sympathetic with the notion that one would have a contracting number of essential facilities over time but I haven't looked at it in the context of Canada.
1LISTNUM 1 \l 15276 THE CHAIRPERSON: Okay, thank you.
1LISTNUM 1 \l 15277 MR. KOCH: Professor Robinson, in your report you discuss the essential facilities doctrine that emerges from the U.S. anti‑trust jurisprudence; correct?
1LISTNUM 1 \l 15278 PROF. ROBINSON: Yes, that is correct.
1LISTNUM 1 \l 15279 MR. KOCH: Okay. And one of the things, is it fair to say, that you take from that jurisprudence is that the obligation to share a facility with a competitor is an exceptional or rare obligation under that jurisprudence?
1LISTNUM 1 \l 15280 PROF. ROBINSON: It is exceptional.
1LISTNUM 1 \l 15281 MR. KOCH: Okay. In fact, you say ‑‑ and I don't know whether it is necessary to turn up the page because I want to try and move efficiently through the cross‑examination.
1LISTNUM 1 \l 15282 You say at page 2, paragraph 5(a) of your report:
"The essential facilities doctrine is an unusual exception to the general principle that firms do not have a duty to deal with other firms and particularly not with their competitors." (As read)
1LISTNUM 1 \l 15283 Now, just so we can all understand, this jurisprudence that you are referring to, this arises out of private anti‑trust enforcement in the United States; correct?
1LISTNUM 1 \l 15284 PROF. ROBINSON: Well, the cases are private. I mean the jurisprudence is general.
1LISTNUM 1 \l 15285 MR. KOCH: Right.
1LISTNUM 1 \l 15286 PROF. ROBINSON: It is the same jurisprudence for public and private. It just happens that there are virtually no government cases.
1LISTNUM 1 \l 15287 MR. KOCH: Okay. So the cases that you are citing are about private litigants bringing private actions?
1LISTNUM 1 \l 15288 PROF. ROBINSON: That is correct.
1LISTNUM 1 \l 15289 MR. KOCH: And the cases you cite arise in a variety of industries; correct?
1LISTNUM 1 \l 15290 PROF. ROBINSON: That is correct.
1LISTNUM 1 \l 15291 MR. KOCH: Okay. Indeed, one of the seminal cases, Associated Press, is about access to the AP news pool; correct?
1LISTNUM 1 \l 15292 PROF. ROBINSON: I am sorry, I didn't hear that.
1LISTNUM 1 \l 15293 MR. KOCH: One of the seminal cases you cite, the Associated Press case, is about non‑discriminatory access to the AP News pool, correct?
1LISTNUM 1 \l 15294 PROF. ROBINSON: This is correct.
1LISTNUM 1 \l 15295 MR. KOCH: And one of the other cases, Aspen Skiing, that is the leading case you say on unilateral refusal to deal, that arose in the ski industry, correct?
1LISTNUM 1 \l 15296 PROF. ROBINSON: Yes, that was not an essential facilities doctrine case.
1LISTNUM 1 \l 15297 MR. KOCH: Okay. But it is one of the body of jurisprudence that you cite in your report?
1LISTNUM 1 \l 15298 PROF. ROBINSON: I don't cite it as an essential facilities doctrine case.
1LISTNUM 1 \l 15299 MR. KOCH: I am not saying you are.
1LISTNUM 1 \l 15300 PROF. ROBINSON: Oh, yes I do.
1LISTNUM 1 \l 15301 MR. KOCH: Professor Robinson, thank you.
1LISTNUM 1 \l 15302 Now, in this general context of the general economy would you have been surprised if the court had held there was a general duty to share?
1LISTNUM 1 \l 15303 PROF. ROBINSON: Yes, I would be very surprised.
1LISTNUM 1 \l 15304 MR. KOCH: Okay. In your report at page 19 you cite the U.S. Supreme Court's 2004 decision in Verizon and Trinko, you go from page 19 over to 20. Just so we can move through it quickly, Professor Robinson, you will agree with me that was a case regarding the alleged failure of Verizon, a U.S. ILEC, to provide adequate access to unbundled elements of its local exchange network, correct?
1LISTNUM 1 \l 15305 PROF. ROBINSON: That is correct.
1LISTNUM 1 \l 15306 MR. KOCH: And you say in your report, the Supreme Court did not accept or reject the essential facilities doctrine in that case, but simply held that it served no purpose where regulatory remedies were available, correct?
1LISTNUM 1 \l 15307 PROF. ROBINSON: That is correct.
1LISTNUM 1 \l 15308 MR. KOCH: Okay. So that case, is it not fair to say, stands to the proposition that there is no role for private antitrust enforcement in the context of an industry subject to a specific regulatory scheme such as the U.S. Telecom Act of 1996, correct?
1LISTNUM 1 \l 15309 PROF. ROBINSON: As a matter of antitrust law, yes, that is the way I interpret it.
1LISTNUM 1 \l 15310 MR. KOCH: In other words, the point of Trinko is that antitrust laws were not the proper route where a statutory scheme existed that was directly applicable to the telecommunications industry?
1LISTNUM 1 \l 15311 PROF. ROBINSON: At least as a matter of private enforcement, yes.
1LISTNUM 1 \l 15312 MR. KOCH: Now, is the statutory regime for unbundling of network elements in the U.S. 1996 Act based on U.S. antitrust doctrine of essential facilities?
1LISTNUM 1 \l 15313 PROF. ROBINSON: No, it is not.
1LISTNUM 1 \l 15314 MR. KOCH: No. Are you familiar with the statutory regime set out in the Telecommunications Act in Canada?
1LISTNUM 1 \l 15315 PROF. ROBINSON: Am I familiar with the statutory regime?
1LISTNUM 1 \l 15316 MR. KOCH: Yes.
1LISTNUM 1 \l 15317 PROF. ROBINSON: Only in a very general way.
1LISTNUM 1 \l 15318 MR. KOCH: Okay. Are you aware that the Act gives the federal cabinet the power to bury CRTC decisions and also to issue general policy directions to the CRTC?
1LISTNUM 1 \l 15319 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15320 MR. KOCH: Okay. Are you aware that the federal cabinet in Canada has in fact articulated a policy in favour of facilities‑based competition?
1LISTNUM 1 \l 15321 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15322 MR. KOCH: In this context, are you aware that the federal cabinet has defined facilities‑based competition or competitors as including those who compete, using a combination of their own facilities and facilities leased from incumbents, in other words shared facilities?
1LISTNUM 1 \l 15323 PROF. ROBINSON: Are you referring to the forbearance variation order?
1LISTNUM 1 \l 15324 MR. KOCH: Yes, I am.
1LISTNUM 1 \l 15325 PROF. ROBINSON: Yes, I am familiar.
1LISTNUM 1 \l 15326 MR. KOCH: Okay. We talked about what would be surprising in a private antitrust context in the United States. I think you agreed that it would have been surprising to find that there was a general obligation to share. But would you not agree with me that in the context of a specific statutory regime such as the Telecom Act and, specifically, the government's recognition that it was promoting facilities‑based competition and including in its definition of facilities‑based competitors those that use both their own facilities and leased facilities that it would be far less surprising if the Commission were to treat the obligation to share essential facilities not as an exceptional obligation but rather as a necessary part of its mandate?
1LISTNUM 1 \l 15327 That's a long question, sorry.
1LISTNUM 1 \l 15328 PROF. ROBINSON: Mr. Koch, I think you lost me there. I don't whether we are talking about the U.S. or we are talking about Canada at this point.
1LISTNUM 1 \l 15329 MR. KOCH: Okay, we are talking about Canada.
1LISTNUM 1 \l 15330 PROF. ROBINSON: When you asked me before about would I be surprised, it was in reference to would I be surprised about the U.S. experience.
1LISTNUM 1 \l 15331 MR. KOCH: Correct, and the private antitrust litigation experience.
1LISTNUM 1 \l 15332 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15333 MR. KOCH: That was the context.
1LISTNUM 1 \l 15334 PROF. ROBINSON: Yes. I don't ‑‑ yes.
1LISTNUM 1 \l 15335 MR. KOCH: The point I am making is it would be a lot less surprising, I am suggesting to you, in the context of a commission like this one with a statutory mandate and with a government that has told it that it favours facilities‑based competition including, from competitors sharing facilities, to find that the obligation to share essential facilities is not such an exceptional obligation.
1LISTNUM 1 \l 15336 PROF. ROBINSON: Well, the premise of your question seems to rest on the forbearance order and I don't know why that would be pertinent here. I mean, we are not talking about forbearance, we are talking about mandatory access.
1LISTNUM 1 \l 15337 MR. KOCH: But you understand that the Commission has to make its decision in the context of the overall regulatory scheme in Canada?
1LISTNUM 1 \l 15338 PROF. ROBINSON: Well yes, of course.
1LISTNUM 1 \l 15339 MR. KOCH: Okay. And that would include the retail forbearance?
1LISTNUM 1 \l 15340 PROF. ROBINSON: Well, I don't know what you are getting at. It doesn't follow that it would have to include the definition of facilities‑based competition used in the forbearance variation order if that is what you mean. I don't see the connection.
1LISTNUM 1 \l 15341 MR. KOCH: Well, I won't take you into interpreting Canadian law. Perhaps I'll go to the next area of my cross‑examination.
1LISTNUM 1 \l 15342 Is it Dr. Crandall or Professor Crandall with you?
1LISTNUM 1 \l 15343 MR. CRANDALL: Well, I'm a PhD and I don't teach at this time, so call me Mr. Crandall, I don't care.
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 15344 MR. KOCH: Once I had a case where someone went from being Dr. to Mr. to witness, I will try not to take you down that path, Dr. Crandall.
1LISTNUM 1 \l 15345 As I understand it, you filed two pieces. You filed one in respect of the U.S. ‑‑
1LISTNUM 1 \l 15346 MR. CRANDALL: Experience, yes.
1LISTNUM 1 \l 15347 MR. KOCH: ‑‑ experience and one in respect of the UK experience, correct?
1LISTNUM 1 \l 15348 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15349 MR. KOCH: Okay. The one on the U.S. was intended as a response to Dr. Selwyn, correct?
1LISTNUM 1 \l 15350 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15351 MR. KOCH: Now, if I could ask you to turn up that piece perhaps.
1LISTNUM 1 \l 15352 Do you have that, Dr. Crandall?
1LISTNUM 1 \l 15353 MR. CRANDALL: Yes, I do.
1LISTNUM 1 \l 15354 MR. KOCH: At page 7 of that piece, Dr. Crandall, at paragraph 17 you say:
"If competition has been damaged by the change in U.S. unbundling policy one should begin to see evidence of this damage in the price of U.S. telephone service, however, no such evidence exists." (As Read)
1LISTNUM 1 \l 15355 Figure 1 shows no reversal in the downward trend in real wireline telephone prices since 2004.
1LISTNUM 1 \l 15356 Local wireline telephone rates rose during the period in which SILECs were expanding, largely because of regulatory decisions to shift per‑minute switched access charges to fixed‑line charges. Since 2003, however, both local and long‑distance prices have been declining because of aggressive competition from wireless cable and the SILECs that remain.
1LISTNUM 1 \l 15357 Now if, we go over to the next page you have a Figure 1 which speaks to the real consumer price indexes for telephone service that you cite to the U.S. Bureau of Labour, the statistics.
1LISTNUM 1 \l 15358 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15359 MR. KOCH: What type of telephone services are included in this?
1LISTNUM 1 \l 15360 MR. CRANDALL: There is two; one is wireline and the other is wireless cellular.
1LISTNUM 1 \l 15361 MR. KOCH: Okay. Because this does not include the enterprise market?
1LISTNUM 1 \l 15362 MR. CRANDALL: No, this does not include business rates, that is right, yes.
1LISTNUM 1 \l 15363 MR. KOCH: Okay. And would you agree with me the situation, whatever it is for the residential market where there has been significant cable entry, is different for the enterprise market?
1LISTNUM 1 \l 15364 MR. CRANDALL: It could be different, I don't know how different it really is. I was not addressing that, because what I was addressing here was what was the effect of the change in U.S. unbundling policy, namely the dropping of the UNEP, and that was entirely in the residential mass market, or preponderantly in the mass market, so I was looking at consumer rates.
1LISTNUM 1 \l 15365 MR. KOCH: Okay. So your evidence doesn't speak to what has happened in the enterprise market in the United States?
1LISTNUM 1 \l 15366 MR. CRANDALL: No, it does not.
1LISTNUM 1 \l 15367 MR. KOCH: Okay, thank you.
1LISTNUM 1 \l 15368 THE CHAIRPERSON: On that figure the short graph, which has the square boxes, is called all telephone services. Does that include internet access?
1LISTNUM 1 \l 15369 MR. CRANDALL: Does that include ‑‑ I am sorry?
1LISTNUM 1 \l 15370 THE CHAIRPERSON: Internet access.
1LISTNUM 1 \l 15371 MR. CRANDALL: No. I am saying that on recollection, I don't believe it does. We could look it up, but I'm pretty sure it does not.
1LISTNUM 1 \l 15372 MR. KOCH: Now, Dr. Weisman, if I could go to you next please.
1LISTNUM 1 \l 15373 And with you, Dr. Weisman, I would like to ‑‑ now, you are doctor and professor, right?
1LISTNUM 1 \l 15374 DR. WEISMAN: Whatever you would like, Mr. Koch.
1LISTNUM 1 \l 15375 MR. KOCH: I rarely have a witness that is that agreeable with me, Dr. Weisman.
1LISTNUM 1 \l 15376 Dr. Weisman, the concept I want to discuss with you, you filed a lot of pages here, but the one that is interesting to me is the concept of consumer welfare over the long run, which you address in your second report, correct?
1LISTNUM 1 \l 15377 DR. WEISMAN: Yes.
1LISTNUM 1 \l 15378 MR. KOCH: And so this is dealing with you supplementary evidence starting at page 17. And I will be taking Dr. Weisman to that evidence, Mr. Chairman, so it might be useful to turn it up.
1LISTNUM 1 \l 15379 In your report, your supplemental report, you speak to tradeoffs between static and dynamic efficiency, you recall that?
1LISTNUM 1 \l 15380 DR. WEISMAN: I do.
1LISTNUM 1 \l 15381 MR. KOCH: Okay. And you observe ‑‑ and this discussion starts, in fact, at page ‑‑ well, the discussion of the standard of consumer welfare over the long‑run starts at page 17 and you observe virtually every party to this proceeding has paid homage to the promotion of consumer welfare as the objective of telecommunications policy. And yet, there is precious little agreement as to the precise avenue, the scope of forced sharing obligations through which this objective would be realized.
1LISTNUM 1 \l 15382 Now, you attempt in your report to explain the difference of opinion as a trade off between static and dynamic efficiency. Do you recall that?
1LISTNUM 1 \l 15383 DR. WEISMAN: I talk about the differences between static and dynamic efficiency and its bearing on this case with regard to the scope of unbundling, that's true.
1LISTNUM 1 \l 15384 MR. KOCH: Okay. You suggest that a policy of broader unbundling may introduce a larger number of competitors and lower prices, but you characterize that as static efficiency; correct?
1LISTNUM 1 \l 15385 DR. WEISMAN: It might be one measure of static efficiency, competition in the short run perhaps moving prices closer to a more incremental cost.
1LISTNUM 1 \l 15386 MR. KOCH: And you characterize as dynamic efficiency, or dynamically efficient, I should say, those policies that incent greater investment and innovation; correct?
1LISTNUM 1 \l 15387 DR. WEISMAN: Yes, it would be the flow of the innovation over time, including new products and services and new production processes.
1LISTNUM 1 \l 15388 MR. KOCH: Okay. Now, so new products and services, new production processes, those would be examples of dynamic efficient ‑‑ considerations of dynamic efficiency; correct?
1LISTNUM 1 \l 15389 DR. WEISMAN: They would generally, yes.
1LISTNUM 1 \l 15390 MR. KOCH: Okay, thank you.
1LISTNUM 1 \l 15391 Now, I'd like you ‑‑ and, Mr. Chairman, I'm violating all my sense of better judgment to cross‑examine an economist on graphs, but I'm going to try anyways.
1LISTNUM 1 \l 15392 If you could turn to Figure 1 on page 22 of your report, please.
1LISTNUM 1 \l 15393 DR. WEISMAN: I have it.
1LISTNUM 1 \l 15394 MR. KOCH: Perhaps this might be a good time, Madam Secretary, to hand out my one‑pager with two alternate scenarios.
1LISTNUM 1 \l 15395 Sure. One of them I may not be using, so it could ‑‑ yeah.
‑‑‑ Pause
1LISTNUM 1 \l 15396 THE SECRETARY: Your graph, counsel, will be Exhibit No. 16.
EXHIBIT MTS‑16: Alternate Scenario 1 re: Significant Price Increase ‑ Modest Demand Increase due to reduced ILEC incentives to innovate & Alternate Scenario 2 re: Price Decrease ‑ Demand Increase due to increased competition and innovation
1LISTNUM 1 \l 15397 MR. KOCH: Here goes. This Figure 1, can you just explain for the Commissioners what you intended to demonstrate through this figure?
1LISTNUM 1 \l 15398 DR. WEISMAN: Yes. The basic idea here is to capture the notion that by expanding the scope of unbundling you may get ‑‑ in the short run you may get downward pressure on price and that benefits consumers because they pay less for the goods and services that they consume; on the other hand, it may come with the cost of foregone innovation and investment over time.
1LISTNUM 1 \l 15399 For example, it's widely accepted in the economics literature that if you want to encourage investment you have to have strong property rights and strong appropriability, and that's a fancy way simply of saying that when firms invest their capital they will only invest when they expect to capture the return or appropriate the returns on that investment.
1LISTNUM 1 \l 15400 Unbundling represents a form ‑‑ excuse me, mandatory unbundling represents a form of appropriating the returns that a firm might normally expect from the investments that it makes.
1LISTNUM 1 \l 15401 So, if it doesn't expect to appropriate the full returns, it may cut back on its investment. And my understanding of the literature is that that is what has happened with unduly broad unbundling.
1LISTNUM 1 \l 15402 MR. KOCH: Now, we've discussed the literature with Dr. Crandall a little bit, so we won't get there ‑‑ we won't go there.
1LISTNUM 1 \l 15403 You say under the ‑‑ in paragraph 47 under the figure you explain that:
"In light of the empirical evidence that suggests that unbundling has had only a marginal effect on price competition (a) is small." (As read)
1LISTNUM 1 \l 15404 Now, you acknowledge that there is literature that demonstrates then that the effect of unbundling has been to lower prices?
1LISTNUM 1 \l 15405 DR. WEISMAN: No, I was actually referencing there, intentionally so, the Competition Bureau's assessment that the effects on competitive intensity of unbundling in Canada have been small or modest.
1LISTNUM 1 \l 15406 I don't remember the exact adjective they used.
1LISTNUM 1 \l 15407 MR. KOCH: So, you're just making a reference over to their characterization of the benefits as being small?
1LISTNUM 1 \l 15408 DR. WEISMAN: In this particular case, yes, for this particular example.
1LISTNUM 1 \l 15409 MR. KOCH: So, you have no particular number when you move the line for the price with ‑‑ let's just go through the graph.
1LISTNUM 1 \l 15410 P0 is the price before the mandated unbundling is expanded; correct?
1LISTNUM 1 \l 15411 DR. WEISMAN: P0 would be the price ‑‑
1LISTNUM 1 \l 15412 MR. KOCH: I'm sorry, before it's restricted.
1LISTNUM 1 \l 15413 DR. WEISMAN: P0 is the price that you might expect in this example with regard to a broad unbundling policy.
1LISTNUM 1 \l 15414 MR. KOCH: Okay. And P1 is the price with a narrower unbundling policy; correct?
1LISTNUM 1 \l 15415 DR. WEISMAN: With a scaled back unbundling policy you might get, might get some increase in price, but also would be expected to stimulate some investment because the ability‑‑
1LISTNUM 1 \l 15416 MR. KOCH: I'm just asking about P0 and P1. We'll get to D0 and D1 in a moment.
1LISTNUM 1 \l 15417 DR. WEISMAN: P1 would be the price when you scaled back in this example ‑‑
1LISTNUM 1 \l 15418 MR. KOCH: Okay.
1LISTNUM 1 \l 15419 DR. WEISMAN: ‑‑ the scope of unbundling.
1LISTNUM 1 \l 15420 MR. KOCH: So, this graph assumes a higher price with less mandated unbundling; correct?
1LISTNUM 1 \l 15421 DR. WEISMAN: Yeah, underscoring assumes.
1LISTNUM 1 \l 15422 MR. KOCH: Yes. Well, that's exactly what I'm going to underscore. And it also assumes that by narrowing the mandated unbundling, or narrowing unbundling generally you will, in fact, increase investment and innovation; correct?
1LISTNUM 1 \l 15423 DR. WEISMAN: Well, again, I ‑‑ following the Bureau and the evidence that they cite regarding the effect of broad unbundling on investment, that is brought into this graph in the sense that it shifts the demand curve D0 out to D1 when the unbundling regime is scaled back.
1LISTNUM 1 \l 15424 MR. KOCH: Okay. So, you're just referencing the Bureau evidence; correct?
1LISTNUM 1 \l 15425 DR. WEISMAN: Well, the Bureau evidence cites a number of studies, including studies of Dr. Crandall, Professor Hazelet that attest to this fact.
1LISTNUM 1 \l 15426 MR. KOCH: Right. And they don't cite other studies; correct? They don't cite the studies that Dr. Ware cited, for example; correct?
1LISTNUM 1 \l 15427 DR. WEISMAN: My recollection is that Dr. Ware cited an article in Telecom Policy which, to be quite honest, is not a journal that you would look to to ‑‑ as necessarily a reference for this type of analysis.
1LISTNUM 1 \l 15428 MR. KOCH: So, the answer is they did not cite what Dr. Ware cited; correct?
1LISTNUM 1 \l 15429 DR. WEISMAN: That's correct.
1LISTNUM 1 \l 15430 MR. KOCH: Okay. They also didn't acknowledge what another witness, Dr. Hatfield ‑‑ or Mr. Hatfield with experience on the technology side at the FCC acknowledged, which was that if you expand unbundling at the physical layer you can incent innovation at higher levels ‑‑ higher layers within the protocol stack; correct?
1LISTNUM 1 \l 15431 DR. WEISMAN: Well, I heard Mr. Hatfield say that, but that is not the view of the FCC regarding their reasons for scaling back unbundling. They viewed it as having an adverse effect, broad unbundling having an adverse effect on investment.
1LISTNUM 1 \l 15432 MR. KOCH: The lines that you draw here though, what determined how far you drew the D1 line from the D0 line? It's illustrative only; is it not?
1LISTNUM 1 \l 15433 DR. WEISMAN: It is illustrative but informed by the facts. For example, the Competition Bureau's conclusion that the effects of unbundling in Canada in terms of competitive intensity have been modest, so given that they believe it was modest, it moved modestly up from P0 to P1.
1LISTNUM 1 \l 15434 And given that they believe that, as did the TPR, that broad unbundling in Canada had served to significantly curtail investment, that shift out of the demand curve from D0 to D1 would be reflective of the foregone innovation and investment associated with that which would not take place under a broad unbundling regime.
1LISTNUM 1 \l 15435 MR. KOCH: But there's no mathematical ‑‑ other than those broad descriptors, there's no mathematical formula that's determining how far you're moving D1 over from D0?
1LISTNUM 1 \l 15436 DR. WEISMAN: Well, we could do that but it wouldn't add to the analysis. I told you, it was based on the fact that it was modest price intensity associated with foregone innovation of significant magnitude.
1LISTNUM 1 \l 15437 So, I think the graph is informed by those facts.
1LISTNUM 1 \l 15438 MR. KOCH: Well, informed by the Bureau's characterization of the record; correct?
1LISTNUM 1 \l 15439 DR. WEISMAN: Which cites the broader literature in general.
1LISTNUM 1 \l 15440 MR. KOCH: Okay. Now, if you look at my alternate scenarios 1 and 2, please. If you could look first ‑‑ which I provided to your counsel last night ‑‑ alternate scenario 1, here I've assumed directionally the same movements, in other words, that within a limited or limitations on unbundling there will be a price increase and I've also assumed, for purposes of argument and illustration only, the Bureau's position that the demand ‑‑ that innovation and investment will expand as a result of restricting unbundling, but I've drawn the lines differently so that the increase is large in price; correct, and the increase in demand is small. Do you see that?
1LISTNUM 1 \l 15441 DR. WEISMAN: Yes, I do.
1LISTNUM 1 \l 15442 MR. KOCH: Okay. And under those assumptions ‑‑ that set of assumptions, you'll agree with me that the consumer surplus goes from A+B, that triangle; correct?
1LISTNUM 1 \l 15443 DR. WEISMAN: Correct.
1LISTNUM 1 \l 15444 MR. KOCH: I'm sorry, the consumer surplus that was first at B+C ‑‑ now, I'm getting confused. This is exactly why I said I shouldn't do this.
1LISTNUM 1 \l 15445 If you would just give me a moment, please.
‑‑‑ Pause
1LISTNUM 1 \l 15446 MR. KOCH: Yes, it goes from A+B to B+C; correct? So, on this set of assumptions, in fact, the consumer surplus shrinks; correct, under a more restrictive unbundling?
1LISTNUM 1 \l 15447 DR. WEISMAN: If you change the assumptions that are not consistent with the facts you will get a different outcome as you have done here.
1LISTNUM 1 \l 15448 MR. KOCH: Well, not consistent with one version of the facts; correct? There's been a different version of the facts here; has there not, at this hearing?
1LISTNUM 1 \l 15449 DR. WEISMAN: Well, let's separate out the empirical from the theoretical. It is widely accepted in the economics literature, I've quoted some of that here, that the gains ‑‑ the consumer welfare gains from dynamic efficiency, new products and services over time, dominate the short‑run gains from static deficiency.
1LISTNUM 1 \l 15450 MR. KOCH: But how we get ‑‑
1LISTNUM 1 \l 15451 DR. WEISMAN: That's a theoretical proposition.
1LISTNUM 1 \l 15452 MR. KOCH: But how we get to the dynamic efficiency, there are different theories as to how we can accomplish those dynamic efficiency gains; correct?
1LISTNUM 1 \l 15453 DR. WEISMAN: There may be different views on that, yes.
1LISTNUM 1 \l 15454 MR. KOCH: Thank you.
1LISTNUM 1 \l 15455 Alternate scenario 2, if I could ask you to flip the page and look at that. Here, rather than under scenario 1, where I stuck with your theory that we were moving from broader unbundling to narrow unbundling, under scenario 2 we have a scenario that we move from narrower unbundling to broader unbundling, and we have two effects: the price goes down, which is broadly consistent with your Figure 1, where the price had gone up in the other scenario, and in this case the increase in unbundling has a positive effect, does it not, on this set of assumptions, on incentives to invest and innovate. Correct?
1LISTNUM 1 \l 15456 DR. WEISMAN: Yes, the way you constructed this graph, you do get that effect.
1LISTNUM 1 \l 15457 The way you have constructed the graph is diametrically at odds with the conclusions of the TPR regarding ‑‑ one of the adverse effects of broad‑scale unbundling is this uniformity of networks, where you don't get this innovation.
1LISTNUM 1 \l 15458 So I don't deny the fact that you have created a graph that comes to the conclusion you have suggested. What I am suggesting is it doesn't agree with the facts.
1LISTNUM 1 \l 15459 Furthermore, if your policy is ‑‑
1LISTNUM 1 \l 15460 MR. KOCH: Are you aware of what ‑‑
1LISTNUM 1 \l 15461 DR. WEISMAN: Excuse me, Mr. Koch, let me finish.
1LISTNUM 1 \l 15462 MR. KOCH: Go ahead.
1LISTNUM 1 \l 15463 DR. WEISMAN: If you policy is correct, on a broad national scale we ought to equip the Competition Bureau with a fleet of cars and send them out across the country, and any time they identify market power they slap a sharing mandate on that firm. Okay?
1LISTNUM 1 \l 15464 And if you think that's a good public policy, I would ask you why we don't observe that? We don't observe that because sharing is very exceptional and we recognize that the costs of sharing, mandated sharing, are very high. We don't do that as a matter of public policy.
1LISTNUM 1 \l 15465 MR. KOCH: We don't have many industries, do we, where we have had 125 ‑‑ or 110‑year monopoly?
1LISTNUM 1 \l 15466 The point of this illustration is that the effect on consumer welfare really depends on the assumptions that you make regarding price and innovation as a result of different policies. Correct?
1LISTNUM 1 \l 15467 DR. WEISMAN: Well, that's the whole point, Mr. Koch. The graph is informed by the facts. You have set up a series of other graphs that are not informed by the facts and come to diametrically opposite conclusions. So you have assumed facts not in evidence here.
1LISTNUM 1 \l 15468 MR. KOCH: Okay. The other facts that are in evidence here, and have to be weighed by the CRTC, you would agree with me, would you not, that if the CRTC, after weighing those facts, determines that they can incent greater innovation by expanding unbundling, then the consumer welfare calculation would look like my scenario 2. Correct?
1LISTNUM 1 \l 15469 The CRTC is the determiner of the facts not you, Dr. Weisman. Correct?
1LISTNUM 1 \l 15470 DR. WEISMAN: No, but you asked me about the facts that informed my graph, and I told you what they were. Certainly, the ‑‑
1LISTNUM 1 \l 15471 MR. KOCH: And those were not cited ‑‑
1LISTNUM 1 \l 15472 DR. WEISMAN: ‑‑ Commission can weigh the evidence that it wants.
1LISTNUM 1 \l 15473 MR. KOCH: Okay, but those were not cited in your report, correct, it's the facts that you are telling me...?
1LISTNUM 1 \l 15474 DR. WEISMAN: Yes, they were.
1LISTNUM 1 \l 15475 I talked about the Bureau's conclusions regarding the modest effects of competitive intensity and the fact that they had come to the conclusion that there is absolutely no empirical support in the academic literature for the stepping‑stone hypothesis. Both of those are cited in my report.
1LISTNUM 1 \l 15476 MR. KOCH: Both of those are cited in your report, although not here in connection with this graph. Is that correct?
1LISTNUM 1 \l 15477 DR. WEISMAN: Not in this immediate vicinity, but in this second round of testimony it is.
1LISTNUM 1 \l 15478 MR. KOCH: Now, Dr. Aron, perhaps I could move to you, and you are both a professor and a doctor, as well, correct?
1LISTNUM 1 \l 15479 DR. ARON: Yes, I am.
1LISTNUM 1 \l 15480 MR. KOCH: Great.
1LISTNUM 1 \l 15481 Now, your piece deals with the pricing of essential facilities. Correct?
1LISTNUM 1 \l 15482 DR. ARON: Pricing principles, yes.
1LISTNUM 1 \l 15483 MR. KOCH: Pricing principles. And, in fact, at the end of the day, your recommendations are restricted to principles to be applied. Correct?
1LISTNUM 1 \l 15484 DR. ARON: Yes. And not just to essential facilities, but for non‑essential facilities during the transition to competition.
1LISTNUM 1 \l 15485 MR. KOCH: Okay. But you don't have any specific recommendations as to how the Commission should go about its job of pricing these facilities. Correct?
1LISTNUM 1 \l 15486 DR. ARON: Well, I do have specific recommendations with respect to the principles ‑‑
1LISTNUM 1 \l 15487 MR. KOCH: Correct.
1LISTNUM 1 \l 15488 DR. ARON: ‑‑ that should be applied, but this proceeding is not, as I understand it, about establishing prices, but rather the Commission asked for evidence on pricing principles. So that's what I have provided.
1LISTNUM 1 \l 15489 MR. KOCH: So you stop at the level of principle. Correct?
1LISTNUM 1 \l 15490 DR. ARON: Yes.
1LISTNUM 1 \l 15491 MR. KOCH: That's all my question is meant to establish. Thank you, Dr. Aron.
1LISTNUM 1 \l 15492 Now, at page 14 of your report, you state, I think, with admirable candour:
"As will become clear throughout my statement, the fundamental reality demonstrated in the economics literature is that although each principle is important, there is no single solution that satisfies all of the above principles simultaneously. Any real‑world solution is necessarily a compromise among conflicting objectives." (As read)
1LISTNUM 1 \l 15493 You will agree with me that's the challenge the Commission faces in this area. Correct?
1LISTNUM 1 \l 15494 DR. ARON: It is, yes.
1LISTNUM 1 \l 15495 MR. KOCH: Okay. There's no perfect solution.
1LISTNUM 1 \l 15496 DR. ARON: Not in the real world, no.
1LISTNUM 1 \l 15497 MR. KOCH: No, not in the real world, exactly.
1LISTNUM 1 \l 15498 Now, you are aware that the Commission employs Phase II costs, plus a 15 percent mark up for essential facilities or others that it considers to be near essential or in the nature of an essential facility?
1LISTNUM 1 \l 15499 DR. ARON: Yes.
1LISTNUM 1 \l 15500 MR. KOCH: Okay. And you understand that these Phase II costs are long‑run incremental costs?
1LISTNUM 1 \l 15501 DR. ARON: They are intended to be, yes.
1LISTNUM 1 \l 15502 MR. KOCH: You dispute that they are?
1LISTNUM 1 \l 15503 DR. ARON: It's not my evidence that they are or are not. As a matter of principle, they are intended to be.
1LISTNUM 1 \l 15504 MR. KOCH: Okay. And you understand that the CRTC marks up these costs by 15 percent to reflect a measure of fixed and common costs. Correct?
1LISTNUM 1 \l 15505 DR. ARON: And also perhaps to recover some residual or embedded differential.
1LISTNUM 1 \l 15506 MR. KOCH: Okay. Now, are you familiar with Dr. Taylor, the economist from NERA, who testified on behalf of the Bell Group of ILECs at this hearing?
1LISTNUM 1 \l 15507 DR. ARON: Yes.
1LISTNUM 1 \l 15508 MR. KOCH: You are, okay. Are you familiar with his specific evidence in this hearing?
1LISTNUM 1 \l 15509 DR. ARON: I'm generally familiar with his evidence, yes.
1LISTNUM 1 \l 15510 MR. KOCH: Okay. Do you agree with Dr. Taylor that the CRTC's Phase II costs are similar to TELRIC, the standard used by the FCC, in that they are forward‑looking, but, in fact, may be more generous to the incumbents in that they are not based on a purely hypothetical model but rather on the incumbent's costs?
1LISTNUM 1 \l 15511 DR. ARON: Well, I would disagree with your characterization of his evidence insofar as I don't think he said that the Phase II methodology is more generous to the incumbents, but rather that I think he said, and what I think, is that the principles articulated with respect to Phase II are probably fairly read to be less hypothetical than TELRIC; however, I would also agree with Dr. Taylor in saying that the effect of it in either case depends on how the principles are applied in practice.
1LISTNUM 1 \l 15512 MR. KOCH: Now, you are also aware that in respect of mandated facilities, what we call here Category 2 facilities, that are not considered essential, near essential or in the nature of essential, the CRTC charges Phase II costs plus a mark up, but the mark up in that case may be much, much larger than the 15 percent. Do you understand that?
1LISTNUM 1 \l 15513 DR. ARON: That's my understanding, it maybe different from the 15 percent.
1LISTNUM 1 \l 15514 MR. KOCH: Okay. It may be or are you aware that it is consistently higher?
1LISTNUM 1 \l 15515 DR. ARON: I haven't done a study of whether it's consistently higher. I have seen in the record reference to examples in which it's higher.
1LISTNUM 1 \l 15516 MR. KOCH: Okay. Are you aware of how much higher it is?
1LISTNUM 1 \l 15517 DR. ARON: For specific services, no.
1LISTNUM 1 \l 15518 MR. KOCH: Okay. What is the highest mark up that you are aware of that the Commission has approved?
1LISTNUM 1 \l 15519 DR. ARON: I don't think I can recall that from memory of the record.
1LISTNUM 1 \l 15520 MR. KOCH: Okay. Is it fair to say it's a little bit all over the map?
1LISTNUM 1 \l 15521 DR. ARON: Well, that's the way it's been characterized, but, as I said, I haven't studied it.
1LISTNUM 1 \l 15522 MR. KOCH: Okay. So you have not studied the way the Commission prices mandated non‑essential facilities. Is that your evidence?
1LISTNUM 1 \l 15523 DR. ARON: Not beyond the understanding that I have, that it's Phase II plus a mark up.
1LISTNUM 1 \l 15524 MR. KOCH: A mark up. So you are not able to assist the Commission, are you, as to how its current practice maps onto the principles you have cited or other costing approaches, are you?
1LISTNUM 1 \l 15525 DR. ARON: Well, my understanding of the Category 2 services is that these are not considered to be essential or near essential, so the economic principles that would reasonably apply to those would be that the prices ought to be determined by the market.
1LISTNUM 1 \l 15526 MR. KOCH: But they are not determined by the market, correct, they are determined by the Commission?
1LISTNUM 1 \l 15527 DR. ARON: They are today, yes ‑‑
1LISTNUM 1 \l 15528 MR. KOCH: Okay.
1LISTNUM 1 \l 15529 DR. ARON: ‑‑ but if one is to assess the principles that ought to apply going forward to services that make no claim to be essential, or even near essential, the proper principles would be that those prices should be determined by the market.
1LISTNUM 1 \l 15530 MR. KOCH: Okay. So you can't help us, though, as to how the Commission's current approach with respect to facilities that it mandates but are not considered essential meets the principles or does not meet the principles. Correct?
1LISTNUM 1 \l 15531 DR. ARON: To the extent that the pricing is not permitted to vary according to market forces, then the current approach would not comport with the principle that I just articulated.
1LISTNUM 1 \l 15532 MR. KOCH: Now, in your report, you don't discuss the definition of an "essential facility" in detail, other than sort of characterizing it for the purpose of your analysis.
1LISTNUM 1 \l 15533 I wonder if you could ‑‑ maybe we could first go to another part of your report. Forgive me.
1LISTNUM 1 \l 15534 Could I ask you to turn up page 24 of your report.
1LISTNUM 1 \l 15535 DR. ARON: Sure, I'm there.
1LISTNUM 1 \l 15536 MR. KOCH: You indicate here:
"The process for determining the price of an essential facility should discourage regulatory rent‑seeking behaviour."
1LISTNUM 1 \l 15537 And you say in paragraph 59:
"Rent seeking occurs when companies devote resources and investment to winning profits by the regulatory process rather than through the marketplace."
1LISTNUM 1 \l 15538 Then in paragraph 60 you say:
"Rent‑seeking behaviour is encouraged when the pricing methodology is more subjective and complex. The greater the discretion of regulators in setting prices and the more difficult it is to validate the resulting prices against objective benchmarks, the greater the incentive of all industry participants to seek to affect the prices by influencing regulators in their favour. All else the same, and recognizing that there are both trade‑offs and practical considerations, a pricing methodology that is transparent, simple, understandable and verifiable or testable against outside objective standards is less likely to encourage regulatory gainsmanship than would pricing methodologies that provide greater room for regulatory discretion."
1LISTNUM 1 \l 15539 Would you not agree with me that allowing for the incumbents to argue for a variety of mark‑ups in the regulatory process in respect of different services provides just the type of room for regulatory discretion that you caution against in this paragraph?
1LISTNUM 1 \l 15540 DR. ARON: What I was referring to in this paragraph really is the problem that the FCC has recognized now with respect to its TELRIC methodology, which is that the more hypothetical a cost methodology is, the more opportunities there are to exercise discretion and the less rigorous tie there is to objective facts like the books of record, books of account.
1LISTNUM 1 \l 15541 So really what I'm saying in this paragraph is that one would be well served in defining a cost methodology that is tied to objective standards such as actual network configuration, actual anticipated forward looking costs rather than hypothetical measures of costs.
1LISTNUM 1 \l 15542 That is really what this is getting at.
1LISTNUM 1 \l 15543 MR. KOCH: But what you are talking about is discretion here. Correct?
1LISTNUM 1 \l 15544 So the points you make apply generally to a situation where a regulatory is exercising discretion. Correct?
1LISTNUM 1 \l 15545 DR. ARON: Regulators indeed exercise discretion and have to in the course of doing their job.
1LISTNUM 1 \l 15546 MR. KOCH: Right.
1LISTNUM 1 \l 15547 DR. ARON: But we are well served in designing regulatory mechanisms and regulators I think are well served in designing methodologies that limit discretion so as to limit the opportunities for rent‑seeking behaviour.
1LISTNUM 1 \l 15548 MR. KOCH: Thank you.
1LISTNUM 1 \l 15549 Going now to the definition of an essential facility, I would ask you to turn to paragraph 11 of your report, please.
1LISTNUM 1 \l 15550 In paragraph 11 you indicate that you will not discuss in any detail or depth the economic definition, but you note that:
"... for a facility to be essential, it must be the case that no reasonably efficient competitor could replicate or bypass the facility or its functionality through its own investment and expect to recover its costs of doing so. That is, for a facility to be essential, there must be no viable business case by which a competitor could produce a reasonable substitute."
1LISTNUM 1 \l 15551 When you speak to viable business case, you would agree with me what we are talking about as a viable case for producing a substitute refers to whether the demand a competitor is facing for a particular facility is likely to be sufficient to justify the costs of construction. Correct?
1LISTNUM 1 \l 15552 That's what a business case is about. It's comparing the prospective returns against the costs.
1LISTNUM 1 \l 15553 DR. ARON: Yes. I would refer any detailed discussion of the definition to Dr. Weisman. I did not intend here to craft my language to be the ultimate definition of essentiality.
1LISTNUM 1 \l 15554 But as a general matter, yes, that's what I mean.
1LISTNUM 1 \l 15555 MR. KOCH: And I'm just speaking as a general matter. I'm not into very technical definitions, unlike some other people in the room.
1LISTNUM 1 \l 15556 In your report you refer to a competitor building its own facility as bypass. That's just your short form for that notion when you are looking at alternatives to an essential facility. Correct?
1LISTNUM 1 \l 15557 DR. ARON: Yes.
1LISTNUM 1 \l 15558 MR. KOCH: If the demand a competitor faces is insufficient to justify the costs of construction, it will not build. Correct?
1LISTNUM 1 \l 15559 DR. ARON: Yes, that's right.
1LISTNUM 1 \l 15560 MR. KOCH: Likewise, in a situation where it is potentially leasing the facility from an incumbent or someone else, a competitor has to again compare the demand it is facing ‑‑ in other words, the potential payback ‑‑ with the cost of obtaining the facility. Correct?
1LISTNUM 1 \l 15561 DR. ARON: Yes.
1LISTNUM 1 \l 15562 MR. KOCH: If the price set by the incumbent or the regulator for that facility is too high, the competitor will not purchase it where the demand does not justify that purchase. Correct?
1LISTNUM 1 \l 15563 The demand for its services doesn't justify the expenditure that it is being asked to make or required to make. Correct?
1LISTNUM 1 \l 15564 DR. ARON: If the price is too high in the sense that that is true?
1LISTNUM 1 \l 15565 MR. KOCH: That there is no viable business case. If the price is too high, such that the expected demand for the competitor services doesn't outweigh the cost, the price that it is being charged for that, then similarly just as it won't build in that scenario, it won't purchase the input in that scenario. Correct?
1LISTNUM 1 \l 15566 DR. ARON: If the price of leasing the essential facility ‑‑
1LISTNUM 1 \l 15567 MR. KOCH: Correct.
1LISTNUM 1 \l 15568 DR. ARON: Yes.
1LISTNUM 1 \l 15569 MR. KOCH: A high price being charged for the incumbent's facility in this example will not change the business case for a competitor's construction of the facility either, will it?
1LISTNUM 1 \l 15570 DR. ARON: No, that's not true.
1LISTNUM 1 \l 15571 MR. KOCH: Well, if the price to lease is too high, this does not change the cost of construction, does it?
1LISTNUM 1 \l 15572 DR. ARON: It doesn't change the cost of construction, but it changes the economic environment in which the potential entrant is considering construction and is going to the capital market to obtain financing for it.
1LISTNUM 1 \l 15573 MR. KOCH: But if the price is too high for it to lease and the price is still too high for it to construct, the fact that the lease price is high doesn't change the cost of construction. Correct?
1LISTNUM 1 \l 15574 DR. ARON: Well, you are referring to two different prices.
1LISTNUM 1 \l 15575 MR. KOCH: That's right.
1LISTNUM 1 \l 15576 DR. ARON: Okay. So looking at them one at a time, if the lease price is, as you characterized it, too high to support a viable business case for a particular entrant for entering using the essential facility, or using the unbundled element really we should say, since we are talking about the potential for bypass, that affects the economic environment in which an alternative provider might choose to invest in that facility.
1LISTNUM 1 \l 15577 This really goes to the very heart of the trade‑off that the Commission faces in establishing prices.
1LISTNUM 1 \l 15578 What I talked about in my evidence is that there are two kinds of entry. There is entry from a competitor seeking to use the unbundled element, and one wants to establish prices that induce efficient entry from such potential entrants. But there is also entry by companies who seek to bypass or may seek to bypass through its own investment and construction, and one also wants to establish prices for the unbundled elements that induce efficient investment and bypass.
1LISTNUM 1 \l 15579 Those are conflicting objectives in the sense that if you set the price too high for leasing the facility, that will, as you have described, discourage companies from entering using that facility. And you might say if it is too high, it would unduly discourage that.
1LISTNUM 1 \l 15580 But it would encourage investment in alternative facilities because it improves the business case for doing so. You don't have to compete against others who can use the incumbent's facility at too low a price.
1LISTNUM 1 \l 15581 So it encourages alternative investment and it encourages investment in the incumbent's own facilities by the incumbent.
1LISTNUM 1 \l 15582 If the price is too low, that would inefficiently discourage entry using the incumbent's facilities, but it would also ‑‑ if the price is too low ‑‑ I want to make sure I say this right ‑‑ that would artificially ‑‑
1LISTNUM 1 \l 15583 MR. KOCH: I was going to finish my questions right there.
1LISTNUM 1 \l 15584 DR. ARON: Well, let me just finish the trade‑offs, if I may do so.
1LISTNUM 1 \l 15585 That would artificially encourage entry using the incumbent's facility, but it would discourage investment in alternative facilities.
1LISTNUM 1 \l 15586 So the trade‑off that one faces: One tries to set the price right, but the risks from a social policy perspective of getting the price too high or too low are asymmetric for the reasons that you have been asking me about, which is if you set the price too low, you encourage the kind of competition that doesn't really generate the benefits for society that I think the government's policy direction wants to establish. And if you set it too high, you overly encourage alternative investment. But encouraging investment I think is explicitly part of the government's policy direction.
1LISTNUM 1 \l 15587 So yes, there are inefficiencies from setting the price too low or too high, but they are not symmetric risks.
1LISTNUM 1 \l 15588 MR. KOCH: Okay. So you say they are asymmetric but I was really just trying to focus on this issue.
1LISTNUM 1 \l 15589 If the price is too high to make the business case for leasing, that does not cure the fact in my specific example where the cost of construction is too high in order to construct; correct? The one doesn't cure the other?
1LISTNUM 1 \l 15590 DR. ARON: Well, taking aside the option to lease and putting that aside and just looking at the construction decision ‑‑
1LISTNUM 1 \l 15591 MR. KOCH: Yes.
1LISTNUM 1 \l 15592 DR. ARON: ‑‑ if the retail price is too low to accommodate alternative investment and undermines the business case of alternative providers to invest, that indeed will discourage investment.
1LISTNUM 1 \l 15593 I think one does have to be careful when one looks at the marketplace to see what alternative investment is out there, whether in areas where one doesn't see alternative investment, is that because there is legitimately not a viable business case or is that because retail rates have been constrained to be unduly low for other public policy reasons and that creates kind of a false inference about whether what we are seeing is the lack of a reasonable business case or artificially constrained opportunities for investment?
1LISTNUM 1 \l 15594 MR. KOCH: We are really going quite far afield of my questions, Dr. Aron, and I am conscious of the fact that we have to move through these, so I would like to move through them a little more crisply if we could.
1LISTNUM 1 \l 15595 But in my example, the fact that I am an entrant facing a high price for leasing, if the cost of construction isn't justified by the potential demand, that high cost of leasing, if it is too high, doesn't change the facts about the cost of construction and the demand for my retail service; correct? I would like a yes or not to that.
1LISTNUM 1 \l 15596 DR. ARON: Yes, I think that is true subject to the caveats about the retail price and the role of it that I just mentioned.
1LISTNUM 1 \l 15597 MR. KOCH: Okay, thank you.
1LISTNUM 1 \l 15598 And in fact, as you say in your report, in certain circumstances an incumbent's high price may actually send the wrong signals and encourage inefficient entry; correct?
1LISTNUM 1 \l 15599 DR. ARON: Now, we are talking about the price of the unbundled network element?
1LISTNUM 1 \l 15600 MR. KOCH: That is correct.
1LISTNUM 1 \l 15601 Is that correct, yes or no, that too high a price may encourage inefficient entry by sending the wrong signal to someone that it makes sense to build; correct?
1LISTNUM 1 \l 15602 DR. ARON: Yes ‑‑
1LISTNUM 1 \l 15603 MR. KOCH: Okay.
1LISTNUM 1 \l 15604 DR. ARON: ‑‑ although as I explained in my evidence, to the extent that there are opportunities for alternative build, there is an incentive for the incumbent to lower that price.
1LISTNUM 1 \l 15605 MR. KOCH: Okay. Let's talk about that.
1LISTNUM 1 \l 15606 That is what you talk about when you say there is an asymmetrical risk to prices that are too low or prices that are too high for the unbundled element; correct?
1LISTNUM 1 \l 15607 DR. ARON: That is one of the sources of asymmetry, yes.
1LISTNUM 1 \l 15608 MR. KOCH: Okay.
1LISTNUM 1 \l 15609 DR. ARON: The other one is the one I just talked about.
1LISTNUM 1 \l 15610 MR. KOCH: Okay. And what you say ‑‑ you make the point that you are of the view there is a self‑correcting mechanism in the case of high prices as the incumbent will have an incentive to lower prices if no one is buying the facility at a price that is set too high; correct?
1LISTNUM 1 \l 15611 DR. ARON: Well, what I said is if the incumbent has downward pricing flexibility for the unbundled facility, then the incumbent has an incentive to decrease that price to the extent that it is feasible to build alternatives.
1LISTNUM 1 \l 15612 MR. KOCH: Okay. But to the extent that it is not feasible to build alternatives, there will be no such incentive on the incumbent to lower the price; correct?
1LISTNUM 1 \l 15613 DR. ARON: That is right and what I am explaining there is that from a social policy perspective when you want that price to be decreased is in those circumstances where there are alternatives. That is when it is efficient to decrease that price.
1LISTNUM 1 \l 15614 MR. KOCH: But the point being where there are no alternatives, there is no self‑correcting mechanism; is there?
1LISTNUM 1 \l 15615 Where there is no viable business case for building an alternative, there is no self‑correcting mechanism of too high a price; is that not correct, Dr. Aron?
1LISTNUM 1 \l 15616 DR. ARON: That is right.
1LISTNUM 1 \l 15617 MR. KOCH: Okay.
1LISTNUM 1 \l 15618 DR. ARON: And what I am explaining there is that the social welfare effects of that price being too high or not is significant for the reasons that I discuss in my evidence about the whole logic underlying Ramsey prices.
1LISTNUM 1 \l 15619 MR. KOCH: Okay.
1LISTNUM 1 \l 15620 Now, one of the alternatives you discuss in your report ‑‑ and I don't know that you are recommending it to the Commission ‑‑ is the ECPR approach; is that correct?
1LISTNUM 1 \l 15621 DR. ARON: Yes, I discuss it.
1LISTNUM 1 \l 15622 MR. KOCH: Okay. And the theory of the ECPR is that the incumbent receives the entire contribution towards shared and common costs that it would otherwise have received from selling the retail service by selling the input to a competitor instead; correct?
1LISTNUM 1 \l 15623 DR. ARON: Correct, that is roughly it.
1LISTNUM 1 \l 15624 MR. KOCH: In other words, it is only in that state where the incumbent is truly indifferent as to whether it is going to sell in the wholesale market or the retail market is the point at which it receives as much profit from the wholesale market as from the retail market; correct?
1LISTNUM 1 \l 15625 DR. ARON: That is the theory, yes.
1LISTNUM 1 \l 15626 MR. KOCH: Okay.
1LISTNUM 1 \l 15627 THE CHAIRPERSON: Where is the wholesale market in that case? If you sell everything at retail prices, you don't really have a wholesale market anymore.
1LISTNUM 1 \l 15628 MR. KOCH: No, the point, sir, is that the ‑‑ the theory is that you mark up the wholesale price so that you recover all of the profit you would have made at the retail level.
1LISTNUM 1 \l 15629 THE CHAIRPERSON: I understand that but I mean ‑‑ okay.
1LISTNUM 1 \l 15630 MR. KOCH: There will be no wholesale.
1LISTNUM 1 \l 15631 THE CHAIRPERSON: Exactly.
1LISTNUM 1 \l 15632 MR. KOCH: Well, that is the point of the question, sir.
1LISTNUM 1 \l 15633 No regulator has ever accepted the ECPR, correct?
1LISTNUM 1 \l 15634 DR. ARON: That is correct.
1LISTNUM 1 \l 15635 MR. KOCH: You state in your report ‑‑
1LISTNUM 1 \l 15636 DR. ARON: To my knowledge, at least in the U.S.
1LISTNUM 1 \l 15637 MR. KOCH: Right.
1LISTNUM 1 \l 15638 DR. ARON: I think that there has been some acceptance internationally.
1LISTNUM 1 \l 15639 MR. KOCH: Yes. The FCC rejected it and no State Commission has adopted it; correct?
1LISTNUM 1 \l 15640 DR. ARON: No, not to my knowledge.
1LISTNUM 1 \l 15641 MR. KOCH: Okay. And the U.S. Supreme Court in the Verizon case ‑‑ I wonder if you could turn that up. This will be my last ‑‑
1LISTNUM 1 \l 15642 DR. ARON: I have it.
1LISTNUM 1 \l 15643 MR. KOCH: Okay. You are well familiar with this case, I expect?
1LISTNUM 1 \l 15644 DR. ARON: I am.
1LISTNUM 1 \l 15645 MR. KOCH: Okay. And the U.S. Supreme Court ‑‑ this was the case where Verizon had challenged the FCC's use of TELRIC; correct?
1LISTNUM 1 \l 15646 DR. ARON: Right.
1LISTNUM 1 \l 15647 MR. KOCH: For unbundled elements; correct?
1LISTNUM 1 \l 15648 DR. ARON: Yes.
1LISTNUM 1 \l 15649 MR. KOCH: Okay. And the U.S. Supreme Court rejected the ECPR approach as well; correct?
1LISTNUM 1 \l 15650 DR. ARON: I mean where do you want to point me to in here?
1LISTNUM 1 \l 15651 MR. KOCH: Well, I don't have a ‑‑ I would have thought that was uncontroversial, Dr. Aron. I guess we can all review this for ourselves.
1LISTNUM 1 \l 15652 Is it not your recollection that they rejected that as a better alternative to TELRIC?
1LISTNUM 1 \l 15653 DR. ARON: The Supreme Court in this decision was not in a position of deciding what pricing policy to establish but rather was evaluating whether TELRIC as a principle was an abuse of the FCC's discretion.
1LISTNUM 1 \l 15654 MR. KOCH: Right. And it determined that it was not; correct?
1LISTNUM 1 \l 15655 DR. ARON: That is right.
1LISTNUM 1 \l 15656 MR. KOCH: Okay. And if I could take you to page 16 of the judgment. Do you see the paragraph under Note 20, the bottom right‑hand corner?
1LISTNUM 1 \l 15657 DR. ARON: Yes.
1LISTNUM 1 \l 15658 MR. KOCH: There is a reference to Justice Breyer. Justice Breyer was in the dissent in this decision; correct?
1LISTNUM 1 \l 15659 DR. ARON: He was.
1LISTNUM 1 \l 15660 MR. KOCH: Okay. But even on Justice Breyer's own terms:
"FCC rules stressing low wholesale prices are by no means inconsistent with the deregulatory and competitive purposes of the Act. As we discuss below, a policy promoting lower lease prices for expensive facilities unlikely to be duplicated reduces barriers to entry, particularly for smaller competitors, and puts competitors that can afford these wholesale prices but not the higher prices the incumbents would like to charge in a position to build their own versions of less expensive facilities that are sensibly duplicable." (As read)
1LISTNUM 1 \l 15661 That is the court's comment on the same topic that I was debating with Dr. Wiseman; correct?
1LISTNUM 1 \l 15662 DR. ARON: I don't know that that was a comment about ECPR, if that is what you ‑‑
1LISTNUM 1 \l 15663 MR. KOCH: No, it is a comment about TELRIC; correct?
1LISTNUM 1 \l 15664 DR. ARON: Well, if you look at the conclusions in this opinion, what the court says is:
"Whether the FCC picked the best way to set these rates is the stuff of debate for economists and regulators first in the technology of telecommunications and microeconomic pricing theory. The job of judges is to ask whether the Commission made choices reasonably within the pale of statutory possibility in deciding what and how items must be leased and the way to set rates for leasing them. The FCC's pricing an additional combination will survive that scrutiny. The FCC has since..." (As read)
1LISTNUM 1 \l 15665 MR. KOCH: I would like to stay with Verizon, the Verizon decision, because I am asking you questions about that, Dr. Aron.
1LISTNUM 1 \l 15666 DR. ARON: All right.
1LISTNUM 1 \l 15667 MR. KOCH: Along the way, the court made a number of comments such as the one I read out which suggested that TELRIC was by no means inconsistent with the deregulatory and competitive purposes of the Act and spoke to in fact the effects of what it accepted were the effects of the TELRIC prices.
1LISTNUM 1 \l 15668 I would like to take you to page 20 and Note 27 on this page:
"Justice Breyer may be right that firms that share existing facilities do not compete in respect to the facilities that they share but this is fully consistent with the FCC's point that entrants may need to share some facilities that are very expensive to duplicate, say, loop elements, in order to be able to compete in other more sensibly duplicable elements, say, digital switches or signal multiplexing technology. In other words, Justice Breyer made no accommodation for the practical difficulty the FCC faced that competition as to unshared elements may in many cases only be possible if incumbents simultaneously share with entrants some costly to duplicate elements jointly necessary to provide a desired telecommunication service. Such is the reality faced by the hundreds of smaller entrants seeking to gain toeholds in local exchange markets." (As read)
1LISTNUM 1 \l 15669 So the FCC clearly felt ‑‑ sorry, the Supreme Court of the U.S. clearly felt that TELRIC was consistent with promoting that type of investment; correct?
1LISTNUM 1 \l 15670 DR. ARON: Well, it was ‑‑ the Supreme Court says what it says here, that they felt that TELRIC was consistent with what was understood to be the avenues for competition at the time, in early 2000, 2001, I believe. This was argued and decided in 2002.
1LISTNUM 1 \l 15671 MR. KOCH: Those are my questions, Mr. Chairman, thank you.
1LISTNUM 1 \l 15672 THE CHAIRPERSON: Do you have a question? Go ahead, Commissioner Cram.
1LISTNUM 1 \l 15673 COMMISSIONER CRAM: Theory is something that I think is very interesting, but we have to sort of get real on a few things.
1LISTNUM 1 \l 15674 When you are talking, Dr. Aron, about investment and discouraging investment, it seems to me that there isn't just the simple economic if the price is too high or if the price is too low. There is also, especially I think in telecom, the need for reliability, redundancy and control of quality of service, which means control of your network and we can't put a number on that.
1LISTNUM 1 \l 15675 Like, to me, if I had a choice between something that cost me $6 and something that cost me $6.25, but I had control over it, I would go for door number two, wouldn't I?
1LISTNUM 1 \l 15676 DR. ARON: Yes, I think that there is a value to reliability. That is why companies make contracts that involve commitments in them. It is also, I think, why there is a social welfare impetus towards development of alternative networks, because it does permit the company to control the quality of its service and provides redundancy for society of alternative networks.
1LISTNUM 1 \l 15677 COMMISSIONER CRAM: And we heard before you came on, your panel, we heard about a building of a submarine cable that was in fact duplicative and was an uneconomic deployment of resources. I have to say, there has to be a line here between incenting investment and having people throw away, I am not saying throw away, but it was a big build, an $82 million build when it was not an issue of the capacity being necessary.
1LISTNUM 1 \l 15678 Like, how do we deal with that? Because I don't want to have a double network all across Canada. So again, it is a factor of price, is that it?
1LISTNUM 1 \l 15679 DR. ARON: Well, I think that in the end it is the decision of companies and their investors, whether they want to take a risk to make an investment that will have the potential for providing a return or not. And in a market economy, that is what companies do, they assess the prospects and look at the pricing signals and make decisions about investment. And I don't think that is a decision that the Commission can make for companies, but rather has to establish an economic environment in which companies and investors in the capital market can make a decision about whether the risk is worth taking.
1LISTNUM 1 \l 15680 COMMISSIONER CRAM: So then at the end of the day the incumbent reduces their prices by 20 per cent for that cable and that may force down the cost that the new people with the cable have and we may have stranded investment?
1LISTNUM 1 \l 15681 DR. ARON: The dynamic you describe is one that is potential in any industry in which companies make investments across the economy. And, you know, in our economy companies assess those risks, make those investments and we enjoy the benefits of the investment and the innovation associated with them.
1LISTNUM 1 \l 15682 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 15683 THE CHAIRPERSON: Dr. Weisman, I have been looking at these little diagrams of yours and studying them. And efficiency is something that I am only painfully familiar with from days as Commissioner of Competition. But all of this, the bias that you have for dynamic efficiency over static efficiency, isn't that based from the fact that you can never get the pricing right? That the pricing on shared services will never be really fully compensatory and that is why you have this difference in pricing? I mean, if you get the pricing right, wouldn't all of this become irrelevant?
1LISTNUM 1 \l 15684 DR. WEISMAN: No, Mr. Chairman. The idea behind that is if we had, in this example, broad unbundling we may induce more competitors into the market and they would put downward pressure on price. Looking at that in isolation, that is good for consumers, they get lower prices for the products and services that they buy.
1LISTNUM 1 \l 15685 The trade‑off here is that, to the extent that sharing that drove those prices down causes investment to be curtailed, you may get less innovation over time, which shifts the demand curve back. So this is this trade‑off between consumers benefit from lower prices today but perhaps at the cost of foregone innovation tomorrow. And in the economics literature, it is generally those dynamic efficiencies that dominate those static efficiencies.
1LISTNUM 1 \l 15686 THE CHAIRPERSON: I understand that, but why would the prices necessarily go down? I mean, these are mandated prices. If we get the pricing principle right and we make sure that the person that provides the wholesale does get back the same type of return that he would if he used it for his own, then it shouldn't cause any negative effect.
1LISTNUM 1 \l 15687 DR. WEISMAN: And it may not. And in the example that I created I assume there was some effect, I said it may cause prices to rise, in fact, indeed not. And as the point I made in my testimony, given that regulation is an additional instrument that the Commission has, regulation can keep prices at a certain level if there is a market failure and, in my opinion, without forgoing that investment that comes from broad‑scale unbundling.
1LISTNUM 1 \l 15688 THE CHAIRPERSON: And I don't know whether you or any one of your colleagues ‑‑ we have heard a lot of evidence here that the real competition is at the application level, not the wholesale level. And the wholesale level is really just the entry to get into that market. And therefore, this is sort a price that has to borne in order to, you know, if you mandate the wholesale access I order to get the competition at the application level where the real action is, then it therefore provides generally a benefit to society.
1LISTNUM 1 \l 15689 As an economist in looking at it and having studied this, what is your attitude? Is this just balderdash, is it just pipe dreaming or is there some economic rationale behind it?
1LISTNUM 1 \l 15690 DR. CRANDALL: I would like to answer that. I think that it is entirely wrong. That, I believe, is the perspective I heard advanced by Dale Hatfield, who is an engineer. But it seems to me, for instance, the idea that you are going to get innovation in mobile telephony off the fixed network, that is absurd. Someone had to build the new wireless network and, with the architecture of that wireless network, it was very important.
1LISTNUM 1 \l 15691 If you are going to deliver extremely hi‑speed real‑time videos, you are not going to do it probably over the copper network, especially if you are going to do lots of high definition. You have got to build the underlying network structure. And we are still watching developments as to whether fibre will dominate, whether there will be some sort of fixed wireless.
1LISTNUM 1 \l 15692 I think an awful lot of the innovation requires changes in the underlying networks and the innovation in there, not just in the applications. The applications may drive the investment in the underlying network, but I think it would be a mistake to say that we have an imbedded network now of ducts and copper wires and we will just let it go and all the actions in the applications. I think that is entirely incorrect.
1LISTNUM 1 \l 15693 DR. WEISMAN: Could I just follow‑up with a couple of points?
1LISTNUM 1 \l 15694 First one, the Bureau cites a study by Tom Hazlett and he looked at, for example, what happened to share prices of equipment manufacturers when the FCC announced that it was going to repeal UNE‑P, the broad unbundled network element platform. And the equipment manufacturer share prices rose on that news, suggesting that there would now be stronger incentives for investment in networks.
1LISTNUM 1 \l 15695 And I just want to clear up a confusion. I have been sitting here for about, well the vast majority of two weeks, and there is this presumption that if it is not mandated to be essential it won't be provided.
1LISTNUM 1 \l 15696 And Professor Church addressed this in point and he said that, to the extent that new applications come forward and the ILEC is not in at retail market, it would be irrational for them not to provide access, because they could sell more utilization on their network. So there is mandated access and there is access that will be provided if the incentives are right and there is sufficient value added, so it is not a 0‑1 binary game here. And I think that sometimes that has been lost in the discussion.
1LISTNUM 1 \l 15697 THE CHAIRPERSON: Okay, you are finished Mr. Koch?
1LISTNUM 1 \l 15698 MR. KOCH: I am, thank you.
1LISTNUM 1 \l 15699 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 15700 Madam Secretary, who is next?
1LISTNUM 1 \l 15701 THE SECRETARY: Thank you. I just want to confirm first that Counsel Milton will not cross‑examine you.
1LISTNUM 1 \l 15702 The next panel is Primus and Globility Communications.
1LISTNUM 1 \l 15703 MR. McCALLUM: Mr. Chair, while the cross‑examining party is getting set, I just wanted to inform you the Commission has received a letter from the Competition Bureau asking for I guess a change in some of the dates for final argument. And they note that they have copied ‑‑ well, I think they made the copy available electronically, and they note that they have discussed the proposal informally with several parties.
1LISTNUM 1 \l 15704 I wonder, Mr. Chair, if any parties have any comment on the request made by the Competition Bureau, if they could provide their comments by the end of the day today so that we can dispose of that in the near future.
1LISTNUM 1 \l 15705 MR. ABUGOV: Mr. McCallum, thank you very much, Mr. Chairman, panel members.
1LISTNUM 1 \l 15706 I wanted to add that in addition to filing the copies electronically this morning with all parties and with the Commission, we have also provided a number of copies to the Secretary as well. And we have an additional 30 copies that we would be prepared to provide at the back of the room. And obviously, if there are any questions, we are prepared to respond to them.
1LISTNUM 1 \l 15707 We thought it would be useful for the Bureau to put forward a proposal for amendments to the written schedule for argument and that is why we have gone ahead and done so.
1LISTNUM 1 \l 15708 THE CHAIRPERSON: May I suggest that counsel get together and try to work this out and, if need be, bring it to me for a ruling, okay?
1LISTNUM 1 \l 15709 Mr. Ruby, I am sorry I didn't look at the clock. I assume you are longer than 10 minutes?
1LISTNUM 1 \l 15710 MR. RUBY: Not a lot longer, but I am content to do it after lunch.
1LISTNUM 1 \l 15711 THE CHAIRPERSON: Yes, well then let us do it after lunch.
1LISTNUM 1 \l 15712 So let us resume at about 1:15.
1LISTNUM 1 \l 15713 Thank you.
‑‑‑ Recessed at 1148 / Suspension à 1148
‑‑‑ Resumed at 1316 / Reprise à 1316
1LISTNUM 1 \l 15714 THE SECRETARY: Please be seated.
1LISTNUM 1 \l 15715 THE CHAIRPERSON: Okay, Mr. Ruby, it was your turn.
1LISTNUM 1 \l 15716 MR. RUBY: Thank you, Mr. Chairman. As I said before, I won't be long.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 15717 MR. RUBY: Dr. Crandall, I noticed that in your report ‑‑ this is Appendix C to TELUS's July evidence ‑‑
1LISTNUM 1 \l 15718 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15719 MR. RUBY: ‑‑ I noticed that you have addressed prices over the last decade or so. Right?
1LISTNUM 1 \l 15720 MR. CRANDALL: Addressed prices? I mean, I had a chart in there of Bureau of Labour Statistics consumer price indexes, yes.
1LISTNUM 1 \l 15721 MR. RUBY: Right. And we went over this with Mr. Koch, right?
1LISTNUM 1 \l 15722 MR. CRANDALL: Yes, yes.
1LISTNUM 1 \l 15723 MR. RUBY: Okay. I take it you are also familiar with telecom costs during that same period?
1LISTNUM 1 \l 15724 MR. CRANDALL: Yes, I suppose.
1LISTNUM 1 \l 15725 MR. RUBY: Well, let's try it the easy way. I take it it's uncontroversial that telecom is a capital‑intensive business, in part because of all the equipment that's needed to provide the services. Right?
1LISTNUM 1 \l 15726 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15727 MR. RUBY: Okay. And wireline equipment costs have fallen over the last decade?
1LISTNUM 1 \l 15728 MR. CRANDALL: To provide the same functionality, yes.
1LISTNUM 1 \l 15729 MR. RUBY: Okay. Is it fair to say they have fallen drastically?
1LISTNUM 1 \l 15730 MR. CRANDALL: They have fallen fairly rapidly, yes.
1LISTNUM 1 \l 15731 MR. RUBY: Okay. Can you turn up that report again, you may have it in front of you, this is your report, and if you can take a look at that same Figure 1, on page 8, that we were looking at earlier with Mr. Koch?
‑‑‑ Pause
1LISTNUM 1 \l 15732 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15733 MR. RUBY: Right. And this is the chart you point at to say that real consumer telephone prices have been falling?
1LISTNUM 1 \l 15734 MR. CRANDALL: Yes. Yes.
1LISTNUM 1 \l 15735 MR. RUBY: Okay. And just reading this, the top line on this graph ‑‑ and like Mr. Koch I'm hesitant to look at a graph with an economist, but I will take a stab ‑‑ the top line is the local wireline service. Right?
1LISTNUM 1 \l 15736 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15737 MR. RUBY: And it looks to me like, from 2003 to the end of the chart in 2006, it's barely decreased.
1LISTNUM 1 \l 15738 Now, I don't have the benefit of the underlying data, but that's an accurate reflection of the data, right ‑‑
1LISTNUM 1 \l 15739 MR. CRANDALL: Yes, it hasn't decreased all that much, you are right.
1LISTNUM 1 \l 15740 MR. RUBY: Okay. And from 1996 overall it's increased just a touch. Is that fair?
1LISTNUM 1 \l 15741 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15742 MR. RUBY: Now, I have to admit I'm a bit surprised by this because, given the falling equipment costs to telecom providers, I would have thought that we should see the real price falling over time, over this same period.
1LISTNUM 1 \l 15743 Am I just reading this wrong or...?
1LISTNUM 1 \l 15744 MR. CRANDALL: No, you are not reading it wrong, but you are failing to understand what's going on, in terms of rebalancing of rates.
1LISTNUM 1 \l 15745 I mean, what has happened over this period of time is, because competition is coming in, the Federal Communications Commission is being forced to rebalance rates and to load more in the way of mandated federal charges on the local line so as to be able to reduce access charges, and so long distance rates are coming down much more rapidly, while there's some upward pressure on local rates.
1LISTNUM 1 \l 15746 MR. RUBY: Could you turn back to the previous page of your report, please?
1LISTNUM 1 \l 15747 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15748 MR. RUBY: At paragraph 17, you say in the middle of that paragraph:
"Local wireline telephone rates rose during the period in which CLECs were expanding largely because of regulatory decisions to shift per‑minute switched access charges to fixed‑line charges." (As read)
1LISTNUM 1 \l 15749 The regulatory changes you just mention there, is that the same thing as you are talking about here?
1LISTNUM 1 \l 15750 MR. CRANDALL: Yes, yes, yes.
1LISTNUM 1 \l 15751 MR. RUBY: And I gather that this shift took place before the 1996 act came into effect?
1LISTNUM 1 \l 15752 MR. CRANDALL: Some of it did, but it continued after the 1996 act.
1LISTNUM 1 \l 15753 MR. RUBY: It wasn't all finished, that shift over by 1991?
1LISTNUM 1 \l 15754 MR. CRANDALL: Oh, no, there was this Alts compromise decision, which led to more of it. No, there continued to be a shift of fixed charges, too, yes.
1LISTNUM 1 \l 15755 MR. RUBY: Will you agree with me that the predominant or the large portion of the shift was pretty much over by 1991, certainly over by the time your charts starts in 1996 ‑‑
1LISTNUM 1 \l 15756 MR. CRANDALL: There had been large amount of rebalancing by 1996, but I assure you it continued. And you can look at the Federal Communications Commission's industry trend publication, which comes out about twice a year, for those numbers.
1LISTNUM 1 \l 15757 MR. RUBY: And your explanation for why your top line on page 8 hasn't gone down is because that shift in what was left after 1996 essentially off‑balances the equipment costs that were falling.
1LISTNUM 1 \l 15758 Is that what you are telling us?
1LISTNUM 1 \l 15759 MR. CRANDALL: Well, I haven't done a careful analysis of what was happening to the costs of delivering local service. Certainly, equipment costs are coming down, but, as you well know, there is a large labour component to maintaining the outside plant for local telecommunications.
1LISTNUM 1 \l 15760 In addition, you should be aware that these are official Bureau of Labour Statistics price indexes. They undoubtedly overstate prices or, let's say, understate the rate of decline. Professor Jerry Hausman, of MIT, has documented this rather carefully.
1LISTNUM 1 \l 15761 MR. RUBY: So, sorry, the chart you are giving us relies on unreliable data. Is that what you are trying to tell us?
1LISTNUM 1 \l 15762 MR. CRANDALL: There are always ‑‑ there are always problems. These are the official ‑‑ these are the best data available, but there are always problems with them. Especially in a competitive world, where there are lots of bundled price discounts and that sort of thing, they tend to understate the rate of decline.
1LISTNUM 1 \l 15763 MR. RUBY: Okay. So should the Commission not pay any attention to this because it's not reliable data?
1LISTNUM 1 \l 15764 MR. CRANDALL: The Commission should be aware that, while these data show a decline in prices, that the decline in prices has probably been substantially greater. This is a conservative measure that I use, and I'm not using ‑‑ I could have used, for instance, the average revenue per minute for wireless from other sources, that would have shown a greater decline in wireless rates.
1LISTNUM 1 \l 15765 MR. RUBY: Right, right, but this is the data set you have given us.
1LISTNUM 1 \l 15766 And I take it that the increased decrease, if I can put it that way, that you just referred to, would apply equally to the cellular line, the second one down, as well?
1LISTNUM 1 \l 15767 MR. RUBY: It would probably apply more to wireless than it does to wireline, yes.
1LISTNUM 1 \l 15768 MR. RUBY: Okay.
1LISTNUM 1 \l 15769 If you flip over the next page of your report, but maybe keeping a finger on page 8 because we will come back to it, Figure 2, I take it the point here deals with the substitutability of cellular phone for local wireline. Right?
1LISTNUM 1 \l 15770 MR. CRANDALL: Correct.
1LISTNUM 1 \l 15771 MR. RUBY: Okay. So I see your chart on Figure 2, but if you flip back to Figure 1, I don't see any drop in price that corresponds to the increase in what you say is substitutability from ‑‑ on wireline, excuse me, drop in price on wireline, that corresponds to this sort of upward graph on Figure 2. Is that right?
1LISTNUM 1 \l 15772 MR. CRANDALL: Are you suggesting what you don't see is a widening in the price difference between wireless and wireline or what are you ‑‑
1LISTNUM 1 \l 15773 MR. RUBY: No. I mean, I would have thought that, if people were using more and more just their cellphone as a substitute for their household phone, then that, as I read it, would have put pressure on the prices of local wireline to come down and we would have seen that in your Figure 1, and that's just not the case. Right?
1LISTNUM 1 \l 15774 MR. CRANDALL: That is correct. The local wireline rates that are included in Figure 1 are largely still regulated rates. To the extent that they have come down, they have probably come down through these bundled packages much more rapidly.
1LISTNUM 1 \l 15775 But I think that you are quite correct, and I thinks that just another reason to suggest that's a conservative measure of how much price decline there has been.
1LISTNUM 1 \l 15776 MR. RUBY: Right. And then my understanding is in the United States, state by state, there is quite a lot of local wireline deregulated prices, right? Not everywhere, but a fair bit.
1LISTNUM 1 \l 15777 MR. CRANDALL: It's beginning to show up, yes, yes.
1LISTNUM 1 \l 15778 MR. RUBY: And it would show up in this data you have provided in Figure 1?
1LISTNUM 1 \l 15779 MR. CRANDALL: Well, if it's properly captured in these bundled rates. But for the most part, as I understand it, and I haven't looked into this ‑‑
1LISTNUM 1 \l 15780 MR. RUBY: Well, Dr. Crandall, it's your chart, that's why I'm asking you.
1LISTNUM 1 \l 15781 MR. CRANDALL: No, well...but I'm trying to answer your question.
1LISTNUM 1 \l 15782 The chart are the official statistics of the Bureau of Labour Statistics on prices, and what I'm saying is that they do not necessarily pick up all the effects of competition through all these bundled packages that are taking place now in an increasingly competitive and deregulated environment.
1LISTNUM 1 \l 15783 MR. RUBY: All right. Let's look at this one more way.
1LISTNUM 1 \l 15784 Can you turn to page 10 of your report, please?
1LISTNUM 1 \l 15785 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15786 MR. RUBY: And this is your cable chart that shows, for the United States, since 2001, resident telephony by cable going up to near 10 percent over time. Right?
1LISTNUM 1 \l 15787 MR. CRANDALL: Going up to 9.5 million ‑‑
1LISTNUM 1 \l 15788 MR. RUBY: Sorry, customers.
1LISTNUM 1 \l 15789 MR. CRANDALL: ‑‑ which is substantially less. Yes.
1LISTNUM 1 \l 15790 MR. RUBY: Pardon me, customers.
1LISTNUM 1 \l 15791 MR. CRANDALL: Right, right.
1LISTNUM 1 \l 15792 MR. RUBY: All right. So like I see the chart and the shape of that graph, and then, again, if I go back to page 8, I don't see the increase in the number of cable companies having any impact on disciplining prices overall in the local wirelines business. So same explanation as to why it made no difference for cellular?
1LISTNUM 1 \l 15793 MR. CRANDALL: Yes, the answer's the same, but remember the reason I put Figure 1 in there was to show that, as a result of the abandonment of the UNE platform, as forced by the U.S. Court of Appeal in the United States on the FCC, there hasn't been an uptick in local prices, even as measured by the Bureau of Labour Statistics.
1LISTNUM 1 \l 15794 MR. RUBY: Okay. And let me just ask you, the middle line on Figure 1 ‑‑ or, sorry, the bottom line on Figure 1 ‑‑
1LISTNUM 1 \l 15795 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15796 MR. RUBY: ‑‑ the bottom is cellular, right?
1LISTNUM 1 \l 15797 MR. CRANDALL: Yes.
1LISTNUM 1 \l 15798 MR. RUBY: The middle one, I mean, is that a line you created or is this out of the statistics?
1LISTNUM 1 \l 15799 MR. CRANDALL: No, that's all telephone services from the CPI, which would include wireline and wireless.
1LISTNUM 1 \l 15800 MR. RUBY: Okay, so it's just an average of the two?
1LISTNUM 1 \l 15801 MR. CRANDALL: No, because I don't have long distance service specifically broken out, so it's not exactly an average of the two, though it does tend to come right about in the middle.
1LISTNUM 1 \l 15802 MR. RUBY: Oh, so ‑‑ okay, I see. So there's other stuff in the middle line ‑‑
1LISTNUM 1 \l 15803 MR. CRANDALL: Yes, yes.
1LISTNUM 1 \l 15804 MR. RUBY: ‑‑ that you haven't ‑‑
1LISTNUM 1 \l 15805 MR. CRANDALL: Right, right, right.
1LISTNUM 1 \l 15806 MR. RUBY: Okay.
1LISTNUM 1 \l 15807 You received from me an exhibit that was an article out of The Globe and Mail from this very past Saturday.
1LISTNUM 1 \l 15808 Do you have that in front of you?
1LISTNUM 1 \l 15809 MR. CRANDALL: The "Shaw expects price...", right, yes.
1LISTNUM 1 \l 15810 MR. RUBY: The "Shaw expects price increases for cable and telcos".
1LISTNUM 1 \l 15811 And I'm not going to read much of this, but just so we are all on the same page:
"Prices for communication services are headed up despite the battle between the phone and cable companies for customers, predicts Shaw Communications...chief executive officer Jim Shaw."
And the quote is:
"'Consistently, all telcos and cablecos will continue to raise rates,' Mr. Shaw said yesterday on a conference call to discuss the company's fourth‑quarter financial results."
1LISTNUM 1 \l 15812 You have had this, and I won't read the whole thing to you, but I have to admit, having heard the testimony in this proceeding about joint dominance, non‑collusive oligopoly, incentives to lower prices by the ILECs, I was troubled by this.
1LISTNUM 1 \l 15813 Can you help me here? This looks to me like an indication of exactly the kind of thing that, in their evidence, the competitors have said they worry about: prices going up between the cable company and the ILEC because they don't discipline each other.
1LISTNUM 1 \l 15814 Isn't that what we are seeing with this type of behaviour, with somebody saying to investors, "Don't worry, we are going to recover our money because everybody's going to raise rates. If I raise rates, the ILEC will"?
1LISTNUM 1 \l 15815 MR. CRANDALL: Well, I'm not going to try to interpret what Mr. Shaw says, nor what's going on specifically in Canada in the video market, but, were Mr. Shaw here, I would be willing to bet him that telecommunications rates, not video but telecommunications rates, will not go up in the future, and I think he's engaged in perhaps a little wishful thinking for the purpose of the financial community.
1LISTNUM 1 \l 15816 MR. RUBY: Oh, so you ‑‑
1LISTNUM 1 \l 15817 MR. CRANDALL: It would be suicidal ‑‑ just let me finish.
1LISTNUM 1 \l 15818 MR. RUBY: No, please do.
1LISTNUM 1 \l 15819 MR. CRANDALL: It would be suicidal for telephone companies such as TELUS or Bell Canada to be raising their rates in the face of such rapid entry from Rogers and Shaw.
1LISTNUM 1 \l 15820 MR. RUBY: Well, so you think Mr. Shaw was talking about cable?
1LISTNUM 1 \l 15821 MR. CRANDALL: No, he says he's talking about video and telecommunications.
1LISTNUM 1 \l 15822 MR. RUBY: Right.
1LISTNUM 1 \l 15823 MR. CRANDALL: He's speculating about the future, and I'm sure you would agree that he could be wrong.
1LISTNUM 1 \l 15824 MR. RUBY: Well, I take it you could also be wrong, right? We could all be wrong.
1LISTNUM 1 \l 15825 MR. CRANDALL: He could be, but after this hearing I will have the same bet with you.
1LISTNUM 1 \l 15826 MR. RUBY: Well, I don't bet with economic experts, but thank you.
1LISTNUM 1 \l 15827 MR. CRANDALL: Hey, this has nothing to do with an economist's view, this is a measurable phenomenon.
1LISTNUM 1 \l 15828 MR. RUBY: All right.
1LISTNUM 1 \l 15829 And just this one more paragraph here that says:
"Cable operators' winning streak started in 2005, when they entered the phone market. They gained enough market share that the big phone companies were recently set free from regulation to local phone service because authorities decided the new competitors no longer need that advantage."
1LISTNUM 1 \l 15830 It strikes me that the reporter may be getting a little ahead of himself there, given that we are all sitting here with an awful lot of people in the room.
1LISTNUM 1 \l 15831 It says:
"Despite that change, there's little pricing pressure to speak of, according to Mr. Shaw."
1LISTNUM 1 \l 15832 Now, when the CEO of the second‑largest cable company in the country says publicly prices are going up and I expect the ILEC prices to go up, too, doesn't that change the dynamic in the market so that we are at risk of having what some people have called joint dominance, other people have called non‑collusive anti‑competitive conduct?
1LISTNUM 1 \l 15833 MR. CRANDALL: The mere fact that he could muse about future prices does not suggest any possibility of collusion.
1LISTNUM 1 \l 15834 MR. RUBY: I'm sorry, I'm not suggesting collusion, not at all. This is purely if you are TELUS and you are advising TELUS, you look at this and say, If Shaw raises their prices a dollar, so can I, and I can make more money?
1LISTNUM 1 \l 15835 MR. CRANDALL: I think if I, like TELUS, are contemplating entry into the video market, I would just as soon see Shaw raise prices, because I will undercut them and get a much larger market share. I think it would be very unwise for Mr. Shaw, once TELUS begins to invade his video space, to start raising prices.
1LISTNUM 1 \l 15836 I think he's musing very optimistically about the future.
1LISTNUM 1 \l 15837 MR. RUBY: Right. And if Shaw raises prices, TELUS doesn't, starts getting market share, Shaw can lower the prices, right? But if they both raise prices, both win don't they ‑‑
1LISTNUM 1 \l 15838 MR. CRANDALL: Then, yes, yes, yes.
1LISTNUM 1 \l 15839 MR. RUBY: ‑‑ if they know that's what the other's going to do?
1LISTNUM 1 \l 15840 MR. CRANDALL: Yes, but the nature of markets is people compete on the basis of quality and price.
1LISTNUM 1 \l 15841 In the United States what's happened is the DSL purveyors have consistently cut prices, putting downward pressure on those cable modem rights.
1LISTNUM 1 \l 15842 MR. RUBY: Right, the DSL competitors that use unbundled local loops, for example?
1LISTNUM 1 \l 15843 MR. CRANDALL: No, no, I'm talking about the little guys like Verizon and AT&T.
1LISTNUM 1 \l 15844 MR. RUBY: Right, right. So you ‑‑ okay. Well, we looked at your price chart.
1LISTNUM 1 \l 15845 Mr. Chairman, those are my questions of this witness.
1LISTNUM 1 \l 15846 THE CHAIRPERSON: Thank you, Mr. Ruby.
1LISTNUM 1 \l 15847 Madam Secretary, who's next?
1LISTNUM 1 \l 15848 Do you have a question? Okay, sorry. So ahead, Barbara.
1LISTNUM 1 \l 15849 COMMISSIONER CRAM: Thank you, Dr. Crandall.
1LISTNUM 1 \l 15850 What would you deduce from the fact that telephony rates have not gone down since a very cable telephony aggressive entry into the market two years ago?
1LISTNUM 1 \l 15851 MR. CRANDALL: Are you talking about Canada now or the United States?
1LISTNUM 1 \l 15852 COMMISSIONER CRAM: Yes.
1LISTNUM 1 \l 15853 MR. CRANDALL: I don't know what's going on in Canada per se, but what I was saying about the United States is that the official measures of telephone local rates, the so‑call 1FR, the flat rate residential service, is typically a regulated rate.
1LISTNUM 1 \l 15854 What has happened in the United States across most of the states is that the regulatory commissions have allowed the telephone companies facing this competition to offer bundled packages with much lower rates, in combination, and not even review their tariffs on those things, while keeping the 1FR rate up there.
1LISTNUM 1 \l 15855 So I think there's been much more price reduction in the United States than sort of the official 1FR rates would suggest.
1LISTNUM 1 \l 15856 What is going on currently in Canada, I simply cannot comment on because I haven't looked at it.
1LISTNUM 1 \l 15857 COMMISSIONER CRAM: But as an economist, what would you conclude if there has been a very aggressive competitor coming into the market and over two years the rates have not gone down?
1LISTNUM 1 \l 15858 MR. CRANDALL: I would be very surprised, because I would be surprised if Bell Canada and TELUS aren't beginning to compete on the basis of some aspect of a package where they are offering customers reduced rates or improved quality.
1LISTNUM 1 \l 15859 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 15860 I had another question, Ms Aron, and I just wanted to look at paragraph 11 of your statement in March of this year.
1LISTNUM 1 \l 15861 And wouldn't it be fair to say the last five lines of paragraph 11 ‑‑
1LISTNUM 1 \l 15862 MR. CRANDALL: I'm sorry, what are you looking at?
1LISTNUM 1 \l 15863 COMMISSIONER CRAM: Dr. Aron.
1LISTNUM 1 \l 15864 MR. CRANDALL: Oh, Dr. Aron, I'm sorry.
1LISTNUM 1 \l 15865 COMMISSIONER CRAM: And I was talking to Dr. Aron, I'm sorry. Did I not say that?
1LISTNUM 1 \l 15866 THE CHAIRPERSON: Yes, you did. You did.
1LISTNUM 1 \l 15867 MR. CRANDALL: I'm sorry, I didn't hear you.
1LISTNUM 1 \l 15868 COMMISSIONER CRAM: Okay.
1LISTNUM 1 \l 15869 For us, that looks to me to be a fairly cogent definition of "essential". And in particular I like the last two lines:
"For it to be essential there must be no viable business case by which a competitor could produce a reasonable substitute."
1LISTNUM 1 \l 15870 That's really it in a nutshell, isn't it?
1LISTNUM 1 \l 15871 MS ARON: Right, with the understanding that I'm not talking about a specific competitor. But a reasonably efficient competitor could not come in, and assuming that retail prices were themselves compensatory, have a viable business case.
1LISTNUM 1 \l 15872 COMMISSIONER CRAM: I am struck by the words of Justice Bryer in the case referred to by MTS, the Verizon case, where he refers to "sensibly duplicable".
1LISTNUM 1 \l 15873 I wonder if, given Canada's size, that that would inject a note of practicality into any analysis we would be making on essentiality and duplicability.
1LISTNUM 1 \l 15874 Do you have any comments on that, or any of the panel?
1LISTNUM 1 \l 15875 MS ARON: Well, in my opinion, it is a practical test in the sense that one can look at whether there are actually facilities out there and determine, on the basis of that evidence, whether it is viable to produce an alternative functionality to the facility at issue.
1LISTNUM 1 \l 15876 Certainly if one sees that it is being done, that's a very practical and conclusive test that the facility is not essential.
1LISTNUM 1 \l 15877 If one doesn't see the facility out there, an alternative facility, then one has to ask if there are other aspects of the market that would be artificially suppressing its development.
1LISTNUM 1 \l 15878 DR. WEISMAN: If I could just respond, it seems to me I think the test we talked about the other day with Mr. Dunbar, Mr. Grieve did, about the TELUS test being the proper definition of an essential facility with a generous transition plan, three to five years, five years in the case of access, in my view what that does is it gives competition, duplication, commercial agreements a chance to work to see what the market can really develop.
1LISTNUM 1 \l 15879 If it turns out ‑‑ and I think Professor Church spoke to this ‑‑ that there is a problem at the end of that transition period, the Commission still retains the ability to regulate that retail market.
1LISTNUM 1 \l 15880 I think the key thing is to get the definition right and see what the market develops with that transition plan in place to get everyone an opportunity to secure their agreements or to self‑supply.
1LISTNUM 1 \l 15881 COMMISSIONER CRAM: How sensible is that when we are one‑tenth the size of the U.S. and the accountability office ‑‑ that was one of our exhibits ‑‑ was asking whether end‑to‑end facility competition is practical in the States?
1LISTNUM 1 \l 15882 How practical is it for us to even think about that?
1LISTNUM 1 \l 15883 DR. WEISMAN: Well, regarding the GAO study ‑‑ I think it's charitable to call it a study. It's basically a set of observations and there are a number of problems associated with it, not the least of which is my understanding is that when the GAO sent out surveys to try and get information regarding the presence of competitors, they did not get responses because, in part, the competitors understood how those were going to be used.
1LISTNUM 1 \l 15884 The FCC is looking at those issues. It's an ongoing proceeding.
1LISTNUM 1 \l 15885 So I wouldn't say the GAO is a study.
1LISTNUM 1 \l 15886 Regarding Canada being one‑tenth of the size and how reasonable is it, if regulation could completely emulate the marketplace, we wouldn't need competition.
1LISTNUM 1 \l 15887 It seems to me that what we are trying to do with the three‑to‑five year transition plan is to see what the market develops. There is plenty of protection built into that. And if there are problems at the end of that hard stop, you retain retail regulation as a tool. I think that is a reasonable approach.
1LISTNUM 1 \l 15888 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 15889 THE CHAIRPERSON: I have to follow this up because this comes really to the core of what troubles all of us, I think.
1LISTNUM 1 \l 15890 You know that the local forbearance order suggested facility‑based competition in Canada should be defined as including those who lease part of the facilities and have built the other. So it makes no sense for us as a Commission to have one definition for forbearance and another one for this proceeding.
1LISTNUM 1 \l 15891 Assuming that we use that definition, all your tests are based on the assumption that the end game is facility‑based competition. You look at the essential services test, et cetera, always against that end goal.
1LISTNUM 1 \l 15892 But that is not our end goal. Our end goal is a facility‑based as defined by the government, which by definition is a mixture.
1LISTNUM 1 \l 15893 How do you apply the essential facility test in that context? I have trouble seeing how you apply that test when you start off with a definition which facility‑based in effect doesn't mean facility‑based. It means mixed.
1LISTNUM 1 \l 15894 PROF. ROBINSON: Mr. Chair, if I may offer an observation on that, I think the way I interpreted the variation order, it didn't apply that non facilities‑based were mandated non facilities‑based. I think you always expect facilities‑based carriers to have some resale.
1LISTNUM 1 \l 15895 So I don't think it follows from the forbearance variation order that we are talking about the same thing.
1LISTNUM 1 \l 15896 They were basically saying, I think, we expect even facilities‑based carriers to be reselling some of their services in some markets.
1LISTNUM 1 \l 15897 So it really doesn't go to the question of mandatory unbundling.
1LISTNUM 1 \l 15898 THE CHAIRPERSON: You have heard the evidence here before. Others said that nobody expects at the end of the day we are going to have two or three end‑to‑end facilities‑based carriers. That just doesn't make sense in light of Canada's population density and the geography, et cetera.
1LISTNUM 1 \l 15899 Given that, when you come to a specific service and we have to determine whether it's essential or not, what do you compare it against?
1LISTNUM 1 \l 15900 I can see as long as you have this sort of notion that the ideal is facility‑based end‑to‑end, that makes a certain sense. But if you have a mixed system to begin with, why is this mixture better than that?
1LISTNUM 1 \l 15901 I'm getting lost here. I don't know whether I made myself clear. I just don't understand how the ‑‑
1LISTNUM 1 \l 15902 MR. CRANDALL: First of all, I assume that when you are saying we are not going to have a full end‑to‑end facilities‑based competitors, you are not talking about the mass market, because at this point with cable television I think you are well on your way to exactly that. So you must be talking about the Enterprise market.
1LISTNUM 1 \l 15903 There the ability to replicate facilities provides the entrant, whether it's an ILEC or a CLEC, with the leverage to negotiate competitive rates from the seller of that service wherever he may be.
1LISTNUM 1 \l 15904 You can contrast the situation with the automobile industry. Toyota is the most efficient automobile producer in the world. It doesn't produce most of its own parts. It negotiates with suppliers, each supplier knowing full well that Toyota could produce its own parts.
1LISTNUM 1 \l 15905 And that is exactly what would be going on here; that is, TELUS would be going to Bell Canada territory and Bell Canada to TELUS territory.
1LISTNUM 1 \l 15906 THE CHAIRPERSON: Toyota doesn't buy from GM and vice versa. That's where your analogy falls down.
1LISTNUM 1 \l 15907 MR. CRANDALL: Well, the reason they don't is that the General Motors parts operations are horrendously inefficient and General Motors has been trying to get rid of them, if you want to know the truth. The fact is Toyota has tremendous leverage to be able to self‑integrate, as do telecommunications carriers.
1LISTNUM 1 \l 15908 If the facility is replicable, they don't have to replicate everywhere. They just have to use the threat of replication in order to negotiate commercial rates at a competitive level.
1LISTNUM 1 \l 15909 THE CHAIRPERSON: So basically what we look at is the feasibility of the threat of duplication.
1LISTNUM 1 \l 15910 MR. CRANDALL: Well, feasibility and the actuality of it. Watch what they do. And in some cases they will do it. They have to actually show their hand in order to convince the person they are negotiating with of their wherewithal to replicate.
1LISTNUM 1 \l 15911 THE CHAIRPERSON: Let's have the next questioner.
1LISTNUM 1 \l 15912 Madam Secretary, who is next?
1LISTNUM 1 \l 15913 THE SECRETARY: Counsel Janigan, please, on behalf of PIAC.
‑‑‑ Pause
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 15914 MR. JANIGAN: Thank you very much, Mr. Chair, Commissioners, panel.
1LISTNUM 1 \l 15915 My friends before me have been thorough, as has the hearing Panel, so I have been able to winnow down my questions to a few.
1LISTNUM 1 \l 15916 I would like to deal primarily with your supplementary evidence of July 5th, I believe, 2007. I have questions primarily for Drs. Robinson and Weisman.
1LISTNUM 1 \l 15917 Starting with you, Dr. Robinson, I wonder if you could turn up page 25 of your evidence. That is in Appendix A of the supplementary material.
1LISTNUM 1 \l 15918 I'm looking at paragraphs 21 and following.
1LISTNUM 1 \l 15919 If I could summarize this, it's a rather trenchant plea for the test for essential facilities under the Telecom Act to line up with that under the Competition Act.
1LISTNUM 1 \l 15920 Is that a fair summary?
1LISTNUM 1 \l 15921 PROF. ROBINSON: I don't know whether I would call it trenchant. I would just simply say I think they should be the same test.
1LISTNUM 1 \l 15922 MR. JANIGAN: Okay, that's fine.
1LISTNUM 1 \l 15923 In the passages following, I believe the point you are making is that this same test should true‑up with the essential facilities test developed under U.S. anti‑trust law.
1LISTNUM 1 \l 15924 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15925 MR. JANIGAN: Okay. Now, would you agree with me that the Competition Act and the Telecommunications Act have differing objectives?
1LISTNUM 1 \l 15926 PROF. ROBINSON: Not with respect to competition, they don't.
1LISTNUM 1 \l 15927 MR. JANIGAN: Okay. But you would agree with me that the Telecom Act in its objectives has quite a few objectives that it is attempting to pursue in terms of outcomes whereas the Competition Act is only pursuing the outcome of attempting to obtain a competitive market?
1LISTNUM 1 \l 15928 PROF. ROBINSON: I am only addressing the element of telecommunications policy that is aligned with the goals of competition policy which is enabling competition. There are other goals, I am sure, but I am just addressing this particular issue of pro‑competition policy.
1LISTNUM 1 \l 15929 MR. JANIGAN: Okay. But the Telecom Act, I am sure you have looked at the Telecom Act of Canada in preparing your evidence?
1LISTNUM 1 \l 15930 PROF. ROBINSON: Not recently.
1LISTNUM 1 \l 15931 MR. JANIGAN: Not recently, okay. Well, we will pursue that while I am with you.
1LISTNUM 1 \l 15932 Now, with respect to potential differences between the U.S. and Canada in relation to Competition Act, Competition Act regimes and the application of telecom regulation, I believe you had an exchange with Mr. Koch this morning on the Trinco case.
1LISTNUM 1 \l 15933 Am I correct on that, Dr. Robinson, that was your evidence? I was listening over the internet.
1LISTNUM 1 \l 15934 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15935 MR. JANIGAN: Okay. And as I understand, the Trinco case is that in effect the mandated sharing rules of the FCC cannot be used to launch a private anti‑trust action.
1LISTNUM 1 \l 15936 Is that effectively a summary of that decision?
1LISTNUM 1 \l 15937 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15938 MR. JANIGAN: However, as I understand it, there still remains the savings clause under the U.S. Telecommunications Act of 1976?
1LISTNUM 1 \l 15939 PROF. ROBINSON: That is correct.
1LISTNUM 1 \l 15940 MR. JANIGAN: Okay. So that individual companies if they are aggrieved by the abuse of dominance of an incumbent carrier can always take application to courts of competent jurisdiction in the United States under lawsuits and sue for triple damages and these sorts of things; is that correct?
1LISTNUM 1 \l 15941 PROF. ROBINSON: Well, as a generalization, yes, but there is some question as to whether they can do so after Trinco if they happen to implicate policies implemented under the Telecommunications Act.
1LISTNUM 1 \l 15942 MR. JANIGAN: Okay. But in the U.S. Telecom Act there was a savings clause put in order to preserve the rights under anti‑trust ‑‑
1LISTNUM 1 \l 15943 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15944 MR. JANIGAN: Okay. Do you know whether or not private competitors here in Canada have similar sorts of rights to take action against incumbent telephone companies?
1LISTNUM 1 \l 15945 PROF. ROBINSON: I understand they do not.
1LISTNUM 1 \l 15946 MR. JANIGAN: Okay. Now, in terms as well of other kinds of mechanisms which may or may not provide additional protections, as I understand it, there are some 51 other regulatory commissions that deal with telecommunications in the United States, dealing with telecommunications from the local standpoint, which may or may not have an impact upon the rights of new competitors or consumers in that district depending on their rulings?
1LISTNUM 1 \l 15947 PROF. ROBINSON: They might. Most of the freedom of action of State regulators is contained by federal pre‑emption on questions like unbundled network access, for example. The rules are basically set by the FCC.
1LISTNUM 1 \l 15948 MR. JANIGAN: Okay. And one of the continuing problems, at least from the consumer standpoint, up here has been the presence of mergers in the telecommunications industry.
1LISTNUM 1 \l 15949 Have you been able to study or make conclusions with respect to the differences in the merger control process in the United States versus the merger process in Canada?
1LISTNUM 1 \l 15950 PROF. ROBINSON: I have not. I can't speak to the Canadian experience with mergers.
1LISTNUM 1 \l 15951 MR. JANIGAN: Okay.
1LISTNUM 1 \l 15952 PROF. ROBINSON: My understanding is that the basic thrust of the Canadian competition law with respect to mergers is essentially similar to ours. That is all I know.
1LISTNUM 1 \l 15953 MR. JANIGAN: And you don't have any knowledge of the practice, of the application?
1LISTNUM 1 \l 15954 PROF. ROBINSON: I have not.
1LISTNUM 1 \l 15955 MR. JANIGAN: Okay. In all of these circumstances, these are all potential avenues or remedies that may or may not have effect upon the behaviour of incumbents and competitors in the market; would you agree?
1LISTNUM 1 \l 15956 PROF. ROBINSON: I am not quite sure I understand the question. How do you mean?
1LISTNUM 1 \l 15957 MR. JANIGAN: Well, in the United States, for example, separate and apart from the essential facilities test that has evolved in the FCC, we also have different rights of remedies that have been given to individuals to pursue claims from an anti‑trust standpoint, pursue matters in State regulatory jurisdictions or pursue matters if it involves, for example, a merger that might impact upon their business through different avenues, either through the FCC or other kinds of things? All of those are important.
1LISTNUM 1 \l 15958 PROF. ROBINSON: Well, I don't know whether they are important or not after the Trinco case. I would have to say that the right to pursue an anti‑trust remedy has been pretty much snuffed out by the Trinco case.
1LISTNUM 1 \l 15959 MR. JANIGAN: I think we agreed that the Trinco case dealt with the rights of mandated access that were propounded by the FCC but the anti‑trust aspects of the savings clause remain intact?
1LISTNUM 1 \l 15960 PROF. ROBINSON: Well, you will have to give me a for instance about what kind of an action you have in mind. I mean it is possible, for example, that you could still bring an action for predatory pricing or something like that.
1LISTNUM 1 \l 15961 But if we are talking about the subject at hand, mandatory sharing, I think the effect of Trinco basically is to rule out private anti‑trust actions.
1LISTNUM 1 \l 15962 MR. JANIGAN: Okay. But whatever is the residual of Trinco, there are a number of different avenues that an individual competitor may pursue that are not available in Canada?
1LISTNUM 1 \l 15963 PROF. ROBINSON: Well, I don't know whether they are available in Canada or not but I don't think that ‑‑ I don't exactly know what you are referring to in the United States.
1LISTNUM 1 \l 15964 MR. JANIGAN: Well, I guess what I am getting at ‑‑
1LISTNUM 1 \l 15965 PROF. ROBINSON: They don't ‑‑
1LISTNUM 1 \l 15966 MR. JANIGAN: Sorry.
1LISTNUM 1 \l 15967 PROF. ROBINSON: The rules right now for unbundled network access are set by the FCC and that is pretty much your forum.
1LISTNUM 1 \l 15968 MR. JANIGAN: Mm‑hmm.
1LISTNUM 1 \l 15969 PROF. ROBINSON: I don't know what other actions there would be.
1LISTNUM 1 \l 15970 MR. JANIGAN: Well, I read your ‑‑
1LISTNUM 1 \l 15971 PROF. ROBINSON: State regulatory agencies do not have the power to make up their own unbundling rules in the United States or to enforce ‑‑
1LISTNUM 1 \l 15972 MR. JANIGAN: No, I didn't say that.
1LISTNUM 1 \l 15973 What I am saying, Dr. Robinson, is that your evidence seems to be geared towards negating any idea that there should be some kinds of differences between the policies that we evolve in Canada versus the policies that involve the United States on essential facilities and all I am doing is pointing out a number of different areas in the regulatory regimes of the United States and Canada which may lead to different results.
1LISTNUM 1 \l 15974 PROF. ROBINSON: It is possible. I wouldn't deny that it is possible. All I have seen on the record, however, points to nothing that would say that conditions in Canada are so unique that when it comes to defining and applying the essential facilities doctrine that somehow Canada stands off independent of the United States. If there is such evidence, I haven't seen it on the record.
1LISTNUM 1 \l 15975 MR. JANIGAN: Dr. Robinson, I wonder if I can take you to page 17 of your evidence.
1LISTNUM 1 \l 15976 PROF. ROBINSON: Are we talking about the supplementary?
1LISTNUM 1 \l 15977 MR. JANIGAN: Sorry, the supplementary evidence, yes.
1LISTNUM 1 \l 15978 PROF. ROBINSON: I have it.
1LISTNUM 1 \l 15979 MR. JANIGAN: This particular part of your evidence contains a discussion of the attempted distinction by the Competition Bureau between abuse of dominance and control of market power.
1LISTNUM 1 \l 15980 Essentially, as I read your evidence, you believe that this is a distinction without a difference?
1LISTNUM 1 \l 15981 PROF. ROBINSON: I am sorry, where are you referring?
1LISTNUM 1 \l 15982 MR. JANIGAN: Up here on page 17 ‑‑
1LISTNUM 1 \l 15983 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15984 MR. JANIGAN: ‑‑ you start with:
"Elsewhere in responses to interrogatories from the Commission and from Rogers, the Bureau states that the mandates of the Bureau and the Commission are basically different because the former is aimed at abuse of dominance and the latter is aimed at control of market power." (As read)
1LISTNUM 1 \l 15985 And then you go on to discuss this, particularly in paragraph 14, that the sort of distinctions between the two statutory mandates are misleading and so on over the next page.
1LISTNUM 1 \l 15986 PROF. ROBINSON: Mm‑hmm.
1LISTNUM 1 \l 15987 MR. JANIGAN: As I read that, you believe that this is a distinction without a difference?
1LISTNUM 1 \l 15988 PROF. ROBINSON: Yes.
1LISTNUM 1 \l 15989 MR. JANIGAN: Okay. Now, in terms of the two situations, I would assume that there may be circumstances in the market where a party may have or a business may have a market power, may choose to exercise that market power, for example, to raise prices or lower quality, but that action in and of itself would not be an abuse of dominant position; would you agree with that?
1LISTNUM 1 \l 15990 PROF. ROBINSON: The mere raising of market prices basically?
1LISTNUM 1 \l 15991 MR. JANIGAN: Yes, or lowering the quality.
1LISTNUM 1 \l 15992 PROF. ROBINSON: Yes, I would.
1LISTNUM 1 \l 15993 MR. JANIGAN: Okay. But given the objectives under the Telecommunications Act, if it was a telecommunications market, that exercise of market power in that circumstance may be cause for concern; would you agree with that?
1LISTNUM 1 \l 15994 PROF. ROBINSON: Yes, I would agree with that.
1LISTNUM 1 \l 15995 MR. JANIGAN: Okay.
1LISTNUM 1 \l 15996 PROF. ROBINSON: That doesn't really go to the question. I mean we are talking about the essential facilities doctrine case, we are not talking about all the other different objectives or powers of the Competition Tribunal versus the powers of the CRTC.
1LISTNUM 1 \l 15997 I wasn't addressing the question of whether or not competition law mapped perfectly under the telecommunications law or elsewhere. I was only addressing the use of the essential facilities doctrine as a special doctrine.
1LISTNUM 1 \l 15998 MR. JANIGAN: Mm‑hmm.
1LISTNUM 1 \l 15999 PROF. ROBINSON: And my basic point is simply to say that they don't have the same reach and scope and the same limitations above all in both forums.
1LISTNUM 1 \l 16000 MR. JANIGAN: But there may be circumstances, for example, given the additional mandate and objectives that the Commission has that the use of market power by an incumbent may attract more attention by the Commission than simply the abuse of dominance test?
1LISTNUM 1 \l 16001 PROF. ROBINSON: Sorry, you lost me. You would have to be a little bit more precise as to what you are getting at.
1LISTNUM 1 \l 16002 My point is simply this. The essential facilities doctrine has a particular character, has a particular purpose, it has the same purpose in competition law as it does in telecom law, which is to enable competition that would not otherwise exist.
1LISTNUM 1 \l 16003 Whether you are talking about the competition law or you are talking about the telecommunications law, it is a very unusual and specially restricted doctrine. It is a kind of a remedy which, whether we are talking about in competition law or we are talking about the telecommunications law, is very rarely invoked and it calls for these specially limited conditions, and one of them is natural monopoly or monopoly control of the facility and non‑duplicability.
1LISTNUM 1 \l 16004 And that is all part of a coherent package, it is the same package that the CRTC articulated and accepted in earlier proceedings. And, as far as I can tell, it matches what the U.S. doctrine is in antitrust law. And so the thrust of my testimony was to say, yes, I think we are talking about the same thing, whether we are talking about competition law or talking about telecommunications law.
1LISTNUM 1 \l 16005 MR. JANIGAN: Yes but, Dr. Robinson, you took issue with the idea that the mandate of the Commission and the Bureau would differ in this area. And what I have taken you is the fact that there are circumstances where the control of market power is a genuine interest of the Commission, but it may not be a genuine interest of the Competition Bureau.
1LISTNUM 1 \l 16006 PROF. ROBINSON: Well, again, I guess I am not following this. What I was saying, I think, is that both are interested in enabling competition. They both have that same objective and, to the extent they are pursuing that same policy objective, with the essential facilities doctrine they ought to do it in the same way.
1LISTNUM 1 \l 16007 Now, if you have got some other objectives like universal service or something like that that you are talking about pursuing, fine, but I don't see how they link up to the essential facilities doctrine.
1LISTNUM 1 \l 16008 MR. JANIGAN: Well, all I am saying is that I am taking issue with your statement on this, Dr. Robinson. But I think that that exchange speaks for itself and I will move on.
1LISTNUM 1 \l 16009 Dr. Weisman, I am afraid I have forgotten the exact wording of the exchange and who you had it with this morning. But as I understood the essence of this exchange, is that it was your belief that the essential facilities test should apply across all industries, whether they are telecommunications, steel, electrical, whatever. Would that have been a misstatement of what I heard this morning?
1LISTNUM 1 \l 16010 DR. WEISMAN: Yes.
1LISTNUM 1 \l 16011 MR. JANIGAN: Okay.
1LISTNUM 1 \l 16012 DR. WEISMAN: What I was pointing out was that the graph that Mr. Koch presented me with, if in fact it was true, it would suggest a new role for the Competition Bureau of travelling throughout the country and anywhere they saw market power, putting a big S on the door indicating that anybody could walk in and share the facilities. That is what I was talking about.
1LISTNUM 1 \l 16013 MR. JANIGAN: Okay. Well, let me ask you the question directly. Do you think the same essential facilities test should apply across industries?
1LISTNUM 1 \l 16014 DR. WEISMAN: I think the essential facilities test is transparent in any particular industry. The question goes to whether competition is possible without access on a mandated basis to these facilities.
1LISTNUM 1 \l 16015 MR. JANIGAN: Okay. And just following up on the market power example I believe on page 30 and 31 of your supplementary evidence.
1LISTNUM 1 \l 16016 DR. WEISMAN: I have it.
1LISTNUM 1 \l 16017 MR. JANIGAN: As I understand it, you believe that the presence of market power should not be the test for essential facilities?
1LISTNUM 1 \l 16018 DR. WEISMAN: That is correct. And in fact, as Professor Robinson pointed out, this Commission came to that conclusion in CRTC 97‑8. The FCC has come to the conclusion that, for purposes of unbundling, it should not turn on the presence of market power or dominance because it would mandate sharing when there is a demonstrated ability to self‑supply. And it is particularly when we have marketplace evidence that it is possible to duplicate, but the social costs of unbundling are particularly high.
1LISTNUM 1 \l 16019 MR. JANIGAN: And you believe that it is monopoly that we should be concerned with and duplication of function rather than the actual competition?
1LISTNUM 1 \l 16020 DR. WEISMAN: Evidence of duplication of the functionality associated with a particular facility.
1LISTNUM 1 \l 16021 MR. JANIGAN: Yes, okay. Now, I wanted to conclude with a question that sort of developed as a result of an exchange that you had with Commissioner Cram. And as well, to take a look at your evidence, I believe, dealing with wasteful and inefficient competition. I believe that is in paragraph 18 at page 8 of your evidence.
1LISTNUM 1 \l 16022 DR. WEISMAN: Was that first round or second round?
1LISTNUM 1 \l 16023 MR. JANIGAN: That is second round, sorry.
1LISTNUM 1 \l 16024 DR. WEISMAN: Yes, I have it.
1LISTNUM 1 \l 16025 MR. JANIGAN: Okay. And my question grows out of an example that used to be repeated fairly frequently at different telecommunications conferences about over a decade ago, and that was the circumstance where Henry Ford, when he went to manufacture cars, decided that he had to have production facilities for every aspect of his automobile to the extent that he went out and acquired flocks of sheep to have wool in order to make the seat coverings of the car.
1LISTNUM 1 \l 16026 And the example was used, obviously, to show look, you know, you don't have to go out and replicate everything in a telecommunications network. There are other things that you can acquire. It is a wasteful and inefficient exercise to go out and, you know, become a shepherd in order to get wool for your seats.
1LISTNUM 1 \l 16027 Do you recall that anecdote?
1LISTNUM 1 \l 16028 DR. WEISMAN: I seem to have some recollection of that.
1LISTNUM 1 \l 16029 MR. JANIGAN: Okay. And it seems to me that the reason that we look upon this whole exercise as wasteful and inefficient is because there are markets out there where Henry Ford could go out and buy wool or buy different parts that hey may need for his automobile without having to go out and acquire a whole means of production for them.
1LISTNUM 1 \l 16030 DR. WEISMAN: Well, I think that is the whole point. And the idea is that, and Dr. Crandall referred to it earlier, is that the essential facilities doctrine mandated unbundling should be reserved for situations in which competition is not possible any other way. For example, I understand that TELUS completes its network by buying off of the retail tariff in Northwestel territory.
1LISTNUM 1 \l 16031 There are all these arrangements all of the time where companies like Ford buy to complete their product line without producing in‑house. They go outside and they buy because, in this case, the marketplace may be a more efficient way to do it than to build it in‑house. But they don't do it under mandated sharing agreement. They do it under simply the marketplace working the way it is supposed to.
1LISTNUM 1 \l 16032 And that is why the essential facilities doctrine is reserved for that very special case, a very special remedy when competition is not possible any other way.
1LISTNUM 1 \l 16033 MR. JANIGAN: But, Dr. Weisman, you will agree with me that in order for this to take place the marketplace has to work as it is supposed to. I guess my question is, doesn't the Commission then have to be concerned with market power in relation to the ability of any competitor to assemble the kinds of products or services that they need to make to compete?
1LISTNUM 1 \l 16034 DR. WEISMAN: I don't believe that I testified ‑‑ in fact, I testified exactly the opposite, that in my view the rate‑making control of market power function of the Commission is separate and distinct from the essentiality unbundling instrument, a policy for the Commission. I am not by any means suggesting they abandon that.
1LISTNUM 1 \l 16035 MR. JANIGAN: So that, in effect, the Commission would have to be still concerned whether or not those facilities that a competitor needs to compete are available?
1LISTNUM 1 \l 16036 DR. WEISMAN: Well, to the extent that the facilities are essential, they will be available to the extent that competitors, because of the unduly broad sharing regime that has been in place, have an artificial dependence on those facilities, which may have happened. There has been testimony among a number of parties in this proceeding that such a dependence has occurred, it is not essential, it is a dependence, a reliance. That, in fact, is the reason for the three to five‑year transition period so that those providers can, for nonessential facilities, secure alternative means, whether through commercial agreements or through self‑supply.
1LISTNUM 1 \l 16037 MR. JANIGAN: And at the end of that three to five years, if they are not available then, we have to do something else, is that what you are saying.
1LISTNUM 1 \l 16038 DR. WEISMAN: And I fully agree with Professor Church on this, you get the definition right, you allow the hard stop at the end of the transition period and if you have a problem you leave the definition pure and you come back and you regulate it retail and solve the problem directly. He obviously believes, as do I, these are two separate functions, two separate policy instruments available to the Commission.
1LISTNUM 1 \l 16039 MR. JANIGAN: Thank you, Mr. Chair, those are all my questions of this panel.
1LISTNUM 1 \l 16040 THE CHAIRPERSON: On that last exchange, why would you regulate it retail if you got it wrong? I mean, why wouldn't you regulate it wholesale?
1LISTNUM 1 \l 16041 DR. WEISMAN: Well, I think you want to get the definition of essential facilities correct.
1LISTNUM 1 \l 16042 THE CHAIRPERSON: Yes.
1LISTNUM 1 \l 16043 DR. WEISMAN: For nonessential facilities you are going to have a three to five‑year transition period, hopefully. The anticipation is that will take care of any market power considerations in that three to five‑year transition period. But if you have a problem at then end of that hard stop, then I think you can come back and regulate at the retail level to discipline that market power rather than adjusting the definition.
1LISTNUM 1 \l 16044 THE CHAIRPERSON: But what do you mean it is bad retail? I thought the scenario under which you were working is that a competitor requires that wholesale service in order to supply. So why would now regulate suddenly at the retail level?
1LISTNUM 1 \l 16045 DR. WEISMAN: Well, my understanding is that Mr. Janigan was talking about problems with forbearance or market power at the retail level based on a certain wholesale regime. And my response to that was to the extent there is a problem at the end, you can address it directly rather than indirectly through adjusting the definition.
1LISTNUM 1 \l 16046 THE CHAIRPERSON: Okay. Mr. Tacit, are you next?
1LISTNUM 1 \l 16047 MR. TACIT: Yes. I have a package of documents, which I would ask to have distributed, containing a few exhibits that were provided to counsel for TELUS, as well as some of the pre‑filed material in this proceeding.
1LISTNUM 1 \l 16048 I'd like to start by following up on a couple of points with regards to Mr. Janigan's cross‑examination.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 16049 MR. KOCH: And, Professor Robinson, these questions will be directed to you specifically.
1LISTNUM 1 \l 16050 Could I ask you to turn to paragraph 14 of your July 5th evidence, please.
1LISTNUM 1 \l 16051 PROF. ROBINSON: I'm sorry, what was it again? Paragraph 14 of...?
1LISTNUM 1 \l 16052 MR. TACIT: Paragraph 14 of your July 5th evidence. I believe it's on page 18.
1LISTNUM 1 \l 16053 PROF. ROBINSON: All right.
1LISTNUM 1 \l 16054 MR. TACIT: And at the end of that paragraph you say:
"If denying access to an essential facility does not have the effect of preventing or excluding competition the Commission, like the Competition Tribunal on application for the Bureau, has no warrant for requiring access. This is no different from the finding required for abuse of dominance." (As read)
1LISTNUM 1 \l 16055 Now, is it your evidence that the Bureau's test under abuse of dominance is only the prevention or exclusion of competition?
1LISTNUM 1 \l 16056 PROF. ROBINSON: Yes, that is my evidence.
1LISTNUM 1 \l 16057 MR. TACIT: Okay. Could I ask you to turn ‑‑
1LISTNUM 1 \l 16058 PROF. ROBINSON: Well, I'm sorry. Is it my evidence that the only purpose is to prevent ‑‑
1LISTNUM 1 \l 16059 MR. TACIT: No, that the test that the Bureau uses in abuse of dominance with regards to access to an essential facility, it would only look at the prevention or exclusion of competition?
1LISTNUM 1 \l 16060 PROF. ROBINSON: That is my ‑‑ that is the thrust of my argument, yes.
1LISTNUM 1 \l 16061 MR. TACIT: That's your understanding. Okay.
1LISTNUM 1 \l 16062 Could I ask you to turn in the package that I just handed out to the page that's numbered 106, and ‑‑
1LISTNUM 1 \l 16063 PROF. ROBINSON: I don't think I have the whole package.
1LISTNUM 1 \l 16064 Mm‑hmm. Yes, I have it.
1LISTNUM 1 \l 16065 MR. TACIT: In there is reproduced, this was an interrogatory response TELUS/MTS Allstream 19 July, 07‑203, in there is reproduced section 79 of the Competition Act which deals with abuse of dominance.
1LISTNUM 1 \l 16066 And I'd like to focus your attention on sub‑paragraph (c), and this talks about the kinds of practice that could be considered to be an abuse of dominance.
1LISTNUM 1 \l 16067 And paragraph (c) says:
"The practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market." (As read)
1LISTNUM 1 \l 16068 So, would you agree with me that the test there is not strictly prevention or exclusion, but it could also be lessening of competition?
1LISTNUM 1 \l 16069 PROF. ROBINSON: This requires a little bit of explanation, if you'll bear with me.
1LISTNUM 1 \l 16070 The idea ‑‑ the central idea of section 79, as I understand it, is to set forth a generic framework for abuse of dominance. Within that generic framework there are a lot of specific offenses and specific remedies of which, by general consensus, I believe, not by specific judicial decision, the essential facilities doctrine is one.
1LISTNUM 1 \l 16071 Now, it simply doesn't follow that because it's a part of that general framework that it has to take every element of that general framework. I mean, there could be lots of offenses under abuse of dominance that would have their own special limitations.
1LISTNUM 1 \l 16072 The thrust of my evidence is that essential facilities doctrine, if incorporated into section 79, should be understood to have that special limitation. And the reason for that is because the doctrine makes sense only in terms of its core requirement of non‑duplicability and it simply cannot be the case that something is non‑duplicable if, in fact, it has in fact been duplicated upstream. Hence the requirement for monopoly.
1LISTNUM 1 \l 16073 The same thing would be true about prevention by the same logic; that is to say, what we're not after here is a kind of generic abuse of dominance test, what we're after is a specific set of requirements that are unique to the essential facilities doctrine as it has been incorporated, so goes the consensus in section 79.
1LISTNUM 1 \l 16074 So, what I'm saying in my testimony is that you shouldn't look to the generic features of section 79, you should look at the essential facilities doctrine, that is, as it has been articulated by the CRTC, among others, and figure out what is the internal logic of that doctrine, because it's a very special and specially limited doctrine, it's not ‑‑ the essential facilities doctrine is not intended to cover every abuse of dominance. There are other tools for that.
1LISTNUM 1 \l 16075 It's a very special remedy designed to deal with one specific kind of offence.
1LISTNUM 1 \l 16076 MR. TACIT: Okay. So, if I understand your evidence, and I am just trying to understand what you're saying, it's your evidence then that if you look at section 79 of the Competition Act in the context of this kind of case, which is an access case, you would basically eliminate the words "or lessening"; is that what you're saying basically, from the statute?
1LISTNUM 1 \l 16077 PROF. ROBINSON: I would eliminate ‑‑ yes. The answer is simple yes. The more complex answer is, if the Bureau were to enforce the essential facilities doctrine in a forborne market, I would argue it should apply the same essential facilities doctrine that the CRTC does, that the CRTC adopted in 1997.
1LISTNUM 1 \l 16078 MR. TACIT: Okay. But let's assume for a minute ‑‑ I'm not going to argue the law with you, obviously ‑‑ but let's assume for a minute that that's not the case and for whatever set of reasons the words "or lessening" remain in there even when one is concerned with an essential facilities case.
1LISTNUM 1 \l 16079 PROF. ROBINSON: All right.
1LISTNUM 1 \l 16080 MR. TACIT: That's my premise of this question.
1LISTNUM 1 \l 16081 PROF. ROBINSON: All right.
1LISTNUM 1 \l 16082 MR. TACIT: Would you want the Commission to apply the same test or a stricter test? In other words, you've said that the two tests should line up. Should they still line up in that scenario?
1LISTNUM 1 \l 16083 PROF. ROBINSON: No, I would argue that the Commission ought to ‑‑ ought not to make that mistake.
1LISTNUM 1 \l 16084 If the Competition Tribunal makes that mistake, well, that's none of CRTC's business I guess, but the CRTC ought to try to get it right independent of the Bureau.
1LISTNUM 1 \l 16085 I just happen to think that the logic of the doctrine and the problems it's trying to address are the same whether it's the Competition Tribunal using it or the CRTC, but let's not compound the mistake by having them both make the same mistake.
1LISTNUM 1 \l 16086 MR. TACIT: Okay. But what if this isn't an issue of the Competition Tribunal, what if this is Parliament speaking; would you want the Commission then to interpret the test in a narrower manner or would you be satisfied if the Commission adopted the same standard that Parliament had given to the Competition authorities?
1LISTNUM 1 \l 16087 PROF. ROBINSON: I don't think the CRTC has power to dispense with a mandate from the Parliament, so I'm not addressing whatever directions Parliament may give it.
1LISTNUM 1 \l 16088 MR. TACIT: No, no, I'm not suggesting that. I'm saying if it turns out that this direction isn't a matter for the Competition Bureau to interpret when it interprets its own powers, let's assume that this is what Parliament has said, okay?
1LISTNUM 1 \l 16089 PROF. ROBINSON: In the Competition Act?
1LISTNUM 1 \l 16090 MR. TACIT: In the Competition Act.
1LISTNUM 1 \l 16091 PROF. ROBINSON: Yeah, okay.
1LISTNUM 1 \l 16092 MR. TACIT: So, you're saying that notwithstanding that you'd still want the Commission to apply the stricter test; is that right?
1LISTNUM 1 \l 16093 PROF. ROBINSON: Yes. Yes, absolutely.
1LISTNUM 1 \l 16094 MR. TACIT: Thanks for clarifying that.
1LISTNUM 1 \l 16095 Dr. Aron, I just have a few questions for you.
1LISTNUM 1 \l 16096 When I read your paper I was left wondering whether or which approach you were recommending for the pricing of essential services. Are you advocating one that involves mark‑ups over the cost of essential facilities or the efficient component pricing rule, because you talk about both but I didn't see you actually come out in favour of one or the other.
1LISTNUM 1 \l 16097 DR. ARON: And you're right, I didn't explicitly come out in favour of one or the other. What I did was articulate the puts and takes, the advantages and disadvantages of the two approaches.
1LISTNUM 1 \l 16098 But I would say that the efficient components pricing rule, as I hope was clear in my evidence, is really focused on getting the incentives right for companies to enter using essential facilities, essentially developed in a world where it was not contemplated that there would be the opportunity, the possibility and the desire to encourage bypass.
1LISTNUM 1 \l 16099 The approach of taking costs appropriately defined and adding a mark‑up is better suited to addressing the incentives and getting the incentives right for encouraging investment in alternative facilities.
1LISTNUM 1 \l 16100 And in light of the government's policy direction that I think clearly articulates the desire to encourage investment and innovation, it would be my opinion then that that approach if properly applied using, you know, the principles that I've described, would be more suitable to those goals.
1LISTNUM 1 \l 16101 MR. TACIT: You're talking about the mark‑up?
1LISTNUM 1 \l 16102 DR. ARON: Yes.
1LISTNUM 1 \l 16103 MR. TACIT: Not the EC ‑‑
1LISTNUM 1 \l 16104 DR. ARON: Not the ECPR.
1LISTNUM 1 \l 16105 MR. TACIT: Yeah. Okay, good.
1LISTNUM 1 \l 16106 So, let's look at that for a minute then, and if I could ask you to look at page 40 of your evidence and there's a table there which says: Principles for Mark‑ups Over the Incremental Cost of Essential Facilities.
1LISTNUM 1 \l 16107 Do you have that?
‑‑‑ Off microphone / Hors microphone
1LISTNUM 1 \l 16108 MR. TACIT: March, yeah.
1LISTNUM 1 \l 16109 DR. ARON: I do.
1LISTNUM 1 \l 16110 MR. TACIT: Okay, thank you.
1LISTNUM 1 \l 16111 So, these are some of the conditions that a good pricing principle should have; is that right? And obviously there's a positive mark‑up, aggregate recovery of common costs, appropriate recovery of shared costs and total prices less than stand‑alone cost.
1LISTNUM 1 \l 16112 Now, you don't have a condition in here in terms of from an efficiency standpoint that deals with the recovery of an imbedded cost differential; is that correct?
1LISTNUM 1 \l 16113 DR. ARON: I talk about that separately later, yes.
1LISTNUM 1 \l 16114 MR. TACIT: But it's not part of the efficient pricing principle per say, that's a separate issue; correct?
1LISTNUM 1 \l 16115 DR. ARON: It is a separate issue.
1LISTNUM 1 \l 16116 MR. TACIT: Okay, thank you.
1LISTNUM 1 \l 16117 Dr. Weisman, at paragraph 46 of your March 15th evidence, I think you say that it's important in applying the essential facilities test for a single CLEC, as opposed to all CLECs, to be able to economically duplicate functionality. Is that right?
1LISTNUM 1 \l 16118 DR. WEISMAN: I'm sorry, could you please tell me where?
1LISTNUM 1 \l 16119 MR. TACIT: I'm sorry, paragraph 46, page 20 of your March 15th evidence.
‑‑‑ Pause
1LISTNUM 1 \l 16120 DR. WEISMAN: Yes, I have it.
1LISTNUM 1 \l 16121 MR. TACIT: Okay. And you see half way through that paragraph, you say:
"It's sufficient for a single CLEC, as opposed to all CLECs, to be able to economically duplicate the functionality economically." (As read)
I think there's an error there with two "economically"s, but ‑‑
1LISTNUM 1 \l 16122 DR. WEISMAN: You can never have too much "economically"s, but you are right.
1LISTNUM 1 \l 16123 MR. TACIT: Yes, I guess, especially when they are economists, right?
1LISTNUM 1 \l 16124 But as a practical matter, I guess what I'm trying to get at is how can the Commission distinguish whether the duplication of a facility is economical or not? Is there an a priori test that the Commission can use to determine that?
1LISTNUM 1 \l 16125 DR. WEISMAN: With respect to whether there is a viable competitor in the market?
1LISTNUM 1 \l 16126 MR. TACIT: Yes. In applying an essential facilities test ‑‑
1LISTNUM 1 \l 16127 DR. WEISMAN: Right.
1LISTNUM 1 \l 16128 MR. TACIT: ‑‑ how is the Commission supposed to discern whether this is going to be the case or not?
1LISTNUM 1 \l 16129 DR. WEISMAN: Right. I think this issue speaks to what precisely is meant by "monopoly controlled", in the first element of the test. And I would define that ‑‑ we have spoken to that in Primus‑1, or in our response to Primus‑1 ‑‑ I would define "monopoly controlled" as a situation when there is a level of ILEC ‑‑ non‑ILEC functionality with respect to a particular facility by an economically viable provider that is just sufficient to convince the Commission ‑‑ tell the Commission that duplication has occurred.
1LISTNUM 1 \l 16130 Now why is that the right standard? Anything less than that standard, in my view, would fail to carry the burden that there has, in fact, been economic duplication, a viable provider, and any more than that standard, any stricter test, would, in fact, run at cross purposes with the policy direction and interfering with incentives for investment in and construction of competing telecommunications networks.
1LISTNUM 1 \l 16131 MR. TACIT: Yes, and I understand that evidence, but my question really amounts to: how do we know if the competitor is really viable or not? And I guess that's what I'm really trying to get at: how do we know that duplication is economical?
1LISTNUM 1 \l 16132 DR. WEISMAN: Well, Mr. Grieve and I have talked about this a good deal, and I think the situation is that when there is that presence, I think it will be clear to the Commission that this is a viable company marketing its services, that has sustainability in the marketplace, and I don't think there will be any question about whether it's a viable provider or not.
1LISTNUM 1 \l 16133 MR. TACIT: Okay. Let me come at it a slightly different way.
1LISTNUM 1 \l 16134 One of the ways, I think, that you come at this, and TELUS comes at this, is by applying a standard of a reasonably efficient competitor. Is that correct?
1LISTNUM 1 \l 16135 DR. WEISMAN: We use that terminology in a very general fashion to get at the idea that sound competition policy should protect the integrity of the competitive process rather than protect individual competitors. But as a matter of application, if there is a CLEC that has duplicated this functionality, and is a viable provider, then that, by definition, would be a reasonably efficient provider in the marketplace.
1LISTNUM 1 \l 16136 MR. TACIT: Okay.
1LISTNUM 1 \l 16137 And we will get to that in a minute, but before we do, I would like to take you to an interrogatory response, TELUS/CRTC 19July07‑3004, which starts at page 99 of the package that I gave you.
‑‑‑ Pause
1LISTNUM 1 \l 16138 DR. WEISMAN: I have it.
1LISTNUM 1 \l 16139 MR. TACIT: Okay, thanks.
1LISTNUM 1 \l 16140 And there the Commission asked a whole series of questions about how to deal with this issue of "reasonably efficient competitor", you know, what range of services, if a competitor only provides a subset of services would they be a reasonably efficient competitor, and so on and so forth.
1LISTNUM 1 \l 16141 So there are a whole series of questions, and it struck me that the response that you gave to this didn't really answer any of those questions in a way that could be operationalized.
1LISTNUM 1 \l 16142 Is there any additional help you can provide with this?
1LISTNUM 1 \l 16143 DR. WEISMAN: Yes. I think that the point is that when we see a rival, an economically viable rival in the marketplace, okay, and it's profitable, it's going business, it's marketing its services, its expanding, we don't need to go any further with the inquiry. It's done.
1LISTNUM 1 \l 16144 Now, to the extent that provider provides three or four possible services and operates, say, at 400,000 lines, if there's another provider in the market that operates at a lesser scope or at a smaller scale and they cannot self‑supply that functionality, the provider that can is reasonably efficient and, by definition, the provider that can't would be reasonably inefficient, and the inquiry doesn't go beyond that.
1LISTNUM 1 \l 16145 MR. TACIT: Okay. So I guess what you are saying is that when a competitor duplicating an ILEC facility is present in a geographic area, that competitor is assumed to be reasonably efficient. Right?
1LISTNUM 1 \l 16146 DR. WEISMAN: It would be duplicating the functionality associated with a particular facility.
1LISTNUM 1 \l 16147 MR. TACIT: Yes, sorry, the functionality.
1LISTNUM 1 \l 16148 DR. WEISMAN: Yes.
1LISTNUM 1 \l 16149 MR. TACIT: Okay. So any other competitor operating at an equal or lesser scope or scale that wanted mandated access shouldn't be entitled to it. Right? That's the way I understand your evidence.
1LISTNUM 1 \l 16150 DR. WEISMAN: The market has revealed that it is possible to duplicate that functionality, okay, so it is no longer monopoly controlled, and hence fails that limb of the test, and it would no longer be essential.
1LISTNUM 1 \l 16151 MR. TACIT: Okay. So is the answer to my question yes?
1LISTNUM 1 \l 16152 DR. WEISMAN: Yes.
1LISTNUM 1 \l 16153 MR. TACIT: Okay. So if the competitor that duplicates that facility turns out really not to be efficient and fails, would you agree with me that in the meantime no other competitor, who might actually have been efficient but operated at some lesser scale or scope, wouldn't have been able to obtain mandated access in the meantime?
1LISTNUM 1 \l 16154 DR. WEISMAN: Well, basically, what you have asked me is if the viable provider is no longer a viable provider, is it possible you need to revisit whether that's an essential facility? And I guess the answer would be, yes, it would.
1LISTNUM 1 \l 16155 MR. TACIT: So in the meantime, we could have actually ended up preventing efficient entry on a mandated basis because of an observation that really was incorrect?
1LISTNUM 1 \l 16156 DR. WEISMAN: Well, I suppose that's possible, but it seems to me that the Commission is going to know it's not going to be a judgment call that's on the border, maybe yes, maybe no, on whether it's a viable provider or not. I think it's going to be clear when the functionality has been duplicated.
1LISTNUM 1 \l 16157 As Mr. Grieve's said, in response to questions related to this, we are not talking about onesies and twosies here, we are talking about an economically viable provider that enters in a substantive way. So when the test is actually applied we can talk about these hypotheticals. I think it's going to be fairly clear to the Commission whether in fact there is economic duplicability of this functionality.
1LISTNUM 1 \l 16158 MR. TACIT: Okay. Well, I think we have experienced a lot of significant players who are no more, but we will leave that for argument.
1LISTNUM 1 \l 16159 Dr. Weisman, at paragraph 120 of your March 15th evidence, and that's at page 50, you say:
"Prevention of competition is not synonymous with the prevention of rivalry." (As read)
1LISTNUM 1 \l 16160 Is that correct?
1LISTNUM 1 \l 16161 DR. WEISMAN: Yes.
1LISTNUM 1 \l 16162 MR. TACIT: Okay. Now, again, I ask you: when the Commission is trying to operationalize the essential facilities test, how is it supposed to know when rivalry does not equate to competition?
1LISTNUM 1 \l 16163 DR. WEISMAN: Well, in the special case of going from zero providers to one provider, they are synonymous. The idea here would be that you not engage in a numbers game, a game that the FCC engaged in for a number of years, where their notion or their metric on competition in long distance was how many providers were in the market, and instead look at what's happening to the marketplace.
1LISTNUM 1 \l 16164 And with respect to essentiality, if there is one provider, then that test is over and it is not essential.
1LISTNUM 1 \l 16165 MR. TACIT: Okay, and we have talked about the perils of that already.
1LISTNUM 1 \l 16166 So the next thing you say, at paragraph 123 of that same evidence is:
"Dynamic considerations may warrant denial of access to an essential facility when such a denial encourages innovation that can be expected to enhance consumer welfare." (As read)
1LISTNUM 1 \l 16167 Now, to me, this seemed like an additional test on top of the essential facilities doctrine.
1LISTNUM 1 \l 16168 Did I read that right or is it part of the three‑part test?
1LISTNUM 1 \l 16169 DR. WEISMAN: No, it is not. The idea here is, for example, section 706 of the 1996 Telecommunications Act, which tells the Commission to put in place policies, the FCC to put in place policies that encourage the development of new telecommunications infrastructure, I believe it's section 7.(g) of your Telecommunications Act which encourages innovation, you may actually find cases where, in fact, the facility is essential, or might be essential, but you recognize, as a matter of public policy, that if you in fact unbundled it you wouldn't get the investment that you wanted.
1LISTNUM 1 \l 16170 For example, with respect to next‑generation services, I know that the FCC has basically said that they are not going unbundle those based on evidence that they found that there would not be the investment if they didn't make such a guarantee, and other countries and other regulators are dealing with very similar issues.
1LISTNUM 1 \l 16171 So you are in the situation of saying, If I don't ‑‑ and again, this goes back to the issue we talked about this morning regarding appropriability of investments, in some cases you are not going to have the investment made unless there's some assurances to the firm that they are going to be able to appropriate the returns on that investment, and in those special cases, where the innovation is particularly pertinent in advancing consumer welfare, the Commission may reasonably decide not to grant access.
1LISTNUM 1 \l 16172 MR. TACIT: And what would be the indicators that the Commission would use to determine that ahead of time, because there's some prognostication required here, correct? The Commission has to decide that it's going to forecast whether dynamic considerations warrant a denial. So if we are trying to help the Commission figure out how it's going to do that, what would be your prescription for that?
1LISTNUM 1 \l 16173 DR. WEISMAN: Well, I think we have to look at what is the likelihood that, for example, with respect to next‑generation services, would you get the investment in the telecommunications sector in the absence of ‑‑ if you did not have mandated access to it?
1LISTNUM 1 \l 16174 And as I said, there is an interest in encouraging investment in innovation in the network, and in many cases that will be inconsistent with having unbundling of those facilities. And I think that, in the case of next‑generation networks, you will not get the investment that the government is looking for unless you put in place some guarantee to that effect.
1LISTNUM 1 \l 16175 MR. TACIT: Okay, but based on what objective standards, because this is what I'm trying to figure out: how can the Commission operationalize this ahead of time?
1LISTNUM 1 \l 16176 I know you happen to believe this about next‑generation services, but tell me the objective standards that the Commission can apply to figure out what are the dynamic considerations?
1LISTNUM 1 \l 16177 DR. WEISMAN: Well, in the case of the Federal Communications Commission, I think it arrived at the conclusion, based on discussions with the ILECs, that this investment was not going to take place. And I understand that ‑‑ perhaps Dr. Crandall ‑‑ we were talking about this the other day with regard to France, that Telstar faces a very similar situation where these are massive investments, massive risks that these companies are incurring. And again, if firms cannot appropriate the returns from their investment, they are not going to make that.
1LISTNUM 1 \l 16178 I know in the case of the FCC, it was based on the realization that the policies, unless they put a stop to it with regard to next generation, it was going to curtail the amount of investment that took place.
1LISTNUM 1 \l 16179 So I'm not sure that I can give you a hard and fast rule that says how you should do it, other than to point out that I think it is absolutely critical that you do do it.
1LISTNUM 1 \l 16180 MR. TACIT: Other than listen to the ILECs basically. Right?
1LISTNUM 1 \l 16181 That's what you said.
1LISTNUM 1 \l 16182 DR. WEISMAN: Well, the proof is in the pudding in the sense that the commitment was made and Verizon is investing to something like $23 billion. The question is: Would you have had that investment if you had not made that commitment not to force unbundling?
1LISTNUM 1 \l 16183 I doubt you would have because the investors would not have put up with it.
1LISTNUM 1 \l 16184 MR. TACIT: I'm going to switch to a slightly different aspect of this and talk a little bit about the FCC's approach and the U.S. Telecommunications Act.
1LISTNUM 1 \l 16185 I believe that in your evidence in July you said something to the effect that the FCC rejects the idea that a decision to unbundle should rest on market power. Rather, the proper standard is one of impairment.
1LISTNUM 1 \l 16186 Is that correct?
1LISTNUM 1 \l 16187 DR. WEISMAN: Are you referring to a specific page in my evidence?
1LISTNUM 1 \l 16188 MR. TACIT: Sure. I can refer you to paragraph 49, at page 23 of your July 5th evidence.
1LISTNUM 1 \l 16189 DR. WEISMAN: Yes, I have it.
1LISTNUM 1 \l 16190 MR. TACIT: I see, starting at the third line of that paragraph before the quote, it says:
"A decision to unbundle a particular network element turns on whether the requesting carrier is impaired without access to that element."
1LISTNUM 1 \l 16191 What do you consider to be impaired?
1LISTNUM 1 \l 16192 DR. WEISMAN: Well, the FCC has a particular definition of impairment associated with barriers to entry. They would make it economically difficult for a carrier to enter the market essentially.
1LISTNUM 1 \l 16193 There is a formal definition in my testimony.
1LISTNUM 1 \l 16194 MR. TACIT: So is it one that is closely aligned to a prevention of competition definition?
1LISTNUM 1 \l 16195 DR. WEISMAN: It is impairment making it difficult but not necessarily impossible to enter otherwise.
1LISTNUM 1 \l 16196 MR. TACIT: And you do agree with me that the reason that the impairment standard is used is because the word "impair" forms part of the Telecommunications Act in the U.S. Correct?
1LISTNUM 1 \l 16197 That is the statutory test in the U.S.
1LISTNUM 1 \l 16198 DR. WEISMAN: Do you have a reference?
1LISTNUM 1 \l 16199 MR. TACIT: Yes. There is an exhibit that we provided, which is right at the beginning of the package of documents.
1LISTNUM 1 \l 16200 If we go to page 93 ‑‑
1LISTNUM 1 \l 16201 THE SECRETARY: This one?
1LISTNUM 1 \l 16202 MR. TACIT: Yes. And that will be...?
1LISTNUM 1 \l 16203 THE SECRETARY: That will be Exhibit No. 7.
1LISTNUM 1 \l 16204 MR. TACIT: Thank you.
EXHIBIT CYBERSURF‑7: Excerpt from the Communications Act of 1934
1LISTNUM 1 \l 16205 MR. TACIT: We see that it says:
"In determining what network elements should be made available for purposes of subsection C(3), the Commission..."
1LISTNUM 1 \l 16206 Which is the FCC.
"... shall consider at a minimum..."
1LISTNUM 1 \l 16207 And skipping to (b):
"(b) the failure to provided access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the service that it seeks to offer."
1LISTNUM 1 \l 16208 So the impairment standard comes from the statutory requirement that uses the word "impair". Correct?
1LISTNUM 1 \l 16209 DR. WEISMAN: It does. It is typically referred to as the "necessary and impair" standard, with the "necessary" part being more closely aligned with the essential facilities doctrine.
1LISTNUM 1 \l 16210 MR. TACIT: Thank you.
1LISTNUM 1 \l 16211 I would like to continue with you, Dr. Weisman.
1LISTNUM 1 \l 16212 Could you look at your response to TELUS‑CRTC 12April07‑109, which is at page 97 of this package.
1LISTNUM 1 \l 16213 Here was an exploration on the term "co‑ordinated activity between firms".
1LISTNUM 1 \l 16214 You say, halfway through that paragraph:
"This may mean one firm that is in sole control of the functionality or it may mean two or more firms that nonetheless act in a co‑ordinated manner to control the supply of that functionality."
1LISTNUM 1 \l 16215 My question for you is: In order for such co‑ordination to take place, is it necessary for the two firms to be related to each other?
1LISTNUM 1 \l 16216 DR. WEISMAN: Are you referring to some sort of collusive agreement between two separate firms so that there would be essentially one source of supply?
1LISTNUM 1 \l 16217 MR. TACIT: I'm asking you if in writing these words you contemplated the possibility that the two firms would not be related to each other?
1LISTNUM 1 \l 16218 DR. WEISMAN: They would be acting independently.
1LISTNUM 1 \l 16219 MR. TACIT: Right. Is it possible that the two firms would not be related to each other and still meet this test?
1LISTNUM 1 \l 16220 DR. WEISMAN: I'm not sure I understand your question.
1LISTNUM 1 \l 16221 MR. TACIT: When you are talking about monopoly control, you say there are two ways you can have it. There is one firm or there is a number of firms engaging in a co‑ordinated activity.
1LISTNUM 1 \l 16222 What I'm saying to you is: Is it possible, is it theoretically possible that such co‑ordination can result from co‑ordination among two firms that are not related to each other and it would meet the monopoly test, the monopoly control test?
1LISTNUM 1 \l 16223 DR. WEISMAN: I think it is theoretically possible. Then that would be an abuse you would want to take up with the Competition Bureau.
1LISTNUM 1 \l 16224 MR. TACIT: Thank you.
1LISTNUM 1 \l 16225 DR. WEISMAN: The whole ideas is that monopoly supply means one source of supply, whether it is one firm or two firms acting in concert.
1LISTNUM 1 \l 16226 MR. TACIT: Dr. Crandall, I would like to turn to your evidence.
1LISTNUM 1 \l 16227 I would like you to turn to your July 5th evidence, your stand‑alone piece, at paragraph 24, which is at the bottom of page 12.
1LISTNUM 1 \l 16228 MR. CRANDALL: I have it.
1LISTNUM 1 \l 16229 MR. TACIT: Thank you.
1LISTNUM 1 \l 16230 You say right near the bottom of the page, starting in the third line from the top right at the very end:
"The scaling back of the U.S. unbundling regime has thus had little effect on competition, but it appears to have unleashed a substantial amount of investment by the incumbent carriers. The Commission should examine closely this latter relationship because tomorrow's new services cannot be delivered over yesterday's network facilities."
1LISTNUM 1 \l 16231 What is this unleased investment that you are talking about? When did it occur specifically?
1LISTNUM 1 \l 16232 MR. CRANDALL: Well, it started essentially after a series of court and regulatory decisions, including a 2004 ‑‑ it goes back to 2002, 2004 Court of Appeals decision, and the follow‑on FCC regulations which have essentially decided not to have any network sharing requirements for any broadband service of any kind, be it cable or that provided by the ILECs.
1LISTNUM 1 \l 16233 And the surge of investment I'm talking about is that which is being engaged in by Verizon, in particular going fibre‑to‑the‑home; and in a more modest scale AT&T going fibre‑to‑the‑curb with its IPTV offering.
1LISTNUM 1 \l 16234 MR. TACIT: Would the pinnacle of that jurisprudence have been the Triennial Review Remand Order?
1LISTNUM 1 \l 16235 MR. CRANDALL: The Triennial Review would be, not the pinnacle but the nadir of the FCC's experience in this matter because as a result of their triennial review they received an incredibly harsh rebuke from the Court of Appeal saying that that order had not satisfied the requirements that they had sent back to them under what's called USTA‑1, I believe, in 2002.
1LISTNUM 1 \l 16236 MR. TACIT: But is the TRRO the inflection point, as far as you are concerned?
1LISTNUM 1 \l 16237 MR. CRANDALL: Well, yes, because in the TRRO there is a beginning ‑‑ they dropped line sharing which the court had told them they must do. They tried to perpetuate the UNE‑P through the back door, which the court then a year later told them they could not do. Therefore, the whole regulatory unbundling regime changed rather dramatically around 2004‑05.
1LISTNUM 1 \l 16238 MR. TACIT: You agree with me that the TRRO became effective on or about March 11, 2005. Right?
1LISTNUM 1 \l 16239 MR. CRANDALL: I don't know when it became effective, because a large part of it was reversed again. So not only do I not know the date, but I don't know what parts are ‑‑
1LISTNUM 1 \l 16240 MR. TACIT: Well, the TRRO remand order of the FCC.
1LISTNUM 1 \l 16241 MR. CRANDALL: I don't have that information in front of me; I'm sorry.
1LISTNUM 1 \l 16242 MR. TACIT: Okay.
1LISTNUM 1 \l 16243 PROF. ROBINSON: It was released on February 4, 2005.
1LISTNUM 1 \l 16244 MR. TACIT: But it became effective March 11th, subject to check.
1LISTNUM 1 \l 16245 MR. CRANDALL: Right, that's subject to review, sure.
1LISTNUM 1 \l 16246 MR. TACIT: So most of this investment then would have occurred as a result of this decision.
1LISTNUM 1 \l 16247 At paragraph 23, page 11 of your evidence, you make an interesting statement.
1LISTNUM 1 \l 16248 You say:
"In the last three years network expenditures by U.S. ILECs and by TELUS have rebounded from their 2003 lows reflecting the need to expand broadband capacity."
1LISTNUM 1 \l 16249 The thing that struck me about this is TELUS isn't subject to the FCC rules or the TRRO, is it?
1LISTNUM 1 \l 16250 MR. CRANDALL: No.
1LISTNUM 1 \l 16251 MR. TACIT: So when we look at the fact that TELUS' behaviour is actually quite similar to that of the U.S. ILECs, despite the fact that what was going on here is quite different from what was going on in the U.S., could it not be the case that the TRRO and the subsequent increase in investment by the U.S. ILECs could be more of a correlative relationship rather than a causal relationship?
1LISTNUM 1 \l 16252 MR. CRANDALL: Well, it could be driven by other factors, but I think it is almost indisputable that the regulatory environment the U.S. had in effect on both Verizon and AT&T ‑‑ AT&T's predecessor, SPC, had been trying to roll out more fibre in states like Illinois and Minnesota. But the competitors were trying to stop them or change their network architecture through state regulatory commissions, and at that point SPC simply said they were going to stop that fibre rollout until they got much better regulatory treatment on next generation networks, essentially fibre‑to‑the‑curb, fibre‑to‑the‑pedestal. And when they did get that treatment, they started rolling out the new networks.
1LISTNUM 1 \l 16253 So I think there are other factors going on there. I mean, the economy is growing. The bubble is a thing of the past. I'm not saying it's the only thing, but I would argue it was certainly a major cause of the surge that we are now seeing in Capex.
1LISTNUM 1 \l 16254 MR. TACIT: And the fact that TELUS was behaving the same way under a different regime is merely coincidental, in your view.
1LISTNUM 1 \l 16255 MR. CRANDALL: Well, I'm not certain that TELUS was affected by the U.S. regulatory regime. However, it is useful to point out that TELUS was never subject to the UNE‑P.
1LISTNUM 1 \l 16256 I do point out in my evidence that the regulatory regime here, however much TELUS might have disliked it, was not nearly as invasive and interventionist as the U.S. until the courts had their way in the United States.
1LISTNUM 1 \l 16257 MR. TACIT: Let me suggest to you another possible reason for the coincident behaviour between the ILECs and TELUS, and that is that all of these entities were realizing that they really needed to beef up their broadband investment so that they could compete in providing broadband platforms.
1LISTNUM 1 \l 16258 Would you agree that that is an important factor?
1LISTNUM 1 \l 16259 MR. CRANDALL: I would state it slightly differently, but I think that once the cable companies demonstrated their ability to roll out VoIP, then in order to keep the customer, the ILECs had to begin to get into the video business.
1LISTNUM 1 \l 16260 I think your ILECs in Canada are in exactly the same position.
1LISTNUM 1 \l 16261 What I'm saying is that the feasibility of doing that in the uncertain regulatory environment circa 1999 to 2002 in the United States was severely impeded.
1LISTNUM 1 \l 16262 MR. TACIT: Would you also agree with me that, as in Canada, in the U.S. the bundling of retail services is becoming very important for residential consumers?
1LISTNUM 1 \l 16263 MR. CRANDALL: Yes. I think you heard my discussion a little bit earlier about prices. And yes, it certainly is.
1LISTNUM 1 \l 16264 MR. TACIT: All right.
1LISTNUM 1 \l 16265 Mr. Chairman, I have a couple more topics, one of which is a little bit longer than the other.
1LISTNUM 1 \l 16266 I don't know if this might be a good time if you are contemplating a break.
1LISTNUM 1 \l 16267 THE CHAIRPERSON: You took the words right out of my mouth.
1LISTNUM 1 \l 16268 Let's do that. Let's have a ten‑minute break.
1LISTNUM 1 \l 16269 MR. TACIT: Thank you.
‑‑‑ Recessed at 1451 / Suspension à 1451
‑‑‑ Resumed at 1505 / Reprise à 1505
1LISTNUM 1 \l 16270 THE CHAIRPERSON: Okay, Mr. Tacit, proceed.
1LISTNUM 1 \l 16271 MR. TACIT: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 16272 MR. TACIT: So Dr. Crandall, still with you, I want to discuss some matters relating to access in the European Union and the UK, in light of your paper on that topic.
1LISTNUM 1 \l 16273 The first thing I would like you to do is turn to one of the exhibits that I provided, which is a speech given by Viviane Reding, EU Commissioner for Information, Society and Media, and it's at page 110 of the package that I gave out.
1LISTNUM 1 \l 16274 MR. CRANDALL: I have it.
1LISTNUM 1 \l 16275 MR. TACIT: This is a speech that she gave to the European Regulators Group.l
1LISTNUM 1 \l 16276 MR. CRANDALL: Yes.
1LISTNUM 1 \l 16277 MR. TACIT: If you could turn with me to page 4 of that document, which is also numbered 113 in the bottom right‑hand corner?
1LISTNUM 1 \l 16278 MR. CRANDALL: Yes.
1LISTNUM 1 \l 16279 MR. TACIT: here Ms Reding comments on the changes taking place in the UK since the functional separation that took place there, and about two‑thirds of the way down, the first paragraph, she says:
"Prior to the acceptance of the relevant undertakings by British Telecom in September 2005, there were just 105,000 unbundled lines in the UK. In June 2007, this had grown to 2.42 million unbundled lines." (As read)
1LISTNUM 1 \l 16280 Now, is that consistent with data that you have, as well?
1LISTNUM 1 \l 16281 MR. CRANDALL: Well, I'm sure she got it from the Offcom. I haven't got those numbers in front of me.
1LISTNUM 1 \l 16282 I cited data through the third quarter of 2006, and I think you even have a report in here that brings some data up to the second quarter of 2007, data that I have now seen, but has been released since I wrote my report.
1LISTNUM 1 \l 16283 MR. TACIT: So you have no reason to dispute this?
1LISTNUM 1 \l 16284 MR. CRANDALL: No, I have no reason to dispute that.
1LISTNUM 1 \l 16285 MR. TACIT: Okay, thank you.
1LISTNUM 1 \l 16286 And you mention the report, and this is also an exhibit.
1LISTNUM 1 \l 16287 Starting at page 117 is a working document of the EU communications committee on broadband access in the EU.
1LISTNUM 1 \l 16288 MR. CRANDALL: Right.
1LISTNUM 1 \l 16289 MR. TACIT: And if you could turn with me to the third page of that document, which is 119...well, first of all, let's look at the figure below, and we see that ‑‑ and this is the EU situation as a whole, not just the UK, but we see that as unbundled local loops increase, the proportion of bitstream and simple resale declines.
1LISTNUM 1 \l 16290 That's a fair observation relative to the unbundled local loop increase, would you agree with me?
1LISTNUM 1 \l 16291 MR. CRANDALL: Yes.
1LISTNUM 1 \l 16292 MR. TACIT: Okay. And then at the top there's a note that explains the two figures, that says:
"Figure 17 displays the type of access used by new entrants to provide DSL lines to their customers. Local loop unbundling, fully unbundled lines and shared access is the main wholesale access for new entrants with 55.4 percent of DSL lines up from 45.9 percent in July 2006. New entrants continue to replace bitstream access, down by 3.1 percentage points since July 2006, for local loop unbundling in the provision of broadband services, as can be seen in Figure 18. Share of resale, which represents a type of access for low investment intensive new entrants has shrunken by 6.3 percentage points during the year." (As read)
1LISTNUM 1 \l 16293 So is it fair to say that, as unbundled local loops are made available to competitors, they will, in fact, rely less on more bundled services and rely more on a combination of local loops in their own facilities to compete?
1LISTNUM 1 \l 16294 MR. CRANDALL: There has been an increase in use of local loop unbundling by some of the entrants. There's been relatively little migration from ‑‑ or much less migration from bitstream and resale to local loop than simply the expansion of those people who rely principally on local loops.
1LISTNUM 1 \l 16295 The exceptions, I think, would be possibly Iliad‑free in France and Tiscali and Wind in Italy, but most of the others are not necessarily replacing bitstream. What is happening is that the people are coming in using LLU ab initio.
1LISTNUM 1 \l 16296 MR. TACIT: But I guess the point is if you are looking for investment in facilities, you would agree with me that there's more investment by competitors when they are using unbundled local loops than if they are using bitstream or simple resale?
1LISTNUM 1 \l 16297 MR. CRANDALL: Yes, there is, but they are hostage to the copper loops of the incumbents, and none of the incumbents in Europe, with the possible exception of Belgacom, is investing in fibre.
1LISTNUM 1 \l 16298 You heard some discussion today from someone from Towerhouse saying that BT is just investing in some new locations in Kent, but BT has definitely decided not to invest at this point in fibre to the home. And France Telecom has also made the same judgment.
1LISTNUM 1 \l 16299 So, yes, there is a little more investment.
1LISTNUM 1 \l 16300 By the way, since you have that page open, in a chart there ‑‑ I want the Commission to be pretty clear about this ‑‑ the words "new entrant" in the EU means cable companies as well as CLECs. And so when you see that "owned network", I think it looks like, I'm not sure where it is here...well, I'm not sure, it may well be that the "owned network" numbers in this include cable facilities, because often in the EU tabulations a "new entrant" is called a cable company because it's a new entrant into the telecom services.
1LISTNUM 1 \l 16301 MR. TACIT: Can I just stop you there? I'm not aware that ‑‑ this is a DSL only ‑‑
1LISTNUM 1 \l 16302 MR. CRANDALL: Yes, yes.
1LISTNUM 1 \l 16303 MR. TACIT: ‑‑ so I can't imagine it has to do with ‑‑
1LISTNUM 1 \l 16304 MR. CRANDALL: Oh, I see, if this idea would sell lines. You are right, you are right.
1LISTNUM 1 \l 16305 MR. TACIT: Okay.
1LISTNUM 1 \l 16306 MR. CRANDALL: But above it says "new entrants", so you have to be careful.
1LISTNUM 1 \l 16307 One other thing, and that is some of the cable companies are using DSL, such as Virgin Media, in the UK, which is no longer pushing out his cable modem services, just reselling DSL from some of the new entrants.
1LISTNUM 1 \l 16308 MR. TACIT: Well, let us look at the situation in the UK specifically and see how much of a shackle the copper loop really is.
1LISTNUM 1 \l 16309 But before that, I want to ask you one question. You know, you talked about the disincentive for the ILECs resulting from local loop unbundling. But would it be fair to say that when the Commission is looking at the benefits of unbundling it should look at total industry investment and not just the ILEC situation?
1LISTNUM 1 \l 16310 DR. CRANDALL: Yes, yes.
1LISTNUM 1 \l 16311 MR. TACIT: In other words, you have got to look at what the entrants are doing too, right?
1LISTNUM 1 \l 16312 DR. CRANDALL: Right, right, and that was the Waverman et al study got at that Ms Palumbo was questioning about this morning.
1LISTNUM 1 \l 16313 MR. TACIT: Okay. So let us look at the last of the major exhibits that I have given you. And this is a portion of the Ofcom Communications Market 2007 study. And I would like you to turn with me to the last page, which is 132. And I am going to draw your attention specifically to the paragraph under the heading, "LLU accounts for 17 per cent of broadband connections as all sectors grow." And that paragraph reads:
"During 2006 the number of LLU broadband lines increased from 0.2 million to 1.3 million, and the end of the year LLU accounted for 10 per cent of all UK broadband connections compared to two per cent a year previously. By the end of June 2007 the number of LLU broadband connections had risen to 2.4 million or 17 per cent of the total with 966,000 of these connections being either Talk Talk or AOL and around 580,000 being BSkyB LLU connections. Talk Talk, AOL and BSkyB therefore account for almost two‑thirds of UK LLU broadband connections." (As Read)
1LISTNUM 1 \l 16314 And you are aware that, for example, Talk Talk and BSkyB offered free broadband services over LLU connections when customers subscribed to other services that they provided?
1LISTNUM 1 \l 16315 DR. CRANDALL: Yes, I have read that, yes.
1LISTNUM 1 \l 16316 MR. TACIT: Okay. And you are also aware that another company called Orange has also been providing free broadband service to customers?
1LISTNUM 1 \l 16317 DR. CRANDALL: I have not heard about Orange, but I will stipulate you are probably right if you have read it somewhere.
1LISTNUM 1 \l 16318 MR. TACIT: Okay. Now, let us look at some of the reasons why LLU has been so popular. And if we could take you back to page 121, and it is in the same report. Right at the bottom of the page Ofcom says:
"Unbundling exchanges gives operators control over more of the value chain and access to economies of scale not available when using BT wholesale tariffs. They are then able to pass these savings onto consumers." (As Read)
1LISTNUM 1 \l 16319 Would you agree with that observation?
1LISTNUM 1 \l 16320 DR. CRANDALL: It may give you more control off the value chain, it depends on what the LLU rate is, whether there's any savings to consumers and whether they can offer the same services at a lower price than the incumbent.
1LISTNUM 1 \l 16321 You should keep in mind that during this period BT's share has actually increased, not declined.
1LISTNUM 1 \l 16322 MR. TACIT: But you don't fundamentally disagree with that premise?
1LISTNUM 1 \l 16323 DR. CRANDALL: I don't disagree with the premise that by having your own facilities and your own DSLAMs that you probably have a little more control over the value chain. You still are constrained by the incumbents' pipes.
1LISTNUM 1 \l 16324 MR. TACIT: And getting to your point about being a slave to the copper loop, if you flip over to page 123, near the top, the first sentence of the first full paragraphs says:
"Although LLU has opened up the retail market by allowing operators to offer differentiated services.." (As Read)
So I'm just going to stop there. Do you agree that LLU can allow operators to offer differentiated services by installing their own equipment ‑‑
1LISTNUM 1 \l 16325 DR. CRANDALL: Yes, probably by varying the upstream and downstream speeds.
1LISTNUM 1 \l 16326 MR. TACIT: And so the wholesale market provides opportunities for an entrant to gain scale before deploying costly infrastructure of its own. Doesn't that sound a lot like a stepping stone approach to you?
1LISTNUM 1 \l 16327 DR. CRANDALL: Yes but, as I say, I haven't looked at the numbers recently. There has not been many of these companies climbing the stepping stones. The major stepping stone is to provide the direct connection to the customer. And the company that is most prime to do so is Virgin Media, which is the new name of NTL:Telewest.
1LISTNUM 1 \l 16328 And you look at the first page you referenced, namely your page 132, their page 289, you will see that cable modem service is growing rather rapidly in 2004, 2005, 2006. Last year cable modems expanded by 3 per cent in the UK, as essentially Virgin Media shut down the expansion cable modem service and decided simply to be a passive reseller of DSL.
1LISTNUM 1 \l 16329 MR. TACIT: If I could just take you then back to page 125 for a minute.
1LISTNUM 1 \l 16330 Now the other thing, would you agree with me, that ‑‑
1LISTNUM 1 \l 16331 DR. CRANDALL: 120 did you say?
1LISTNUM 1 \l 16332 MR. TACIT: 125, yes.
1LISTNUM 1 \l 16333 DR. CRANDALL: 125 yes.
1LISTNUM 1 \l 16334 MR. TACIT: If you look at the middle of the page, it says that:
"BT is upgrading the speed of its basic broadband connections up to 8 megabits and some LLU operators like B with its up to 24 megabits per second, core proposition are using speed as a point of differentiation." (As Read)
1LISTNUM 1 \l 16335 Would you agree with that observation?
1LISTNUM 1 \l 16336 DR. CRANDALL: I haven't independently checked to see what speeds BT or any of the competitors are offering.
1LISTNUM 1 \l 16337 MR. TACIT: And then you see on the immediate following two lines it talks about Virgin Media upgrading its system to 20 megabits per second and BT's 21CN will use ADSL2+ to potentially provide speeds of up to 25 megabits per second. Seems like a pretty competitive market to me.
1LISTNUM 1 \l 16338 DR. CRANDALL: It would be nice if Virgin Media decided to sell that service. And the problem is they apparently shut down the decision to expand their sales of that service because it is cheaper to use the LLU product.
1LISTNUM 1 \l 16339 MR. TACIT: Now, would you agree with me that the LLU product facilitates service bundling?
1LISTNUM 1 \l 16340 DR. CRANDALL: Well, any access to a product, if you have got a broadband data product it allows you to bundle whatever else you have in our service page. I don't know that the LLU perse allows that. It may allow you to vary the broadband package more.
1LISTNUM 1 \l 16341 MR. TACIT: Well, let us then look at what the study says at page 127 under the heading 4.1.9, Service and Bundling Proliferates as LLU Availability Increases. The text says:
"A key benefit of LLU is that allowing operators to locate their own equipment in a BT exchange enables greater service differentiation as unbundlers are no longer tied to BT's wholesale products. One out come of this has been the proliferation of multiple communication service product bundling in the last 18 months, much of which is provided over unbundled local loops." (As Read)
1LISTNUM 1 \l 16342 And the table below shows a number of those bundled offerings by different suppliers. Do you dispute any of this data?
1LISTNUM 1 \l 16343 DR. CRANDALL: I don't dispute that. What I know is, from their own statistics, is that broadband growth has slowed down in the UK since this policy was inaugurated in the third quarter of 2005 and continued to slow down. Given the most recent numbers it is growing at about half the rate it was prior to 2005.
1LISTNUM 1 \l 16344 So it may be that all of these bundling options available to entrants leads to lower prices, more attractive packages and a resurgence of growth, but we haven't seen it yet and I think it is a little early for Ofcom, who I understand wants to put a good gloss on its policy, to be declaring victory.
1LISTNUM 1 \l 16345 MR. TACIT: Now, at the bottom of that we see the remark:
"Service bundling is popular with operators, as it offers the potential to reduce churn in a market characterized by rising acquisition costs. It can also increase average revenue per user even though the prices of individual services are falling. Consumers typically benefit from discounts when buying a selection of communication services from a single operator and, in many cases, receive a single bill and point of contact for customer services." (As Read)
1LISTNUM 1 \l 16346 So those are all benefits, you would agree?
1LISTNUM 1 \l 16347 DR. CRANDALL: They are not necessarily benefits of unbundling, but they are benefits of operators being able to offer multiple services, whether with their own platforms, through resale or however.
1LISTNUM 1 \l 16348 MR. TACIT: And you would agree with me that local loop unbundling also facilitates IPTV offerings in the UK such as Tiscali's Triple Plays offering?
1LISTNUM 1 \l 16349 DR. CRANDALL: That I don't know how much they are constrained by the underlying copper loop in developing that, but it may be possible, yes.
1LISTNUM 1 \l 16350 MR. TACIT: So I guess what I would like to suggest to you in light of some of this evidence is that there can certainly be a lot of dynamic benefits associated with local loop unbundling. It facilitates bundles of services, it allows operators to have a sufficient scope and scale to deploy their own facilities and equipment, it allows new innovative offerings that are differentiated by speed, quality, IPTV. Why are these dynamic benefits not important for consumers?
1LISTNUM 1 \l 16351 DR. CRANDALL: Oh, I think they are, but I think at the same time the cost is that it has discouraged the further rollout of cable in the UK, which is exactly what the Waverman report identifies across the EU. And the platform competition that could come from Virgin Media, it seems to me, could be rather substantial and could provide even greater value. But there could be some value for the unbundling regime, but it is offset substantially by shutting down Virgin Media's expansion of its own platform‑based services.
1LISTNUM 1 \l 16352 MR. TACIT: Would you agree with me that in terms of cable penetration in the UK it has been about the same for a decade at about 45 per cent?
1LISTNUM 1 \l 16353 DR. CRANDALL: You are talking about video ‑‑
1LISTNUM 1 \l 16354 MR. TACIT: I am talking about cable passing households.
1LISTNUM 1 \l 16355 DR. CRANDALL: Yes, right. Well, there is different numbers here. Cable always did have trouble competing with BSkyB. On the video side they competed much better than the telephone side for years. Now, what their current numbers are I don't know.
1LISTNUM 1 \l 16356 There is a study by Jerry Hausman and Greg Sidak, which shows that when unbundling was first started in the UK essentially all growth of cable stopped and that was like six years ago. And that would be consistent with your observation that cable has not grown in the UK.
1LISTNUM 1 \l 16357 MR. TACIT: Well, let us look at that issue a bit too, because the Ofcom report also speaks to that. And if you turn to page 130, near the bottom, the last statement made there is:
"Absolute growth in the number of broadband connections slowed from 3.8 million during 2005 to 3.1 million in 2006 and this trend is likely to continue. Ofcom research indicates that at the end of 2006 50 per cent of UK households had a broadband connection while home computer laptop penetration stood at 69 per cent." (As Read)
1LISTNUM 1 \l 16358 So doesn't it stand to reason that the more and more people have it you are going to get a slowdown eventually?
1LISTNUM 1 \l 16359 DR. CRANDALL: Now, you are switching from the cable question to the broadband question.
1LISTNUM 1 \l 16360 MR. TACIT: Well, I will get to the cable one as well.
1LISTNUM 1 \l 16361 DR. CRANDALL: Yeah, yeah. Okay, yeah.
1LISTNUM 1 \l 16362 Yes, I think that's correct, but what ‑‑ after all, Offcom does have access to sophisticated economists in U.K. at Oxford and Cambridge and London School.
1LISTNUM 1 \l 16363 They could have done an econometric analysis on whether their policies have actually led to a growth but for their policies, you know, that you would expect through the S‑curve some slow‑down in broad band but there hasn't been as much slow‑down because of the beneficial effects of the Offcom policy.
1LISTNUM 1 \l 16364 As I read through their market reports and their periodic reports, I see no such studies.
1LISTNUM 1 \l 16365 MR. TACIT: No, they ‑‑
1LISTNUM 1 \l 16366 DR. CRANDALL: Yeah.
1LISTNUM 1 \l 16367 MR. TACIT: No, instead they just cited the benefits to competitors and consumers.
1LISTNUM 1 \l 16368 DR. CRANDALL: Yeah. Well, they don't measure the benefits, they just assert that this is ‑‑ the benefits ‑‑ they assert there are benefits from LLU competition, they don't talk about the declining role of cable modems.
1LISTNUM 1 \l 16369 MR. TACIT: Now, as to the point on cable, let's go to page 126 of that same report under the heading 4.1.7, Cable Broad Band Accounts for Less than 25 Per Cent of all Connections.
1LISTNUM 1 \l 16370 DR. CRANDALL: Mm‑hmm, mm‑hmm.
1LISTNUM 1 \l 16371 MR. TACIT: Do you see that?
1LISTNUM 1 \l 16372 DR. CRANDALL: Mm‑hmm.
1LISTNUM 1 \l 16373 MR. TACIT: And halfway through the first paragraph, Offcom states:
"Cable's share of broad band connections has declined as a result of higher availability of DSL. Nearly all premises are connected to a DSL enabled exchange while cable broad band is only available to around 55 per cent of households and more recently increased competition from LLU operators." (As read)
1LISTNUM 1 \l 16374 So, DSL growth is faster because it already is in the home, whereas cable only passes 55 per cent of households; isn't that right?
1LISTNUM 1 \l 16375 DR. CRANDALL: And also it's stimulated because the cable company has become a re‑seller of DSL service rather than investing in its own facilities.
1LISTNUM 1 \l 16376 I've had this debate for years with Ed Richards, the Chief Executive of Ofcom, on why haven't they looked more to stimulating infrastructure competition in cable as Commissioner Redding seems to want to do. She talks very much about infrastructure competition in places like the Netherlands.
1LISTNUM 1 \l 16377 For some reason he views cable as hopeless and is willing to sacrifice cable growth on the altar of DSL competition.
1LISTNUM 1 \l 16378 We'll see if that turns out to be a good idea. I don't think the evidence thus far supports that it is a good idea.
1LISTNUM 1 \l 16379 MR. TACIT: Well, in fairness though, you've mentioned that cable penetration hasn't increased in a long time and even before this policy went into effect, the new functional separation policy; correct?
1LISTNUM 1 \l 16380 DR. CRANDALL: Yes, but what I was saying was then you should look at the Hauzman Sydak study. They claim that the major inflection occurred when the EU mandated unbundling in 2001 and it was ‑‑ it began to be implemented by Offtel, admittedly not in a very aggressive fashion.
1LISTNUM 1 \l 16381 MR. TACIT: Well, what I see here is where it has a footprint, Virgin Media, it says in the very next paragraph there:
"...the U.K.'s largest cable provider has been to promote its broad band offering bundled with TV, fixed line and more recently mobile telephone services to consumers in its cabled areas." (As read)
1LISTNUM 1 \l 16382 So, where it seems to be competing vigorously where it has a footprint, the fact is, it may not have been economical for Virgin Media to increase its footprint long before the new policy went into effect for other reasons; correct?
1LISTNUM 1 \l 16383 DR. CRANDALL: Well, it's possible. It's possible because they couldn't figure out how to compete with Rupert Murdoch, but what they also were doing is shutting down, as I mentioned, shutting down the sale of cable modem services where they do have a footprint and they're growing by re‑selling DSL, and that passive activity is induced by low‑cost DSL services apparently and does not lead to greater platform competition innovation.
1LISTNUM 1 \l 16384 MR. TACIT: Now, I want to just switch topics for a minute and talk about when we talk about the stimulation of investment, what facilities are we talking about.
1LISTNUM 1 \l 16385 In your view, is it just last mile facilities that we're looking to build; is that realistic, or are we looking at facilities to include DSLAM equipment, smarter servers that can offer new types of IP‑based services?
1LISTNUM 1 \l 16386 What facilities are we looking, what investment are we looking to stimulate here?
1LISTNUM 1 \l 16387 DR. CRANDALL: Well, you realize you're talking to an economist not an engineer now. But the term 21st Century network, or NGN, next generation network means a lot of different things to different people, but I think generally what it means is changing the network topology over from a circuit switch topology to a packet switch, soft switch topology and that may not require huge investments, depends on the nature of the network in place. Where the big costs come apparently is in rolling out fibre to the final subscriber.
1LISTNUM 1 \l 16388 MR. TACIT: And although it's not necessary to roll out fibre to the subscriber, as we've seen DSL can be provided at 24‑megabytes per second over copper, can support IPTV.
1LISTNUM 1 \l 16389 DR. CRANDALL: It can if fibre is rolled out close enough, if the nodes are close enough. The fact that it is offered somewhere in the U.K. doesn't mean to say that it is offered everywhere and, in fact, a recent study by ITIF in Washington shows that we're far ahead of the U.K. I believe in terms of cost per megabyte per second.
1LISTNUM 1 \l 16390 So, I think while you can rely upon DSL to get you some speed, companies such as Verizon and NTT in Japan have decided it is by far the better part of wisdom to roll out fibre and have speeds of 50, 100‑megabytes per second or more.
1LISTNUM 1 \l 16391 MR. TACIT: But a lot of the competition that's going to support the new emerging services is based on the electronics involved. You're hooking up new electronics to old fibre, old copper, old spectrum; isn't that the case?
1LISTNUM 1 \l 16392 You're not going to be replicating, have three, four, five last mile networks to everybody's home; are you?
1LISTNUM 1 \l 16393 DR. CRANDALL: We don't know that. I mean here we're having a middle‑aged lawyer talking to an older economist, none of us knows where these services are going, it's the kids that are driving it and we don't know where the technology's going, but we do know that at this juncture fibre's going to get you a lot more than copper and Verizon and Nippon Telephone, NTT, seem to be doing very well with their bet so far.
1LISTNUM 1 \l 16394 MR. TACIT: Thank you, Dr. Crandall.
1LISTNUM 1 \l 16395 Thank you TELUS Panel. Those are my questions.
1LISTNUM 1 \l 16396 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 16397 Commissioner Cram.
1LISTNUM 1 \l 16398 COMMISSIONER CRAM: Dr. Crandall, that same page that you referred to before, 113.
1LISTNUM 1 \l 16399 DR. CRANDALL: Of his attachment?
1LISTNUM 1 \l 16400 COMMISSIONER CRAM: Yes.
1LISTNUM 1 \l 16401 DR. CRANDALL: Yeah, his exhibit, excuse me.
1LISTNUM 1 \l 16402 COMMISSIONER CRAM: Hello. Somebody answer the phone.
1LISTNUM 1 \l 16403 DR. CRANDALL: Let me get it. Yeah.
1LISTNUM 1 \l 16404 COMMISSIONER CRAM: 113.
1LISTNUM 1 \l 16405 DR. CRANDALL: Oh, 113, Ms Redding's speech?
1LISTNUM 1 \l 16406 COMMISSIONER CRAM: Yes.
1LISTNUM 1 \l 16407 DR. CRANDALL: Yes.
1LISTNUM 1 \l 16408 COMMISSIONER CRAM: And the line underneath where they were talking to just 105,000 unbundled lines to .42, the next sentence is what interested me more.
"In parallel, the share price of BT went up and network investment was substantially intensified." (As read)
1LISTNUM 1 \l 16409 DR. CRANDALL: Well, she unfortunately has her numbers wrong. There's no evidence that network investment by ‑‑ at least by BT intensified. It did intensify back earlier. It has stayed flat. It stayed at a fairly high level and that's kind of a puzzle.
1LISTNUM 1 \l 16410 Why the share price has been that high, I mean, you and I could muse over that. One possibility is that the alternative is much worse. They were facing a possibility of a structural break up before their competition authorities and they chose to throw themselves upon the mercy of Offcom instead.
1LISTNUM 1 \l 16411 So, the market might have been discounting the fact that they would get much worse treatment from the competition authorities and a result of it the stock took off for a while. Now it hasn't done as well lately.
1LISTNUM 1 \l 16412 COMMISSIONER CRAM: And what is open reach?
1LISTNUM 1 \l 16413 DR. CRANDALL: Oh, open reach is the wholesale division that is set up in this functional separation regime and they now have ‑‑ it's very puzzling, I don't claim to understand it ‑‑ they now have a separate wholesale division and an open reach division and it depends upon whether they are wholesaling mandated facilities or wholesaling under commercial agreements, as I understand it. I think the Chairman was in Europe last week and maybe he got a better explanation.
1LISTNUM 1 \l 16414 THE CHAIRPERSON: You are absolutely right, that is exactly what it is.
1LISTNUM 1 \l 16415 COMMISSIONER CRAM: And from my read of it, in 2006 and 2007 in addition to ‑‑ I guess you would say relatively flat Cap‑ex by BT, they've had an additional ‑‑ oh man, I can't ‑‑ millions of pounds, 1,000‑million, so is that ‑‑
1LISTNUM 1 \l 16416 DR. CRANDALL: It would be a billion pounds, yeah. It's in the billion pounds range, yeah, I think.
1LISTNUM 1 \l 16417 COMMISSIONER CRAM: So, you don't think that's a substantial increase?
1LISTNUM 1 \l 16418 DR. CRANDALL: Well, let's be careful. We don't know what this investment is. They talk about having to spend a lot of money in order to meet their obligations to Offcom, their undertakings as they refer to it. We don't know what that means.
1LISTNUM 1 \l 16419 In the United States, back during the period of structural separation, the Bell company spent a lot of money just complying with the requirements of running a structurally separate operation and dealing with the long distance companies.
1LISTNUM 1 \l 16420 This may be investment in the long run runs down to the benefit of consumers and it may not, so we don't know what this investment is.
1LISTNUM 1 \l 16421 COMMISSIONER CRAM: It is Cap‑ex though?
1LISTNUM 1 \l 16422 DR. CRANDALL: Well, they're measuring ‑‑ I assume their accountants are accurately capturing what they're spending in capital. How they divide it between open reach and wholesale division is very interesting because those two divisions have to use many of the same facilities, so there's a real allocation problem here and I don't know how they do that.
1LISTNUM 1 \l 16423 COMMISSIONER CRAM: It seems to me you state the real problem with the separation is that it discouraged broad band.
1LISTNUM 1 \l 16424 DR. CRANDALL: Well, I'm looking for evidence, so I'm looking for evidence of what the effect has been.
1LISTNUM 1 \l 16425 And we've been over the evidence, Mr. Tacit, about unbundling increasing and I granted you that some unbundling could provide new entrants with ability to provide additional services.
1LISTNUM 1 \l 16426 My concern is that, and I've had this concern with Mr. Richards for years, is that they're doing nothing to incent the cable system to expand. They have a large cable system that is not rolled out to the entire country and now that cable system isn't even expanding its cable modem services.
1LISTNUM 1 \l 16427 So, yes, I am worried about that and I think that's something to watch.
1LISTNUM 1 \l 16428 I think even Ms Redding admits that for half the countries in the EU you don't want a policy like this. She points in another document that ‑‑ maybe in that speech ‑‑ that she wouldn't impose this on a country like the Netherlands which, of course, looks more like Canada with lots of cable competition, but she wouldn't maybe impose it on Bulgaria. Now, you'll be happy to know you don't resemble Bulgaria much, so I don't think there's any need to even talk about functional or structural separation in a situation such as Canada where you have very vibrant platform competition.
1LISTNUM 1 \l 16429 COMMISSIONER CRAM: Yes. Well, my point was going to be, if we adopted this, we wouldn't have the same problem about worrying about broad band competition because it's already there and very alive and well.
1LISTNUM 1 \l 16430 DR. CRANDALL: Well, it's not clear to me that either Bell Canada or TELUS has begun to roll out fibre to the home. My colleagues here, two who were on the panel here, tell me that they are trialing fibre‑to‑the‑home but they haven't started to roll it out yet. It is possible that an adverse regulatory climate could induce them to slow it down, maybe not abandon it because they eventually have to compete with the cable companies in video.
1LISTNUM 1 \l 16431 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 16432 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 16433 A couple of things came out that I wanted to clarify.
1LISTNUM 1 \l 16434 First of all, from the Competition Bureau, you heard the definition that Dr. Robinson gave for section 79, which is perfectly logical. I agree with you, Dr. Robinson. But I'm not so sure whether that is the Competition Bureau's interpretation of how they interpret section 79 when we come to essential facility.
1LISTNUM 1 \l 16435 Maybe in your argument you can address that point. I would like to see whether that is shared by the Bureau or not.
1LISTNUM 1 \l 16436 Second, Dr. Weisman, you talked about if we get it wrong, we suggest fade it out, five years. And if you get it wrong just before the five years, you can in effect have a review and vary, I presume, and re‑institute and regulate it at the retail.
1LISTNUM 1 \l 16437 Doesn't that totally undermine what you said before about a hard stop predictability, knowing where to go, et cetera?
1LISTNUM 1 \l 16438 DR. WEISMAN: Well, it's a bit of a paired action in the sense that in some sense you have to let go to see what's possible. I think the idea is that over the three‑to‑five year period you would see what commercial agreements were arranged, what self‑supply was arranged and things like that.
1LISTNUM 1 \l 16439 It wouldn't in the sense that the point is that you are not going to change the definition. You are going to stick to the pure definition of an essential facility. But if there is a problem at the retail level with respect to market power, you could come in there.
1LISTNUM 1 \l 16440 I don't know that that would necessarily change the incentives to self‑supply or enter into commercial agreements. Over that three‑to‑five year period, of course you would do a couple of things. You would provide the opportunity to self‑supply and you would also lower the bargaining power of the network owners, knowing that that option to build was viable over that extended period of time.
1LISTNUM 1 \l 16441 It's a generous transition period in a technologically dynamic marketplace.
1LISTNUM 1 \l 16442 THE CHAIRPERSON: So it's a hard stop with limited exceptions in the final analysis.
1LISTNUM 1 \l 16443 DR. WEISMAN: Well, it's a hard stop at the wholesale level. You are not going to change that definition.
1LISTNUM 1 \l 16444 My understanding under your statutory responsibilities, you do have a rate‑making market power issue at the end that you have to address perhaps.
1LISTNUM 1 \l 16445 THE CHAIRPERSON: And lastly, Dr. Crandall, let's have another go at this. I'm a pragmatic person. I'm trying to figure out how to operationalize this thing.
1LISTNUM 1 \l 16446 You have heard the testimony this morning of Mr. MacDonald, who says when you roll out a network, et cetera, you don't do it line‑by‑line; you sort of look at the totality of what do my customers need, what do I need, et cetera.
1LISTNUM 1 \l 16447 So here we have a definition of essential facilities but we realize the end result is not going to be end‑to‑end facility but it is going to be a mixture of facility‑based and leased, et cetera.
1LISTNUM 1 \l 16448 So when he comes to his roll‑out, to determine whether something is duplicable or not, since he is just talking about economic terms, it is a question of where you put your money.
1LISTNUM 1 \l 16449 So if it technically cannot be duplicated, fine, no problem. But if it is economically, what is feasible, what is sensible, given that at the end of the day he is going to have a network, but it is mixed; some leased, some facility‑based?
1LISTNUM 1 \l 16450 How does he make that decision or how do we make that decision to determine in this instance that makes sense, that would be economically unsound and yes, it is essential; and no, maybe a bit on the expensive side. But given the totality of your network, that would be the right investment.
1LISTNUM 1 \l 16451 I'm trying to figure out how from time to time we operationalize. Maybe you can help me. Or maybe I misunderstand the problematic ‑‑
1LISTNUM 1 \l 16452 MR. CRANDALL: Remember that to some extent I was speaking out of school. My testimony doesn't go to this, but I would be happy to pursue it with you.
1LISTNUM 1 \l 16453 THE CHAIRPERSON: Any one of you, if you want to pass it on.
1LISTNUM 1 \l 16454 MR. CRANDALL: I will start and let the others chime in.
1LISTNUM 1 \l 16455 Mr. MacDonald wants to take you to the reductio ad absurdum. He wants to compete across Canada for the enterprise business. Large enterprises are increasingly spread all across Canada. He's going to serve all of them. Therefore, if he were to connect all of them directly, it would cost him $200 billion, or something like that he tells you, and therefore it's an impossibility.
1LISTNUM 1 \l 16456 THE CHAIRPERSON: I didn't take that example. I appreciate that was the extreme.
1LISTNUM 1 \l 16457 MR. CRANDALL: Right.
1LISTNUM 1 \l 16458 THE CHAIRPERSON: But I thought the point said that you don't develop the thing line‑by‑line but you look at it in terms of network configuration, which is surely right.
1LISTNUM 1 \l 16459 MR. CRANDALL: What I attempted to persuade you of earlier, and apparently have not yet succeeded, is that to the extent that he can show he is capable of building in specific locations, he is capable of building in similar locations elsewhere and therefore can strike a commercial deal with the incumbents.
1LISTNUM 1 \l 16460 Canada and the United States, neither one of us has a national carrier. These carriers have to negotiate with each other for access, and it doesn't necessarily have to be unmandated, unbundling terms at regulated rates.
1LISTNUM 1 \l 16461 If there is no doubt that Quest or AT&T or Verizon can build in each other's territory, there is also no doubt that they are not going to build ubiquitous networks in those territories. As long as they have the ability, the knowledge, the engineering skills and the financial resources to do this, they can strike deals with one another.
1LISTNUM 1 \l 16462 Mr. MacDonald has access to the capital market. This is not an insubstantial firm. He has similar abilities. And I would argue that as long as he can demonstrate his ability to build in certain locations, he can persuade those facilities in other similar locations to do business with him.
1LISTNUM 1 \l 16463 THE CHAIRPERSON: Everybody's test says economically feasible. How do I determine economically feasible then?
1LISTNUM 1 \l 16464 It just depends on how you distribute your investment capital, whether there is something economically feasible. That's where my problem is in terms of operationalizing it.
1LISTNUM 1 \l 16465 MR. CRANDALL: I would only be concerned if I thought that this term would lead a limited number of CLEC players to deliberately withhold investment so as to show that they couldn't economically feasibly replicate facilities.
1LISTNUM 1 \l 16466 I think, as Professor Weisman suggested, the proof is in the pudding. If they start building facilities in some locations, it shows that they are economically feasible. Then you have to decide whether MTS Allstream is a viable enterprise in the long run. And that doesn't seem to me to be an issue that is on the table.
1LISTNUM 1 \l 16467 PROF. ROBINSON: Mr. Chairman, if I may, I would like to add an observation.
1LISTNUM 1 \l 16468 I'm just a common lawyer so I don't know how you figure out these economic tests, but it strikes me that you are not going to get away from this problem, no matter what definition of essential facilities you come up with. You are going to have to have some burden of proof type rule to show me.
1LISTNUM 1 \l 16469 I don't know that anything in this particular definition, this pure definition, limited strict definition, essential facilities, makes it any more problematic. One way or another, wherever you draw the line, there is going to be a proof problem, whether something is duplicable or not.
1LISTNUM 1 \l 16470 So to some extent your question is a question that nobody can answer in this proceeding, I think.
1LISTNUM 1 \l 16471 DR. WEISMAN: I guess I would just add that over the course of the transition period, I think you would have some carriers building in some areas and other carriers in another area, and at the end of that hard stop you would have a competitive wholesale market.
1LISTNUM 1 \l 16472 In some sense, as I thought about that and we've heard evidence on the stepping stone theory ‑‑ and a number have spoken to this ‑‑ they've really got it wrong in some sense; that it is really not stepping through unbundled loops and then on to a facilities‑based network. It's facilities‑based networks that will open up opportunities where these carriers seek to increase utilization on their own networks that is going to create this vibrant wholesale competitive market.
1LISTNUM 1 \l 16473 I think, Mr. Chairman, you seem to be troubled by the fact of putting yourself in Mr. MacDonald's shoes and saying how do you make these decisions. I think my only advice to you is to put in place a definition that allows the marketplace with a reasonable transition period to reveal what's possible and at the other end address any problems that may show up at that point.
1LISTNUM 1 \l 16474 Trying to forecast what is going to happen, we're not very good at that. If we were good at that, Charlie Brown would not have given away the cellular franchises to AT&T divestiture and then brought them back and sold them again. We are not very good at technologically forecasting.
1LISTNUM 1 \l 16475 THE CHAIRPERSON: Basically all of you are saying the same thing: that because it is an economic test, it should be dealt with on ex post basis rather than ex ante.
1LISTNUM 1 \l 16476 As you say, the proof is going to be in the pudding. You will be able to look, when you look retrospectively at it, saying that really is not feasible economically to duplicate. All of these others, actually they were because somebody actually did it.
1LISTNUM 1 \l 16477 Am I over‑simplifying or is that ‑‑
1LISTNUM 1 \l 16478 DR. WEISMAN: No, I don't think you are. As we have discussed this idea, I think the evidence reveals that when you have a broad unbundling regime at artificially low prices, firms that can build don't. So you can pretty much be assured, if you adopt a broad definition, in the end you are going to get less investment than you otherwise would.
1LISTNUM 1 \l 16479 That is a bad outcome with probability one.
1LISTNUM 1 \l 16480 It is also possible that you are not going to have an ideal outcome with what we are proposing. But the risk of a bad outcome is better than the certainty of a bad outcome.
1LISTNUM 1 \l 16481 THE CHAIRPERSON: Thank you very much.
1LISTNUM 1 \l 16482 Madam Secretary, who is next?
1LISTNUM 1 \l 16483 THE SECRETARY: Our last panel will be Mr. Denton. Please come forward.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 16484 MR. DENTON: Gentlemen, we have been listening to the discourse of you folk this afternoon, and sort of the narrative I get out of what you are saying is: Let's have this change of rules regarding the lease of essential facilities so that telcos can get on with the business of building next generation networks.
1LISTNUM 1 \l 16485 Would that be a correct interpretation of some of the things you have been saying?
1LISTNUM 1 \l 16486 DR. WEISMAN: I think a correct characterization would be: Put in place the proper definition of essential facilities with a generous transition period to see what the marketplace reveals and address any problems at the end.
1LISTNUM 1 \l 16487 It's not restricted to next generation facilities; it's regarding letting the marketplace work the way it's supposed to and not interfere with it, to the greatest extent possible.
1LISTNUM 1 \l 16488 MR. DENTON: That's true insofar as what you are saying. But I think also there has been an emphasis that next generation networks is the direction in which things are moving.
1LISTNUM 1 \l 16489 DR. WEISMAN: Perhaps Dr. Crandall can add to this, but I think the idea is that those are expensive investments to undertake. And to the extent that firms have concerns about their ability to appropriate the returns on those, it is likely to diminish their incentives to invest.
1LISTNUM 1 \l 16490 And also, to the extent that you can obtain unbundled loops or facilities at artificially low prices, when you can construct you will get construction, less investment than you otherwise would, so it is not exclusively next generation.
1LISTNUM 1 \l 16491 MR. DENTON: Granted, but you are claiming that they are expensive to build and that they need to be able to build them, they being next‑generation networks?
1LISTNUM 1 \l 16492 DR. WEISMAN: They are expensive to build.
1LISTNUM 1 \l 16493 MR. DENTON: Dr. Crandall?
1LISTNUM 1 \l 16494 DR. CRANDALL: Yes, I mean, my evidence in this proceeding involved a lot of things, but it seems like the questions came on the investment in the next‑generation network, which I think is properly the concern of this Commission. Whether the U.S. unbundling policy failed in 1996 to 2002 is an interesting academic question, but the real question here is who is going to build these networks and are you going to be competitive with the rest of the world? And it isn't just the ILECs, it could be fixed wireless networks, it could be SILEC networks of various sorts and, of course, there is a little matter of cable television out there too.
1LISTNUM 1 \l 16495 MR. DENTON: Great. So my text for my questions is I Googled "NGN working definition" where we went to the ITU. Now, the International Telecommunications Union is to telephony as the Vatican Catholicism. And we got the definition of next‑generation network and I would like to read it, however tedious it is. And then we can discuss how much the NGN differs from what we now have today:
"A Next‑Generation Network (NGN) is a packet‑based network able to provide services including Telecommunication Services and able to make use of multiple broadband, QoS‑enabled transport technologies and in which service‑related functions are independent from underlying transport‑related technologies. It offers unrestricted access by users to different service providers. It supports generalized mobility which will allow consistent and ubiquitous provision of services to users."
1LISTNUM 1 \l 16496 Now, packet‑based network, I think you would agree with me that the internet is a packet‑based network. Anyone?
1LISTNUM 1 \l 16497 DR. CRANDALL: Maybe you have got to direct this to the company people who know much more about the network than we do.
1LISTNUM 1 \l 16498 MR. DENTON: Well, the question really in relation to this is, how much do NGNs differ from what we have already? And in terms of the definition, you are still going to have the basic issue of the transport and services are going to be separate from each other. So how does that differ from the internet today?
1LISTNUM 1 \l 16499 DR. CRANDALL: Well, there is still lots of circuit switching and voice calls in my understanding. We haven't gone over fully to a packet‑switch network, but that is not the only.. I mean, what the ITU says isn't quite the Vatican and we don't ‑‑ this is a trade association of large telephone companies.
1LISTNUM 1 \l 16500 MR. DENTON: Indeed.
1LISTNUM 1 \l 16501 DR. CRANDALL: And that is a compromised statement, some of them don't want to roll out fibre probably.
1LISTNUM 1 \l 16502 But I think we have been focusing on not only the next‑generation network in terms of topology, but also the fatness of that last mile.
1LISTNUM 1 \l 16503 MR. DENTON: So in other words, really then if you had to make your balance between whether the fatness of the last mile or the next‑generation network you would say then that the real issue of the investment is in the fatness of the last mile, not the next‑generation network?
1LISTNUM 1 \l 16504 DR. CRANDALL: It depends on the company and I think you are really pushing economist and lawyers here into territory they shouldn't be opining about.
1LISTNUM 1 \l 16505 MR. DENTON: Well, it is very interesting, but the assumption that is being blandly cast about is that unless the carriers get their way in relation to essential facilities something quite vital for the future called next‑generation networks will not come into being. And I am suggesting for your consideration that NGNs are in fact definable, people have been working on them and, when looked at, will provide a quite different view of what the matter is.
1LISTNUM 1 \l 16506 So let us go back to NGNs. If they resemble the internet of today, does anyone on this panel know how NGNs will differ from the internet of today? I can give you the answer if you want.
‑‑‑ LAUGHTER / RIRES
1LISTNUM 1 \l 16507 PROF. ROBINSON: Well, I would suggest that maybe the answer isn't necessary what the ITU says it is.
1LISTNUM 1 \l 16508 MR. DENTON: I would suggest that the NGN is basically a charging mechanism put into the internet.
1LISTNUM 1 \l 16509 DR. CRANDALL: And this is an essential facilities proceeding, not a neutrality proceeding, isn't it? I don't know what we are getting into here.
1LISTNUM 1 \l 16510 MR. DENTON: Well you are getting into the basic doctrine, as you are proposing, is that we need to have this change of essential facilities whereby we focus our attention two inches from our face on essential facilities and lose at basically restraining at a gnat and swallowing a camel. What we are really being asked to do is ignore the fact of what this is being done for, which is to put a charging mechanism into the internet.
1LISTNUM 1 \l 16511 Anyone want to give a go at it?
1LISTNUM 1 \l 16512 THE CHAIRPERSON: I think you got your answer, why don't you go on.
1LISTNUM 1 \l 16513 MR. DENTON: Sorry?
1LISTNUM 1 \l 16514 THE CHAIRPERSON: You got your answer, silence speaks volumes. Ask the next question.
1LISTNUM 1 \l 16515 MR. DENTON: There is no next question.
1LISTNUM 1 \l 16516 THE CHAIRPERSON: Good, thank you.
‑‑‑ LAUGHTER / RIRES
1LISTNUM 1 \l 16517 MR. DENTON: Quod erat demonstrandum.
1LISTNUM 1 \l 16518 THE CHAIRPERSON: One last question for the panel.
1LISTNUM 1 \l 16519 Dr. Weisman, you basically ended up saying, you know, we are better to make a type 2 error than a type 1 error and go ahead and let us experiment. And then at the end of the day you can always re‑regulate, partially if need be.
1LISTNUM 1 \l 16520 And your experience and that of the other panellists, it is obviously based on the U.S. and UK, et cetera. In Canada, we have a very low population density, huge geographic land mass. And it is our experience in most infrastructures, whether you take rail, whether you take bus lines, whether you take airlines, et cetera, we wind‑up with a duopoly or more or less a quasi‑duopoly, they compete, but not too tough with each other, et cetera.
1LISTNUM 1 \l 16521 And isn't there a possibility we wind up with exactly the same thing here if we mandate too much and don't allow other people to ‑‑ isn't there a great danger that by committing a type 2 error and over‑relaxing them on mandating we it leads to reconsolidation of the industry and into a quasi‑duopoly?
1LISTNUM 1 \l 16522 DR. WEISMAN: Dr. Church gave us a nice exposé on the first day regarding likelihood of cooperation, and I can't add much to that, I thought he covered it well.
1LISTNUM 1 \l 16523 The idea though is that over that transition period, as I mentioned earlier, we don't do technological forecasting very well. And you might find that if you back away and see what the market delivers it might deliver wireless options that you hadn't considered.
1LISTNUM 1 \l 16524 Now, I know Commissioner Cram has spoken of Canada being one‑tenth the size of the U.S. and you have talked about this. There are many areas of the U.S. that look exactly like Canada and we have densities, we have rural areas and things like that. And I think the essential facilities moves north of the border quite well, the definition. And I think if that is applied and, given this transition period to see what develops, I think, again, you are going to have the same problem.
1LISTNUM 1 \l 16525 If you don't do that, I think you are guaranteed there is not going to be the development of these alternatives. If you do do it, there still might not be, but you have a chance that it is going to work and perhaps a pretty good chance. So the question is, you can continue with a broad unbundling regime, but you pretty much know how that is going to go. And if you back‑up, which the FCC has been doing, they had a very expansive unbundling regime and they slowly have been backing up and they've been backing up because they became convinced that they were discouraging investment in alternatives.
1LISTNUM 1 \l 16526 And there are ongoing proceedings, Commissioner Cram, regarding have they gone too far or not and that is still an open question and they are going be looking into that. But the fact of the matter is, we are moving in the direction away from broad‑scale unbundling rather in the direction of more expansive unbundling.
1LISTNUM 1 \l 16527 THE CHAIRPERSON: Okay, go ahead.
1LISTNUM 1 \l 16528 COMMISSIONER CRAM: But we are somewhere in the middle of that anyway aren't we, Dr. Crandall? Didn't you say that ours was a far less invasive system anyway?
1LISTNUM 1 \l 16529 DR. CRANDALL: Yes, I think you have never gone as far as the United States. The United States has back‑pedalled substantially. I think you still have a network alliance sharing requirement and the U.S. does not and that is very important in terms of broadband and the rollout of fibre and so forth.
1LISTNUM 1 \l 16530 And I suppose one of the major issues before you, and I have heard the Chairman opine on this, is how you apply this to new networks, whether you call them NGNs or fibre or whatever you call them?
1LISTNUM 1 \l 16531 COMMISSIONER CRAM: Thank you.
1LISTNUM 1 \l 16532 THE CHAIRPERSON: Okay, thank you very much, panel. I guess that is it for you today.
1LISTNUM 1 \l 16533 Madam Secretary, what is the next panel?
1LISTNUM 1 \l 16534 THE SECRETARY: We are prepared to move with a new panel of witnesses, with Primus/Globility.
1LISTNUM 1 \l 16535 THE CHAIRPERSON: Okay, we will give you five minutes to change panels then.
‑‑‑ Upon recessing at 1558 / Suspension à 1558
‑‑‑ Upon resuming at 1605 / Reprise à 1605
1LISTNUM 1 \l 16536 THE SECRETARY: Please be seated.
1LISTNUM 1 \l 16537 Counsel Ruby you may introduce your witnesses, please.
1LISTNUM 1 \l 16538 MR. RUBY: Thank you, Madam Secretary.
1LISTNUM 1 \l 16539 Mr. Chairman, I'm pleased to introduce to you the witness panel for Primus and Globility Communications.
1LISTNUM 1 \l 16540 Sitting closest to you is Dr. Kevin Hickey who is the Senior Vice‑President, Network and Technical Operations for Primus. He's also a consultant for Globility.
1LISTNUM 1 \l 16541 Dr. Hickey holds a Ph.D. in mathematics and has decades of experience in the telecom industry including as a Vice‑President of AT&T in the United States which I know we've had some questions about, which is why I mention it.
1LISTNUM 1 \l 16542 I also note that Dr. Hickey was the Chief Operating Officer of MaxLink, a fixed wireless service provider.
1LISTNUM 1 \l 16543 Next to Dr. Hickey is Mr. Ted Chislett, the President of Primus Canada. He is both an engineer who holds an M.Ba. and Mr. Chislett is the founding President of Primus Canada and has been with the company since its inception as a long distance re‑seller, now into the largest of Canada's non‑incumbent telecommunications service providers with over a million customers and about $300 (sic) worth of investment in facilities.
1LISTNUM 1 \l 16544 Mr. Chislett is also a Director of Globility and can speak to that company's operations.
1LISTNUM 1 \l 16545 Next to Mr. Chislett is Dr. Lee Selwyn who you've already been introduced to, so I will leave it at that.
1LISTNUM 1 \l 16546 THE CHAIRPERSON: Finally you get your chance, Dr. Selwyn.
1LISTNUM 1 \l 16547 MR. RUBY: Yeah. The problem is he's only got about 20 minutes today to fit it all in.
1LISTNUM 1 \l 16548 THE CHAIRPERSON: Well, we will give him plenty of time tomorrow. Don't worry.
1LISTNUM 1 \l 16549 MR. RUBY: All right. All right.
1LISTNUM 1 \l 16550 Thank you, Mr. Chairman.
1LISTNUM 1 \l 16551 Finally, of course last but not least, is Mr. Joe Boutros who is the President of Globility. Mr. Boutros also has a long history in the Canadian telecommunications market working with service providers, equipment manufacturers and he is also a professional engineer.
1LISTNUM 1 \l 16552 And, of course, assisting with the panel today in the back row is Mr. Jonathan Holmes, Director of Regulatory Affairs for Primus Canada.
1LISTNUM 1 \l 16553 Mr. Chislett has kindly offered to act as the chairman of the witness panel.
1LISTNUM 1 \l 16554 Mr. Chairman, I would note at this point that Primus and Globility did file an additional expert report from Mr. Rob Yates of LeMay Yates, but all of the parties who at first indicated they wished to cross‑examine him have since advised us that they did not intend to do so and, as a result, we have suggested to Mr. Yates that he need not participate on this panel and gave notice to all the parties and the Commission accordingly. So, he's not with us today.
1LISTNUM 1 \l 16555 Madam Secretary, the witnesses are now ready to be affirmed.
1LISTNUM 1 \l 16556 THE SECRETARY: Thank you very much.
AFFIRMED: DR. KEVIN HICKEY
AFFIRMED: TED CHISLETT
AFFIRMED: JOE BOUTROS
RESUMED: DR. LEE SELWYN
1LISTNUM 1 \l 16557 THE SECRETARY: Thank you.
1LISTNUM 1 \l 16558 Do you wish to examine your witnesses?
1LISTNUM 1 \l 16559 MR. RUBY: Yes, very briefly, Madam Secretary.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 16560 MR. RUBY: Mr. Chislett, Mr. Hickey and Mr. Boutros, was the Primus and Globility evidence and interrogatory responses prepared by you or under your supervision?
1LISTNUM 1 \l 16561 DR. HICKEY: Yes, it was.
1LISTNUM 1 \l 16562 MR. CHISLETT: Yes, it was.
1LISTNUM 1 \l 16563 MR. BOUTROS: Yes, it was.
1LISTNUM 1 \l 16564 MR. RUBY: And I take it they are true to the best of your knowledge and belief?
1LISTNUM 1 \l 16565 DR. HICKEY: Yes.
1LISTNUM 1 \l 16566 MR. CHISLETT: Yes.
1LISTNUM 1 \l 16567 MR. RUBY: And, Dr. Selwyn, I believe you've been sworn already with respect to most of your evidence, but just to confirm that to the extent there were interrogatory responses that you prepared on behalf of Primus, I take it that you provided those matters or interrogatory responses with respect to expert economic evidence?
1LISTNUM 1 \l 16568 DR. SELWYN: Yes.
1LISTNUM 1 \l 16569 MR. RUBY: And they were also prepared to the best of your knowledge and belief?
1LISTNUM 1 \l 16570 DR. SELWYN: Yes.
1LISTNUM 1 \l 16571 MR. RUBY: For all the panel members, are there any changes you want to make to your evidence at this point?
1LISTNUM 1 \l 16572 Mr. Chislett, maybe you could answer for the panel?
1LISTNUM 1 \l 16573 MR. CHISLETT: No.
1LISTNUM 1 \l 16574 MR. RUBY: All right. Mr. Chairman, the panel is now available for cross‑examination.
1LISTNUM 1 \l 16575 THE CHAIRPERSON: Okay. Mr. Daniels and Mr. Hofley, go.
1LISTNUM 1 \l 16576 MR. DANIELS: Thank you very much, Mr. Chairman. It's Mr. Daniels here first.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 16577 MR. DANIELS: I'd like to begin by just clarifying, is it fair to say that whatever wholesale services get mandated in this proceeding, you propose that the price for that service be set at phase 2 costs plus a mark‑up of 15 per cent; is that correct
1LISTNUM 1 \l 16578 MR. CHISLETT: Yes, that's correct.
1LISTNUM 1 \l 16579 MR. DANIELS: And I'd like to start then with that in mind and look at your opening statement.
1LISTNUM 1 \l 16580 Now, again, Mr. Chairman, I hope that everyone has been provided with a binder of our compendium of material, so I'm looking at Tab A which is your revised opening statement that reflects ‑‑ that was made after the changes in light of the Commission's October 3rd letter.
1LISTNUM 1 \l 16581 Sorry, I think there may be a couple of people short binders.
1LISTNUM 1 \l 16582 So, I'm at Tab A which is the opening statement of Primus and Globility. Now, in your opening statement you state that there are three major categories of service, as I understand it, access services, network services and interconnection facilities; is that correct?
1LISTNUM 1 \l 16583 MR. CHISLETT: Yes, that's correct and we've tried to put together a framework, this was before the Commission suggested their six‑part framework and I think the two are reasonably consistent.
1LISTNUM 1 \l 16584 MR. DANIELS: And so, to be clear, by access you mean ‑‑ and I'm taking this from your definition on page 2, which if you want I can turn you to ‑‑ facilities that CLECs use from a customer premises to the first logical point of interconnection.
1LISTNUM 1 \l 16585 That's your definition of access, when you say that; is that correct?
1LISTNUM 1 \l 16586 MR. CHISLETT: Yes, that's correct.
1LISTNUM 1 \l 16587 MR. DANIELS: And I assume here that you are generally, at least in the case of ILECs, referring to, you know, the central office when you make that statement about logical point of interconnection.
1LISTNUM 1 \l 16588 I just want to make sure that we're talking about access meaning the loop from the central office right to the customer's premises.
1LISTNUM 1 \l 16589 MR. CHISLETT: Generally speaking that's correct. There are a few exceptions where we get into what we call indirect access which are things like remotes, things like TPIA, what have you which basically provide equivalent services to the customer for the last mile.
1LISTNUM 1 \l 16590 MR. DANIELS: Okay. But we can ‑‑ just to keep this, and I'm not going to go into that issue, I don't want to talk about TPIA and cable and so on, I'm just trying to say that generally just access we're talking loops or CDNA or whatever, and your proposal, again, is that access, network and/or connection services all be priced at Phase II plus 15 percent?
1LISTNUM 1 \l 16591 MR. CHISLETT: That's correct.
1LISTNUM 1 \l 16592 MR. DANIELS: Now, as I understand your opening statement, Primus and Globility acknowledged that the stepping stone, or sometimes referred to as the ladder‑of‑investment approach to regulation, is not going to lead you or anyone else to build access facilities. Is that correct?
1LISTNUM 1 \l 16593 MR. CHISLETT: That's correct.
1LISTNUM 1 \l 16594 I mean, our position is the access is just something which is, you know, impossible to replicate that last metal copper wire. There may be disruptive technologies that come about which will permit something to happen, but that's something which we can't plan for.
1LISTNUM 1 \l 16595 The cable company is an example where there's been disruptive technology, where facilities that have been in placed in the access, because of new technology, are able to be used for local loops for phone services and things like that.
1LISTNUM 1 \l 16596 I think, from our perspective, the access, whereas it cannot be duplicated, does not really impact dramatically as far as innovation. The copper wire that goes into some homes cannot be ‑‑ you know, the copper wire, itself, is pretty dumb. It's not something which is going to be able to add innovation as to what goes on the ends of the copper wire, or the applications and different things like that which provide the opportunity for innovation.
1LISTNUM 1 \l 16597 MR. DANIELS: So if I could get you, then, to turn to ‑‑ in the opening statement, you have an appendix, so you have four pages, and then you have a two‑page appendix. One of them is Appendix A, "The Analytical Paradigm", and you are talking about access facilities on this page 5 of your material.
1LISTNUM 1 \l 16598 Do you have that there? It's a little tricky actually, because they are long scale, so...that may become a problem later, but right now it's something that you don't have to open it up for.
1LISTNUM 1 \l 16599 If you look under "Innovation and Investment", you actually say, "Wholesale regulation plays...", do you see me right there in the first sentence under ‑‑
1LISTNUM 1 \l 16600 MR. CHISLETT: Yes.
1LISTNUM 1 \l 16601 MR. DANIELS:
"Wholesale regulation plays no role in innovation and investment decisions with respect to access." (As read)
1LISTNUM 1 \l 16602 So that's your position, that there's no role at all for innovation in the access?
1LISTNUM 1 \l 16603 MR. CHISLETT: As far as a twisted pairs type of thing is concerned, it's pretty dumb. There's opportunities to innovate by what you put on the ends of the access. What you put in the CO, as far as equipment for DSLAMs, what applications you use ‑‑
1LISTNUM 1 \l 16604 MR. DANIELS: Right, but ‑‑
1LISTNUM 1 \l 16605 MR. CHISLETT: ‑‑ to the extent that you cannot provide, you know, twisted pair for things like remote, there's some implications there.
1LISTNUM 1 \l 16606 But whether there's a five‑year transition period or a 10‑year transition period, for someone to duplicate the access network out there, our position is that's not going to happen. It needs to be a disruptive technology which would cause something like that to occur.
1LISTNUM 1 \l 16607 MR. DANIELS: I just want to understand this, on this innovation point, that you say it doesn't ‑‑ when you say wholesale access. So are you saying that there can't be any innovation at the access level or layer, or whatever you want to call it?
1LISTNUM 1 \l 16608 And let me just put out my confusion on this point, too. You keep saying the twisted copper pair, the twisted copper pair, and I mean ‑‑ so what I'm trying to struggle with is the notion of is not building fibre to the node or fibre to the home, and so on, isn't that innovation at the access level, and wouldn't you agree with that statement regardless of who does it?
1LISTNUM 1 \l 16609 MR. CHISLETT: I would say that's potentially a disruptive technology. Once that copper wire is in the ground, it's pretty dumb copper wire. There's nothing you can do to innovate on that copper wire. It's really what you put on the ends of it which is going to impact the innovation and what applications you decide to develop.
1LISTNUM 1 \l 16610 MR. DANIELS: So it's a potential disruptive on the air.
1LISTNUM 1 \l 16611 Okay, so let's then look at ‑‑ when you say that wholesale regulation plays no innovation and investment decision with respect to access, now, to be fair to you, you go on to describe some of your innovations, because you say it takes place at the application layer. And I would like to turn to that for a moment, page 3.
1LISTNUM 1 \l 16612 And before I go through the full list, I do notice on this list, this is in the second‑last bullet under "Residential Competition", you are listing innovative things that Primus has done. Is that correct? We will go through this a little bit in a minute.
1LISTNUM 1 \l 16613 MR. CHISLETT: Sure.
1LISTNUM 1 \l 16614 MR. DANIELS: Page 3 of the opening statement ‑‑
1LISTNUM 1 \l 16615 MR. CHISLETT: Yes.
1LISTNUM 1 \l 16616 MR. DANIELS: ‑‑ the second‑last bullet.
1LISTNUM 1 \l 16617 So when I'm looking at that, I see one of yours, skipping down the list, three lines from the bottom of that bullet, is Wi‑Max trials, standards‑based Wi‑Max trials.
1LISTNUM 1 \l 16618 MR. CHISLETT: Yes.
1LISTNUM 1 \l 16619 MR. DANIELS: So can we agree that Wi‑Max, in terms of when you are referring to it there, something that Primus is looking into, that is a form of innovation at the access layer?
1LISTNUM 1 \l 16620 MR. CHISLETT: I think it's, again, what we look at as being a disruptive ‑‑ potentially a disruptive technology. And we, you know, may be able to offer lots of services for the access, we think it's promising there. Our point on the access is the copper wire that's in the ground, we talk about unbundling, making that available, you know, to third parties like ourselves, it doesn't ‑‑ there's no innovation that could possibly happen by us duplicating that copper wire in the ground.
1LISTNUM 1 \l 16621 What it does do, by making it available to us, is it means that we are able to innovate and offer, you know, new services. And I can go through a list of those.
1LISTNUM 1 \l 16622 MR. DANIELS: Well, we are going to go through that in a second, but just so I'm clear, what you are basically saying is giving you the copper loop is not going to prevent you from innovating, in terms of building your own copper loop, because that's not something you would do.
1LISTNUM 1 \l 16623 MR. CHISLETT: You can't afford to put another copper loop in the ground and you are not taking away innovation in the copper loop by making it available to third parties. It's just a dumb copper loop there. It's what goes on the end that makes a difference.
1LISTNUM 1 \l 16624 MR. DANIELS: So as long as we are only providing the copper loop to third parties, we are not taking away innovation, but it's different if we are talking about different access technologies, such as Wi‑Max or ‑‑
1LISTNUM 1 \l 16625 MR. CHISLETT: Yes, exactly.
1LISTNUM 1 \l 16626 MR. DANIELS: ‑‑ fibre to the node or fibre to the home?
1LISTNUM 1 \l 16627 MR. CHISLETT: Exactly.
1LISTNUM 1 \l 16628 MR. DANIELS: Okay.
1LISTNUM 1 \l 16629 MR. CHISLETT: I mean, we like to have things unbundled as much as they could, obviously, and unbundling it to the copper stage gives us access to the same capability. We invest in the rest of the network. You know, we don't invest in the access, but we invest in the rest of the network to do innovations and...
1LISTNUM 1 \l 16630 MR. DANIELS: Now, when I looked at your innovations here ‑‑ again I'm looking at that second‑last bullet on page 3 ‑‑ in the fourth line you start giving examples of what Primus has invested in.
1LISTNUM 1 \l 16631 Now, you say, "For example, Primus has innovated and invested in..." ‑‑ so I'm in the fourth line, do you see me there, "For example, Primus has innovated and invested in local VoIP services"?
1LISTNUM 1 \l 16632 MR. CHISLETT: Yes.
1LISTNUM 1 \l 16633 MR. DANIELS: Okay. So I just want to stop there. You are the first company to launch VoIP services in Canada, are you not?
1LISTNUM 1 \l 16634 MR. CHISLETT: That's correct, as an alternative to local phone service.
1LISTNUM 1 \l 16635 MR. DANIELS: Right, and that is a service called Primus TalkBroadband, I believe.
1LISTNUM 1 \l 16636 MR. CHISLETT: That's how we launched it, that's correct.
1LISTNUM 1 \l 16637 MR. DANIELS: Right. And this is an access independent VoIP service, is that correct?
1LISTNUM 1 \l 16638 MR. CHISLETT: That's correct.
1LISTNUM 1 \l 16639 MR. DANIELS: Now, just so we are clear, to some of us who are uninitiated, could you just bother to explain what an access independent VoIP is and how it's different from an access dependent VoIP?
1LISTNUM 1 \l 16640 MR. CHISLETT: Sure. Access independent will operate under ‑‑ comes sort of independent of the access. It needs hi‑speed Internet to operate, but we don't provide the hi‑speed access at the same time. How well it operates is a function of the quality of the hi‑speed access, whether it's cable or DSL, and some of the qualities of service there, but it will operate and it goes over top, if you will, any hi‑speed access.
1LISTNUM 1 \l 16641 MR. SELWYN: Mr. Daniels, maybe a better description is a "bring your own" access. It doesn't operate without access, but it simply means that the consumers' purchase of access is separate from the purchase of the dial tone service.
1LISTNUM 1 \l 16642 MR. DANIELS: Thank you. Okay, so, basically, we can agree, the consumer buys its own retail Internet service, and then you are able to sell Primus TalkBroadband over that?
1LISTNUM 1 \l 16643 MR. CHISLETT: Absolutely. Without hi‑speed Internet, I mean, it wouldn't work.
1LISTNUM 1 \l 16644 MR. DANIELS: Right.
1LISTNUM 1 \l 16645 And you were offering the first access independent VoIP service in Canada. Now, that was an innovation, was it not?
1LISTNUM 1 \l 16646 MR. CHISLETT: That's correct.
1LISTNUM 1 \l 16647 MR. DANIELS: And with that offer, if we go on, we can see voicemail to email, find me/follow me service, you offer that. Voicemail to email, that's offered with your Primus TalkBroadband, isn't it?
1LISTNUM 1 \l 16648 MR. CHISLETT: It's offered on that. It's also offered on our conventional local phone service, too.
1LISTNUM 1 \l 16649 MR. DANIELS: It's offered on both, right?
1LISTNUM 1 \l 16650 MR. CHISLETT: We offer that on both services.
1LISTNUM 1 \l 16651 MR. DANIELS: Find me/follow me service?
1LISTNUM 1 \l 16652 MR. CHISLETT: That's correct.
1LISTNUM 1 \l 16653 MR. DANIELS: Delinking phone numbers from geography offered on your Primus TalkBroadband?
1LISTNUM 1 \l 16654 MR. CHISLETT: That's correct.
1LISTNUM 1 \l 16655 MR. DANIELS: Five‑way calling?
1LISTNUM 1 \l 16656 MR. CHISLETT: Yes.
1LISTNUM 1 \l 16657 MR. DANIELS: Web‑based management of local calling features?
1LISTNUM 1 \l 16658 MR. CHISLETT: Offered on both.
1LISTNUM 1 \l 16659 MR. DANIELS: Okay. I can keep going, online directory, Privacy Guard, but whatever, these are all available, as we agreed, on your access independent, and the only thing the customer need is Internet access that they buy themselves, so can we agree that no regulated wholesale access is required for you to sell and customers to receive any of these innovations that we just listed?
1LISTNUM 1 \l 16660 MR. CHISLETT: No, you have to be in the call path, if you will, for this to operate.
1LISTNUM 1 \l 16661 Let me give you the example of one of the more recent innovations that we have, which is a service called Telemarketing Guard, which we have just launched.
1LISTNUM 1 \l 16662 What Telemarketing Guard is: we surveyed our customers and we found that 90 percent of our customers, they are disturbed by getting interruptions from telemarketers during the supper time.
1LISTNUM 1 \l 16663 So for people who are on our local phone service, we offer a network‑based service for them, which basically gives them the option of we will intercept and block telemarketing calls to these customers. So for this to happen it has to be going through our call path to our switch, if you will, to block it.
1LISTNUM 1 \l 16664 So this is something which we couldn't offer if we were simply reselling a Bell Centrex service or something like that. We have to be integral to the service itself.
1LISTNUM 1 \l 16665 MR. DANIELS: I guess I'm a little confused. I thought we just went through voicemail to email, find me/follow me service, delinking, five‑way, so and so forth. The service that I just listed there are all available on your access independent, we have agreed that they are all forms that you can innovate, now to the extension that you have to be in the call path ‑‑
1LISTNUM 1 \l 16666 MR. CHISLETT: That's correct, we couldn't offer these things on a peer resale ‑‑
1LISTNUM 1 \l 16667 MR. DANIELS: That wasn't, sorry ‑‑
1LISTNUM 1 \l 16668 MR. CHISLETT: ‑‑ local service from Bell or from somebody else.
1LISTNUM 1 \l 16669 MR. DANIELS: Maybe I'm not characterizing my question properly.
1LISTNUM 1 \l 16670 My question is no regulated wholesale access is required. So let's think about this. What regulated wholesale access do you need to provide those services you just listed to me for your innovations in the market?
1LISTNUM 1 \l 16671 MR. CHISLETT: We need that to offer it on primary local exchange service.
1LISTNUM 1 \l 16672 MR. DANIELS: No, no, no, now you are saying I need it on my other service.
1LISTNUM 1 \l 16673 MR. CHISLETT: Yes, I can offer it ‑‑ I can offer it for the niche TalkBroadband service, which goes over the top, but if I want to offer it on the general local phone service that everybody uses, I need to have access to the access network so I can do this.
1LISTNUM 1 \l 16674 THE CHAIRPERSON: What's the difference between write‑offs? You said that you can offer it on a niche basis.
1LISTNUM 1 \l 16675 MR. CHISLETT: We look at TalkBroadband service as being very much of a niche service. Just because of the way it operates, you can't have multiple lines in your home, usually the customer has to do the installation. As a comparison, we have another service offering, which is a true first line local service which operates in the existing phones. The customer doesn't have to install anything. And it runs over the unbundled loop we purchase from the carrier.
1LISTNUM 1 \l 16676 THE CHAIRPERSON: But the first time, the first part, the access‑independent one.
1LISTNUM 1 \l 16677 MR. CHISLETT: On the access‑independent one?
1LISTNUM 1 \l 16678 THE CHAIRPERSON: I'm a customer of Rogers so I have broadband. I can phone you up and you can give me VoIP over that Internet.
1LISTNUM 1 \l 16679 MR. CHISLETT: Absolutely. We can give you VoIP.
1LISTNUM 1 \l 16680 THE CHAIRPERSON: And you don't have to come and install anything? I just plug my phone into the computer and it works?
1LISTNUM 1 \l 16681 MR. CHISLETT: You have to install an access terminal adapter to convert the signal from a digital signal going over the Internet to an analog phone system that you have in your home already.
1LISTNUM 1 \l 16682 So we send out a box, an adapter to you.
1LISTNUM 1 \l 16683 THE CHAIRPERSON: But that's all I need. In terms of Mr. Daniels, no LLU or anything like that. All I need is get a little box, someone install it and I'm home free.
1LISTNUM 1 \l 16684 MR. CHISLETT: Exactly, for that version of service. As I say, we look at that as very much a niche service as compared to a generally available one.
1LISTNUM 1 \l 16685 Maybe Mr. Hickey would like to comment.
1LISTNUM 1 \l 16686 MR. HICKEY: Your characterization is correct, Mr. Chairman. And if you want to go make phone calls next to your computer, assuming you don't have some kind of in‑home distribution network, the set of population that stays really close to their computer and doesn't stray too far from it, it's a great service for them.
1LISTNUM 1 \l 16687 For those that want to make calls elsewhere in their home, they have to add other things to it. And that is typically where the home phone is used in its normal state, which is our other service.
1LISTNUM 1 \l 16688 DR. SELWYN: Let me point out, however, that so‑called access‑independent VoIP services differ from access‑dependent VoIP services and suffer a potential quality of service impairment.
1LISTNUM 1 \l 16689 When you use an access‑independent VoIP services, such as the Primus offering or Vonage or others in that category, there is a certain amount of the route from the customer's premises to the switch intelligence in the service provider's own network that requires that you transit the public Internet, which introduces potential degradation of the signal and quality of service problems.
1LISTNUM 1 \l 16690 When a cable company, for example, or an ILEC provides a VoIP‑type service over a dedicated access facility that they control, they are in a position to route that traffic, that VoIP traffic, directly to their switching and networking backbone without using the public Internet, which gives them significantly improved quality of service opportunities that aren't available to the access‑independent provider.
1LISTNUM 1 \l 16691 So there is actually a connection between VoIP and access that gives the owner of access, the actual entity that physically owns or controls the access arrangement, an opportunity to offer a superior service that is not going to be available to any access‑independent VoIP provider.
1LISTNUM 1 \l 16692 MR. DANIELS: I can appreciate your distinction there, but in fact what we have agreed is that the innovations, the list of innovations, a number of them ‑‑ well, actually all of them so far ‑‑ are available on your access‑independent.
1LISTNUM 1 \l 16693 If we look at the list we have here, in fact some of the services you offer with your regular phone service, I think you mentioned, on this list am I correct in stating that voicemail to e‑mail, find‑me/follow‑me, delinking phone numbers from geography, five‑way calling and web‑based management of local calling features are only available today on your TalkBroadband product.
1LISTNUM 1 \l 16694 Is that correct?
1LISTNUM 1 \l 16695 MR. HICKEY: No, it's not correct.
1LISTNUM 1 \l 16696 MR. DANIELS: So which one? Are all of them available?
1LISTNUM 1 \l 16697 MR. HICKEY: They are all available on the local service as well.
1LISTNUM 1 \l 16698 MR. DANIELS: I'm misinformed on that one. I apologize.
1LISTNUM 1 \l 16699 MR. CHISLETT: Sorry, not the geography one, Mr. Hickey.
1LISTNUM 1 \l 16700 MR. DANIELS: Sorry? Let's be fair.
1LISTNUM 1 \l 16701 MR. HICKEY: Since the local phone service is tied to an unbundled local loop, it's very difficult to move that around geographically. So delinking the phone number from the geography is only available for top broadband, not for our Primus local service.
1LISTNUM 1 \l 16702 MR. DANIELS: So we can agree then that all of these innovations that I just listed are available on your TalkBroadband, and at least in the case of the geographic delinking, that one is only available on your TalkBroadband. And you have been able to introduce that in the market.
1LISTNUM 1 \l 16703 With that, Mr. Chairman ‑‑ sorry, I should get a "yes".
1LISTNUM 1 \l 16704 It's 4:30. I've finished this line and I'm prepared to stop so that we can continue tomorrow with my next line.
1LISTNUM 1 \l 16705 THE CHAIRPERSON: All right. Why we don't do that.
1LISTNUM 1 \l 16706 We will break now and we will start tomorrow at 8:30.
1LISTNUM 1 \l 16707 Counsel, do you have some announcement to make?
1LISTNUM 1 \l 16708 MR. McCALLUM: Perhaps counsel could informally gather for two minutes on the procedural question.
1LISTNUM 1 \l 16709 MR. DANIELS: Mr. Chairman, could we just clarify that it is 8:30 tomorrow morning? You have changed from 8:00?
1LISTNUM 1 \l 16710 THE CHAIRPERSON: I am told by counsel that we have about four hours left for tomorrow, so we can start at 8:30 rather than 8:00.
1LISTNUM 1 \l 16711 Thank you.
‑‑‑ Whereupon the hearing adjourned at 1630, to
resume on Tuesday, October 30, 2007 at 0830 /
L'audience est ajournée à 1630, pour reprendre
le mardi 30 octobre 2007 à 0830
REPORTERS
______________________ ______________________
Marc Bolduc Fiona Potvin
______________________ ______________________
Beverley Dillabough Jennifer Cheslock
______________________ ______________________
Sharon Millett Monique Mahoney
- Date modified: