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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
November 9, 2007 Le 9 novembre 2007
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Elizabeth Duncan Commissioner / Conseillère
Helen del Val Commissioner / Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
Marielle Giroux-Girard Secretary / Secrétaire
Robert Martin Staff Team Leader /
Chef d'équipe du personnel
Peter McCallum Legal Counsel /
Amy Hanley Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
November 9, 2007 Le 9 novembre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
Argument by The Competition Bureau 2891 /17947
Argument by The Companies 2921 /18090
Argument by Rogers 2961 /18297
Argument by TELUS 2992 /18452
Argument by MTS Allstream 3024 /18594
Argument by Primus 3057 /18743
Argument by Cybersurf 3084 /18881
Argument by Yak Communications 3106 /18982
Argument by Xittel 3119 /19053
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
BUREAU-8 Response to CRTC request in 3145 /19179
- vi -
ERRATA / ADDENDA
The paragraph numbering for the soft and hard copies of the transcripts from the Essential Services hearing are incorrect, beginning with the 16 October transcript. The paragraph numbers in the 16 October transcript should have been consecutive, following the 15 October transcript.
La numérotation des paragraphes de la version électronique et de la version papier des transcriptions de l'audience traitant des services essentiels n'est pas correcte, commençant avec la transcription du 16 octobre. La numérotation des paragraphes dans la transcription du 16 octobre aurait dû être consécutive, après la transcription du 15 octobre.
Gatineau, Quebec / Gatineau (Québec)PRIVATE
‑‑‑ Upon resuming on Friday, November 9, 2007
at 0844 / L'audience reprend le vendredi
9 novembre 2007 à 0844
1LISTNUM 1 \l 1 \s 79417941 THE SECRETARY: Please be seated.
1LISTNUM 1 \l 17942 THE CHAIRPERSON: Good morning.
1LISTNUM 1 \l 17943 As you can see, it is a much‑reduced Commission. My colleagues commissioners Cram and Noël, unfortunately, are no longer colleagues but we had the benefit of their advice before they left and we had extensive discussions.
1LISTNUM 1 \l 17944 I am looking forward to this morning's argument. I guess the Competition Bureau is first.
1LISTNUM 1 \l 17945 MS PALUMBO: That is right.
1LISTNUM 1 \l 17946 THE CHAIRPERSON: Go ahead.
ARGUMENT / PLAIDOIRIE
1LISTNUM 1 \l 17947 MS PALUMBO: Thank you.
1LISTNUM 1 \l 17948 Good morning, Mr. Chairman and commissioners Duncan and del Val.
1LISTNUM 1 \l 17949 Today, I will be representing the Competition Bureau, Josephine Palumbo with the Department of Justice.
1LISTNUM 1 \l 17950 I am joined by my colleague and the Bureau's outside counsel, Mr. Lorne Abugov.
1LISTNUM 1 \l 17951 The Bureau has a long history, Mr. Chairman, members of the Commission, of engaging itself in the debate on telecommunications regulatory reform, and as you are well aware, under section 125 of the Competition Act, the Commissioner of Competition can indeed make representations and call evidence before federal boards, commissions or tribunals in respect of competition.
1LISTNUM 1 \l 17952 The Bureau has used this ability of intervention in a number of industries but none more extensively than telecommunications, and indeed, since 1990, the Bureau has made more than 65 interventions before the Commission, including a full participation in the 2005 local forbearance proceeding.
1LISTNUM 1 \l 17953 Our participation in this proceeding, as in the many past proceedings, is as an amicus curiae, to offer our assistance and expertise to the Commission on issues of broader scope, unlike the immediate commercial concerns of the other parties to this proceeding.
1LISTNUM 1 \l 17954 The Bureau's sole motivation is to assist the Commission in facilitating the development of a regulatory framework for wholesale services that will promote effective and efficient competition in telecommunication markets for the benefit of Canadian consumers.
1LISTNUM 1 \l 17955 During the next 30 minutes we will canvass three main areas of interest in the final oral phase of this most important proceeding and I wish to outline those three main areas to you now.
1LISTNUM 1 \l 17956 First, we will review with you the Bureau's specific proposals regarding our suggested definition of essential facilities and the objectives that, in our view, must underlie the regulatory framework governing mandated access.
1LISTNUM 1 \l 17957 The second area that we will cover is how best to implement these objectives through the proper operationalization of the appropriate definition of an essential facility, an area over which there is still significant debate among the parties to this proceeding.
1LISTNUM 1 \l 17958 Several parties have downplayed the operational differences between their definitions and that proposed by the Bureau. They argue that their proposals are also based on competition principles and will achieve competitive objectives.
1LISTNUM 1 \l 17959 With respect, we do not agree and in fact their definitions are often inconsistent with competition principles. Consequently, they are much less likely to advance the general competition objectives that we all agree should be the cornerstone of an effective wholesale access regime. In our second area of discussion we will explain why this is so.
1LISTNUM 1 \l 17960 Thirdly and lastly, we will address claims by some parties that their definitions are easier and more practical to apply than that of the Bureau. You will see that they are not necessarily simpler to apply, and where they are, they achieve that simplicity at significant cost.
1LISTNUM 1 \l 17961 In contrast, The Bureau's definition is based on tested and objective standards that are employed by regulators and competition authorities the world over and we are confident that our proposal can be practically applied by this Commission.
1LISTNUM 1 \l 17962 I will turn now to the first main area that we will canvass with you this morning, The Bureau's definition of an essential facility and the objectives underlying that definition.
1LISTNUM 1 \l 17963 The Bureau's definition of "an essential facility" is indeed rooted in competition policy principles, which is to say it is focused directly on identifying market power where it exists and controlling the exercise or abuse of that market power. That is the most appropriate way to ensure that competition is sufficient to protect the interest of consumers.
1LISTNUM 1 \l 17964 Mr. Chairman, Members of the Commission, you will recall that the Bureau initially proposed a definition for an essential facility that could be applied prospectively, that is when the Commission determines whether or not to mandate access to a facility.
1LISTNUM 1 \l 17965 And at your request, Mr. Chairman, during our panel's appearance at the hearing we undertook to provide a definition that could be applied retrospectively, that is when the Commission examines the list of services to which access is currently mandated, to determine whether or not that access should be withdrawn.
1LISTNUM 1 \l 17966 Our retrospective definition is as follows:
"A facility, a function or service can be considered to be essential and therefore mandatory access to that facility can be justified if the following three conditions are satisfied.
First, the firm controlling the facility in question is vertically integrated and dominant in two markets.
The first relevant market is the upstream market for wholesale market for the facility.
The second relevant market is the downstream market or retail market in which the facility is an input.
A necessary condition for concluding that there is dominance in the upstream market is that it is not practical or feasible for competitors to duplicate the facility in question.
Second, withdrawing mandated access to the facility is likely to result in competitors exiting from or contracting in the downstream market.
Finally, such exit or contraction is likely to result in a substantial lessening of competition in the downstream market."
1LISTNUM 1 \l 17967 The first condition of The Bureau's definition which requires a finding that the owner of the facility in a properly defined product and geographic market is dominant both upstream and downstream identifies where market power exists and where incumbents can exercise that market power to harm consumers.
1LISTNUM 1 \l 17968 This is a relevant consideration in both the upstream and downstream market.
1LISTNUM 1 \l 17969 Upstream, a firm may exercise its market power to the detriment of competitors and eventually consumers.
1LISTNUM 1 \l 17970 Downstream market power may be exercised directly to harm consumers.
1LISTNUM 1 \l 17971 The Bureau's two‑market test provides a useful screen for the Commission. If a firm is not dominant downstream in a particular market, then consumers have alternatives that can control the market power inherent in a firm's upstream facility. If a firm is not dominant upstream, competitors have similar alternatives to provide downstream services, again to the benefit of consumers.
1LISTNUM 1 \l 17972 In either case, Mr. Chairman, Members of the Commission, the facility in question should not be considered essential and the analysis is concluded.
1LISTNUM 1 \l 17973 Ignoring upstream and downstream market power when defining an essential facility is to focus more on the interests of individual competitors than on the effects of competition and ultimately consumers.
1LISTNUM 1 \l 17974 The only appropriate method to adopt and to pinpoint and assess market power comes from competition policy where market definition tools and market power analysis have been carefully refined through time and experience.
1LISTNUM 1 \l 17975 The Bureau's second condition is a simple question: Without access to a given facility or service will competitors exit or contract from a given downstream market?
1LISTNUM 1 \l 17976 This concern seems to be the primary focus of the parties to this proceeding. However, this condition alone does not, Mr. Chairman, answer the fundamental question: What is the effect of mandating access on competition and ultimately consumers?
1LISTNUM 1 \l 17977 The Bureau's third condition which asks whether there is a substantial lessening of competition in a downstream market focuses on the effects on consumers, indeed where the focus should be, and asks whether the exit or contraction of individual competitors will result in higher prices, in lower quality or less innovation.
1LISTNUM 1 \l 17978 If the answer is no, then mandating access may in fact generate more costs then benefits by focusing on the costs and benefits to competition and hence consumers and not on individual competitors. The Bureau's definition avoids either an under inclusive or an over inclusive wholesale access regime.
1LISTNUM 1 \l 17979 The fundamental issue in this proceeding is the proper role of mandated access in the development of efficient and effective competition which will ultimately prove most beneficial for consumers.
1LISTNUM 1 \l 17980 And when it comes to controlling the market power of the ILECs, two types of competition are possible, that created by mandating the access and that created by investment in competing facilities.
1LISTNUM 1 \l 17981 The Commission should strive, it is our respectful submission, to establish a wholesale regime that implements each when appropriate.
1LISTNUM 1 \l 17982 MR. ABUGOV: Almost all parties to this proceeding endorse the development of a regulatory framework for wholesale services and a definition of an essential facility that will ultimately result in effective and efficient competition. However, parties have very different notions of what constitutes effective and efficient competition.
1LISTNUM 1 \l 17983 The Bureau submits that consistent with competition principles effective and efficient competition is most likely to come from independent end‑to‑end facilities‑based providers that control their own networks.
1LISTNUM 1 \l 17984 Under The Bureau's definition, where competition of this kind is possible the right incentives are put in place for its development. Where it is not possible, access would be mandated.
1LISTNUM 1 \l 17985 We have heard from experts at this hearing who agree strongly that competition at the network layer is preferable to competition at the applications layer alone, which is not likely to be effective in disciplining incumbent market power.
1LISTNUM 1 \l 17986 In the Bureau's view, settling on competition at the application layer would deter technological innovation in this country and ultimately prove detrimental to Canadian consumers.
1LISTNUM 1 \l 17987 We heard Dr. Church, one of the Bureau's expert witnesses, explain that two independent networks would allow for much more intense competition than only one network with sharing. He explained that where there are two networks all of the possible parameters on which they can compete are available because they share nothing in common.
1LISTNUM 1 \l 17988 Dr. Church noted that this is particularly true in a broadband world with two broadband networks competing against one another. In that context, it is likely that consumers at any given location are only going to subscribe to one of the two networks, creating a winner‑take‑all situation.
1LISTNUM 1 \l 17989 The result is very vigorous competition and more than ample incentives for investment and innovation in each network in response to the other network.
1LISTNUM 1 \l 17990 We also heard from Dr. Taylor, one of The Companies expert witnesses, that true competition takes place in the portions of the network that are unshared. Dr. Taylor acknowledged that there may still be competition at the applications layer where providers are sharing the network and reselling services, in that resellers can offer value‑added features, compete on customer service and provide different bundles.
1LISTNUM 1 \l 17991 He noted, however, that resell competition will not produce fundamental changes or enhancements in technology or in the network. In his view, resell competition could not compare in that regard to the competition that we see between the two near end‑to‑end networks today in Canada, the cable network and the telephone network. From those networks, he remarked, we see high‑end and high‑speed services, internet services, many new broadband services and video services.
1LISTNUM 1 \l 17992 The key point is that competition from competing networks is much better for consumers than competition only at the applications layer on a common network.
1LISTNUM 1 \l 17993 To the extent that effective competition between networks is possible, it should not be inadvertently precluded by an overly permissive access regime.
1LISTNUM 1 \l 17994 This would be especially disappointing in the Canadian context, given that, as we heard from another of The Companies expert witnesses, Dr. Waters, the fact that we in Canada have a second network in residential markets is envied the world over. As he put it, and I quote:
"The rest of us are using a ladder of investment to climb to where you are, so I must admit it's a little strange when I come here and I see one of the world's most complete ladders of investment in a market that actually already is where the rest of us are struggling to get to." (As read)
1LISTNUM 1 \l 17995 It has been The Bureau's position throughout this proceeding that the goal of any wholesale access regime must be the development of efficient and effective competition, that is competition between networks.
1LISTNUM 1 \l 17996 In The Bureau's view, the policy direction clearly recognizes that goal. It directs the Commission to undertake the instant review:
"... with a view to increasing incentives for innovation and investment in and construction of competing telecommunications network facilities". (As read)
1LISTNUM 1 \l 17997 The Bureau's definition of an essential facility is designed to do just that. It is intended to ensure that the proper incentives for network investment are in place.
1LISTNUM 1 \l 17998 If these incentives for network investment are not embodied in the core of the wholesale access regime, and indeed if the regime instead disincents investment by mandating access to an overly broad set of facilities, the Commission will have adopted, and thereby accepted, an inferior form of competition and one that, in The Bureau's view, is far less effective.
1LISTNUM 1 \l 17999 In the Bureau's view, the objectives of efficient and effective competition, that is end‑to‑end facilities‑based competition where possible, can only be achieved through a definition of an essential facility that is firmly rooted in competition principles.
1LISTNUM 1 \l 18000 Although most parties to this proceeding claim that their definitions reflect competition principles, when viewed operationally they do not. These operational issues are the second main area that we will discuss with you this morning.
1LISTNUM 1 \l 18001 The operational differences between the Bureau's definition and those of other parties must be understood and assessed carefully by the Commission since while other parties' proposals appear at first blush to involve less effort to apply, they do so at the cost of significant mis‑classification of facilities. These mis‑classifications result in either uncontrolled market power in many markets or the discouragement of effective and efficient competition between competing networks.
1LISTNUM 1 \l 18002 THE CHAIRPERSON: Mr. Abugov, do you mind if I interrupt you here before we go to the operational and just ask you a couple of questions on the theoretical?
1LISTNUM 1 \l 18003 MR. ABUGOV: Mr. Chairman, I can't guarantee that we can provide you with an answer, but we will certainly undertake to provide you with one in writing.
1LISTNUM 1 \l 18004 THE CHAIRPERSON: Just so that I understand, you used or Mrs. Palumbo used the words "near end‑to‑end facilities competition".
1LISTNUM 1 \l 18005 What, in your view, is near end‑to‑end?
1LISTNUM 1 \l 18006 MR. ABUGOV: Mr. Chairman, I believe I made the remark in the sense that the end‑to‑end facilities‑based providers definition includes both owning one's own facilities and sharing facilities to a given extent. And the word "near" simply indicates that the existing networks are not ubiquitous at this time.
1LISTNUM 1 \l 18007 THE CHAIRPERSON: So there is no idea of preponderance on majority facility owned or something like that inherent in that expression.
1LISTNUM 1 \l 18008 MR. ABUGOV: That's correct.
1LISTNUM 1 \l 18009 THE CHAIRPERSON: On the first part where you insist on a dominance in the downstream market, why do you need to have that since you are starting off with the assumption that there is dominance in the upstream market and access to that upstream market is necessary in order to compete in the downstream market?
1LISTNUM 1 \l 18010 I just don't understand. Does your definition work if we do not require dominance in the downstream market?
1LISTNUM 1 \l 18011 MS PALUMBO: Our test has always proposed dominance in both markets, and our experts have explained that our test, our definition presented before this Commission, requires dominance in both markets.
1LISTNUM 1 \l 18012 THE CHAIRPERSON: So your answer is no.
1LISTNUM 1 \l 18013 MS PALUMBO: No.
1LISTNUM 1 \l 18014 THE CHAIRPERSON: Would your test also work if I don't delete the requirement of dominance in the downstream market?
1LISTNUM 1 \l 18015 Looking at your test and applying it, it seems to me the outcome would be the same regardless of whether there is a requirement for dominance in the downstream market or not.
1LISTNUM 1 \l 18016 If I have misunderstood it, please explain it to me.
1LISTNUM 1 \l 18017 MS PALUMBO: Our position has been that dominance needs to be in both markets. However, what the Bureau can do is take an undertaking and we can respond to this issue that you have raised, Mr. Chairman, in our formal written arguments.
1LISTNUM 1 \l 18018 THE CHAIRPERSON: Okay, thank you.
1LISTNUM 1 \l 18019 Sorry, Mr. Abugov. Please go ahead.
1LISTNUM 1 \l 18020 MR. ABUGOV: Are we back on the clock, Mr. Chairman?
1LISTNUM 1 \l 18021 THE CHAIRPERSON: This doesn't count on your clock. Don't worry.
1LISTNUM 1 \l 18022 MR. ABUGOV: Just checking.
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 18023 MR. ABUGOV: So I had said that the misclassifications that can arise through the proposals put forward by other parties, which appear at first blush to involve less effort to apply, can result in either uncontrolled market power in many markets or the discouragement of efficient and effective competition between the two operating networks.
1LISTNUM 1 \l 18024 For example, Mr. Chairman and Commissioners, TELUS' definition requires 100 per cent monopoly control in the relevant upstream market as opposed to the Bureau's requirement for dominance.
1LISTNUM 1 \l 18025 The TELUS definition would not find a facility essential if there is any competing supply in the upstream market. Conversely, the Bureau's definition might classify that same facility as essential if to do so would result in a substantial increase in competition sufficient to make consumers better off in the long run.
1LISTNUM 1 \l 18026 TELUS' approach does not recognize that it may well be more beneficial to consumers for the Commission to control the market power of the ILEC by mandating wholesale access than by relying on entry that has very little competitive effect.
1LISTNUM 1 \l 18027 MTS Allstream, on the other hand, has neither a competitive effects test nor a requirement for dominance downstream. As a result, the definition proposed by MTS is too expansive. It would mandate access to facilities with the resulting costs even if there is competition downstream from facilities‑based carriers and even if mandated access does not have a substantial effect on competition in the downstream market.
1LISTNUM 1 \l 18028 In addition, several parties claim that proper geographical market definition is an unnecessary burden in assessing whether or not a facility is essential.
1LISTNUM 1 \l 18029 For example, TELUS' definition assesses upstream monopoly in terms of potential and not actual duplication. Key to the TELUS definition is the notion that if a facility or a functionality of that facility has been duplicated in some similar geographic area ‑‑ TELUS suggests rate bands, for instance ‑‑ then it must be feasible to duplicate it in every similar geographic area, regardless of whether or not it has in fact been duplicated.
1LISTNUM 1 \l 18030 In such case, according to TELUS, the facility should be considered non‑essential.
1LISTNUM 1 \l 18031 While the Bureau would agree that a proxy approach to geographic markets is practical for the Commission to adopt over time, the Bureau questions whether there is truly enough geographical homogeneity within rate bands to make such a test meaningful.
1LISTNUM 1 \l 18032 Despite claims to the contrary, the TELUS criteria run the very real risk of abandoning certain exchanges and locations and consumers where duplication may in fact not be possible and where forbearance, particularly in business markets, may have been granted based on competitor access to facilities.
1LISTNUM 1 \l 18033 In this case, the potential benefits of competition from mandated access may dramatically outweigh the potential costs of that access.
1LISTNUM 1 \l 18034 The Bureau's definition seeks to identify these particular markets by using the principles of competition policy to identify relevant markets rather than forcing Canadian consumers to fend for themselves in the face of incumbent market power.
1LISTNUM 1 \l 18035 Certain parties to this proceeding, such as MTS Allstream and Rogers, have argued that where the Commission has forborne from retail regulation based on competitor access to leased facilities, it necessarily follows that those facilities must be found to be essential.
1LISTNUM 1 \l 18036 This logic, while simple and seductive, is ultimately incorrect.
1LISTNUM 1 \l 18037 Wholesale regulation is not an equivalent substitute for retail regulation. Contorting the wholesale access regime by broadening its scope to fit the retail forbearance regime may have the cost of precluding the entry of true end‑to‑end facilities‑based competition most notably in business markets.
1LISTNUM 1 \l 18038 The Bureau's definition of an essential facility does not run this risk. It will hold regardless of whether or not there is regulation at the retail level.
1LISTNUM 1 \l 18039 It is important, therefore, that the Commission use the proper definition of essential facility, which we submit is the Bureau's definition in the first instance, to enable or to increase competition in downstream markets where the benefits of that competition outweigh the potential costs of mandating access.
1LISTNUM 1 \l 18040 If at the end of a transition period with a hard stop facilities which have been properly declared to be non‑essential have not been replaced and market power issues have arisen downstream, the Commission should at that point address those issues directly by revisiting whether retail regulation is necessary. Widening the wholesale access regime inappropriately is not an efficient alternative.
1LISTNUM 1 \l 18041 MS PALUMBO: Finally, many of the parties' definitions fail to recognize that the Commission's ultimate concern in this proceeding must be the control of market power.
1LISTNUM 1 \l 18042 Allowing the exercise of market power harms consumers through higher prices, lower quality of service and fewer incentives for firms to offer new and better services.
1LISTNUM 1 \l 18043 In developing an effective wholesale access regime, the Commission's primary focus should be to streamline access where competition is sufficient to control the exercise of market power, most residential markets, for example, and to continue to mandate access where it is not, which may be the case in some business markets.
1LISTNUM 1 \l 18044 Many parties have failed to acknowledge this fundamental point, primarily because it is not in their commercial interest to do so. Rogers' definition, for example, concludes that unbundled loops in residential markets should be classified as essential facilities, despite the presence of facilities‑based competitors in the form of cable companies, including Rogers itself in some areas.
1LISTNUM 1 \l 18045 Under the Bureau's test, downstream market power is a screen. If there is no dominance downstream as a result of control of a particular facility, the facility is not essential.
1LISTNUM 1 \l 18046 In the case of residential telephony, the presence of a cable company offering local telephony is likely sufficient to reach this conclusion, and thus in most residential markets under the Bureau's definition there should not be mandated access to unbundled local loops.
1LISTNUM 1 \l 18047 Furthermore, the empirical record suggests that after ten years of unbundling, the competitive significance of residential loops has been minimal and it is unlikely to generate benefits to consumers significant to cover its costs. It is evident to the Bureau that these purportedly more practical and operationally simpler proposals will result in significant errors.
1LISTNUM 1 \l 18048 Furthermore, it is not at all clear that these proposals are in fact simpler to operationalize. Both TELUS and Rogers, among others, have asserted at this hearing that their definitions will be easier for the Commission to apply than that of the Bureau.
1LISTNUM 1 \l 18049 Indeed, it appears to be relatively simple to count to one in order to assess a monopoly or to count to four to tally up the number of competitors operating within a wire centre. In fact, these criteria or definitions are not as simple as they may appear since they do not employ tested and measurable competition law principles.
1LISTNUM 1 \l 18050 TELUS, for example, suggests that relevant product market definition in both upstream and downstream markets is overly complex and unnecessary. It is sufficient, they argue, to identify, one, a single substitute of comparable functionality to establish that duplication of a particular facility is possible, and, thus, that there is some form of alternative for consumers in a downstream market.
1LISTNUM 1 \l 18051 This is simply too simple to be true and TELUS has never firmly set out how the Commission should actually assess comparable functionality, nor the extent to which it must exert competitive discipline sufficient to control any exercise of incumbent market power, which is the key concern.
1LISTNUM 1 \l 18052 Market definition tools used by the Bureau and competition authorities around the world have well‑established thresholds for these criteria to assess market power and the extent to which competition can control market power. In practice, for the Commission to assess and apply meaningful benchmarks of functionality, it would have to turn to competition law principles.
1LISTNUM 1 \l 18053 This brings us to our third area of discussion. We have seen that definitions proposed by other parties either offer no real guidance on fundamental issues of implementation, and so are not as simply as they may appear, and/or that they are in fact simple to implement, but to achieve that simplicity at great, great costs of precision.
1LISTNUM 1 \l 18054 These parties might say that costs are worth it when compared to the effort that they claim would be involved in implementing the Bureau's definition. In fact, Mr. Chairman, members of the Commission, the Bureau's test is not nearly as complex and difficult to apply as other parties would have you believe, precisely because it is based on well‑established competition policy principles that properly recognize and balance the potential benefits and costs of mandating wholesale access. Indeed, competition law authorities and regulators worldwide routinely perform these market power assessments.
1LISTNUM 1 \l 18055 The Bureau's retrospective definition is akin to the approach in assessing abuse of dominance outlined in the Bureau's Enforcement Guidelines on the Abuse of Dominance Provisions. This approach has been endorsed by the Competition Tribunal and provides an objective standard that can be applied in the context of this proceeding, it is our submission.
1LISTNUM 1 \l 18056 Put simply, the competition policy principles and jurisprudence that underlie the Bureau's definition are the best guarantee that our definition, the Bureau's definition, can, in fact, be properly and successfully applied by the Commission going forward.
1LISTNUM 1 \l 18057 More importantly, whatever effort the Commission may expend in applying the Bureau's definition will be more than worthwhile from the standpoint of achieving the fundamental objective of promoting effective and efficient competition and avoiding ‑‑ avoiding ‑‑ the significant errors that we have identified is inherent in the other definitions that are before you.
1LISTNUM 1 \l 18058 MR. ABUGOV: Mr. Chairman, Commissioners, we understand well that you are seeking pragmatic and workable solutions to deal with the issues before you in this proceeding. With this in mind, you have posed interrogatories to the parties, you have proposed a possible regulatory framework of categories of services and you have circulated a list of specific services for categorization based upon the possible regulatory framework.
1LISTNUM 1 \l 18059 The Bureau recognizes the attempts by the Commission to streamline your review of services and agrees that there is merit in identifying and categorizing the services over which there is little disagreement and singling out those services that are more contentious.
1LISTNUM 1 \l 18060 However, for each of the contentious services, once they are identified, the Bureau would emphasize that it will still be very important for the Commission to use and apply the correct definition in order to determine whether or not the services in question are essential. To do otherwise would bypass the necessary analysis to identify essential services and would create the potential for serious errors, for instance by failing to incorporate and analyze specific geographic markets.
1LISTNUM 1 \l 18061 Still, as the Bureau's panel explained at the hearing, once the Commission considers in depth whether specific facilities are essential, you will no doubt develop insight and understanding that can be applied more broadly. The Bureau expects that the Commission could at that point develop its own accurate and "Made in Canada" proxy rules.
1LISTNUM 1 \l 18062 In conclusion, Mr. Chairman and Commissioners, the Bureau's proposal in this proceeding is indeed an operational approach. It is based on a competition framework that the Commission has itself adopted in the past and has been able to use with success.
1LISTNUM 1 \l 18063 To oversimplify the Bureau's approach, as some parties have aimed to do in this proceeding, and to substitute proposals that deviate from competition policies and principles is to ask the wrong questions and, more importantly, for Canadian consumers and for Canada to obtain the wrong answers.
1LISTNUM 1 \l 18064 Mr. Chairman and Commissioners, on behalf of the Competition Bureau, we thank you for hearing our views this morning in this most important proceeding, and that concludes our oral argument.
1LISTNUM 1 \l 18065 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 18066 Just a couple of questions to make sure I understood you correctly.
1LISTNUM 1 \l 18067 You don't like the proxies offered by TELUS, but if I understand it you don't offer any alternative proxies. You are tell us, "Develop the proxy test".
1LISTNUM 1 \l 18068 MR. ABUGOV: Our experts indicated in the evidence, and we have indicated this morning, Mr. Chairman, that we believe the Commission can, indeed, develop its own proxies over time, based on its analysis of cases that come before it.
1LISTNUM 1 \l 18069 The Commission has done this in the past, and we believe that's a more appropriate route to take than to adopt proxies put forward before you during this proceeding that are either imported from another jurisdiction or that have not been tested in the Canadian context, that's correct.
1LISTNUM 1 \l 18070 THE CHAIRPERSON: Okay.
1LISTNUM 1 \l 18071 On page 11, you suggest that after a transition period with a hard stop, if things haven't developed as we expected, we should hold another hearing and, if necessary, adopt retail regulation.
1LISTNUM 1 \l 18072 I gather implicit in that is that you ‑‑ what you have called type I and type II errors ‑‑ you think we should at all costs avoid making type I error, and therefore deregulate or take away mandating wherever possible, and then revisit if ‑‑ in terms ‑‑ if made an error, rather than being overly protective, so, in effect, to avoid a type I error. Is that correct?
1LISTNUM 1 \l 18073 MS PALUMBO: That is correct.
1LISTNUM 1 \l 18074 THE CHAIRPERSON: Okay. And we have heard noting from you on a phaseout, so I gather you have no comment on what's the appropriate phaseout period?
1LISTNUM 1 \l 18075 MS PALUMBO: We will be addressing this more fully in the write oral argument, however, in terms of the transition period, the Bureau's position has been that a transitional period would be somewhere between the three years and the five years.
1LISTNUM 1 \l 18076 THE CHAIRPERSON: Okay. Thank you.
1LISTNUM 1 \l 18077 Commissioner del Val.
1LISTNUM 1 \l 18078 COMMISSIONER del VAL: Thank you.
1LISTNUM 1 \l 18079 Just one question. Referring to the direction where there's been ‑‑ the competitor presence test set out for the residential and the business market, do you see those tests playing any role in, say, helping define "market power" in the Bureau's proposed definition of "essential services"?
1LISTNUM 1 \l 18080 MR. ABUGOV: Commissioner del Val, it would be our preference to take an undertaking and respond to that question in writing.
1LISTNUM 1 \l 18081 Thank you.
1LISTNUM 1 \l 18082 COMMISSIONER del VAL: Thank you, Mr. Abugov.
1LISTNUM 1 \l 18083 THE CHAIRPERSON: Okay, thank you very much for your presentation.
1LISTNUM 1 \l 18084 Madam Secretary, who's next?
1LISTNUM 1 \l 18085 THE SECRETARY: For the record, Mr. Abugov, just note that the undertaking from Mr. von Finckenstein is CRTC‑8, and the last one is CRTC‑9.
1LISTNUM 1 \l 18086 Thank you.
1LISTNUM 1 \l 18087 THE SECRETARY: Our next panel, The Companies, please come forward, Counsel Hofley and Mr. Bibic.
1LISTNUM 1 \l 18088 MR. HOFLEY: With your permission, Mr. Chairman.
1LISTNUM 1 \l 18089 THE CHAIRPERSON: Mr. Hofley, good morning. Please begin.
ARGUMENT / PLAIDOIRIE
1LISTNUM 1 \l 18090 MR. HOFLEY: Good morning, Mr. Chairman, good morning, Commissioners.
1LISTNUM 1 \l 18091 You will hear from me, Randall Hofley, for our radio listeners, followed by Mr. Bibic.
1LISTNUM 1 \l 18092 Mr. Chairman, Commissioners, this Commission has undertaken an assessment of a wholesale regulatory regime that has broad implications for the development of telecommunications markets, residential and business, in Canada. It has done so in a particular context that cannot be ignored: at the direction of the government, following a comprehensive review of telecommunications policy by independent experts, the TPR. This independent expert panel's conclusions could not be more clear.
1LISTNUM 1 \l 18093 The panel concluded that the scope of wholesale access currently required by the Commission is too broad, that it undermines incentives for parties to be efficient, to invest, including building of alternative facilities, and to innovate, and that, quote, "the scope of such mandated wholesale access should be narrowed", end quote.
1LISTNUM 1 \l 18094 It is clear, in our submission, Mr. Chairman, Commissioners, that these conclusions not only inform the policy direction, but provide the foundation for the policy direction's instruction that the Commission complete this very review process.
1LISTNUM 1 \l 18095 Above all else, the policy direction requires that the Commission, quote, "rely on market forces to the maximum extent feasible", end quote. In our submissions, these words plainly mean that wholesale regulation can only be maintained where regulation is absolutely necessary to address a real and sustained market failure in a properly defined product and geographic market.
1LISTNUM 1 \l 18096 Indeed, it is our submission that this fundamental direction requires that the Commission be convinced that the benefit to society of mandating access to a facility will exceed the cost. If, and only if, the Commission reaches this conclusion, the policy direction requires that the Commission use regulatory measures that are efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary.
1LISTNUM 1 \l 18097 The policy direction's specific provisions related to the regulation of wholesale services must be interpreted within this important and undeniable context. The policy direction gives the Commission an important mandate. It indicates that this review is to result in an approach which, again I quote:
"Increases the incentives for innovation and investment in, and construction of, competing telecommunications network facilities." (As Read)
1LISTNUM 1 \l 18098 It directs the Commission to determine the extent to which mandated access to wholesale services that are nonessential should be phased out and the appropriate pricing of any remaining regulated services.
1LISTNUM 1 \l 18099 Clearly, Mr. Chairman, commissioners, the mandate the Commission has been given directs change. It requires a determination of the extent to which mandated access should be phased out. It doesn't say the extent, if any, to which mandated access should be phased out.
1LISTNUM 1 \l 18100 It clearly focuses on incentives, not only for incremental investment in existing facilities, but on incentives for the construction of network facilities to compete with those in existence. The Commission is not to be satisfied with the status quo or even with incremental investment at the margins, but rather investment in facilities that will, like cable telephony, bring what the Bureau's Mr. Hariton describes as "the vast bulk of the benefits of competition."
1LISTNUM 1 \l 18101 Now, MTS Allstream suggests that the policy direction favours competition that includes a mixture of leased and owned facilities on the grounds that the policy direction instructs the Commission to encourage facilities‑based competition. And that facilities‑based competition was defined in the government's forbearance variation order to include competition from parties who use a mix of leased and owned facilities.
1LISTNUM 1 \l 18102 At its simplest level, the acceptance of this proposition would mean that the status quo meets the government's policy objectives and that, quite simply, this review has been a waste of time. It would amount, in our submission, to a serious misreading of the government's policy pronouncements.
1LISTNUM 1 \l 18103 Of course, it is true that the retail forbearance test embodied in the forbearance variation order can be satisfied with competition, is based on a party that uses a combination of its owned and leased facilities. This policy outcome simply recognizes the fact that service providers will inevitably rely, to some extent, on leased facilities, particularly in the provision of business services.
1LISTNUM 1 \l 18104 There is no ubiquitous carrier that covers the entirety of Canada, nor is there likely ever to be. This fact does not mean that the provision of leased facilities should be regulated as a matter of policy. What should be regulated at the wholesale level is a very different question than the question which was resolved in the government's forbearance variation order. What should be regulated at the wholesale level is answered by the policy direction.
1LISTNUM 1 \l 18105 The policy direction does not use the term "promote facilities‑based competition." What it does say, Mr. Chairman, commissioner is:
"Increase incentives for investment in and construction of competing telecommunications network facilities." (As Read)
1LISTNUM 1 \l 18106 These words, I say, leave no doubt or ambiguity as to their meaning.
1LISTNUM 1 \l 18107 As the Bureau's Mr. Hariton stated, innovation and competition does occur and must occur at the physical or network level, not simply the application level. This is clear from Verizon's fibre to the home and Bell and Bell Aliant's fibre‑to‑the‑node programs. The government's objective is more construction of network facilities as end to end facilities‑based competition fosters the greatest reliance on market forces.
1LISTNUM 1 \l 18108 Now, as for the definition of essential facilities, a review of the record reveals that, perhaps not surprisingly, the more a party relies or hopes to continue to rely on facilities owned by another the broader the definition of essential facilities that party proposes, the greater the number and complexity of the hoops that party would require the facility owner to jump through in order to have the facility declared nonessential, and the further the definition strays from both the ordinary and competition law meaning of essential.
1LISTNUM 1 \l 18109 At one end of the spectrum is MTS Allstream who would have a facility declared essential where it is required by any competitor to provide any service downstream. And a facility is required by a competitor unless it is capable of self‑supply and is available from a vigorous, sustained third‑party market with alternative sources of supply. Notwithstanding that it acknowledges that the concern is competition downstream, MTS and its expert insist that there is no need to assess if there is market power downstream whether in the absence or the presence of mandated access.
1LISTNUM 1 \l 18110 Under this definition, Mr. Chairman, commissioners, nearly every wholesale service mandated today, and a couple of new ones, will continue to be mandated. This will provide MTS with the certainty of cost structure it desires to continue along the path of resale competition. This is the everything I want is essential definition. MTS's approach is, of course, premised on the continuation of the open network access model, a model that would see most parts of the incumbent's network opened up to competitors in the hopes it will lead to retail forbearance. This model envisaging wholesale regulation in perpetuity has been discredited, notably by the TPR panel and most recently by this Commission in Telecom Decision 2007‑35, the retail DNA decision.
1LISTNUM 1 \l 18111 At paragraph 100 of the decision the Commission stated and I quote:
"In order for forbearance of retail hi‑speed DNA services to be appropriate the competitor should be able to independently and reasonably offer customers an alternative to ILEC's hi‑speed DNA services over their own facilities, that is competitors should own and operate the underlying transmission facilities." (As Read)
1LISTNUM 1 \l 18112 Now, other parties, like Rogers, who have an interest in buying as much time as possible to expand their facilities‑based network to serve business as extensively as they serve residential customers propose a definition of essential facility that comes closer to the ordinary and competition law meaning. But, to be mandated as essential, Rogers would only require that the party controlling the facility possess enough power upstream to prevent or lessen competition in a downstream market in a nontrivial manner.
1LISTNUM 1 \l 18113 As for duplicability, Rogers proposes the use of arbitrary proxies, at least arbitrary in the Canadian context, which Rogers is well aware will not be met anytime soon. This is what you may recall I coined "the Rogers don't rush me approach." Rogers' approach is, of course, premised on the steppingstone model, a model the CDN experience demonstrates has not worked in Canada, again, as recently recognized by this very Commission in the same paragraph 100 of the same Decision 2007‑35. And again, I am going to quote. The decision says:
"Forbearance for hi‑speed DNA service should not be predicated on the availability of ILEC CDN services within a wire centre. The Commissions considers the ILEC‑supplied CDN service would not contribute towards a sustainability of hi‑speed DNA market because it would perpetuate competitors' dependency on ILEC hi‑speed DNA facilities and continued regulation of underlying facilities for the provision of hi‑speed DNA services." (As Read)
1LISTNUM 1 \l 18114 At the other end of the spectrum of course, Mr. Chairman, commissioners, is the definition proposed by TELUS.
1LISTNUM 1 \l 18115 Now, for their part, the Companies have unwaveringly taken an approach that is grounded in Canadian competition law principles so much so that it has adopted the definition proposed by the Competition Bureau and effectively Mr. Osborne.
1LISTNUM 1 \l 18116 The Companies' definition requires that the Commission consider whether the facility owner has market power downstream that access to the facility may redress. Absent such market power, there can be no principled basis upon which wholesale regulation can be maintained or imposed. Market power over a facility upstream does not necessarily mean there is market power downstream if there is a party or parties who compete downstream without any need for an ILEC's facilities. For example, using an alternative platform or wire.
1LISTNUM 1 \l 18117 From there, we say the Commission must conclude that the facility owner has market power in the supply of that facility because it cannot be duplicated and that mandating access will materially preserve or enhance, as the case may be, competition in the downstream market such that the benefits of regulation outweigh the considerable costs of regulation.
1LISTNUM 1 \l 18118 The Companies' definition, I suggest, is practical, principled and, most importantly, consistent with the policy direction.
1LISTNUM 1 \l 18119 Now, Mr. Chairman, I have appeared before a number of federal tribunals charged with the important task of regulating business conduct over many years. And with that experience I believe that it is important to note that the Commission is in a unique position in these proceedings. It has the benefit of detailed and expert advice from three independent sources; the TPR, the Bureau and Mr. Osborne, each of whose sole constituency is the public interest.
1LISTNUM 1 \l 18120 Moreover, this independent advice addresses the fundamental issues before the Commission, including the government's intention in this policy direction, the definition of an essential facility, the incentive to invest and whether if, and I say if, only two competitors emerge they will provide sufficient competition. Each of these independent sources have made submissions consistent with that of the Companies on these fundamental issues.
1LISTNUM 1 \l 18121 In respect of the policy direction Mr. Osborne stated that, and I quote:
"The regulatory goal of the policy direction is to increase incentives for innovation and development of new facilities. Any ambiguity in the particulars in subsections 1(b) and (c)..."
1LISTNUM 1 \l 18122 ‑‑ those are the factors ‑‑
"...should be resolved in favour of the general principles articulated in subsection 1(a), being reliance on market forces to the maximum extent feasible." (As Read)
1LISTNUM 1 \l 18123 In respect of the definition of essential facilities, as already indicated, the Competition Bureau's and Mr. Osborne's proposed definitions are inline with that of the Companies or should I say the Companies support those definitions.
1LISTNUM 1 \l 18124 On incentives to invest, you have heard from the TPR, from the Bureau and the overwhelming majority of the academic evidence that mandated wholesale regulation undermines the incentive to invest in constructing network facilities.
1LISTNUM 1 \l 18125 Indeed, the record of this proceeding has confirmed that this is not merely a theoretical conclusion, but is a practical reality in Canada, the case CDN confirms that. Bell West, TELUS in the east, Vid,otron and five utelcos all indicated in interrogatory responses that they cutback on their building of new facilities as a result of the CDN decision.
1LISTNUM 1 \l 18126 Of all the companies in this proceeding that are building access facilities, MTS is the only company that claimed that CDN incented it to build. Everyone else stated it either had no impact or it undermined their access construction programs.
1LISTNUM 1 \l 18127 Of course, MTS evidence on the issue must be considered carefully. Under cross‑examination, MTS could not explain why in 2002 they had access to approximately 3,300 buildings using their own facilities but in 2007 they were down to approximately 2,300. Regardless of why the numbers went down, Mr. Chairman, commissioners, what is clear is that they did not go up.
1LISTNUM 1 \l 18128 Such evidence is not isolated. Take the case of Shaw, a company that has advocated the need for mandated CDN access but under cross‑examination admitted they were only seeking mandated access for low‑speed services.
1LISTNUM 1 \l 18129 Even in that case, Shaw admitted that they viewed CDN as an essential service, in contrast to Vidéotron, because they had not been building their network over the last few years like Vidéotron.
1LISTNUM 1 \l 18130 As for whether two facilities‑based competitors can provide sufficient competition, the Competition Bureau has concluded that given the nature of the industry, coordinated conduct or joint dominant behaviour is, to use Dr. Church's words, "very highly unlikely."
1LISTNUM 1 \l 18131 Only the Bureau and Dr. Taylor and Ms Sanderson for The Companies conducted the well‑recognized competition law analysis of whether a duopoly, again, if it occurs, would be likely to result in a coordinated anticompetitive outcome in these circumstances.
1LISTNUM 1 \l 18132 They all concluded it would not, much like the government must have concluded in the forbearance variation order.
1LISTNUM 1 \l 18133 For his part, Mr. Osborne opined in the residential broadband internet context that "the numbers suggest that a cableco‑telco duopoly can result in strong facilities‑based competition."
1LISTNUM 1 \l 18134 In short, Mr. Chairman, commissioners, on these fundamental issues, the Commission need not be concerned about weighing the submissions in light of the parties' self‑interest. It has three independent public interest sources to assist in this process.
1LISTNUM 1 \l 18135 As the independent TPR panel concluded, the current wholesale policies of the Commission have distorted the behaviour and incentives of new entrants in Canadian telecommunications markets. No less than a fundamental change to these policies is required to achieve the outcome envisaged by the policy direction.
1LISTNUM 1 \l 18136 I turn it over to Mr. Bibic to provide The Companies' specific recommendations as regards this fundamental change.
1LISTNUM 1 \l 18137 MR. BIBIC: Mr. Chairman, commissioners, from my vantage point there seem to be two conflicting concerns of the Commission at the heart of this proceeding.
1LISTNUM 1 \l 18138 First, the evidence shows that too much wholesale regulation undermines the construction of competing telecom network facilities.
1LISTNUM 1 \l 18139 Second, there is the view put forward by some that the removal of most wholesale regulation or its removal too quickly will undermine competition.
1LISTNUM 1 \l 18140 Now, of course, you won't be surprised to hear me say that we believe that the proposal we put forward during our testimony when we were on the panel, relying as it does on market forces and ex post regulation, is the best way to achieve the objectives in the Policy Direction.
1LISTNUM 1 \l 18141 That being said, we believe that it is possible to meet the Policy Direction's objectives and reconcile these two conflicting concerns using the ex ante framework set out in the Commission's October 3rd letter if the Commission feels compelled to do so, which brings me to our proposal, Mr. Chairman.
1LISTNUM 1 \l 18142 Contrary to likely expectations, we are not proposing to classify all services as non‑essential and I am not referring here only to public goods services and interconnection services.
1LISTNUM 1 \l 18143 We have therefore developed an alternative proposal which takes into account the two conflicting concerns and recognizes that the Commission is strongly considering some form of ex ante model consistent with that October 3rd letter.
1LISTNUM 1 \l 18144 In my remaining time this morning, I will briefly highlight the key parts of our alternative proposal, in particular which services should be considered as conditional essential, which should be non‑essential subject to phase‑out, and which should be conditional mandated non‑essential, and the reasons why.
1LISTNUM 1 \l 18145 I will also briefly touch upon the transition period and what should transpire at the end of that transition period.
1LISTNUM 1 \l 18146 Mr. Chairman, you may recall that on October 10th, the first day our panel appeared, you pointed out that The Companies say everything should be ex post. You also asked me if it is absolutely necessary to take this black and white approach.
1LISTNUM 1 \l 18147 My answer back then basically was that if I were in your shoes I would focus on low‑capacity access. We have thought about this some more and I have a more fully developed answer for you this morning.
1LISTNUM 1 \l 18148 The Companies still believe that the Commission should focus its regulation on low‑capacity access services, and by that I mean unbundled copper loops and low‑capacity CDNA, DS‑0s and DS‑1s. This means that access services at DS‑3 and above and transport services would be classified as non‑essential services subject to phase‑out.
1LISTNUM 1 \l 18149 Competitors have already built or are prepared to build these higher‑capacity access and transport facilities largely due to the high revenue potential of the many and varied existing and reasonably foreseeable retail services which utilize these facilities. Such facilities are duplicable and this has been clearly established in the marketplace and on the record, even by those who call for continued regulation of CDN.
1LISTNUM 1 \l 18150 With respect to high‑capacity DS‑3 and above access, I provide the following examples from the record.
1LISTNUM 1 \l 18151 First, as Mr. Hofley just mentioned, Shaw stated during Mr. Daniels' cross‑examination that DS‑3 access should not be mandated.
1LISTNUM 1 \l 18152 Primus also conceded when they were on the stand that DS‑3 and above access can be economically justifiable for competitors to build, including themselves via Globility.
1LISTNUM 1 \l 18153 And Rogers admitted that it has access to a much greater number of buildings than it otherwise would have had the Commission believe. In fact, in the downtown core of Ottawa, an area where one is most likely to sell high‑speed business services, Rogers has admitted that it already has access to 78 percent of the major buildings in the downtown core.
1LISTNUM 1 \l 18154 Mr. Chairman, when I was on the stand I pointed out that based on our surveys we thought they had access to 90 percent of the buildings in the downtown core. There was an undertaking. Rogers came back, did their own search and the 78 percent comes from their answer.
1LISTNUM 1 \l 18155 Now, of course, when a cableco has fiber into a building, it obviously can offer all the sophisticated business services at issue in this proceeding. Some of the access they have is via coax. Now, when they have coax access, they can obviously offer basic voice service and internet service but more importantly, as Mr. Babin of Bell pointed out, with that access one can pull in fiber using existing conduits.
1LISTNUM 1 \l 18156 So those are my examples, Mr. Chairman, for DS‑3 and above access.
1LISTNUM 1 \l 18157 Turning now quickly to transport services, these have by and large already been duplicated. For example, Bell, TELUS, Rogers and MTS all operate their own national fiber backbone networks, not to mention the existence, of course, of you telco networks.
1LISTNUM 1 \l 18158 So under our alternative proposal, unbundled local loops and low‑capacity access would continue to be regulated as either conditional essential or conditional mandated non‑essential in areas where the retail service which uses these access facilities is regulated or where retail forbearance has been secured based on such mandated access.
1LISTNUM 1 \l 18159 Conversely, such facilities would be or become non‑essential at wholesale when the corresponding retail service is or would become forborne at retail based on the presence of competitors that do not require mandated access.
1LISTNUM 1 \l 18160 And this is an important point, Mr. Chairman. Unbundled local loops, DS‑0s and DS‑1s, would not become non‑essential at wholesale until retail forbearance had been secured as a result of end‑to‑end competition.
1LISTNUM 1 \l 18161 I am going to proceed now to highlight our alternative proposal using residential and business voice ‑‑ actually, I am going to go through now and explain the model. I am going to use residential and business voice and data services as examples just to highlight it. So let's start with residential and business voice.
1LISTNUM 1 \l 18162 In exchanges where an incumbent's retail residential or business local voice services have been forborne based on the presence of end‑to‑end facilities‑based competition from competitors who use their own access ‑‑ so we can take Vidéotron in Montreal, for example, where we are forborne already for residential voice ‑‑ unbundled local loops would be classified as non‑essential and subject to phase‑out.
1LISTNUM 1 \l 18163 Clearly, in those exchanges like Montreal, loops have been duplicated ‑‑ Vidéotron is there ‑‑ and they should not be regulated at wholesale.
1LISTNUM 1 \l 18164 So now taking another example, in exchanges where an incumbent's retail residential or business voice services have been forborne on the basis of mandated access to unbundled loops ‑‑ so now we can take Bell's business voice services in Toronto where MTS and TELUS are co‑located and use our loops ‑‑ those loops would be classified as conditional mandated non‑essential.
1LISTNUM 1 \l 18165 They would remain so classified until such time as the incumbent were able to demonstrate to the Commission that were it not already forborne, it could be forborne at the retail level either on the basis of the presence of a competitor that does not require mandated access or on the basis of the Competition Bureau's structured rule of reason test which it developed in a local forbearance proceeding.
1LISTNUM 1 \l 18166 So going back to my example, Toronto exchange were forborne today for business voice on the basis that some competitors co‑locate and use our loops, if in the future we see a cable company like Rogers start offering those business voice services using not its Call‑Net network but its own end‑to‑end network, we would come back to the Commission and say: We know we are forborne but we could be forborne now on the basis of Rogers with its network. Then those loops would move from conditional mandated non‑essential to non‑essential.
1LISTNUM 1 \l 18167 And then the third example using business voice is we need to take exchanges where the incumbent continues to be regulated today. We are not forborne, we are regulated. Unbundled loops in those areas would be classified as conditional essential.
1LISTNUM 1 \l 18168 Over time, should the incumbent become forborne at retail on the basis either of a competitor using its own access facilities or the Bureau's structured rule of reason test, which fundamentally depends on a competitor being present with its own facilities, then the loops would become non‑essential.
1LISTNUM 1 \l 18169 Alternatively, should we become forborne in that area on the basis of a competitor who leases loops, then the loops would become classified as conditional mandated non‑essential. So this would address areas where today we are regulated because there is no competition.
1LISTNUM 1 \l 18170 So those were my examples using retail residential and business voice.
1LISTNUM 1 \l 18171 I would just like to spend a moment, Mr. Chairman, on retail data services. Many of these require low‑capacity DNA to function, and the regulatory treatment of low‑capacity CDNA, the wholesale version, which is at issue obviously in this proceeding, would follow the same principles. So in a wire centre where low‑capacity retail DNA is regulated, the corresponding wholesale CDNA version would be classified as conditional essential.
1LISTNUM 1 \l 18172 Now, I recognize that to date there has been no forbearance of low capacity retail DNA, which means under our proposal DS‑0s and DS‑1s at wholesale would not be non‑essential but, in the future, as low capacity retail DNA becomes forborne based on the presence of alternative low capacity access services, the corresponding wholesale version, the low‑speed CDNA, would also be forborne.
1LISTNUM 1 \l 18173 Mr. Chairman, this of course means that you should expect to soon receive from us a forbearance application to be forborne for retail, low‑speed DNA services.
1LISTNUM 1 \l 18174 So at its core our alternative model recognizes that once an incumbent has been forborne at retail on the presence of the end‑to‑end facilities‑based competition for residential and for voice and low‑speed accesses, the relevant public policy and regulatory objectives espoused in the policy direction have been met and wholesale regulation becomes redundant and should be removed.
1LISTNUM 1 \l 18175 I'm going to move now to my comments on the transition period.
1LISTNUM 1 \l 18176 In this proceeding there has been much discussion concerning the length of the transition period. The Companies initially proposed one year and many others proposed three to five.
1LISTNUM 1 \l 18177 Now, the transition period must reflect the entire regulatory scheme adopted. It should not be selected in isolation from other elements of the regime.
1LISTNUM 1 \l 18178 Our alternative approach is in fact very conservative. With the adoption of a conservative approach to the application of the definition of "essential facilities" it is important not to strike a transition period that is too long. Thus, should the Commission opt for our alternative approach, it is critical that the transition period should not be unduly lengthy.
1LISTNUM 1 \l 18179 It would be a serious mistake, in our view, to opt for a generous application of a definition of "essential facilities" as well as a generous transition period.
1LISTNUM 1 \l 18180 Frankly, Mr. Chairman, in an industry as dynamic and as competitive as ours five years is an awfully long time. Such a long period of time will not incent industry participants to modify their current behaviours in an effort to reach an optimal balance between building, negotiating market‑based arrangements and relying on regulation where a facility really is essential.
1LISTNUM 1 \l 18181 This actually brings me back to the words from the policy direction which Mr. Hofley mentioned:
"... the reliance on market forces, to the maximum extent feasible, and interference with market forces to the minimum extent necessary." (As read)
1LISTNUM 1 \l 18182 Those words mean something and, in my view, they don't contemplate a wholesale regime that continues the way it is today for a lengthy period of time when that wholesale regime was actually developed when there weren't any market forces or when the Commission didn't rely on them. All that is going to do, in my submission, Mr. Chairman and Commissioners, is keep us all in this comfortable state of suspended animation where there is no incentive to modify behaviours.
1LISTNUM 1 \l 18183 Because of that, and in an effort to address the conflicting concerns I mentioned at the very beginning of my remarks, The Companies have revised their transition period proposal as follows:
1LISTNUM 1 \l 18184 A three‑year transition period would apply for all access services, whether high‑speed or low‑speed. For example, residential unbundled local loops in Ottawa ‑‑ we can use Montréal which was my earlier example ‑‑ where we are already forborne on the basis of cableco presence would continue to be regulated for a full three‑year period.
1LISTNUM 1 \l 18185 A two‑year transition period would apply for transport, given the general recognition that transport can be more quickly duplicated and in fact has been.
1LISTNUM 1 \l 18186 A one‑year transition period would apply for all those services for which competitors already have developed competing alternatives. We heard about some of them during the cross examinations but they would include LRN‑absent, LNP and billing and collections services, all of which have been shown to have many competitive alternatives.
1LISTNUM 1 \l 18187 So our transition proposal also includes the following elements: the flexibility for periodic price increases; allowing parties to negotiate commercial agreements during the transition period and beyond; and no obligation to make applicable services available on a mandated basis to new customers or to permit existing customers to augment capacity at specified intervals during the transition period. We will of course flush this out in more detail in our final written materials.
1LISTNUM 1 \l 18188 Commissioners and Mr. Chairman, certain parties have questioned the real motivation behind our proposal and as I sit here this morning in closing argument I can sincerely say that our end goal is not to exit the wholesale business.
1LISTNUM 1 \l 18189 In fact, we spoke earlier this week to my counterpart who heads up Bell's wholesale business and his desire. He reaffirmed his desire that he wants to enter into long‑term business partnerships with his wholesale customers where possible.
1LISTNUM 1 \l 18190 So ours is not a trust me or a trust us approach, it is a trust the market approach, which brings me to the regulatory treatment at the end of the transition period.
1LISTNUM 1 \l 18191 In our view,the Commission must send a strong signal to the industry that at the end of the transition period services already found by the Commission to be non‑essential will no longer be regulated.
1LISTNUM 1 \l 18192 It would be highly inappropriate and wasteful of regulatory resources for the Commission to require incumbents after that period to again apply to be forborne from regulation of wholesale services which have already found to be non‑essential.
1LISTNUM 1 \l 18193 It would also be inappropriate for the Commission to signal that it would be open to considering an extension of a transition period. This would perpetuate competitors' existing behaviour and again would do nothing to incent industry participants to modify their business behaviour.
1LISTNUM 1 \l 18194 Ten years ago the Commission in fact established a five‑year sunset regime for loops and other services which many actually anticipated would eventually be extended and of course competitors acted accordingly.
1LISTNUM 1 \l 18195 Instead, the Commission must implement a hard stop to the continued regulation of non‑essential services, recognizing that following the transition period it would still be possible to address anti‑competitive behaviour on an ex post basis.
1LISTNUM 1 \l 18196 As a closing note, and recognizing the Commission's legitimate concerns with incenting investment without diminishing competition, I believe it is important for the Commission to note that it is not being asked in these proceedings to deregulate on a leap of faith that an alternative ubiquitous network will be built.
1LISTNUM 1 \l 18197 Cable is already present, wireless is also here and continues to develop and who knows what else will come down the pike.
1LISTNUM 1 \l 18198 Now, we heard Mr. Abugov in representing The Bureau earlier this morning refer to the words of Mr. Waters, an independent ‑‑ not an independent, a well‑known expert in telecom regulation internationally. You may recall that Mr. Abugov referred to the words of Mr. Waters who had said that it's a little strange when he comes here to see one of the world's most complete ladders of investment and how in other countries they want to get to where we are.
1LISTNUM 1 \l 18199 What Mr. Abugov didn't mention was the next part of Mr. Waters' statement when he put to the Commission that he thinks the basic question is: How do we make what we have got work harder, faster and better? Mr. Waters believes that is the essential question.
1LISTNUM 1 \l 18200 And we believe, Commissioners, that our proposal today will accomplish just that.
1LISTNUM 1 \l 18201 So we wish you well in your deliberations and on behalf of The Companies I would like to thank the Commissioners, I would like to thank the Hearing Secretary and the counsel and all staff for the time that you have put into this proceeding. They are important issues that are being decided upon and we certainly appreciate the opportunity we have been given to put our case forward.
1LISTNUM 1 \l 18202 THE CHAIRPERSON: Thank you very much.
1LISTNUM 1 \l 18203 I must say, I very much appreciate you coming forward with an alternative proposal. You obviously listened very carefully to our question and looked at our framework. What you have put forward is a very interesting variation which we will study carefully.
1LISTNUM 1 \l 18204 Just a couple of questions. Is anything that's going to fall in the bucket essential?
1LISTNUM 1 \l 18205 MR. BIBIC: The first bucket?
1LISTNUM 1 \l 18206 THE CHAIRPERSON: Yes.
1LISTNUM 1 \l 18207 MR. BIBIC: Do you know which one?
1LISTNUM 1 \l 18208 The Commission's October 3rd letter had an example "BLIF", "Basic Listing Information", I think, and that's what we would put in that category.
1LISTNUM 1 \l 18209 THE CHAIRPERSON: I thought during questioning of you particularly something came up which you mentioned here that actually would fall in essential, if memory serves me correctly.
1LISTNUM 1 \l 18210 Counsel, do you remember what it was?
1LISTNUM 1 \l 18211 MR. McCALLUM: Subscriber listings perhaps?
1LISTNUM 1 \l 18212 MR. BIBIC: That's the same service.
1LISTNUM 1 \l 18213 THE CHAIRPERSON: I see. All right.
1LISTNUM 1 \l 18214 Second, you mentioned during the phase‑out periodic price increases.
1LISTNUM 1 \l 18215 I presume you will outline that in your written submissions?
1LISTNUM 1 \l 18216 MR. BIBIC: Yes.
1LISTNUM 1 \l 18217 THE CHAIRPERSON: Can you share with us what you have in mind?
1LISTNUM 1 \l 18218 MR. BIBIC: Well, I haven't landed on what we would recommend in terms of the level of the price increase, but I could offer this: Ms Cram asked a number of questions of a number of parties where she posited a price increase from cost plus 15 to cost plus 20, over time to cost plus 25, and of course that presupposes that the price increases would apply to Category 1 services or essential services.
1LISTNUM 1 \l 18219 Our proposal will suggest price increases not only for Category 1 services, but services that fall in conditional mandated non‑essential as well.
1LISTNUM 1 \l 18220 THE CHAIRPERSON: You suggest three‑year phase‑out for certain services. If I understand you correctly, you are saying we would say mandated prices and at the end of year one or at the end of year two you may increase the prices by "X" and "X" will be at a formula or an amount or whatever?
1LISTNUM 1 \l 18221 MR. BIBIC: That's absolutely correct.
1LISTNUM 1 \l 18222 Actually, I can develop that a little bit further.
1LISTNUM 1 \l 18223 Let's take access services where we propose a three‑year transition period. Probably I would say that we will come forward and we will say after the first year price increases would be permissible and over certain intervals for the remaining period as well.
1LISTNUM 1 \l 18224 But also, one element that you haven't asked me about but it is tied into this, is this notion of not having, on the mandated basis, the obligation to augment capacity.
1LISTNUM 1 \l 18225 So take the three‑year transition period after year two. So after the second year we would say that there would be no further obligation on the incumbents to sell on a mandated basis ‑‑ and those are important words ‑‑ to competitors further capacity.
1LISTNUM 1 \l 18226 So starting from the date of the decision the competitors could buy more services at mandated prices. After year two they could continue with what they have at mandated prices, but the rest would have to be negotiated commercially.
1LISTNUM 1 \l 18227 THE CHAIRPERSON: You anticipated where I was going, exactly that.
1LISTNUM 1 \l 18228 MR. BIBIC: All right.
1LISTNUM 1 \l 18229 THE CHAIRPERSON: I can see that you don't want to increase the mandated service to existing, but why are you punishing new ones as well? I mean, that is three years. If somebody enters the market during that three years, why should that company not be able to take advantage of the mandated services? They are still in existence for that period.
1LISTNUM 1 \l 18230 On page 18 ‑‑
1LISTNUM 1 \l 18231 MR. BIBIC: Yes, yes.
1LISTNUM 1 \l 18232 THE CHAIRPERSON: Top paragraph (iii) you say:
"... on a mandated basis to new customers or to make existing customers' to augment." (As read)
1LISTNUM 1 \l 18233 MR. BIBIC: It's a question of as a new competitor enters, it will enter knowing what the rules of the game clearly are and we will have bene two years down the road.
1LISTNUM 1 \l 18234 Again, what we didn't specify in here are the words "at specified intervals during the transition period". I didn't want to spend too much time on that because there are different definitions.
1LISTNUM 1 \l 18235 THE CHAIRPERSON: Yes.
1LISTNUM 1 \l 18236 MR. BIBIC: Taking the three‑year one, after two years or two years down the road the competitor would know when it enters that, if it wants to enter on the basis of access it should do so on a commercially negotiated basis with the incumbent.
1LISTNUM 1 \l 18237 Now if it turns out ‑‑ and this is where we go back to our ex post model that we presented during our testimony.
1LISTNUM 1 \l 18238 If it turns out that we are denying access, which I don't think we are going to do, the Commission could step in.
1LISTNUM 1 \l 18239 THE CHAIRPERSON: Right.
1LISTNUM 1 \l 18240 Finally, what is a strong signal? You want us to send a strong signal that this is a hard stop and there will be no extension.
1LISTNUM 1 \l 18241 I agree with you, as you have heard me speak many times in terms of predictability, et cetera. I would just like to know what, in your view, is a strong signal.
1LISTNUM 1 \l 18242 MR. BIBIC: The strong signal would actually be a statement from the Commission that says that at the end of the transition period, those services are forborne.
1LISTNUM 1 \l 18243 In fact, I have to say it is partly a reaction to the October 3rd letter wherein Category 3, non‑essential subject of phase‑out, the last sentence of that says that we would have to re‑apply for forbearance. So that is a related point as well.
1LISTNUM 1 \l 18244 Saying that they are forborne actually sends that strong signal that the transition period won't be extended.
1LISTNUM 1 \l 18245 THE CHAIRPERSON: You made that already in your submission.
1LISTNUM 1 \l 18246 MR. BIBIC: Right.
1LISTNUM 1 \l 18247 THE CHAIRPERSON: That sentence is superfluous: once it's over, it should be over. I understand that.
1LISTNUM 1 \l 18248 MR. BIBIC: That's correct.
1LISTNUM 1 \l 18249 THE CHAIRPERSON: I just wanted to know what you meant. By strong signal, you want a definitive statement from us.
1LISTNUM 1 \l 18250 MR. BIBIC: Correct.
1LISTNUM 1 \l 18251 THE CHAIRPERSON: All right; thank you.
1LISTNUM 1 \l 18252 Commissioner de Val, did you have a question?
1LISTNUM 1 \l 18253 COMMISSIONER del VAL: Thank you, Mr. Bibic and Mr. Hofley.
1LISTNUM 1 \l 18254 I believe that when you were having the exchange with the Chairman, wasn't it 1‑800 service that you had agreed in testimony would be essential?
1LISTNUM 1 \l 18255 MR. MARTIN: That was considered. I think it was Mr. Denis Henry who indicated that 1‑800, this was the question of access tandem interconnection service, as to whether it would be continued to be mandated for 1‑800 versus normal ‑‑
1LISTNUM 1 \l 18256 MR. BIBIC: Yes, Mr. Martin is correct.
1LISTNUM 1 \l 18257 We have classified those as interconnection services, and by definition those are mandated.
1LISTNUM 1 \l 18258 COMMISSIONER del VAL: Thank you very much.
1LISTNUM 1 \l 18259 MR. BIBIC: You are welcome.
1LISTNUM 1 \l 18260 THE CHAIRPERSON: Commissioner Duncan?
1LISTNUM 1 \l 18261 COMMISSIONER DUNCAN: I'm just wondering, am I to understand then that these comments are in addition to the definition that you proposed on October 3rd?
1LISTNUM 1 \l 18262 MR. BIBIC: Yes. The definition of essential facilities we proposed remains as it is.
1LISTNUM 1 \l 18263 COMMISSIONER DUNCAN: So I did have a concern, when I read that, with your reference to "potential competitors".
1LISTNUM 1 \l 18264 It says, unless I have it incorrectly ‑‑ this is your October 4th opening statement:
"The facility is required as an input by all competitors or potential competitors."
1LISTNUM 1 \l 18265 MR. BIBIC: That goes back to the transition period. It is a related question to the one that the Chairman just asked me.
1LISTNUM 1 \l 18266 Again, this transition period applies to services which are, by definition, non essential. So the definition of essential facilities has already determined that the service in question is not essential.
1LISTNUM 1 \l 18267 What we are saying is that at the end of the second year of the three‑year transition period no new customers should be able to come on board and say I want access to a non essential facility at mandated prices.
1LISTNUM 1 \l 18268 COMMISSIONER DUNCAN: You also said in that, in your third point, that it is not practical or feasible for any competitor existing or potential.
1LISTNUM 1 \l 18269 I just have a problem with the "potential".
1LISTNUM 1 \l 18270 MR. BIBIC: The use of the words is ‑‑
1LISTNUM 1 \l 18271 THE CHAIRPERSON: I think Commissioner Duncan is going back to your definition of essential services.
1LISTNUM 1 \l 18272 MR. HOFLEY: I'm going to try to answer your question.
1LISTNUM 1 \l 18273 The point is duplicability by a competitor. Obviously you are going to have to in the real world look at kind of actual or existing competitors. But you also, frankly, have to look at whether it is duplicable by a reasonably efficient competitor. You have that framework.
1LISTNUM 1 \l 18274 What we are suggesting is that you can't just take as a given that because it's not duplicable by an existing competitor, that it would not be duplicable by a potential competitor.
1LISTNUM 1 \l 18275 And why potential is important, Commissioner Duncan, is because competition is driven both by actual competition and the threat of competition. And that's why the word "potential" is used there.
1LISTNUM 1 \l 18276 COMMISSIONER DUNCAN: Okay. I guess I'm still troubled by it.
1LISTNUM 1 \l 18277 Is there another word that I could substitute that would make it easier for me to read?
1LISTNUM 1 \l 18278 I didn't want to say a reasonably efficient competitor, because it's difficult to predict. I just don't understand how we would assess potential in the context of what you just said, that it is existing, and then we have to take into consideration what would be I guess humanly possible. I don't know how we would be able to assess that.
1LISTNUM 1 \l 18279 MR. BIBIC: Again, I think I'm back to the standard kind of competition law analysis. This would be an analysis that would be done by, for example, the Competition Bureau in considering a merger case, for example.
1LISTNUM 1 \l 18280 As you know very well, Mr. Commissioner, it's not just simply whether or not it is duplicable by an actual competitor; it is whether it is duplicable by a potential competitor.
1LISTNUM 1 \l 18281 If it is, market power is disciplined by virtue of that threat. So that's what we are trying to say there.
1LISTNUM 1 \l 18282 COMMISSIONER DUNCAN: Thank you very much.
1LISTNUM 1 \l 18283 Thank you, Mr. Chairman.
1LISTNUM 1 \l 18284 THE CHAIRPERSON: We asked the Competition Bureau and they suggested a proxy approach of bands put forward by TELUS is already simplistic and suggested we should develop other proxies.
1LISTNUM 1 \l 18285 Of course, we can do that and we will, but it is an awful lot of work and also you are the experts, et cetera.
1LISTNUM 1 \l 18286 Are you going to make in your submission some suggestion as to what viable proxies we should be using?
1LISTNUM 1 \l 18287 MR. BIBIC: I think, Mr. Chairman, we already have. We are proposing that you focus on low capacity access. And our proxy actually is once we are forborne at retail, we are forborne at wholesale.
1LISTNUM 1 \l 18288 It is actually the most conservative proxy that could be developed, for those services, mind you, low capacity access.
1LISTNUM 1 \l 18289 We could have put forward a proxy that was less conservative by saying if a competitor enters a wire centre and connects with DS‑0 or DS‑1 equivalent networks, two buildings, ten buildings, 20 per cent of the buildings then were forborne, but we went all the way to retail forbearance, equates to wholesale forbearance. That's our proxy.
1LISTNUM 1 \l 18290 THE CHAIRPERSON: Okay. Thank you very much.
1LISTNUM 1 \l 18291 I see it is 10 o'clock. Let's take a 15‑minute break.
1LISTNUM 1 \l 18292 Thank you.
‑‑‑ Upon recessing at 1006 / Suspension à 1006
‑‑‑ Upon resuming at 1024 / Reprise à 1024
1LISTNUM 1 \l 18293 THE SECRETARY: Be seated please.
1LISTNUM 1 \l 18294 THE CHAIRPERSON: Okay, Madam Secretary, go ahead.
1LISTNUM 1 \l 18295 THE SECRETARY: Thank you, Mr. Chairman.
1LISTNUM 1 \l 18296 We will now proceed with Rogers Communications, Mr. Englehart.
ARGUMENT / PLAIDOIRIE
1LISTNUM 1 \l 18297 MR. ENGLEHART: Thank you very much.
1LISTNUM 1 \l 18298 Mr. Chairman, with me today are Suzanne Blackwell and Lori Dunbar.
1LISTNUM 1 \l 18299 Most of the parties to this proceeding are in agreement that the ultimate objective should be facilities‑based competition, that facilities‑based competition is the objective that we are trying to achieve. And in the residential market you could argue you are already there, you have the competition between cable and telephone. If you want to rely on facilities‑based competition in the residential market, you can.
1LISTNUM 1 \l 18300 But there is a problem in the business market, a huge problem, and that is that most buildings have only one company's wires into that building, so you just don't have anything like the residential market in the business market. And you have sporadic pockets of buildings that have two companies' wires or sometimes even three companies' wires into a building, but they really are sporadic pockets.
1LISTNUM 1 \l 18301 This is not a uniquely Canadian problem. It is not as though this is some failing of the Canadian system. It is true in virtually every country in the world. In the United States it is true where the general accounting office found that in the downtown cores of the really big American cities like New York and Los Angeles only 6 per cent of small business and 25 per cent of large business buildings have competitive wires going into them. So that is the problem, that is what we are here to solve.
1LISTNUM 1 \l 18302 What is the cause of the problem? How does this come about? People presented to you maps and diagrams showing that there were fairly extensive metropolitan area networks owned by competitors in some cities. The problem is getting from those metropolitan are networks into the buildings, the high cost of the laterals. That is the evidence that has been presented to you in this proceeding.
1LISTNUM 1 \l 18303 And building those laterals is very expensive for competitors. For the incumbent, first of all, the cost of getting into that building is somewhat lower but, more importantly, they have got all the customers, they are the incumbent. You can pay for those facilities when you have got 100 per cent of the revenue. I am not saying there is no risk, I am saying the risk is fairly low.
1LISTNUM 1 \l 18304 But if you are a new entrant you have to build that expensive lateral. Maybe you only have one customer, maybe you spend $100,000 on a fibre lateral, you have got one customer, you are never going to recoup your investment unless you get other customers in the building, and you might not. So there is a lot more risk, that is the cause of the problem and that is what we are here to solve.
1LISTNUM 1 \l 18305 So what are the solutions to the problem? Some parties seem to feel that technology can solve all of our problems. We have got Inukshuk, we have got new technologies coming on cable networks and these new technologies are going to solve all of our problems if we only let them. This is, in our submission, wishful thinking.
1LISTNUM 1 \l 18306 Competitors have been building facilities in business locations in Canada for at least the past 17 years. And there has been lots of new wireless technologies that have come and gone, there have been lots of new ideas and still, for the most part, those access facilities are fibre or copper. So counting on technology to bail us out is highly speculative.
1LISTNUM 1 \l 18307 Second, we can just assume the problem away. The phone companies argue that, well, Rogers is already in all of these buildings, the competitors are already in all of these buildings. There is no problem, if they are not in them they are right beside them. This is not solving the problem, this is assuming the problem away. You have the information from the DNA proceeding, from the forbearance applications. You know how many of these buildings have competitive facilities in them.
1LISTNUM 1 \l 18308 The pattern of distribution of competitive facilities is based on engineering economics. If you have got a big building with lots of customers that have lots of expensive high‑bandwidth services a competitor can afford to building a facility into that building. In most buildings you don't, so in most buildings there is no second wire.
1LISTNUM 1 \l 18309 Rogers, in our operating territory, has 1,850 buildings served by fibre and about 1,400 of those came with the recent Group Telecom acquisition. That is pretty good, we are making progress and we are, you know, committed to driving our facilities as much as we can into buildings. But it still doesn't solve the problem, we are still a long way away. As Mr. Hatfield said, you cannot repeal the law of economies of scale.
1LISTNUM 1 \l 18310 Bell argues, well maybe Rogers doesn't have a lot of fibre in the buildings, but it has coax and new technologies are going to enable that coax to do wonderful things. We estimate that we have coax into about 5 per cent of the building locations. Now, Bell has stated during their cross‑examination of the Rogers panel that Rogers was present in 90 per cent of 187 large downtown Ottawa office buildings with coax. In fact, 26 of these buildings were apartment buildings or hotels. In the remainder we had fibre in 11 of the buildings and coax in 75 per cent.
1LISTNUM 1 \l 18311 But those facts don't change the fundamental problem of the expensive lateral. For example, in one of the buildings where the coax went in most recently we checked our records and there the landlord paid us a $50,000 installation fee to put our coax into the building so that the landlord's tenants could subscribe to our cable and internet services. And these expensive installation charges for cable television in business buildings are not uncommon, either paid for by the landlord or paid for by the first tenant that wants the cable television service.
1LISTNUM 1 \l 18312 Even once we have coax into the buildings it doesn't help us that much for providing telecom services. If you have a $10,000 lateral for coax, because the coax laterals, as you know from the evidence filed before you, are much cheaper than the fibre laterals, you know, you might be able to support three or four internet services, a couple of phone lines, that is not going to pay for the cost of that lateral.
1LISTNUM 1 \l 18313 And the sort of troubling thing is a lot of the buildings where we do get someone to pay because they want cable TV in these large office buildings, many of the tenants are large and medium businesses and the coax really doesn't do much for those businesses on telecom services. It is really a way of providing internet service today, it is really a way of providing single line phone service.
1LISTNUM 1 \l 18314 There are some technologies underway for multi‑line hunting, so we hope in the near future that coax can be used to provide service for small business and even some medium businesses. But it will be a long time before it can provide services for big business or large or medium businesses.
1LISTNUM 1 \l 18315 As Mr. Watt explained on the stand, the T1 emulation on coax may never be cost effective. So coax, although it will help, although it is in some of the buildings, although it will nibble away at the problem, it is not the solution of the problem.
1LISTNUM 1 \l 18316 So there is no technology fix, we can't assume the problem away, we have to look at some regulatory solutions. What are those regulatory solutions?
1LISTNUM 1 \l 18317 Well, one solution is what I call hope for the best. If a facility is duplicable the Commission should walk away and hope for the best. And by duplicable, in their evidence before this proceeding, the incumbents meant, well Bell meant, if you can build a wire into a building in a market it is duplicable in the whole market. If you can build a wire into the Toronto‑Dominion Centre, it is duplicable for an industrial park in Etobicoke.
1LISTNUM 1 \l 18318 TELUS goes farther. They say if you can build a wire anywhere in the band, in the entire band, then it is duplicable throughout the entire band. That is an attractive position if you are the incumbent. You want market forces to rule, you want the Commission to walk away because you will have the whole market to yourself.
1LISTNUM 1 \l 18319 And particularly for voice services, which have been deregulated, you can price largely in an unrestrained fashion. So when you say that everything is in the nonessential bucket it is not a realistic proposal, it is not a solution of the problem.
1LISTNUM 1 \l 18320 The second thing you could do is what the Bureau has suggested, which is regulate retail rates. And for voice, that option has been taken away from you by the government. They have clearly said that they are going to deregulate based on leased facilities. You could do it for data.
1LISTNUM 1 \l 18321 We think the government has sent you a powerful message. You know, the direction really doesn't, despite what everyone says, the direction is really very unbiased in what it says to the Commission. The direction says to you, take a look at those essential facilities and figure out what you think is best.
1LISTNUM 1 \l 18322 And people say, well, you should be in formed by other words in the direction. Well, we think you should also be informed by the forbearance decision. In the forbearance decision the government said, given a choice between retail regulation and the continuance of unbundled facilities, we would prefer the unbundled facilities. That is what the government said to you in the forbearance decision. We think you should take some guidance from that.
1LISTNUM 1 \l 18323 Now, one possibility that arises from the fact that the voice market has been forborne based on those essential facilities is that you could classify the facilities as mandated conditional non‑essential, which is your bucket four in CRTC Exhibit 4.
1LISTNUM 1 \l 18324 We don't think that is the right approach because the facilities were deregulated ‑‑ or the services that were deregulated were voice services, so someone is going to say: Well, we have got the restriction on use doctrine, the restriction on use concept, and that means if you lease those facilities, you can only use them for voice.
1LISTNUM 1 \l 18325 So classifying them as mandated conditional non‑essential is a problem. It will mean, I suspect, that competitors can't use them for data and that will take a very difficult business case and make it even more dreary.
1LISTNUM 1 \l 18326 A better way to look at it is that if the facilities are needed by competitors in order to protect retail customers, that is a pretty strong indication that they are not really duplicable and they should be classified as essential or, in our view, conditional essential.
1LISTNUM 1 \l 18327 With that classification, competitors can use them for both voice and data. So we think that is an approach that is more consistent with the government's forbearance order and that the government considers competition using these unbundled facilities to be legitimate.
1LISTNUM 1 \l 18328 So now we get really to the heart of this proceeding, which is: How would unbundled facilities regulation work?
1LISTNUM 1 \l 18329 There are really three ways of doing it. You can have ex ante tariffs with a review hearing, you can have an ex post process or you can have proxy rules. Proxy rules say that the tariffs will exist until certain observable, verifiable criteria have been met.
1LISTNUM 1 \l 18330 So what are the problems with ex ante? The problem with ex ante is really the review hearing. It creates too much uncertainty. Competitors can't build a business knowing that in three years there will be a review hearing. In three years the tariffs might go away.
1LISTNUM 1 \l 18331 Primus said in their evidence that just the fact of this hearing has caused them to put their activities on hold. Markets can't tolerate that sort of uncertainty. You need to impose a set of rules and walk away and let the market come to grip with those rules or you are never going to have a market.
1LISTNUM 1 \l 18332 The other thing you could do is ex post regulation. There, no facilities would be mandated up front but the Commission will have an ex post process if the ILEC and the competitors cannot agree on a rate.
1LISTNUM 1 \l 18333 Bell, at least in their evidence before today, recommended this approach, although they did say on the stand that there really were no essential facilities, so I thought it was a bit of a hollow offer. But they also go on to say that whether a facility is essential or not, they will always have an incentive to offer it to competitors.
1LISTNUM 1 \l 18334 Dr. Taylor actually said in his evidence that it would be irrational for a supplier, a wholesaler, to cut off their wholesale customers, but after a long, slightly painful cross‑examination, he admitted that it was perfectly rational for a supplier that had upstream and downstream dominance to deny access to wholesale customers.
1LISTNUM 1 \l 18335 And Bell says: Well, we are really good to our wholesale customers in the long distance market. Yes, but there are already multiple facilities‑based long distance competitors. So that example isn't very relevant.
1LISTNUM 1 \l 18336 The fact is if you have a huge retail share in the local market, it is perfectly rational to deny your facilities to wholesale customers because you will then pick up the end users as your retail customers. There is no rationale, there is no reason why a rationally behaving wholesaler would behave otherwise.
1LISTNUM 1 \l 18337 The final problem with the ex post solution is it is the same problem as the review hearing. It injects too much uncertainly into the process to allow a competitive market to develop. You don't know what you are going to get and even when you get it, you don't know if it is going to be renewed.
1LISTNUM 1 \l 18338 In our submission, the only practical solution is the imposition of proxy rules.
1LISTNUM 1 \l 18339 The Competition Bureau agreed that imposing proxy rules was the best approach. Here is what they said:
"The best outcome for this proceeding would be the development of accurate proxy rules that identify when certain facilities, for example, access‑differentiated by capacity and transport, are likely to be essential. These proxy rules would base the determination of whether a facility is essential ex ante on easily observable and verifiable structural characteristics. These structural characteristics would encompass variables that measure or are correlated with relevant factors such as demand and cost as well as indicating the markets, product and geographic, in which they are applicable." (As read)
1LISTNUM 1 \l 18340 Now, the Bureau said that they didn't have the data to effectively set proxy rules but you do.
1LISTNUM 1 \l 18341 Proxy rules would assign the mandated facilities into your bucket two. So the facilities are mandated at regulated rates until observable, verifiable conditions are met. Proxy rules give the market participants certainty and allow the essential facilities regime to deregulate itself.
1LISTNUM 1 \l 18342 So we have modelled our proposal on the FCC's proxy rules. What did the FCC look at?
1LISTNUM 1 \l 18343 They looked at two things: the number of lines in each wire centre and the number of competitive suppliers of facilities.
1LISTNUM 1 \l 18344 The number of lines is a proxy for the density of business customers. With sufficient density, there are revenue opportunities to construct lateral facilities.
1LISTNUM 1 \l 18345 The number of competitors shows two things. It shows that competitors have been able to cost‑effectively build those laterals and it shows that there is a viable market for wholesale services without Commission involvement, so the Commission can walk away in those wire centres.
1LISTNUM 1 \l 18346 One of the questions that the Rogers panel received was: Well, why do you need four competitors, why not two?
1LISTNUM 1 \l 18347 The difference is that in the business markets, unlike the residential markets, it is not ubiquitous, every competitor doesn't go into every building. You might have 1,000 buildings and four competitors each going into 40 buildings. So now with four you have got a better chance that you are going to have someone prepared to build a lateral into a building.
1LISTNUM 1 \l 18348 Why co‑located? The FCC said co‑located. Well, that is to show that they can really provide access and transport services.
1LISTNUM 1 \l 18349 In the Canadian context, insisting on co‑location may be unnecessary. The point is that that competitor has to be able to provide access and transport services. If they have wired up a few public schools out in the suburbs, they are probably not really helpful as a provider of access and transport services. If it is a hydroelectric utility with a telecom arm that has a metropolitan area network and laterals into big buildings, they probably should count whether they are co‑located or not.
1LISTNUM 1 \l 18350 So that is the FCC rule. What are the facilities that the FCC applies that rule to? It is unbundled loops, it is DS‑1s and it is DS‑3s. They also included dark fiber for transport in small wire centres. But it is our submission that those are the right facilities. Those are the facilities that competitors need to get into the buildings.
1LISTNUM 1 \l 18351 Mr. Hatfield's evidence explained the protocol stack model. If you have got the DS‑1s, if you have got the DS‑3s, if you have got the unbundled loops, competitors can add their own Ethernet, they can add their own IP. We don't need that from the incumbents.
1LISTNUM 1 \l 18352 It means that the incumbents don't have to provide next‑generation facilities, so they would have no disincentive to build them. And it means that there is very little risk of stranded investment because those loops and those DS‑1s and those DS‑3s for the most part, they are already there.
1LISTNUM 1 \l 18353 So we think that works but there are other proxy rules that the Commission could use if it wanted to.
1LISTNUM 1 \l 18354 In retail DNA forbearance, your rule was that if 30 percent of the buildings have a competitor's fiber facilities, you will forbear. That rule would work for wholesale as well.
1LISTNUM 1 \l 18355 We were asked the question, the Rogers panel was asked: Well, what if that rule led to retail forbearance while your rule led to continued wholesale regulation?
1LISTNUM 1 \l 18356 That is a theoretical problem. We think in most cases the wire centres are going to be the same wire centres. But if the Commission were more comfortable with the proxy rule in the DNA retail forbearance decision, it could use that rule.
1LISTNUM 1 \l 18357 The key is that proxy rules have to be easily observable and verifiable. The FCC's rule really is. You know how many co‑located competitors there are. You know how many lines there are in a wire centre. The number of buildings with more than one supplier is a bit more problematic and the Commission would have to be very careful.
1LISTNUM 1 \l 18358 But the overall message that we would give to you is the only way to move forward, consistent with sound public policy, is with a proxy rule for essential facilities.
1LISTNUM 1 \l 18359 Now, I want to speak for a moment about the residential marketplace.
1LISTNUM 1 \l 18360 The residential market is very different from the business market because we do have competition from cable companies. If you wanted to strictly apply our test or anyone's test you could say: Well, that facility is duplicable. The cable company has already duplicated it, for heaven's sakes, or duplicated the same functionality. So we don't think there are any essential facilities in the residential market.
1LISTNUM 1 \l 18361 You could, in our submission, take a more flexible interpretation of the test. You could say: Well, it is really only the cable company that can duplicate those facilities in the residential market. No one else can duplicate it.
1LISTNUM 1 \l 18362 So with a flexible interpretation we believe you could classify those services as non‑duplicable and therefore they should be mandated as long as they would substantially increase competition.
1LISTNUM 1 \l 18363 Well, do they?
1LISTNUM 1 \l 18364 The Bureau said: Well, if you look at the total number of unbundled loop services in Canada as a proportion of the total number of loops, we don't think it is a substantial form of competition. We think it's more appropriate to look at the proportion of loops in those cities where it's actually offered.
1LISTNUM 1 \l 18365 When we bought Call‑Net it had 400,000 residential loops and 70,000 business loops. We have migrated a lot of the residential loop customers to our cable platform where they live in our cable territory, so there are less now.
1LISTNUM 1 \l 18366 But if you look for example at Vancouver where we don't have a cable system, we have 60,000 customers using those loops. That's 10 per cent of the market where we can offer the service. That is an important form of competition for those customers.
1LISTNUM 1 \l 18367 And the costs of continuing to mandate those facilities are pretty small.
1LISTNUM 1 \l 18368 Do you have to worry about a failure to incent facilities‑based competition? No, there already is facilities‑based competition. The cable companies have already entered.
1LISTNUM 1 \l 18369 Do you have to worry that the incumbents won't have an incentive to build advanced facilities? Of course not. They don't have to provide those advanced facilities, they only have to provide the loops.
1LISTNUM 1 \l 18370 Do you have to worry about the regulatory costs? You have already incurred them. We already have the tariff, we already have the rules, we already have the collocation rooms. We have done it. It's already in place.
1LISTNUM 1 \l 18371 And bear in mind that virtually every major industrialized country in the world, including the United States of America, mandates those residential loops.
1LISTNUM 1 \l 18372 That provides a segue for me into the issue of benchmarking what you do against the other countries.
1LISTNUM 1 \l 18373 It is sort of easy to get fixated on a particular definition and let that definition drive you to a certain outcome. But instead of doing that, or in addition to doing that, we would say you should look at what other countries are doing. We think that provides a sanity check.
1LISTNUM 1 \l 18374 In the forbearance proceeding the phone companies, the incumbents said: How come Canada is the only country that has a retail regulation? Why Canada? Why can't the Canada be more like its trading partners?
1LISTNUM 1 \l 18375 Like the joke about the proud mother watching her son marching in the parade: Why is my little Johnny the only one marching in tune?
1LISTNUM 1 \l 18376 We can ask the same question about unbundled loops: Why is Canada the only one that should be marching in tune? If the United States mandates unbundled loops for residential and business markets there might be an important lesson there.
1LISTNUM 1 \l 18377 Much was made of the fact that in Omaha 9 of 24 wire centres have been deregulated for unbundled facilities and 5 of 11 wire centres in Anchorage, and the Bell panel indicated that they believed there would be more widespread deregulation based on what the FCC was doing.
1LISTNUM 1 \l 18378 The FCC redacts all the reasons from its forbearance decision so it's very hard to know what they are saying. But we did find paragraph 43 of the Omaha decision where they said that mandating facilities was no longer necessary because:
"... the majority of customers have selected carriers other than Quest". (As read)
1LISTNUM 1 \l 18379 In other words, in the U.S. they don't mandate facilities when the competitor actually has more retail customers than the incumbent.
1LISTNUM 1 \l 18380 Well, that seems fair, but it indicates that the extent of the forbearance of mandated loops will be fairly limited in the United States.
1LISTNUM 1 \l 18381 Bear in mind, the United States is a country most like us. Their telecom market is the most like ours, their economy is the most like ours and the FCC requires DS‑1 and DS‑3 facilities, and DS‑0 facilities for access and transport at regulated rates based on a long‑run incremental cost.
1LISTNUM 1 \l 18382 Bell's own evidence shows that once the Americans got rid of the UNE‑P and went to that regime there has been strong growth of competitive facilities, strong growth of incumbent facilities, strong growth of competition. So in the midst of all these theoretical arguments you have a real live laboratory experiment in the United States.
1LISTNUM 1 \l 18383 The regime that we are asking you to impose in Canada is working very well in the United States and we believe that's an important factor for you to include in your considerations.
1LISTNUM 1 \l 18384 The telecom market is working very well in Canada, too. There is considerable growth and investment by both competitors and incumbents.
1LISTNUM 1 \l 18385 What the Commission needs to do is add some certainty to that market so participants know how to plan and grow, and you need a way to transition away from unbundled facilities once facilities‑based competition is effective.
1LISTNUM 1 \l 18386 We submit that properly designed proxy rules will provide you with the necessary regulatory structure.
1LISTNUM 1 \l 18387 THE CHAIRPERSON: Thank you very much, Mr. Engelhart.
1LISTNUM 1 \l 18388 I found your explanation very clear and very easy to follow when you talked about the business market. Frankly, you lost me in the residential market.
1LISTNUM 1 \l 18389 Can you just tell me what exactly are you doing?
1LISTNUM 1 \l 18390 Go to page 15, the top paragraph, you said:
"A more flexible interpretation of the tests in there would be in the public interest." (As read)
1LISTNUM 1 \l 18391 In effect, what are you suggesting in the residential market?
1LISTNUM 1 \l 18392 MR. ENGELHART: In the residential market we are saying that until a third technology really can come along ‑‑ or service provider can come along that could provide a competitive alternative in the residential market, you should continue to mandate unbundled loops.
1LISTNUM 1 \l 18393 You don't have to. You could say: Look, a duopoly is just fine for us, cable telco competition seems to be working really well right now, we think it will continue to work really well, we don't think we need the unbundled loops.
1LISTNUM 1 \l 18394 It's the nature of duopolies, when they work they work really well because the two participants kind of slug each other with body blows. The point is that you might not be comfortable with that duopoly and, unlike the business market, the fact that someone is duplicated is not evidence that a third or fourth or fifth player will duplicate.
1LISTNUM 1 \l 18395 So if you look at duplicability that way, and I suppose a really, really what I'm saying is you should define duplicability as triplicability, you should say that someone else can make those ‑‑ some third player can make those facilities work, or make facilities work. Until you have gotten to that point you should keep mandating those loops.
1LISTNUM 1 \l 18396 THE CHAIRPERSON: So it was not a reference to the difference between cable companies? Some of them, like your company, is already providing telephony while others have not done it yet, especially the small ones.
1LISTNUM 1 \l 18397 MR. ENGELHART: They will. I mean, they will sooner or later. I don't think we have to worry too much about cable companies doing that because just to survive against satellite they are going to have to put in fibre and they are going to have to have a robust internet service, and once they do that they will provide telephony.
1LISTNUM 1 \l 18398 THE CHAIRPERSON: All right.
1LISTNUM 1 \l 18399 Going back to your proxy test in the business, I understood what you said about collocation, but you are basically saying they have to be four competitors. That is your basic test?
1LISTNUM 1 \l 18400 MR. ENGELHART: Yes. That is the proxy test that the FCC has. We think it works. Other proxy tests would work, but we think that one works well.
1LISTNUM 1 \l 18401 If one of them provided ubiquitous facilities into every business building, then four would seem excessive. In the real world they don't. In the business market you will have the hydro going into a few buildings, Allstream going into a few buildings, Rogers going into a few buildings, TELUS going into a few buildings, and if you have four of them you have probably got a workable market.
1LISTNUM 1 \l 18402 THE CHAIRPERSON: If one of them is a utility telco which actually does go into all the buildings, then two would be enough, as far as I can see?
1LISTNUM 1 \l 18403 MR. ENGELHART: The utelcos don't go in every building, but if they did I agree with you that four would be excessive.
1LISTNUM 1 \l 18404 Utelcos go into fairly few buildings as a matter of fact.
1LISTNUM 1 \l 18405 THE CHAIRPERSON: That's obviously a question of fact for you to verify, yes.
1LISTNUM 1 \l 18406 MR. ENGELHART: Yes.
1LISTNUM 1 \l 18407 THE CHAIRPERSON: Commissioner Duncan, did you have something?
1LISTNUM 1 \l 18408 COMMISSIONER DUNCAN: I think I would just like to talk a bit more about the business market.
1LISTNUM 1 \l 18409 I'm just wondering, on what we heard this morning from Bell with respect to the Ottawa downtown core, that you are in 78 per cent of the major buildings in downtown, but I think your comments here would indicate that's mostly with co‑ax.
1LISTNUM 1 \l 18410 MR. ENGELHART: It's with co‑ax.
1LISTNUM 1 \l 18411 What Bell said this morning is: If you can pull co‑ax into the building, well, then you can pull fibre into the building.
1LISTNUM 1 \l 18412 That is a complete non sequitur. The fact that you have co‑ax in the building says nothing whatsoever about the cost of putting fibre into the building. We have given you, in confidence, costing studies that show what it costs to pull fibre in and those costs don't materially change just because there happens to be co‑ax in the building.
1LISTNUM 1 \l 18413 COMMISSIONER DUNCAN: I noticed you are saying that you are serving 1,850 buildings with fibre, 1,400 of them came from the Group Telecom. So that doesn't on the surface seem to be very many buildings in the whole of your serving territory.
1LISTNUM 1 \l 18414 MR. ENGELHART: No, it's not. A lot of these fibres from Group Telecom and Metronet were put in by companies that subsequently failed. So the track record for pulling those fibres in has not been great, but it is still growing and people are still doing it where they can.
1LISTNUM 1 \l 18415 COMMISSIONER DUNCAN: I'm just having difficulty wondering how you would expect that we would end up with four competitors, or up to four competitors. I guess your point is you have to say four because it is highly unlikely that you will have four.
1LISTNUM 1 \l 18416 But I'm wondering how many businesses can reasonably expect to have a competitive solution?
1LISTNUM 1 \l 18417 MR. ENGELHART: Well, in the retail DNA preceding you found that there were 18 wire centres in Bell's territory that had 30 per cent of the buildings with fibre in them, competitive fibre in them. Thirty per cent of the buildings in the entire wire centre. That is a fairly huge number.
1LISTNUM 1 \l 18418 I would guess that in those same 18 wire centres you probably do have four competitors. You probably have Rogers and MTS and the Utelco and probably TELUS. So I think it's not unrealistic to think there's going to be four, and I think that the track record of those 18 wire centres indicates that it's growing.
1LISTNUM 1 \l 18419 Now, how fast it's going to grow and where it's going to end up is something that, if we knew that, we probably wouldn't be here in the regulatory business. But I do think that there is growth.
1LISTNUM 1 \l 18420 And ultimately, facilities‑based competition is the goal for most companies because that's where you make the biggest margins. So people will have an incentive to get their facilities into those buildings.
1LISTNUM 1 \l 18421 COMMISSIONER DUNCAN: And again, your transition period was how long, your recommendation on the transition?
1LISTNUM 1 \l 18422 MR. ENGELHART: Five years, but that's really for the services that are considered to be non‑essential, which, for us, are the Ethernet and IP services.
1LISTNUM 1 \l 18423 For the DS‑1s and the DS‑3s, rather than having a transition period, we believe in the proxy rule or mandated conditional essential, in other words, when the market conditions are right to deregulate, there's verifiable objective data that caused those things to be automatically deregulated.
1LISTNUM 1 \l 18424 COMMISSIONER DUNCAN: Okay, thanks for the clarification.
1LISTNUM 1 \l 18425 Thanks.
1LISTNUM 1 \l 18426 THE CHAIRPERSON: And where there is a phaseout of five years, how do you feel about pricing increases that have been suggested by Bell, for instance?
1LISTNUM 1 \l 18427 MR. ENGELHART: Seems a bit like rubbing salt in the wound to me. I mean, if you have to get out in five years, you are going to get out, and in many cases you are going to need that five years to either sell those subscribers or figure out some other plan. So I think the price increase is a wealth transfer, it probably doesn't have any efficiency impact.
1LISTNUM 1 \l 18428 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 18429 Commissioner del Val.
1LISTNUM 1 \l 18430 COMMISSIONER del VAL: Just going back to your proxy model for business market, now why isn't three in a wire centre enough?
1LISTNUM 1 \l 18431 MR. ENGELHART: Well, I mean, I don't think that there's a magic to the proxy rule that the FCC took. They looked at the data, they looked at the wire centres, they looked at the extent of competition, and they were of the view that four was the right number.
1LISTNUM 1 \l 18432 You might look at the Canadian market and you might say, Well, you know what, there aren't the same activities of utelcos in the U.S. as there are in Canada, so we think in Canada it's three.
1LISTNUM 1 \l 18433 What we said at the beginning of this proceeding is we think that we will put the FCC rules as a stake in the ground, and then we will ask questions of the other parties to try and get some clarification on whether this is the right rule.
1LISTNUM 1 \l 18434 We didn't really get much on the record in response to those questions, so it's very hard for us to know what the right rule is. It's probably only the Commission that has the data.
1LISTNUM 1 \l 18435 A priori, you wouldn't necessarily rule out three, but I think the question you have to ask yourself is: Does the presence of those competitors indicate that people are building laterals in significant numbers in those wire centres; and secondly, does the presence of those competitors give us some confidence that if there's no more mandated facilities there will be a thriving wholesale market for those facilities?
1LISTNUM 1 \l 18436 So whether is three or whether it's four, that's the conclusion you are coming to. We would be more comfortable with four, but we don't really have the data to prove that to you.
1LISTNUM 1 \l 18437 COMMISSIONER del VAL: Okay, and you don't think that you will have further data say come your final written argument stage?
1LISTNUM 1 \l 18438 MR. ENGELHART: No, but...
1LISTNUM 1 \l 18439 COMMISSIONER del VAL: Okay.
1LISTNUM 1 \l 18440 MR. ENGELHART: No, we don't think so, but as we said in our argument here, another possibility would be to get away from four competitors and so many wires in a wire centre and move to your retail DNA forbearance test, which came out after we filed our evidence, and that test says 30 percent of the buildings have competitor fibre. That seemed to be the same test that I think I heard Bell urging on you this morning, so that's another way of cracking open the problem.
1LISTNUM 1 \l 18441 COMMISSIONER del VAL: Thank you.
1LISTNUM 1 \l 18442 THE CHAIRPERSON: Or you could use them alternatively, right, one or the other ‑‑
1LISTNUM 1 \l 18443 MR. ENGELHART: Yes, you could, sir.
1LISTNUM 1 \l 18444 THE CHAIRPERSON: ‑‑ because they are not exclusive, right?
1LISTNUM 1 \l 18445 MR. ENGELHART: Correct, Chair.
1LISTNUM 1 \l 18446 THE CHAIRPERSON: Right.
1LISTNUM 1 \l 18447 Okay, thank you very much.
1LISTNUM 1 \l 18448 Madam Secretary.
1LISTNUM 1 \l 18449 THE SECRETARY: Thank you very much.
1LISTNUM 1 \l 18450 I'm now calling, please, the TELUS Communications Company panel.
1LISTNUM 1 \l 18451 THE CHAIRPERSON: Mr. Rogers.
ARGUMENT / PLAIDOIRIE
1LISTNUM 1 \l 18452 MR. ROGERS: Good morning, Mr. Chairman, and members of the panel.
1LISTNUM 1 \l 18453 Phil Rogers for TELUS, and with me is Stephen Schmidt and Dr. Lee Selwyn.
1LISTNUM 1 \l 18454 This morning, Mr. Chairman, we will be doing three things: we will provide the Commission with a short overview of TELUS's proposals in this proceeding, we will identify areas on which there is near consensus; and finally, we will provide our views on remaining open issues.
1LISTNUM 1 \l 18455 Those with long memories know that TELUS has been deeply involved in and committed to competition in local telecom markets since at least 1993. We consider this proceeding to be a major opportunity for the Commission. More particularly, it is an opportunity to establish a long‑term, sustainable framework that will shift the focus of competitive activity away from the hearing room to where it really belongs: on competing for customers, developing services, innovating and investing in more and better facilities.
1LISTNUM 1 \l 18456 In our view, Mr. Chairman, the TELUS proposals respond to several important objectives of the Commission: they are simple and pragmatic, they reflect the realities of the Canadian marketplace and they are relatively easy for the Commission to administer.
1LISTNUM 1 \l 18457 Before turning to the issues, we will very briefly review some of the key elements of our proposal. We propose that the Commission define an "essential facility" as follows: "a facility, function or service that satisfies all three of the following criteria: it is monopoly controlled; secondly, competitors require it as an input to provide services; and third, competitors cannot duplicate it economically or technically".
1LISTNUM 1 \l 18458 This test, Mr. Chairman, is not new to the Commission, in fact, it is very similar to the test that the Commission established in Decision 97‑8. You will recall that in that decision the Commission concluded that, and I quote:
"...ILECs should generally not be required to make available facilities for which there are alternative sources of supply or which CLECs can reasonably supply on their own."
1LISTNUM 1 \l 18459 Like the Commission's own 97‑8 test for an essential facility, and unlike the tests proposed by many parties in this proceeding, the TELUS test does not rely on whether a particular supplier is dominant. The Commission expressly dealt with that question in Decision 97‑8 when it concluded, and again I quote:
"...the Commission considers it inappropriate to define an essential facility as a facility that is provided by a dominant firm with market power because it would require facilities to be treated as essential even in the face of the demonstrated feasibility of alternative provision, including self‑supply."
1LISTNUM 1 \l 18460 In TELUS's view, the Commission's approach was correct then, and it remains correct today.
1LISTNUM 1 \l 18461 In regards to the second limb of the test, it does not matter that a particular competitor may require the facility. What matters is whether competition is enabled, not that any particular competitor requires access. Excessive mandatory unbundling to accommodate any potential entrant will only raise costs and promote inefficient entry. That results in higher prices and harm to consumers.
1LISTNUM 1 \l 18462 The third limb, duplicability, is a critical part of the test. This question should be considered through the lens of whether an efficient competitor could economically duplicate a facility. It is readily apparent from the record that there are very few facilities that have not already been duplicated. Even where they have not been duplicated in a given geographic area, they could generally be economically duplicated.
1LISTNUM 1 \l 18463 MR. SCHMIDT: When the accepted definition of an essential facility is applied to the current list of wholesale services that TELUS is mandated to provide, two services present themselves as essential: basic listing interchange file service and directory file service. These services would be placed in the Category 1 essential bucket of the Commission's six‑category classification system.
1LISTNUM 1 \l 18464 With the exception of those services falling in the public good category and the interconnection classification, all other existing competitor services and facilities would be placed in Category 3, the non‑essential services, subject to phaseout.
1LISTNUM 1 \l 18465 While public good facilities or services, such as 911 service, and interconnection services do not, strictly speaking, meet the definition of an "essential facility", there appears to be broad agreement among the parties on the continued need to mandate these arrangements.
1LISTNUM 1 \l 18466 On the question of pricing, TELUS recommends that regulated prices for essential facilities be set at fully compensatory rates. By this TELUS means that rates would reflect actual company‑specific Phase II costs, plus a mark up to recover the proportionate share of fixed common costs and the embedded cost differential.
1LISTNUM 1 \l 18467 On the question of periodic reviews, in TELUS's view there will be no need for the Commission to undertake periodic reviews of essential facilities at regular intervals. Any party could, of course, apply to the Commission to change the classification of a facility at any time should the facts warrant this. The burden of proof would fall on that party seeking the change in classification.
1LISTNUM 1 \l 18468 On the question of the transition period, TELUS anticipates that mandated sharing of non‑essential facilities would be phased out at the end of a transition period. In general, the length of this transition period would be three years, although, in our view, a longer transition of up to five years is warranted for certain classes of facilities such as access facilities.
1LISTNUM 1 \l 18469 During the transition, tariffed rates would be gradually adjusted to fully compensatory levels. While tariffs would remain in place for non‑essential services during the transition period, suppliers and purchasers of non‑essential facilities would also be entitled to negotiate mutually acceptable commercial arrangements during the transition period, comforted by the fact that the backstop of compulsory supply and price controls exist for these non essential services during the transition.
1LISTNUM 1 \l 18470 At the end of the transition, all non essential facilities would be forborne pursuant to section 34.1 of the Telecommunications Act.
1LISTNUM 1 \l 18471 So that is TELUS' proposal in a nutshell in this proceeding.
1LISTNUM 1 \l 18472 The next subject we want to touch on is those matters where significant consensus is apparent on the record.
1LISTNUM 1 \l 18473 We note that in spite of the great diversity of parties in this hearing room, in spite of the great diversity of views, there are a number of key issues on which there appears to be near consensus or at least very broad support.
1LISTNUM 1 \l 18474 Specifically, TELUS has identified six such issues where there appears to be near consensus.
1LISTNUM 1 \l 18475 First, there was a recognition by most parties that the Commission should adopt a definition of essential facilities that provides as much clarity and as much guidance as possible to the industry. If the players are to be incented to make long‑term investments and enter into long‑term supply arrangements with facility owners, then all players need to know the rules of the road.
1LISTNUM 1 \l 18476 In short, they need to know with palpable certainty which facilities will be subject to compulsory unbundling and compulsory pricing rules and which facilities will be subject to commercially determined unbundling decisions and commercially determined pricing decisions.
1LISTNUM 1 \l 18477 Clarity on these points will help guide business decisions.
1LISTNUM 1 \l 18478 A second point of consensus is that most parties to the proceeding acknowledge that the policy direction calls for a narrowing of the scope of mandated supply. There is little debate on that fact. Rather, any residual debate is around the pace of the phase‑out of mandated supply or the precise scope. But there is general recognition that there will be a narrowing of the scope of mandated supply.
1LISTNUM 1 \l 18479 A fourth point of consensus that has emerged is that while there are various proposals on the table before you for a transition period, consensus seems to be clustering around a three‑to‑five‑year transition period.
1LISTNUM 1 \l 18480 Importantly, as well, there seems to be a generalized recognition that there should be a hard stop at the end of the transition period. This is critical to create a sense of certainty for all players in the industry, to make it, in short, vivid and obvious as to where the rules are going and what the rules are going to be. Otherwise, we may be trapped in a never‑ending transition.
1LISTNUM 1 \l 18481 A fifth point of consensus among the parties concerns the transition period as well, which is first that there ought to be some allowance for price increases during the transition period; and second, that there ought to be flexibility to negotiate over rates, terms and conditions for non essential services during this transition period.
1LISTNUM 1 \l 18482 Many parties, including the Rogers witness Mr. Watt, supported allowing the negotiation of mutually acceptable terms, conditions and pricing for non essential services during the transition period, provided of course that regulated tariffs remain in place as a backstop until the end of the transition.
1LISTNUM 1 \l 18483 A sixth and final point of consensus that we noted is that there was near universal support for continuing to require all parties to interconnect with each other and support for the grandfathering of current interconnection arrangements. The same widespread support is evident for continuing the current arrangements for support structure access, for 911 and message relay service.
1LISTNUM 1 \l 18484 MR. ROGERS: Mr. Chairman, at this point we would like to turn to a discussion of four important issues that remain unresolved in the proceeding. We will provide TELUS' solution in regard to each.
1LISTNUM 1 \l 18485 First, the definition of essential facility. It is clearly a central issue in this proceeding. It continues to generate quite a bit of debate.
1LISTNUM 1 \l 18486 With the assistance of Professor Robinson and Dr. Weisman, TELUS has pointed out that there is only one definition of an essential facility that is properly grounded in legal jurisprudence and the economics literature.
1LISTNUM 1 \l 18487 Unlike most parties, TELUS and its experts have provided the jurisprudence and the references to the economics literature that demonstrate the correctness of our definition. It is worth noting that ours is nearly the same definition that the Commission itself accepted in Decision 97‑8. It is the definition that the Commission should continue to use.
1LISTNUM 1 \l 18488 It is important in this context to recognize a priori that mandated unbundling, or forced sharing of facilities with another competitor, is a rare exception and not the rule. A proper definition of essential facilities limits mandated unbundling to only exceptional circumstances.
1LISTNUM 1 \l 18489 Why should mandated unbundling or sharing be limited to rare cases? It must be limited because the sharing of facilities between competitors offends the fundamental nature of a competitive marketplace.
1LISTNUM 1 \l 18490 Simply put, to the extent that competitors are sharing, they are not competing.
1LISTNUM 1 \l 18491 In the normal competitive market such forced sharing impairs the competitive benefits that would otherwise flow to consumers. A competitive marketplace where consumers could only choose between the product of one supplier and the same product available via resale from another supplier provides only the semblance of competition. It does not create real alternatives for customers.
1LISTNUM 1 \l 18492 What the essential facility doctrine allows for is the mandated unbundling of facilities where competition would not be possible otherwise. It is clear that many of the definitions proposed by other parties are not designed with this objective in mind. Yet those definitions proposed by other parties are said to be based on the definition originally proposed by the Competition Bureau in its draft information bulletin on abuse of dominance.
1LISTNUM 1 \l 18493 The problem that has occurred is that the definition proposed in the draft information bulletin determines essentiality based on whether a supplier has market power. The Competition Bureau's additional iterations of its essential facilities test continue this line of reasoning.
1LISTNUM 1 \l 18494 The danger, Mr. Chairman, in these proposed definitions of essential facilities is that they lead to potential ambiguity or misinterpretation. The risk is that mandated unbundling could be required for facilities beyond those that are essential.
1LISTNUM 1 \l 18495 In this context it is useful to contrast the position of The Companies and MTS Allstream.
1LISTNUM 1 \l 18496 Both have incorporated concepts of market power in their definitions but they arrive at vastly different views of what should be unbundled.
1LISTNUM 1 \l 18497 The Companies state that their definition leads to the conclusion that very little is essential. MTS Allstream, on the other hand, argues that all current services are essential and many new services will be essential.
1LISTNUM 1 \l 18498 With such definitions, clarity would be eliminated. The Commission would face the likelihood of many follow‑up proceedings.
1LISTNUM 1 \l 18499 MR. SCHMIDT: There has been some debate in this proceeding regarding the relationship between the definition of an essential facility in the context of the Commission's jurisdiction under the Telecommunications Act and the concept of an abuse of dominance under the Competition Act.
1LISTNUM 1 \l 18500 As Professor Robinson has argued in this proceeding, if the fundamental objective of forced sharing is to enable competition ‑‑ that is, to permit competition to happen ‑‑ the test for the CRTC to forced sharing should be the same as the Competition Tribunal's test under section 79 of the Competition Act.
1LISTNUM 1 \l 18501 In practical terms, if denying access to a facility does not have the effect of preventing or excluding competition, the Commission should not mandate access.
1LISTNUM 1 \l 18502 In other words, access should only be mandated if competition is not possible absent access to that facility. These circumstances will predictably be rare.
1LISTNUM 1 \l 18503 Professor Robinson's formulation of the policy rationale for forced sharing is no different from the finding required for an abuse of dominance under the relevant part of the Competition Act. In essence, the essential facilities doctrine is a special case of abuse of dominance, in which the abuse stems from the prevention of competition caused by denial of access to an essential facility.
1LISTNUM 1 \l 18504 In other words, forced sharing is a very special remedy applicable to a very special fact situation.
1LISTNUM 1 \l 18505 As you have heard from Professor Robinson, compulsory sharing is a remedy that is very rarely invoked because it calls for specially limited conditions of monopoly control of the facility and the impossibility of duplication.
1LISTNUM 1 \l 18506 This test would be the same under telecommunications law or under competition law in Professor Robinson's submission.
1LISTNUM 1 \l 18507 Having said these things, we want to stress that our purpose is not to be critical of the Competition Bureau because on many fundamental issues TELUS and the Bureau are in complete agreement.
1LISTNUM 1 \l 18508 In its evidence the Bureau has stated that access should only be mandated to facilities that are essential for competition. TELUS wholeheartedly agrees.
1LISTNUM 1 \l 18509 At the end of the day it is clear that the Bureau harbours a very deep scepticism about the wisdom of mandated facilities sharing as a means of enabling competition.
1LISTNUM 1 \l 18510 The Bureau cites the substantial risk that such sharing will distort investment incentives on the part of incumbents and new entrants. The Bureau's concerns about the relative costs of excessive forced sharing are entirely valid in our view.
1LISTNUM 1 \l 18511 A second area that remains an open question in the proceeding or at least has embedded open questions in it is the question of the transition period.
1LISTNUM 1 \l 18512 The Public Notice contemplates that there will be without a doubt a transition period after which time mandated access to non essential facilities would end. The fact that there will be a transition period raises certain questions, not all of which have been clearly disposed of in the course of last month's hearing.
1LISTNUM 1 \l 18513 TELUS sees three such open questions right now about the transition period.
1LISTNUM 1 \l 18514 First, what ought to be the duration of the transition period?
1LISTNUM 1 \l 18515 Second, how will negotiations work during the transition period and what role, if any, would the Commission play in the context of failed commercial negotiations?
1LISTNUM 1 \l 18516 And third, what happens at the end of the transition period?
1LISTNUM 1 \l 18517 MR. ROGERS: In response to these three questions, the Commission has been presented with a wide array of proposals as to the duration of the transition period.
1LISTNUM 1 \l 18518 At one end of the spectrum are parties like Bell's original proposal and Cogeco calling for a very abbreviated transition period, as little as one year. We appreciate that this morning Bell modified that and I understand it is now one to three years.
1LISTNUM 1 \l 18519 At the other end of the spectrum are parties like MTS Allstream, who see the transition as effectively eternal.
1LISTNUM 1 \l 18520 At the end of the day TELUS believes the Commission must resolve the issue of duration in a pragmatic manner by answering this question. What is a reasonable period of time for the industry to transition from mandated to market‑based supply arrangements via the construction of facilities, negotiations with alternative suppliers and negotiation with incumbent suppliers?
1LISTNUM 1 \l 18521 TELUS believes that its proposed transition period is pragmatically responsive to the realities of the marketplace. TELUS recommends, in general, a transition period of three years.
1LISTNUM 1 \l 18522 However, the company recognizes that certain classes of nonessential access facilities, such as loops, may require a longer transition period. For these, TELUS recommends a transition period of no more than five years. TELUS believes that this duration is long enough for all participants, including TELUS, we would point out, to create new supply arrangements and to adapt to existing ones.
1LISTNUM 1 \l 18523 An inordinately long transition along the lines proposed by MTS Allstream and others amounts in the end to a permanent reliance on regulation. This is, in our view, inconsistent with the policy direction and must be rejected.
1LISTNUM 1 \l 18524 By the same token, an excessively abbreviated transition runs the risk of not letting a market for nonessential wholesale facilities develop and that is critical. That is, a market through construction, through negotiation with new suppliers and through renegotiation with existing suppliers. Such a short option must also be rejected.
1LISTNUM 1 \l 18525 TELUS believes that its transition period strikes a reasonable balance by allowing for enough time for a market for these nonessential wholesale facilities to emerge while not allowing for so much time that the transition period becomes a de facto permanent reliance on regulation, thereby removing the incentive to make alternative facilities arrangements.
1LISTNUM 1 \l 18526 Another open question regarding the transition period is how negotiations would work during the transition period and what role, if any, would the Commission play in the context of any failed commercial negotiations?
1LISTNUM 1 \l 18527 Again, the Commission has been presented with a spectrum of views. At one end are parties, such as MTS Allstream, that say even voluntary negotiations ought to be prohibited. At the other end of the spectrum are parties, such as Bell, that advocate negotiation for all facilities, including essential facilities.
1LISTNUM 1 \l 18528 Most parties are open to the idea that negotiations ought to be permitted. So the question then becomes, how will negotiations work in practice during the transition period, what role, if any, would the Commission play?
1LISTNUM 1 \l 18529 Under TELUS' proposal during the transition suppliers and their customers would be free to negotiate mutually acceptable agreements for nonessential facilities that depart from those already reflected in Commission‑approved tariffs.
1LISTNUM 1 \l 18530 Competitors would negotiate from a position of relative strength having the benefit of mandated supply agreements or arrangements with the Commission‑guaranteed rates during the transition period. Competitors would therefore only consent to other terms that, in their view, amount to a long‑term improvement over the baseline rates, terms and conditions set out in the tariffs.
1LISTNUM 1 \l 18531 At the same time, competitors would continue to pursue other supply arrangements in the marketplace, including self‑supply, all of which would serve as a source of competitive pressure on the incumbent suppliers.
1LISTNUM 1 \l 18532 To be specific about this point, Mr. Chairman, TELUS does not foresee the need for an adjudicative role for the Commission with respect to failed commercial agreements during the transition simply because Commission‑approved tariffs will remain in place as the fallback for all competitors seeking nonessential facilities from the incumbents. The decision to continue mandated access to nonessential facilities coupled with price controls would be the Commission's primary regulatory intervention in the market for nonessential facilities during the transition period.
1LISTNUM 1 \l 18533 In TELUS' view, this is enough. It gives the wholesale market a chance to develop, which is the important thing, while providing assurance of continued supply during the three to five‑year period.
1LISTNUM 1 \l 18534 Lastly, there is the matter of what the Commission should do, if anything, at the end of the transition period. In TELUS' view, the Commission should set the rules of the road, pick a reasonable duration for the transition and step back and allow market participants to develop alternatives to mandated supply arrangements by building facilities or by purchasing from alternative carriers or by renegotiating with incumbent suppliers. The Commission can be secure in the knowledge that the backup of tariff‑mandated supply is there for a period of three to five years.
1LISTNUM 1 \l 18535 Furthermore, there is no need to presume a need for another review or some other form of intervention in the market by the Commission at the end of the transition.
1LISTNUM 1 \l 18536 MR. SCHMIDT: A third broad area of unresolved issues involves setting the appropriate incentives for investment. TELUS' proposal in this proceeding is designed to be responsive to the policy direction's overall objective of enhancing incentives to invest in network facilities.
1LISTNUM 1 \l 18537 While there has been debate in the hearing room about the relationship between regulatory measures and investment incentives for carriers, TELUS sees no deep magic or mystery here. The basic proposition is that without the correct incentives carriers will not invest, investments will either be altogether bypassed or at least significantly delayed in the face of incorrect incentives.
1LISTNUM 1 \l 18538 Obviously, neither outcome is positive for customers, because in both cases there is a diminished amount of investment in networks, diminished amounts of investment in innovations, and this would attach to both incumbent and entrant networks alike.
1LISTNUM 1 \l 18539 You have heard from some parties that they need mandated access to incumbent facilities so that they can get sufficient scale and then make their own network investments. The message is, in effect, that they will invest and innovate eventually. This is the so‑called steppingstone theory.
1LISTNUM 1 \l 18540 There are two fundamental frailties to this theory. The first problem is that the argument ignores the state of facilities‑based competition in Canada. Everyone recognizes that there is competition between ILECs and cable companies. There are also multiple independent wireless networks out there. We heard Mr. Mercia, the witness for Cybersurf, acknowledge the existence of at least five distinct hi‑speed internet access networks in the province of Alberta.
1LISTNUM 1 \l 18541 So platform competition, competition among distinct networks is the norm and not the exception in Canada's telecommunications economy for wireless telephony, for internet access, for residential telephony and increasingly for business telephony. There is no need, therefore, for us to be stepping towards something, we are already there. We have already proved it is possible to have multiple competing independent networks.
1LISTNUM 1 \l 18542 These facts additionally serve to refute any claim that Canada is too small or not densely populated enough to have facilities‑based competition. Facilities‑based competition is happening in Canada.
1LISTNUM 1 \l 18543 The second fundamental frailty with the steppingstone theory is that there is no credible empirical evidence that it actually works in practice. Indeed, the evidence that is out there points to a contrary conclusion. A review of the academic literature reveals the stepping stone notion to be a discredited theory, not supported by the facts, not supported by marketplace outcomes.
1LISTNUM 1 \l 18544 You have heard from Dr. Crandall who stated that the empirical research does not support the steppingstone theory. His research shows that investment in facilities by both ILECs and CLECs increased after the U.S. dismantled its massive unbundling experiment. In other words, liberal unbundling policies are not the route to getting providers to invest in facilities.
1LISTNUM 1 \l 18545 And anyone in this room that is telling you that they need all of TELUS' network or all of Bell's network for a while, but then they will build their own network, is telling you something not borne out by studies of other jurisdictions.
1LISTNUM 1 \l 18546 Indeed, Mr. Hariton, the expert for the Bureau, came to a similar conclusion. He testified that the Bureau sees no evidence that the steppingstone works in practice. And this is a view, of course, that is echoed amply as well in the TPR report.
1LISTNUM 1 \l 18547 On a related note, it is important for us not to be mislead by certain policy experiments in European countries with respect to mandated local loop unbundling. These countries are not precedents for Canada. They lack a second competing wireline network and have basically given up on the prospect of platform competition, hence their recourse to massive unbundling. In Canada, cable entry has changed the game.
1LISTNUM 1 \l 18548 There was some discussion in the proceeding about where in telecommunications network innovation takes place. Does it take place at the application layer or do you even have innovation down below at the network layer?
1LISTNUM 1 \l 18549 You will recall the Competition Bureau's expert, Mr. Hariton, stated that there is lots of innovation occurring at the network layer, at the transport level, in terms of adding capacity, in terms of adding greater speed to make new and different services and applications possible.
1LISTNUM 1 \l 18550 Rogers' expert, Mr. Hatfield, also agreed that networks are undergoing fundamental dynamic change in terms of their underlying technologies. You will also recall that Dr. Crandall pointed out how fundamentally determinative the physical network is of the possibility of innovation when he reminded us that you could never get a wireless network out of a wireline network. For that innovation to be possible, for mobility to be possible, you need a completely new network.
1LISTNUM 1 \l 18551 The physical network matters in short. It is fundamentally determinative of the nature or the extent of the possibility of innovation and regulatory policy must keep this in mind. The Bureau's expert witness, Dr. Church, put it most delightfully when, paraphrasing Schumpter, he said, "No matter how many locomotives you put end to end, you will never get a plane." The task of regulatory policy is to ensure that it is possible to have planes.
1LISTNUM 1 \l 18552 MR. ROGERS: Another area of unresolved debate involves the question of the relationship to the new forbearance regime. And this centres on the confusion between the definition of an essential facility and the conditions stipulated for the retail forbearance, particularly in the area of retail business forbearance that might depend on competitors using ILEC facilities such as unbundled loops.
1LISTNUM 1 \l 18553 According to TELUS' definition, an essential facility is one that is monopoly‑supplied, cannot be economically duplicated and is required to provide the retail service. The conditions for retail forbearance, however, may be met by competitors that in part rely on this essential facility.
1LISTNUM 1 \l 18554 It is important to recognize that it is not a problem and indeed it is correct that the definition of an essential facility is not the same as the conditions for retail forbearance. In practice, retail forbearance will not be limited or need to be reversed by the adoption of TELUS' definition of an essential facility.
1LISTNUM 1 \l 18555 If a wholesale facility is truly essential, it will be provided on a mandatory basis at tariffed rates so that all competitors in the retail market will have access to the essential facility. The concern, however, arises for non‑essential facilities that are currently required to be provided on a mandatory basis to retail competitors.
1LISTNUM 1 \l 18556 Consider the situation for non‑essential local loops. Under TELUS' proposal the five‑year transition period for access facilities provides ample time for competitors to make other arrangements for the facilities. During the transition period when the non‑essential local loops will be provided at tariffed rates, competitors who rely on them can either build their own facilities or make arrangements with one of the other alternative suppliers of non‑essential facilities.
1LISTNUM 1 \l 18557 We do not expect any competitor ‑‑ and let me remind you that this applies to TELUS as a competitor in Eastern Canada. We do not expect any competitor to want to duplicate entirely a national network, nor will they need to.
1LISTNUM 1 \l 18558 Companies, including ILECs, that already have networks will have a strong commercial incentive to provide local loops on a wholesale basis. It is better to get some wholesale revenue than no revenue at all if the retail service provider constructs its own loops or purchases them from another supplier.
1LISTNUM 1 \l 18559 Furthermore ‑‑ and I must stress this ‑‑ an ILEC will simply not risk losing its retail forbearance by cutting its competitors off from local loops.
1LISTNUM 1 \l 18560 However, notwithstanding what I have just said, in the unlikely event that a problem does develop in the retail market, the Commission should address that problem directly, as Dr. Church has suggested. The Commission would always retain the power to regulate the retail service.
1LISTNUM 1 \l 18561 While unlikely, this is a preferable option to altering the definition of an essential facility in order to mandate the provision of certain wholesale facilities just to address the remote possibility that they would not otherwise be available from any other provider or could not be self‑supplied and would still be required in order to maintain retail forbearance.
1LISTNUM 1 \l 18562 There would be no benefit from this approach and the cost would be a reduction in the network investment by both the ILECs and the competitors. Consumers would be ultimately the losers.
1LISTNUM 1 \l 18563 For these reasons, TELUS believes that the Commission can safely continue to apply the correct definition of an essential facility, the one that TELUS has proposed and the one that was accepted by the Commission in 1997.
1LISTNUM 1 \l 18564 This will encourage facilities‑based competition and the Commission can do so with little risk of having to reverse any current retail forbearance or limiting future forbearance, even where some competitors rely on other facilities to provide retail services.
1LISTNUM 1 \l 18565 MR. SCHMIDT: In conclusion, Mr. Chairman, commissioners, as we said at the outset of these comments, TELUS regards this proceeding as a very important opportunity for the Commission. It is an opportunity to establish a new framework that will move Canada decisively forward into a new era of investment, innovation and competing networks.
1LISTNUM 1 \l 18566 The Commission has embarked on this inquiry in circumstances that are certainly unique. The final report of the Telecom Policy Review Panel has set in motion a movement towards significant policy change. As well, for the first time, the federal government has exercised its power of policy direction under the Telecommunications Act.
1LISTNUM 1 \l 18567 The TPR Report and the Policy Direction, taken together, lead to the clear conclusion that the Commission has been given a vivid mandate for change.
1LISTNUM 1 \l 18568 TELUS has been struck by the fact that in this proceeding, with a few notable exceptions, most parties accept that the Commission has been given a mandate to fundamentally reassess and fundamentally revise the current wholesale services framework.
1LISTNUM 1 \l 18569 In fact, even a number of telephony new entrants in the local market acknowledge that there can be and indeed ought to be a narrowing of the scope of mandated access.
1LISTNUM 1 \l 18570 The Commission has before it a record that shows that all market participants, whether wireless, wireline, internet, incumbent or new entrant, already compete using a combination of their own facilities and the facilities of other parties. Many of those arrangements have been established commercially, outside of the Commission's regulated wholesale regime that exists today. Simply put, telecom markets can and do work when allowed to do so.
1LISTNUM 1 \l 18571 MR. ROGERS: Mr. Chairman, I will close these remarks by saying what is important in this proceeding is that the Commission send a clear signal that it will substantially reduce regulated, mandated sharing, that the transition period of three to five years will allow all parties to adapt and that the new framework calls for all players to focus on a combination of facilities investment and commercial negotiations.
1LISTNUM 1 \l 18572 In this proceeding, the Commission can set the tone for telecommunications regulation for Canada for many years to come. It should make clear that its role going forward is to protect the competitive process, and I underline the word "process."
1LISTNUM 1 \l 18573 The number and identity of the various players in the market will change over time, as it does in most industries. However, the Commission's objective will be to remain focused on enabling the competitive process to operate, not on the status or market share of any particular competitors.
1LISTNUM 1 \l 18574 TELUS' proposals in this proceeding are clear, pragmatic and simple for the Commission to administer. They build on the sound economic and legal principles that were at the heart of the Commission's original decision on local competition in 1997.
1LISTNUM 1 \l 18575 Those principles, as articulated in this proceeding by TELUS, constitute a coherent, robust and pragmatic framework through which the Commission can create the right framework for Canada. We urge the Commission to adopt them.
1LISTNUM 1 \l 18576 Thank you, Mr. Chairman and members of the panel.
1LISTNUM 1 \l 18577 THE CHAIRPERSON: Thank you, Mr. Rogers.
1LISTNUM 1 \l 18578 Tell me, did I mishear when your client was on the stand and testifying, didn't they propose a five‑year transition period across the board? You are now saying three to five. What made you change your mind?
1LISTNUM 1 \l 18579 MR. ROGERS: Mr. Chairman, I think a fair reading of the written evidence, and perhaps it wasn't clear in the oral responses in the hearing, but certainly the written evidence made clear that our proposal was three but five years for access facilities on the theory that access facilities take longer and more arrangements need to be put in place by all players, including TELUS, but there are other arrangements which are much more quickly replaced and so we said three for those.
1LISTNUM 1 \l 18580 THE CHAIRPERSON: I am going from memory but I thought I asked Mrs. Yale and she said it is five years across the board. But anyway, we can check the record.
1LISTNUM 1 \l 18581 What about the whole issue of ‑‑ wasn't it your client who also suggested we should go to an ex post facto regime and should not make any ex ante regulations?
1LISTNUM 1 \l 18582 MR. ROGERS: No, I don't think so.
1LISTNUM 1 \l 18583 THE CHAIRPERSON: I hear nothing on that point here at all. Does that mean you dropped that point?
1LISTNUM 1 \l 18584 MR. SCHMIDT: I don't think, in fact, the word "ex post" probably appears in any of our written evidence. So that was not ours.
1LISTNUM 1 \l 18585 THE CHAIRPERSON: I am sorry, I must be mixing you up with ‑‑
1LISTNUM 1 \l 18586 MR. SCHMIDT: That is quite okay.
1LISTNUM 1 \l 18587 THE CHAIRPERSON: ‑‑ but I wanted to know ‑‑
1LISTNUM 1 \l 18588 MR. SCHMIDT: But the brief answer would be no. We anticipate a three‑ to five‑year ex ante role for you in terms of setting the rules of the road and at the end forbearance but ‑‑ except for essential stuff.
1LISTNUM 1 \l 18589 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 18590 Any questions from my colleagues?
1LISTNUM 1 \l 18591 Okay, thank you very much.
1LISTNUM 1 \l 18592 Who is next, Madam Secretary?
1LISTNUM 1 \l 18593 THE SECRETARY: MTS Allstream Inc. will be our next panel.
ARGUMENT / PLAIDOIRIE
1LISTNUM 1 \l 18594 MR. PEIRCE: Good morning, Mr. Chairman, commissioners.
1LISTNUM 1 \l 18595 Chris Peirce, Chief Regulatory Officer for MTS Allstream.
1LISTNUM 1 \l 18596 In an effort to add value to any questions you may have, I also have Teresa Griffin‑Muir, Vice‑President, Regulatory Affairs, with me.
1LISTNUM 1 \l 18597 Just before I start my prepared remarks, I might just correct a bit of a mischaracterization about those MTS Allstream guys and them wanting everything including the kitchen sink as essential.
1LISTNUM 1 \l 18598 The materials will be filed later in the day in response to the detailed list from the Commission. Of those services that are non‑interconnection, it is about half and half of those things we call essential versus those things we think would be subject to phase‑out.
1LISTNUM 1 \l 18599 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 18600 MR. PEIRCE: The Commission's task in this proceeding is clearly described in the government's Policy Direction in paragraph 1(c)(ii), in short:
"...to review the regulatory framework regarding mandated access to wholesale services, to increase incentives for innovation and investment in competing network facilities, to determine the treatment of access to non‑essential services..." (As read)
1LISTNUM 1 \l 18601 And importantly:
"...to take into account the principles of technological and competitive neutrality, the potential exercise of market power by incumbents absent mandated access, and impediments in the way of network construction by carriers." (As read)
1LISTNUM 1 \l 18602 I say importantly because that last wording was added by the government to the final form of the direction in direct response to concerns that competitors like MTS Allstream had expressed about the importance of network access, especially in an industry that was deregulated at the retail level.
1LISTNUM 1 \l 18603 And consistent with those concerns and the importance of that language, the government's forbearance framework, sanctioned retail deregulation solely on the basis of the presence of a facilities‑based competitor that, by definition, was reliant upon the very same network access, not retail deregulation based on the absence of market power in the hands of the applicant incumbent, retail deregulation based on the mere presence of a competitor reliant upon network access.
1LISTNUM 1 \l 18604 And to be clear, all retail deregulation in the business market to date has hinged on the presence of exactly that type of competitor.
1LISTNUM 1 \l 18605 Over the course of this proceeding you have heard two very different approaches to achieving these goals, one endorsed by competitors like MTS Allstream we submit relies on fact and experience.
1LISTNUM 1 \l 18606 The other, espoused by the incumbent Bell companies and TELUS, is to ignore the facts on the ground in favour of abstract economic theory and, oddly I submit in a quasi‑judicial proceeding, hope.
1LISTNUM 1 \l 18607 I am going to start today by discussing some of the key conclusions we believe you should draw from the facts put forward in this proceeding and why a wholesale regime built on those facts will result in the competition investment and innovation we seek.
1LISTNUM 1 \l 18608 Along the way, I will explain why the fictions the large incumbents seek to perpetuate are unsupported by the evidence and are ultimately antithetical to the goals of this proceeding.
1LISTNUM 1 \l 18609 Next I will address MTS Allstream's criteria for essential facilities and show why it will achieve these goals.
1LISTNUM 1 \l 18610 Our test, I should emphasize, is built on reality and experience, not on wishful thinking and hopeful hypothesis.
1LISTNUM 1 \l 18611 Finally, I will talk briefly about why our framework meets the objectives of the Telecommunications Act, the goals of the government policy direction, and addresses the realities of the local forbearance regime as recently modified by the government's Order in Council.
1LISTNUM 1 \l 18612 The focus of my remarks, as has been the case for MTS Allstream throughout this proceeding, is the business market. We don't accept Bell and TELUS' conclusions about the residential market, but it is clear that the facts regarding the business market are very different.
1LISTNUM 1 \l 18613 So let me start by identifying some of the facts and some of the fictions we have all heard these last few weeks.
1LISTNUM 1 \l 18614 The facts show that competition, innovation and investment has been brought to market and spurred by facilities‑based competitors as defined by the Canadian government.
1LISTNUM 1 \l 18615 The first conclusion must therefore be that our facilities‑based regime brings benefits to customers and is to be fostered over the long term. In fact, this regime has also brought us retail deregulation.
1LISTNUM 1 \l 18616 MTS Allstream is uniquely positioned to demonstrate this proposition. No competitor has invested more in competitive network facilities in this country than we have. We are the largest facilities‑based competitors serving the business market in Canada, with more out of territory lines than all other business competitors combined, including Bell and TELUS.
1LISTNUM 1 \l 18617 We are the only former monopoly provider that derives more than one half it's revenue from competing outside its former monopoly region and is therefore, by its very profile, committed to a regime that spurs competitive market forces on the ground.
1LISTNUM 1 \l 18618 But we haven't, and couldn't, have gotten here just by using our own facilities. MTS Allstream has and continues to invest efficiently in facilities where a business case justifies investment and makes use of the incumbent and other networks in combination with our own facilities. We could not serve the customer or justify any investment otherwise. This is the only competitor strategy that investors will fund and that can be successful.
1LISTNUM 1 \l 18619 Everyone in this proceeding acknowledged that the demand characteristics of the business market, particularly the medium to enterprise size business market, necessitates that a competitor be able to serve a customer in multiple locations. The facts show that there is simply no way for a competitor to do that without combining its own network with leased facilities.
1LISTNUM 1 \l 18620 It should be trite to observe telecommunications is a network‑based industry and, as Mr. MacDonald pointed out, network efficiencies and any provider's cost structure improves dramatically the more extensive the network.
1LISTNUM 1 \l 18621 The evidence also shows that the presence of MTS Allstream, and other competitors in the market who use a combination of their own and leased facilities, leads to competitive rivalry. With that comes lower prices, market innovations and, undeniably, greater customer choice.
1LISTNUM 1 \l 18622 For example, you have heard that MTS Allstream, through significant capital investment in its core network has built a national MPLS network that provides business customers with expanded service functionality at a performance level that eclipses the capabilities of the legacy network.
1LISTNUM 1 \l 18623 In addition, our investment ethernet transport switching and routing technology has positioned MTS Allstream to provide cost‑effective high bandwidth ethernet accessibility in major centres across the country. But that innovation, as our Ron Rout pointed out, relies upon mandated ethernet access and transport from the incumbents.
1LISTNUM 1 \l 18624 These advances have in turn spurred rivalrous behaviour in the market. Such innovations then themselves speak to the need to include next generation access and transport services in the wholesale regime which is faithful to the principle of technological and competitive neutrality set out in the policy direction.
1LISTNUM 1 \l 18625 The government has embraced investment in competing networks and MTS Allstream's definition of facilities‑based competition. It is clear from both the policy direction and the forbearance Order in Council that the government does not see end‑to‑end competition as the only goal or indeed necessarily as a realistic goal.
1LISTNUM 1 \l 18626 That makes sense. If end‑to‑end competition were the only goal, it is clear that the government's desire for less regulation at the retail level would be unachievable for the foreseeable future in the business market. The government's recognition of this reality must inform how an essential facility or services is defined.
1LISTNUM 1 \l 18627 The ideal of competition from an end‑to‑end ubiquitous facilities‑based provider was recognized as unachievable by all parties, save the Competition Bureau.
1LISTNUM 1 \l 18628 Mr. Fleiger for TELUS frankly admitted that the concept that any provider could have a ubiquitous network everywhere in Canada at every location is totally unrealistic, that "You can't do that and stay in business".
1LISTNUM 1 \l 18629 We agree. Again, we speak from hard experience.
1LISTNUM 1 \l 18630 For many years MTS Allstream's predecessor companies try to fulfil his ideal, building where there was no business case to do so and, after investing billions, ending up being forced to write off and restructure about $4 billion worth of debt through the CCAA process.
1LISTNUM 1 \l 18631 Nor can we rely, as the Bell companies and TELUS like to pretend, on the advent of cable telephony as the end‑to‑end facilities‑based competitor in the business market.
1LISTNUM 1 \l 18632 There is no evidence that the incumbent's wireline network will be duplicated in the business market.
1LISTNUM 1 \l 18633 The cable network resulted, let's remember, from a monopoly structure just like the telephone network. It was built out in residential markets for a very different purpose, the transmission of video, then upgraded after many years to allow two‑way broadband communication. More recently, technology finally developed to allow voice communication over that network.
1LISTNUM 1 \l 18634 These facts are unique to cable, unique to the residence market, and are not repeatable for any competitor in the business market.
1LISTNUM 1 \l 18635 That includes the cablecos themselves by the way. As the evidence in this proceeding has shown, the cable plant is not built up in business areas. Even where it passes a business, without the necessary demand a cable provider lacks a business case to build a lateral to that building, and cable technology as it stands does not have the functionality required to serve the business market.
1LISTNUM 1 \l 18636 You heard Mr. Pattinson for Rogers explain that coaxial cable has significant constraints for upstream bandwidth and so to provide services in the business market which typically need symmetrical data flows Rogers needs to build out fibre.
1LISTNUM 1 \l 18637 Jean Brazeau from Shaw told you that ubiquity is a very important demand characteristic of the business market and because of that in many instances Shaw has no choice but to lease circuits for voice services from the incumbents.
1LISTNUM 1 \l 18638 Finally, the Bell companies and TELUS would have you believe that the investment that the government is seeking is in the last mile or access portion of the network.
1LISTNUM 1 \l 18639 This is pure invention. Facilities‑based competition takes place at all levels of the network. This, too, is consistent with the policy direction which refers to competing networks, not to competing access networks.
1LISTNUM 1 \l 18640 It is important to remember that the value of a network, economies of scale and the feasibility of build outs all increase with the number of customers connected.
1LISTNUM 1 \l 18641 Shaw speaks directly to this point. It is not just about the access portion of the network, it is about the backbone and transport portion, too, and how every addition at every level increases the value of the whole network.
1LISTNUM 1 \l 18642 Any analysis of whether a connection can be duplicated at one particular site or route therefore clearly misses the forest for the trees.
1LISTNUM 1 \l 18643 Duplicability, as we discuss in more detail below, is part of the analysis, but it is by no means the only or even the most important consideration.
1LISTNUM 1 \l 18644 The ILEC starts out with a whole network already in place, which is why it has such an enormous advantage. Because the second ubiquitous network is, on the evidence, not going to appear in the business market, mandated access is essential, otherwise competitors will be crushed by the economies of scale already implicit in the ubiquitous network controlled by the incumbent.
1LISTNUM 1 \l 18645 So the facts are clear, combining owned and leased facilities has successfully brought innovative new services, lower prices and choice to customers. The logical conclusion is that we should take measures to promote and sustain this facilities‑based regime that brings demonstrable consumers benefits and less retail regulation while encouraging efficient investment in facilities.
1LISTNUM 1 \l 18646 Let's now look at the facts and fictions about investment.
1LISTNUM 1 \l 18647 The facts show that providers invest in networks where it is economically viable to do so. Our second conclusion is, therefore, that a regime that reflects this economic reality will best spur investment and innovation.
1LISTNUM 1 \l 18648 Every party to this proceeding acknowledged that facilities will only be built where there is a business case to do so.
1LISTNUM 1 \l 18649 TELUS' own expert, Dr. Aron, defined an essential facility on the basis of the economic viability of its construction, and evidence from every industry participant showed that it is simply not economic to build unless the potential demand justifies the costs.
1LISTNUM 1 \l 18650 Indeed, no party to this proceeding argued that there would be one national competitor who would or could build to every location. Accordingly, to reap the benefits of competition we must have a wholesale access regime that makes it economically viable for competitors to invest and innovate.
1LISTNUM 1 \l 18651 Both the incumbent telephone companies and the incumbent cable companies built their networks under monopoly conditions, the telephone companies with a guaranteed rate of return. It is impossible for a company relying on risk capital to emulate that network.
1LISTNUM 1 \l 18652 You have heard clear evidence that even after winning a customer company often can't justify an end‑to‑end build‑out of its network to serve that customer.
1LISTNUM 1 \l 18653 As John MacDonald from our company explained, with respect to a contract that MTS Allstream wanted to serve a national bank with over 1,000 branches across Canada, it would take $2 billion in capital expenditures if we were trying to try to build to each location. Even if we only made investment in certain locations, reducing the investment by half, it would still take 203 years to pay it back.
1LISTNUM 1 \l 18654 It is clear that the focus must be on encouraging efficient investment by competitors where and when it makes economic sense in order to foster competition and innovation.
1LISTNUM 1 \l 18655 But to encourage efficient investment, you have to set the right signals to the market. The facts show that mandating access to services and facilities that competitors require as inputs and pricing them at cost plus a 15 per cent mark‑up encourages efficient entry and sends the right signal to the market.
1LISTNUM 1 \l 18656 So our third conclusion is that a properly constructed wholesale regime with the right pricing signals will incent investment and efficient entry.
1LISTNUM 1 \l 18657 Rogers' expert, Dr. Ware, in a book he co‑authored with the Bureau's expert, Dr. Church, acknowledged what we all know is true and particularly resident in this industry: the competitive process incents investment by incumbents to defend their competitive advantage and this stimulates innovation.
1LISTNUM 1 \l 18658 You heard a lot over the last few weeks about Type 1 and Type 2 errors. The Bell companies, TELUS and the Competition Bureau take it on faith, audaciously, I submit, that there is a greater danger from over‑mandating access or pricing services too low than from under‑mandating and pricing services too high.
1LISTNUM 1 \l 18659 Note that the effect of over‑pricing is the same as that of under‑mandating since in both instances the service becomes economically unavailable to competitors who are thereby removed as a competitive threat to the incumbent and a competitive alternative for customers.
1LISTNUM 1 \l 18660 Dr. Selwyn spoke eloquently to this when he stated that "the risks of a Type 1 error quite frankly are quite minimal, and risks of a Type 2 error are extreme".
1LISTNUM 1 \l 18661 The risks to innovation, for example, of discouraging competition arise not just in the downstream retail telecom market, but they arise in any other industry segment that itself relies on telecom services. Those who argue that over‑mandating access will act as a disincentive to investment have presented only one side of the economic literature on this point.
1LISTNUM 1 \l 18662 Clearly, this is an issue around which there is continuing debate, but I submit to you that the facts are not in serious dispute.
1LISTNUM 1 \l 18663 We note that the literature cited by the Bell companies, TELUS and the Bureau speaks principally to investments by incumbents, not by competitors.
1LISTNUM 1 \l 18664 Dr. Crandall has only performed a regression analysis of the number of lines served by CLECs, not about all of the other kinds of investments that competitors have undeniably made in the network.
1LISTNUM 1 \l 18665 As I noted before, the evidence shows that investment and innovation by competitors takes place all over the network, not just or even primarily at the access level.
1LISTNUM 1 \l 18666 Let's be clear. This is not a case where competitors don't want to build. All of the evidence shows that everyone wants to build facilities because there are obvious advantages to being able to control one's own networks. Surely the continuing battles over competitor quality of service are a testament to this.
1LISTNUM 1 \l 18667 But you also have heard repeatedly in this proceeding from all of the competitors that high prices don't act as incentives either to extend services or to build facilities. We submit that the notion they do is a convenient fiction with no empirical basis, at least in Canada today.
1LISTNUM 1 \l 18668 The ILECs argue that Type 2 errors are self‑adjusting because if the price is too high, no one will buy, which in turn will force prices down. This theory only works if there is an alternative source of supply. If there is no alternative, the price isn't self‑correcting; it just acts to discourage efficient entry and ultimately stifles competition.
1LISTNUM 1 \l 18669 You have a perfect example in the evidence. You heard John MacDonald explain that when the Commission refused to deem an Aliant submarine cable to Newfoundland an essential facility, left to its own devices Aliant charged MTS Allstream $7 million annually, a rate that includes a mark‑up of at least 1000 per cent, and when MTS Allstream tried to recoup some of this cost through the resale of excess capacity to TELUS, Aliant immediately offered TELUS a better arrangement.
1LISTNUM 1 \l 18670 This is what happens when there is monopoly control.
1LISTNUM 1 \l 18671 Persona, MTS Allstream, Rogers and the Government of Newfoundland ultimately decided to build its own facility together as a result of a unique situation where, as John MacDonald termed it, "the stars aligned" to bring those four partners together collectively: an $82 million investment that diverted funds for more efficient and innovative investment.
1LISTNUM 1 \l 18672 The build required $15 million of taxpayers' money from the Government of Newfoundland to subsidize it, and even before the construction has finished, Aliant's prices over that same route have dropped by about 20 per cent.
1LISTNUM 1 \l 18673 This was an uneconomic build. There was plenty of capacity available on Aliant's network. It just wasn't affordable capacity.
1LISTNUM 1 \l 18674 This is a classic example of how high prices send precisely the wrong signals to the market and how the actions of a monopoly can subvert efficient entry. It doesn't make sense to have high prices drive the deployment of uneconomic facilities that require government subsidy, and it is inimacable to the government stricture to avoid inefficient entry.
1LISTNUM 1 \l 18675 Dr. Taylor, the Bell Companies' own expert, acknowledged that in 2001 he had tendered evidence stating that the Commission's framework was economically efficient because "making network elements available to competitors at the incumbent's costs give potential entrants access to the same economies of scale and scope that the incumbent experiences in its network".
1LISTNUM 1 \l 18676 He agreed that allowing different modes of entry puts pressure on retail prices, and he agreed that this principle remains unchanged today.
1LISTNUM 1 \l 18677 During a discussion of CDN pricing at the hearing, the Chair asked a logical question of both Bell and TELUS: Why was CDN pricing a disincentive to investment? Didn't it mean that these ILECs out of territory could now use the investment that it would otherwise have spent on CDN in other areas of its business?
1LISTNUM 1 \l 18678 In cross‑examination TELUS admitted that even after CDN rates went down, its level of investment out of territory remained constant and that in 2004 and 2005, post that decision, TELUS' out of territory operations became EBIDA profitable.
1LISTNUM 1 \l 18679 Clearly TELUS was able to grow its competitive business while moving its dollars from being spent inefficiently on high priced CDN services to other places, just as the Chair had assumed would be the place.
1LISTNUM 1 \l 18680 The Bell Companies and TELUS doth protest too much. Their objections to the CDN prices are more about preventing competitive entry in‑territory than providing an incentive to competitors, including themselves, out of territory.
1LISTNUM 1 \l 18681 In my submission, the Bell Companies and TELUS are more interested in protecting their monopoly at home than in providing competitors with the means to build. This is rational behaviour on their part, but it doesn't mean it's best for competition, innovation or investment. Quite the opposite.
1LISTNUM 1 \l 18682 No party has unlimited capital to build facilities. Decisions as to when and where to build are cash flow driven and must be supported by a business case. That's why a wholesale regime that provides competitors with the inputs they need at reasonable prices will incent investment and efficient entry.
1LISTNUM 1 \l 18683 Finally, the facts show that competition, innovation and investment can be promoted by providing access to inputs needed by competitors on an ongoing basis, including next generation facilities and services.
1LISTNUM 1 \l 18684 The conclusion, therefore, is that continuing to provide such access will continue to bring benefits while cutting off access, whether now or later, will only result in less competition and eventually the prospect of retail re‑regulation.
1LISTNUM 1 \l 18685 The fiction that denying access, whether immediately or after a transition period, will bring about competition and investment is based on a hope that an alternative network will come along. Indeed, hope is the very word used by Dr. Church on behalf of the Bureau in describing this possibility.
1LISTNUM 1 \l 18686 This hope has no basis in fact. Counsel for the Bell Companies and TELUS waved around press releases and brochures for TeraGo and other wireless providers at the hearing to create an impression of impending entry. But as was explained at the hearing, fixed wireless is nowhere near the stage where it could be considered an alternative network and, in any event, is not practical at this point for the business market in many respects.
1LISTNUM 1 \l 18687 The truth is there is no silver bullet. If a new disruptive technology comes along, then the whole playing field will be altered. But no such technology is on the foreseeable horizon. Remember, cable entry into the voice market was forecast as early as 1992 and yet it took almost 15 years to get here. Canadians would have been without any competitive alternatives at all if the Commission had denied competitors access for that period.
1LISTNUM 1 \l 18688 That's also why restricting mandated access only to legacy or slower speed services would be counter‑productive. To continue to innovate and experiment, competitors need access to next generation facilities too. Ethernet is the broadband local loop of the early 21st century.
1LISTNUM 1 \l 18689 Continuing access, by the way, doesn't mean we expect the Commission to be regulating the same services forever. We expect that once competitive supply of a given facility develops, incumbents will be granted forbearance in an upstream market. But competitive and technological neutrality mean, by definition, that what is essential tomorrow may not be essential or even a known technology today.
1LISTNUM 1 \l 18690 The Commission's framework will need to be alive to the evolving nature of the industry if we want to continue to promote innovation in facilities and services.
1LISTNUM 1 \l 18691 Bell and TELUS say don't mandate access. We can negotiate.
1LISTNUM 1 \l 18692 Well, we have been down that road before. As you heard in the cross‑examination of Bell, it took more than six years to negotiate an ethernet solution, even with ongoing Commission involvement, and there are still outstanding issues to be resolved.
1LISTNUM 1 \l 18693 The incumbents simply don't have any incentive to negotiate. In a deregulated environment, they will charge prices for wholesale services that will give them the same margins as in the retail market. That's not even margin squeezing; it's margin thieving.
1LISTNUM 1 \l 18694 As the Chair recognized at the hearings, such a practice would mean the elimination of the wholesale market altogether. The notion that negotiation between a vertically integrated ubiquitous provider and its potential competitor could possibly be an answer for the Commission is a blatantly self‑interested one put up by the incumbents.
1LISTNUM 1 \l 18695 As Mr. MacDonald definitively put it, retail trumps wholesale.
1LISTNUM 1 \l 18696 Remarkably, all of the experts who defended their theoretical models engaged in hope or guesswork when it came to the transition period. When asked what they would recommend if the hoped‑for alternative network didn't materialize at the end of the transition period, Drs. Church and Weisman, for the Bureau and TELUS respectively, disagreed with the proposition that they should actually check their assumptions. Rather, they both said that at the end of the transition period, if there is no alternative network despite the hope we all went in with, then the solution will be to reregulate the retail market.
1LISTNUM 1 \l 18697 That is clearly not a solution that would be acceptable to the government, given its directive to take measures that increase reliance on market forces.
1LISTNUM 1 \l 18698 I want to turn now to our own test for essential facilities and services and talk about why we think it's the right one and how the Commission could put it into practice.
1LISTNUM 1 \l 18699 I'm going to use the term "facilities" to refer both to facilities and services in this context.
1LISTNUM 1 \l 18700 MTS Allstream, like most of the parties in this proceeding, proposes to adopt the Commission's definition of an essential facility ‑‑ that is, an input that provides the firm controlling it with the power to lessen or prevent competition in a relevant downstream market.
1LISTNUM 1 \l 18701 MTS Allstream's two criteria for determining whether an input meets this definition are: whether the facility provided by the former monopoly is required as an input by one or more competitors to provide downstream retail services; and that the former monopoly dominates the wholesale supply of the facility in question.
1LISTNUM 1 \l 18702 The first criterion takes into account the nature of the input, existing and expected competitor demand for the input, and the extent to which self‑supply or duplication is sufficient practical or feasible to allow entrants to compete effectively in downstream markets.
1LISTNUM 1 \l 18703 Where it is found that competitors largely, if not entirely, rely on incumbents' supply of the input to compete in one or more downstream markets, this element of the test would be satisfied.
1LISTNUM 1 \l 18704 The second criterion involves an assessment of the extent, if any, of alternative competitive supply in the provision of the input in question, including the scale, market coverage, service quality, price levels and general substitutability of such third party alternatives.
1LISTNUM 1 \l 18705 We believe the relevant geographic market for this analysis is the metropolitan area because at the retail level local exchanges mean nothing to the incumbents, the competitors or customers. Where a former monopoly is found to be dominant or to possess significant market power for the supply of a specific facility, the second element of the test would be satisfied.
1LISTNUM 1 \l 18706 So how do we operationalize these criteria? Implicit in our criteria, consistent with the policy direction, is an analysis of market power. The test for significant market power, which follows the principles of competition law, has been relied upon by the Commission for the past 15 years. We submit that you don't need to reinvent the wheel. You can build on this experience and use the same analytical tools to get where you are going.
1LISTNUM 1 \l 18707 The CDN decision, for example, took a very similar path to that which we are recommending. In that case, the Commission looked at many of the factors we have identified in our criteria, which are the same or similar to those used in an analysis of significant market power. It determined which elements of the services were subject to market power and it rendered its decision accordingly.
1LISTNUM 1 \l 18708 That's not to say we don't have some quibbles with that decision. For example, we think making a distinction between the speeds of facilities was not justifiable and today would contravene the policy direction's emphasis on technology and competitive neutrality. But we think the general approach, which fundamentally looks at the degree of market power held by the incumbent over an upstream facility and the impact that dominance has on competition in the downstream market, is irreproachable.
1LISTNUM 1 \l 18709 Generally speaking, the CRTC should have much of the data required for such analysis from this and past proceedings, as well as from its annual industry data collection exercise. Indeed, the Commission went through the same process last year in determining to mandate access to Ethernet services while reserving the issue of essentiality to this proceeding.
1LISTNUM 1 \l 18710 Where we differ from the Commission's past practice is in the way that "essential services" are defined. In the CDN, DSL and Ethernet proceedings, the Commission had to find that there was significant market power being exercised over the upstream supply of those facilities in order to find that it was a competitor service at all, and then went on to further define those services as Category 1 or Category 2.
1LISTNUM 1 \l 18711 We recommend a streamlined approach that gets rid of many of the unnecessary distinctions that plague the current system. With respect to the Commission's six proposed categories of services, for example, we would say that Categories 2 and 4, what the Commission has called "conditional essential" or "conditional mandated non‑essential", should simply be recognized as Category 1 essential.
1LISTNUM 1 \l 18712 If there is upstream ILEC dominance, and since forbearance in the downstream is based on access to these upstream facilities, then, in our view, they are essential and should be mandated as such until the facts on the ground change. When sufficient alternative sources of supply develop, then a party can apply to have that market forborne, secure in the knowledge that competition will discipline pricing.
1LISTNUM 1 \l 18713 And to offer a few words about pricing, except for TELUS all parties agree that essential facilities should be priced at Phase II costs, plus a fixed mark up of 15 percent. This is streamlined, administratively simple and consistent with the views of the experts.
1LISTNUM 1 \l 18714 Finally, we submit that MTS Allstream's test meets the objectives of act, fully captures the intent of the government's policy direction and is consistent with the modified local forbearance framework.
1LISTNUM 1 \l 18715 With respect to the act, our approach meets a number of the objectives set out in section 7: it will help facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions; it will ensure we can render reliable, affordable and accessible telecommunications services of high quality, accessible in urban and rural areas across Canada; it allows us to respond to the economic and social requirements of users; and, in particular, it will foster increased reliance on market forces at the retail level through efficient and effective regulation at the wholesale level.
1LISTNUM 1 \l 18716 Our testing criteria also meet the specific instructions contained in the policy direction with respect to the Commission's review of access to wholesale services: it is technologically and competitively neutral; it takes into account the potential for incumbents to exercise market power in the absence of mandated access to wholesale services and it recognizes the impediments faced by new and existing carriers seeking to develop competing network facilities; and our test is consistent with the modified forbearance framework which clearly relies on providers who compete downstream by using a mix of their own and leased facilities.
1LISTNUM 1 \l 18717 The policy direction requires that the Commission rely on market forces to the maximum extent feasible. You have heard a lot of evidence in this proceeding as to what's feasible and what's not. We believe that our criteria for essential facilities will ensure that there is a wholesale market that genuinely makes it feasible to rely on competition at the retail level.
1LISTNUM 1 \l 18718 We strongly urge the Commission to take a pragmatic and realistic approach to its deliberations based on the facts and the evidence that has been provided in this proceeding and that reflect more than 15 years experience. We believe that such an approach will foster a robust competitive environment that encourages companies to invest and innovate at all levels of the network to the benefit of all Canadians.
1LISTNUM 1 \l 18719 Thank you.
1LISTNUM 1 \l 18720 THE CHAIRPERSON: Thank you very much.
1LISTNUM 1 \l 18721 I didn't hear any reference to phaseout. Does that mean that under your scheme, basically, there wouldn't be anything in the bucket which we called non‑essential subject to phaseout, that everything would be, as you suggest, essentially conditional essential or non‑essential and if the condition is met the market will be forborne?
1LISTNUM 1 \l 18722 MS GRIFFIN‑MUIR: Actually, just on the list that you gave us there are some services that we have identified that would fall into the phaseout category.
1LISTNUM 1 \l 18723 THE CHAIRPERSON: Okay.
1LISTNUM 1 \l 18724 MS GRIFFIN‑MUIR: Then, when we are referring to being forborne, upstream services being forborne, we are actually referring to services that initially ‑‑ or services that are deemed essential, but in specific geographic markets there is sufficient competition in the upstream market to allow for forbearance.
1LISTNUM 1 \l 18725 THE CHAIRPERSON: And what are your recommendations, then, both in terms of length of phaseout so there can be contracting during the phaseout period and whether there should be price increases during the phaseout period?
1LISTNUM 1 \l 18726 MS GRIFFIN‑MUIR: Okay, with respect to the length of the phaseout period, that would depend on the service. So for access and transport within the metropolitan area, we would have a longer phaseout period, five years. For services that are more oriented towards database or services of that nature shorter, three years.
1LISTNUM 1 \l 18727 MR. PIERCE: And then going forward, when services that were classed as essential came to be subject of an application for forbearance by an incumbent and the Commission decided to forbear, that decision would, presumably, date from the date of the decision, there wouldn't be a phaseout in that case.
1LISTNUM 1 \l 18728 THE CHAIRPERSON: What about the issue of pricing during the phaseout?
1LISTNUM 1 \l 18729 MS GRIFFIN‑MUIR: Okay, the pricing we think would remain at the tariff rate.
1LISTNUM 1 \l 18730 THE CHAIRPERSON: So you feel like Rogers, that would be rubbing salt in the wounds, if you increase it?
1LISTNUM 1 \l 18731 MS GRIFFIN‑MUIR: Well, to a certain extent, but I think it also reflects the fact that for many services today, depending on what the Commission ultimately decides, they are priced, actually, well above Phase II plus 15 percent.
1LISTNUM 1 \l 18732 For example, if we took DS‑3 and above speeds, the rate that we have been mandated ‑‑ or all ILECs have been mandated to provide that service at was Bell's lowest retail rate, so that is ostensibly a retail rate. And when you are talking about increasing prices, because, obviously, that would be the reason we would want to be able to incent people to get off the service, the notion is that you are talking about a price increase not a price decrease.
1LISTNUM 1 \l 18733 THE CHAIRPERSON: So TELUS's notion of fully compensatory rate, meaning Phase II costs plus mark up to recover a proportionate share of fixed government costs and the embedded cost differential, is another one of those fictions you were talking about, Mr. Pierce?
1LISTNUM 1 \l 18734 MR. PIERCE: Yes, Mr. Chairman. I think you have put well to them, in questioning their panel, about being content to have an averaged approach across rate bands, in terms of geographic market definition, but wanting a very specific approach when it comes to costing.
1LISTNUM 1 \l 18735 It also bears on that issue of negotiation during any tariffed period, so that someone could, presumably, get a better deal during a period of time when clearly the services is defined as not being subject to competitive supply, and we think that has obvious implications, in terms of price discrimination, that really should not be mandated by the Commission or approve by it implicitly.
1LISTNUM 1 \l 18736 THE CHAIRPERSON: Yes. Any questions from my colleagues?
1LISTNUM 1 \l 18737 Okay, thank you very much, then.
1LISTNUM 1 \l 18738 I think we will break for an hour and we will resume, then, at 1:30.
1LISTNUM 1 \l 18739 Thank you.
‑‑‑ Upon recessing at 1220 / Suspension à 1220
‑‑‑ Upon resuming at 1331 / Reprise à 1331
1LISTNUM 1 \l 18740 THE CHAIRPERSON: Mr. Ruby, welcome back.
1LISTNUM 1 \l 18741 MR. RUBY: Thank you, Mr. Chairman.
1LISTNUM 1 \l 18742 THE CHAIRPERSON: Go ahead.
ARGUMENT / PLAIDOIRIE
1LISTNUM 1 \l 18743 MR. RUBY: Mr. Chairman and commissioners, in the 30 minutes allotted to me my goal is quite modest.
1LISTNUM 1 \l 18744 THE CHAIRPERSON: You don't have to take 30, you can be shorter.
1LISTNUM 1 \l 18745 MR. RUBY: Yes, I heard a rumour about that.
1LISTNUM 1 \l 18746 I would like to try and just help the Commission keep at the forefront of its deliberations three key points. The first point is that the objective of wholesale regulation is to encourage facilities‑based competition arising both from providers that use a hybrid of their owned and leased facilities and fully‑owned facilities.
1LISTNUM 1 \l 18747 The second point is that access services should be subject to different regulatory treatment than network services, because they have different characteristics. For example, treat CDN different from local loops. And in this regard, the Commission's six‑bucket model properly takes this approach in my submission.
1LISTNUM 1 \l 18748 The third point I would like to make to you today is simply that two providers are not enough. The Commission should resist the temptation to declare victory and abandon the field when there are merely two sets of facilities in a market and no other source of competition.
1LISTNUM 1 \l 18749 As well, Mr. Chairman, as has already been noted today, woven through some of your questions that were asked during cross‑examination, there appeared to be a concern with how the Commission would operationalize the essential facilities test and the Commission's six categories of wholesale services.
1LISTNUM 1 \l 18750 I will try in this regard to assist you by walking through how to apply the analysis with respect to the residential market example, which I think has been less discussed today than the business model.
1LISTNUM 1 \l 18751 So turning now to my first point. The first question I would suggest the Commission should ask in this proceeding is what is the end goal for what we are doing? What we are trying collectively to do is achieve vigorous and sustainable competition. I think that would be non‑controversial, but who it is between is important. It is between; telecom providers that use only facilities they own, and providers that use a hybrid of facilities that they own and lease. And I would suggest, actually, everybody falls in the second bucket as far as I can tell from the evidence, some more than most obviously.
1LISTNUM 1 \l 18752 But hybrid models of owned and leased facilities offer value to Canadians. Hybrid providers are not second class citizens, which is apparent from the Governor in Council's definition of facilities‑based competition, as set out in its variance of the Commission's forbearance decision and consistent with the policy direction. And I don't propose to take you through the details again. I think some of the other parties have touched on that already. But this has to be the starting point for any discussion about wholesale regulation.
1LISTNUM 1 \l 18753 And just to depart from this point for a moment, you heard from the Bureau, first up today, a discussion really that was about resale and the problems if you only deal with the application layer and you don't deal with the network layer or the physical layer. That is not really what we are talking about. That is a strawman. What we are dealing with is hybrid, that is combining the two, facilities that you own and facilities of others.
1LISTNUM 1 \l 18754 Any approach that embarks from a different starting point should be viewed with caution. For example, Bell Canada premises its position in this proceeding on the incorrect view that our collective goal is confined to what it calls end‑to‑end facilities‑based competition.
1LISTNUM 1 \l 18755 And I would note in passing that Bell has actually been driven to use this new terminology which doesn't show‑up anywhere else, because the Governor in Council defined facilities‑based competition in a way that doesn't get Bell where it wants to go and the Governor in Council defined facilities‑based competition in a way that includes the hybrid model.
1LISTNUM 1 \l 18756 And really, what Bell has done by including the words "end‑to‑end" is try and shift the debate over the starting point of regulation away from where the government and the Telecommunications Act have put us. I am sure that the Commission will no doubt see this fiddling with words as a tactical manoeuvre that colours all of Bell's position.
1LISTNUM 1 \l 18757 Similarly, my friend Mr. Osborne also starts his analysis on the incorrect premise that what we are trying to achieve is only end‑to‑end facilities‑based competition, which I would submit undermines his whole report. He is starting in the wrong place.
1LISTNUM 1 \l 18758 The second point, if I can come to that, to keep top of mind is that wholesale services with different characteristics should be subject to different types of wholesale regulation.
1LISTNUM 1 \l 18759 The Commission has adopted this approach on a preliminary basis by providing six buckets into one of which each wholesale service must fall.
1LISTNUM 1 \l 18760 Even before the Commission provided its list of six buckets, Primus and Globility had already provided to the Commission a bucket approach. Primus and Globility's categories are described in its opening statement and they match up roughly with three of the six buckets that the Commission later provided to us.
1LISTNUM 1 \l 18761 I pause here to note that wholesale services with different characteristics have historically been treated differently by the Commission. The Commission's past decisions with respect to the treatment of wholesale services are a very useful resource for you to draw upon
1LISTNUM 1 \l 18762 The Commission should consider the detailed reasoning in its past decisions and some of those decisions are quite recent. For example, it should look at its decisions with respect to CDN, HSA, GAS and Ethernet, and I would suggest that in most cases you will find that the Commission's previous logic continues to apply and is consistent with the policy direction.
1LISTNUM 1 \l 18763 While in this proceeding we are reviewing wholesale services with fresh eyes, there is no need to pretend that there is not a long history behind the current approach to wholesale services.
1LISTNUM 1 \l 18764 I would like to now turn and look straight at the residential market to highlight how a wholesale analysis can be implemented and to underline what is really my third key point: Two providers are not enough for sustainable vigorous competition.
1LISTNUM 1 \l 18765 Here, let me reiterate that I appreciate that there is a temptation to declare the residential market a competitive success and deregulate. After all, it is the only market with a second set of transmission facilities largely, but not ubiquitously, paralleling the ILEC facilities, in fact, declaring victory and leaving the arena, exactly what the Bureau proposes you do, which I have to admit, for a competition authority, I find quite odd.
1LISTNUM 1 \l 18766 And I would note that Dr. Ware seemed to find it odd as well on behalf of Rogers when he kept saying, I think, over and over again: In competition analysis, it is very hard to slip a four‑to‑three merger by the regulator, never mind a three‑to‑two. But the Bureau has given you its position.
1LISTNUM 1 \l 18767 Mine is simply that two is not enough and I would ask you to resist the temptation to just declare victory and instead look carefully at how the deregulated duopolists will likely behave.
1LISTNUM 1 \l 18768 So let me set the stage for a moment with separating out some of these facilities that fall into the buckets.
1LISTNUM 1 \l 18769 We can start our illustrative analysis of the residential market by looking at two very different aspects of residential services. First, there are the local loops on one hand with similar services, and second, we can review the facilities used to move traffic in and out of central offices, backhaul to points of presence and out across the rest of the network.
1LISTNUM 1 \l 18770 What I am trying to do here, Mr. Chairman and commissioners, is highlight the difference between how to use your essential bucket and your conditional essential bucket with real facilities.
1LISTNUM 1 \l 18771 With respect to local loops, it appears to be common ground that for the foreseeable future no one is going to have a third line into Canadian homes. We have only two residential access facilities: ILEC and cable.
1LISTNUM 1 \l 18772 Now, the ILECs point to a variety of wireless technologies that have been available for sometime without attracting more than a small number of niche customers and they also point to one new technology in particular as having the potential to provide widespread additional methods of access to Canadian homes.
1LISTNUM 1 \l 18773 With respect to the technologies that have already been rolled out such as satellite in Inukshuk and some others that we have heard a lot about, there is no evidence that customers see them as a general substitute for wireline internet or telephony.
1LISTNUM 1 \l 18774 I pause here to note that with respect to local telephony, the replacement of one's wireline phone with a cell phone seems to be confined to a niche market of less than 5 percent of the population and I take that figure out of the Monitoring Report.
1LISTNUM 1 \l 18775 The new wireless technology that everybody is talking about in this proceeding is WiMAX. This is a technology being tested by a number of parties, including my client Primus, but whether it will ever be ready for widespread rollout, and if so, when, is not a matter for which the Commission can plan.
1LISTNUM 1 \l 18776 This has been mentioned before but as was the case with the ILECs' warning of the coming of cable telephony more than 15 years before it happened, wishing WiMAX to be ready now will not make it so. We simply have no idea when it will be ready, if at all.
1LISTNUM 1 \l 18777 It is because of the unpredictability of potentially disruptive technologies such as WiMAX that Primus and Globility submit that the Commission should not roll the dice by anticipating if or when WiMAX will be ready.
1LISTNUM 1 \l 18778 In addition, contrary to the ILECs' submissions, there is no factual evidence that the mere possibility of a new technology coming down the road has disciplined ILEC behaviour. If and when a new technology provides a third mass market connection to Canadian homes, I think we can all be confident that the ILECs will bring it to your attention and we can deal with it at that time but we are just not there yet.
1LISTNUM 1 \l 18779 Let us move back to today's residential access facilities.
1LISTNUM 1 \l 18780 So there is an ILEC and a cable company, and in some greenfield situation there is only one or the other.
1LISTNUM 1 \l 18781 Here again, I would pause and note that a duopoly model for residential is being promoted to you as being sufficient but it is clearly not a very robust model because when the parties look at new rollouts and new residential developments, for example, we are suddenly back to monopoly. So I would query just how robust that kind of duopoly competition is.
1LISTNUM 1 \l 18782 Now, the ILECs say that in an unregulated duopoly environment, the competitors will be able to negotiate for the use of ILEC facilities. But despite having all the information it needed, on cross‑examination, Bell was unwilling to advise the Commission of what price it would offer to charge Globility for the local loops used by Globility today.
1LISTNUM 1 \l 18783 And so having everything it needed to do, it would not say if it was going to try for a 10 percent price increase, 100 percent, 1000 percent. It just wouldn't say. And I submit to you that this was telling of what competitors can expect from the ILECs post regulation and that allows us a glimpse of the 800‑pound gorilla that wears the ILECs' friendly mask.
1LISTNUM 1 \l 18784 Let me put our concerns about these kinds of negotiations this way. It is tough to dance with an 800‑pound gorilla whether it is friendly or not.
1LISTNUM 1 \l 18785 One can only truly negotiate where there are alternative providers. In this regard, it is notable that Rogers, as the largest cable company in the country, testified that it had no business plan to offer wholesale services to its competitors in the absence of regulation.
1LISTNUM 1 \l 18786 In a deregulated environment, the ILEC would be the only wholesale access provider. As a result, in the absence of regulation, a competitor such as Primus will very likely not be able to get access to its customers.
1LISTNUM 1 \l 18787 Let us be perfectly clear here. The Commission should make its decision in this proceeding on the basis that if it releases the ILECs from regulation there will be a residential duopoly and no more than that. We are looking at two, not two plus. It is a black and white choice. There is no grey here.
1LISTNUM 1 \l 18788 That brings me to the last point I would like to make to you. Two players are not enough to have vigorous sustainable residential competition.
1LISTNUM 1 \l 18789 Now, the ILECs say two is enough and they implicitly say: Trust us. I heard Mr. Hofley say explicitly: Well, no, no, the market is going to discipline us. In that regard, they point to the theoretical view of their experts, which I would note are contradicted by Primus' and MTS' expert, but they don't offer any factual Canadian data supporting their position.
1LISTNUM 1 \l 18790 But there is some factual data on the record demonstrating that two is not enough and I would just like to point you to a few examples.
1LISTNUM 1 \l 18791 For example, Shaw answered an interrogatory in this proceeding saying that it would compete vigorously with the ILECs if it was deregulated, presumably with respect to price and other matters.
1LISTNUM 1 \l 18792 In contrast, we saw that report in the Globe and Mail where Shaw's CEO publicly stated that cable company and ILEC prices would be going up, not down. This is hardly the type of response that is predicted by the ILECs' experts.
1LISTNUM 1 \l 18793 Another example of the factual evidence not being consistent with the ILEC experts' position was the data put forward by Mr. Crandall concerning U.S. wireline prices which have remained steady for a decade. You will remember there was that chart we made extensive use of on cross‑examination.
1LISTNUM 1 \l 18794 So wireline prices have remained steady notwithstanding the fall in telecom equipment costs, drastically falling wireless prices and the uptake of cellular telephone use, and the increased share of the local telephony market captured by the cable companies.
1LISTNUM 1 \l 18795 That U.S. wireline pricing experience is consistent with the evidence of Mr. Yates, who was not cross‑examined by any party. It is consistent with his evidence that in a similar BDU market, Bell and Rogers have not engaged in vigorous price competition.
1LISTNUM 1 \l 18796 The fact evidence is that ILEC pricing has not been disciplined by any of these factors, even when those factors are combined. Simply put, we need the competition which hybrid lease and ownership providers such as Primus and Globility can offer as they grow.
1LISTNUM 1 \l 18797 With respect to the theoretical considerations of duopolies, I recommend for your review the Netherlands OPTA paper called "Is two enough?" a great title.
1LISTNUM 1 \l 18798 I suggest that you read it carefully to focus on the portion of the report dealing with non‑collusive oligopoly. The balance of the report deals with collusive conduct, which is not being alleged by anybody in this proceeding.
1LISTNUM 1 \l 18799 I would ask you, Mr. Chairman and Commissioners, please don't fall for The Bureau and the ILECs attempts to mix together the analysis of collusive and non‑collusive conduct. It is clear with respect to non‑collusive conduct, so not even tacit collusion, that this OPTA Report concludes, as does Dr. Selwyn, that there is a substantial risk of a non‑competitive outcome.
1LISTNUM 1 \l 18800 The Commission should be regulating in a manner that prevents ILECs and cable companies from watching each other's actions and, in good faith and in their best interests, raising prices or maintaining their prices over the long term.
1LISTNUM 1 \l 18801 With that background we can try to place local loops in the right basket.
1LISTNUM 1 \l 18802 Local loops are an example of what Primus calls access for services which fall in the Commission's "essential" basket. With respect to access services the logic of incentives for investment in innovation simply do not apply.
1LISTNUM 1 \l 18803 A transition period with respect to access services will not lead to more innovation and investments. Motivating competitors to invest by increasing wholesale prices is not the issue. Ability is what counts with respect to access.
1LISTNUM 1 \l 18804 Deregulating access in three to five years will simply cause a company like Primus to go into harvesting mode and weaken Canadian competition, not strengthen it.
1LISTNUM 1 \l 18805 Turning away, now, from local loops, we can look at the second aspect of residential facilities I wanted to cover with you this afternoon, the facilities that move traffic from the ILEC central office back through the network.
1LISTNUM 1 \l 18806 Unlike access facilities over time a portion of these facilities may be replicated. In the analytical paradigm attached to Primus and Globility's opening statement we called these facilities network facilities.
1LISTNUM 1 \l 18807 We expect that as competitors increase the volume of traffic they receive from their customers, the construction of new network facilities becomes justifiable. This is really the steppingstone approach.
1LISTNUM 1 \l 18808 Importantly I would note that the steppingstone approach with respect to network facilities can work and it can work in more than one matter, which was a fact that TELUS admitted on cross‑examination.
1LISTNUM 1 \l 18809 Most simply, when a single facility becomes more expensive to lease than to build ‑‑ this is the key ‑‑ and the revenues associated with the traffic carried by that facility are sufficient to pay for a build, the steppingstone approach will be a competitor to replace a leased facility with its own facility. This is what Primus is trying to do by building a fibre ring in Toronto which you have heard about.
1LISTNUM 1 \l 18810 In this regard you will recall that on the cross‑examination of TELUS about how as competitor attracts customers and traffic it is more economical for a competitor to build its own facilities in order to replace a group of DS‑3 lines used to provide ethernet service.
1LISTNUM 1 \l 18811 Now, a second aspect of the steppingstone approach that leads to increased construction involves a competitor using leased network facilities over a geographically widespread network so it does not have to construct all facilities all at once and can use the revenues it derives from the portion of the network in which it leases facilities to finance the construction of specific transmission facilities elsewhere in the network.
1LISTNUM 1 \l 18812 Keeping wholesale prices at the Phase 2 plus 15 per cent level allows the steppingstone approach to work best ‑‑ I'm not saying it has to be at that level, but it works best at that level ‑‑ and prevents the ILECs from draining construction funds from their competitors.
1LISTNUM 1 \l 18813 It will take time for additional network facilities to be built out on an efficient basis. In this regard I note that it has taken TELUS nine years so far to build out its limited out of territory fibre and it took Bell ‑‑ there was some debate, but certainly it took Bell over 13 years to build it's first round of fibre.
1LISTNUM 1 \l 18814 Deregulating network CDN now, even with a five‑year transition, would kill the competitive market. Five years is simply insufficient time to build the facilities that are necessary.
1LISTNUM 1 \l 18815 I would note here that I'm not suggesting that every competitor has to build everything. No doubt some competitors will build part of the network, some will build others. If there is a competitive market they can make commercial deals among each other.
1LISTNUM 1 \l 18816 But even taking that scenario in mind, five years is not enough. That I think is the evidence you have before you.
1LISTNUM 1 \l 18817 Let me put it a different way. With respect to network facilities, firing a gun at a horse does not incent the horse to be actually able to outrun the bullet. All right?
1LISTNUM 1 \l 18818 The key difference between essential and conditional essential categories is whether there is light at the end of the competitive tunnel.
1LISTNUM 1 \l 18819 To use Bell's phraseology, essential facilities have no clearly identifiable path to competition, but conditional essential services are characterized by a non‑speculative light we can see today at the end of the tunnel.
1LISTNUM 1 \l 18820 The essential category should include facilities for which we cannot reliably predict alternatives will be rolled out on a widespread basis. Putting services in this bucket should not involve running after whiz‑bang developments that some claim are just around the corner. The Commission should insist on strong evidence that we have already turned the corner before pouring a service out of the essential bucket.
1LISTNUM 1 \l 18821 Essential facilities such as residential local loops fall into this category.
1LISTNUM 1 \l 18822 The "conditional essential" category includes facilities that can be built as competitors gain market share and revenues that can support new construction, but should not be deregulated until they are actually built.
1LISTNUM 1 \l 18823 The difficult question in this regard is to determine what is the condition that causes deregulation. It strikes me that is a little bit what we have been struggling with over the last several weeks.
1LISTNUM 1 \l 18824 TELUS seems to think just time will do the trick.
1LISTNUM 1 \l 18825 Reading between the lines I would say that TELUS says that the condition is just the passage of three to five years. This cannot be right. I submit that the condition should be evidence of a vigorous obtainable competition.
1LISTNUM 1 \l 18826 Now, at the operational level the Commission can use what we have called proxies or a factual trigger to decide whether a review in a particular market should be conducted.
1LISTNUM 1 \l 18827 For example, if an ILEC advised the Commission that a particular percentage ‑‑ I know I heard 30 per cent should be used, I would suggest probably that it should be the other way around and say well, 70 per cent of the network transmission facilities in a wire centre have been duplicated, that could cause the Commission to conduct a review of whether there is vigorous sustainable competitive market in that wire centre.
1LISTNUM 1 \l 18828 If the condit