ARCHIVED - Transcript, Hearing 26 October 2010
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Volume 1, 26 October 2010
TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO-TELEVISION AND
Obligation to serve and other matters (Formerly Proceeding to review access to basic telecommunication services and other matters)
Days Inn and Conference Centre
14 Mountjoy Street South
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.
Canadian Radio-television and
Obligation to serve and other matters (Formerly Proceeding to review access to basic telecommunication services and other matters)
Konrad von Finckenstein Chairperson
Len Katz Commissioner
Rita Cugini Commissioner
Timothy Denton Commissioner
Suzanne Lamarre Commissioner
Peter Menzies Commissioner
Candice Molnar Commissioner
Marc Patrone Commissioner
Lynda Roy Secretary
Alastair Stewart Legal Counsel
John Macri Hearing Manager
Days Inn and Conference Centre
14 Mountjoy Street South
October 26, 2010
- iv -
TABLE OF CONTENTS
PAGE / PARA
The Bell Aliant Companies 9 / 57
Barrett Xplore Inc. and Barrett Broadband Networks Inc. 136 / 885
Northwestel Inc. 209 / 1317
- v -
Undertakings can be found at the following paragraphs:
121, 347, 566, 608, 635 and 742
--- Upon commencing on Tuesday, October 26, 2010 at 0932
1 THE CHAIRPERSON: Good morning, ladies and gentlemen.
2 The panel for this hearing consists of:
3 - Len Katz, vice-président des Télécommunications;
4 - Rita Cugini, vice-présidente intérimaire de la Radiodiffusion;
5 - Tim Denton, conseiller national;
6 - Suzanne Lamarre, conseillère régionale du Québec;
7 - Peter Menzies, conseiller régional de l'Alberta et des Territoires du Nord-Ouest;
8 - Candice Molnar, conseillère régionale de la Saskatchewan et du Manitoba;
9 - Marc Patrone, conseiller national;
10 - et moi-même, Konrad von Finckenstein, président du CRTC. Je présiderai cette audience.
11 L'équipe du Conseil qui nous assiste se compose notamment de :
12 - John Macri, coordonnateur de l'audience et directeur des politiques de télécommunications;
13 - Alastair Stewart, conseiller juridique; et
14 - Lynda Roy, notre secrétaire.
15 Au cours de cette audience qui débute ici aujourd'hui et qui se poursuivra la semaine prochaine à Gatineau, nous examinerons les trois mesures relatives aux services de base offerts aux Canadiens par les entreprises de télécommunication.
16 These three measures are the following:
17 1. We required telephone companies to serve their existing customers as well as new customers requesting telephone service. This is known as the obligation to serve.
18 2. We also developed a basic service objective, which is a minimum target for residential service that includes:
19 - local service on an individual telephone line;
20 - access to low-speed Internet at local rate (i.e. dial-up Internet service);
21 - operator and directory assistance services;
22 - access to the long-distance network;
23 - enhanced calling features; and
24 - a copy of the local telephone directory.
25 3. We developed a regulatory regime whereby companies that provide local telephone service to residential customers in rural and remote areas receive a subsidy.
26 Ce cadre réglementaire a fonctionné très bien. De nos jours, plus de 99 pour cent des Canadiens ont accès à des services conformes aux exigences de base. Cependant, les mesures que je viens de décrire ont été instaurées il y a plus de 10 ans, alors que les consommateurs avaient seulement accès au service téléphonique d'une des grandes entreprises. Les outils de communication des Canadiens et l'environnement de concurrence et de réglementation ont évolué considérablement depuis.
27 Une variété de fournisseurs offrent maintenant le service téléphonique local et un nombre croissant de Canadiens utilisent les téléphones cellulaires. Cette évolution a permis au Conseil de déréglementer plus des trois quarts des lignes téléphoniques de résidence, ce qui est conforme à notre approche qui mise autant que possible sur le libre jeu du marché. De plus, environ 95 pour cent des foyers canadiens ont accès à des services Internet à large bande.
28 The three measures related to basic services have remained largely intact during this period of change. The objective of this proceeding is to make certain that the framework is appropriate for today's competitive environment.
29 For example, the Commission's target for dial-up Internet has been achieved. The burning question now becomes whether the Commission has a role to play in the provision of broadband Internet services where it is currently not available.
30 The panel will also consider the related issue of local telephone competition.
31 There are a number of rural and remote areas in Ontario, Quebec and British Columbia that are served by small independent providers. The large majority of these providers hold a monopoly in their home markets when it comes to local service.
32 Le Conseil a établi un cadre permettant la concurrence locale dans ces marchés et les trois plus grands ont été ouverts à la concurrence. Depuis, nous avons reçu des demandes de concurrents qui veulent entrer dans d'autres territoires présentement desservis par des petits fournisseurs indépendants.
33 Le panel souhaite obtenir des opinions à savoir si la concurrence locale devrait être introduite dans d'autres marchés. Dans l'affirmative, devrait-on utiliser les mêmes politiques que celles qui ont été appliquées aux grandes entreprises titulaires ou devrait-on les adapter aux conditions des petits fournisseurs?
34 As you can see, we have a lot of issues to discuss with you.
35 I would now invite the Hearing Secretary, Lynda Roy, to explain the procedures we will be following.
36 Madame Roy.
37 LA SECRÉTAIRE : Merci, Monsieur le Président, et bienvenue à tous.
38 I would now like to go over a few housekeeping matters to ensure the proper conduct of the hearing.
39 Please note that the Commission Members may ask questions in either English or French. Simultaneous interpretation is available during the hearing. The English interpretation is available on channel 1. You can obtain an interpretation receiver from the technician at the back of the room.
40 We would like to remind participants that during their oral presentation they should provide for a reasonable delay for the interpretation while respecting their allocated presentation time.
41 Veuillez noter que les membres du Conseil peuvent vous poser des questions en français ou en anglais. Le service d'interprétation simultanée est disponible durant l'audience, et l'interprétation en français se trouve au canal 2. Vous pouvez vous procurer un récepteur également auprès du technicien à l'arrière de la salle.
42 Nous désirons rappeler aux participants d'allouer un délai raisonnable pour la traduction lors de leur présentation à vive voix, tout en respectant le temps alloué pour leur présentation.
43 When you are in the hearing room we would ask that you please turn off, and not only put on vibration mode, your cell phones and BlackBerrys as they cause interference on the internal communication systems used by our translators and interpreters. We would appreciate your cooperation in this regard throughout the hearing.
44 The first part of the hearing being held here in Timmins is expected to last approximately three days. We will then continue in Gatineau starting on November 1st and ending no later than November 5th.
45 We will begin each morning at 9:00 a.m. and we will advise you of any scheduling changes as they occur.
46 We invite participants to monitor the progress of the hearing in order to be ready to make their presentation on the day scheduled or, if necessary, the day before or after their scheduled date of appearance, depending on the progress of the hearing.
47 You may consult the public file for this hearing in the examination room in Ballroom C. The telephone number of the examination room is 705-264-0700.
48 There is a verbatim transcript of this hearing being taken by the court reporter sitting at the table to my right, which will be posted daily on the Commission's website. If you have any questions on how to obtain all or part of this transcript, please approach the court reporter during a break.
49 The hearing process will be similar to the one used in the hearing that took place earlier this year on wholesale high-speed services.
50 Parties who wish to participate in Phase II, the rebuttal phase, must do so in person and be present for the entire duration of Phase II. Phase II will be held in Gatineau and we expect it to begin on Wednesday, November 3rd.
51 We would ask that by Tuesday, November 2nd at 2:00 p.m. you advise the Commission through epass if you do not wish to participate in the rebuttal phase.
52 For the record, Mr. Chairman, I would like to note that the following participants have indicated to the Commission they will not be appearing at this hearing:
53 - Kincardine Cable TV Ltd. and
54 - Northern College, who was appearing with Charlie Angus, M.P. for Timmins and James Bay.
55 Now, Mr. Chairman, we will proceed with the presentation in the order of appearance set out in the agenda and we will begin with the joint presentation of Bell Aliant Regional Communications, Limited Partnership, KMTS, NorthernTel and Télébec -- the Bell Aliant Companies.
56 Appearing for the Bell Aliant Companies is Mr. Denis Henry. Please introduce your colleagues, after which you will have 25 minutes to make your presentation.
57 MR. HENRY: Thank you, Madam Secretary, Mr. Chairman and Commissioners.
58 I am Denis Henry, Vice-President, Legal, Regulatory and Government Affairs for Bell Aliant and I am pleased to introduce our panel.
59 Joining me today are:
60 - on my immediate right, Peter Dilworth, Vice-President, Finance and Chief Procurement Officer of Bell Aliant;
61 - to his right, Dennis Bruce, Senior Vice-president, HDR/Decision Economics;
62 - to my immediate left, Dr. George Hariton, President, TIA telecommunications Issues and Analysis; and
63 - to his left, Michel Gilbert, Associate Director - Regulatory Affairs, Bell Aliant.
64 Just before I start, Mr. Chairman, I thought I should extend thanks from probably all of us to Mr. O'Brien and CARTT and Channel Zero for a very nice reception last night. I think it set the tone and we all enjoyed it.
65 THE CHAIRPERSON: Yes, I think we all did.
66 Thank you very much.
67 MR. HENRY: Let me begin by thanking the Commission for giving us the opportunity to appear before you in Timmins, a municipality at the heart of the serving territory of NorthernTel, who is part of our larger Bell Aliant family. It is not very often that we get to appear before the Commission outside the National Capital Region, so we welcome that opportunity.
68 We have structured our remarks this morning to address the four major topics set out in the Commission's letter.
69 Just before we address those, I would like to start with a very brief overview of Bell Aliant.
70 Perhaps I could ask you to turn to the slide -- we have four slides that we distributed separately. If you start with Slide 1 you will see a profile of Bell Aliant.
71 Now, we are the largest regional telecom company in Canada, serving the four Atlantic provinces and rural Ontario and Québec. We also own Télébec which operates mainly in rural parts of Québec, NorthernTel which serves northern Ontario, and KMTS which serves Kenora and its surrounding area. It is indeed a diverse and challenging territory.
72 We provide primarily wireline telephony and Internet, and are the largest provider of residential telephone service in high cost areas, serving almost half the lines in Bands E and F and approximately one-third of all lines in Band G. We also provide IPTV service, currently confined to our advanced networks in Atlantic Canada. We do not provide wireless service except in Télébec, NorthernTel and KMTS.
73 Our company is at a crossroads as we face declining revenue and profitability in an intensely competitive marketplace.
74 This proceeding takes place in the context of a broader journey to regulatory reform that we have all been on for some time now. In fact, its genesis lies in the Commission's review of all of its regulatory measures to ensure compliance with the government's Policy Direction. That Direction called upon the Commission to ensure that any regulatory measures are minimally intrusive and rely on market forces to the maximum extent feasible.
75 Our position is thus guided by our strong belief that we must continue this journey and resist the urge to slip backwards. It is therefore somewhat distressing to us to see various parties suggesting that the Commission effectively reverse its path.
76 Calls to expand the basic service objective and the subsidy regime to include broadband would result in an expansion of old school regulation and a distortion of market forces, and this all at a time when the market alone has made phenomenal strides to expand the reach and capability of broadband.
77 In fact, regulatory intervention could actually damage the industry and have major unintended consequences, particularly for companies like ours who are engaged in a fierce competitive struggle as we try to rebuild our networks to remain relevant to our customers, all in the face of declining revenues.
78 Our views on the local subsidy regime are similarly informed. To be blunt, that mechanism is broken, resulting in large transfers of funds from Bell Aliant to others. We can no longer afford this state of affairs.
79 Fortunately, we think the industry has evolved to the point where the Commission has the opportunity to largely eliminate this subsidy mechanism and in the process remove the inequities and increase a reliance on market forces. It is an opportunity to be seized.
80 Let me now turn to the specific questions the Commission has posed, starting with the obligation to serve and basic service objective.
81 Bell Aliant proposes no changes to the obligation and BSO in locations where residential service continues to be regulated. There is no evidence that it should be changed or expanded. We also believe that any technology, including wireless, should be capable of satisfying the obligation.
82 In forborne markets, however, the obligation should be eliminated. It arose in, and is legally confined to, an environment where there is a practical monopoly. That is far from the case in forborne exchanges where customers have choice. Also, in a forborne environment, it would not be clear as to what supplier should bear the obligation.
83 Similarly, in forborne exchanges, the Commission should remove the current price ceiling on standalone basic service. Maintaining price controls in competitive markets is not necessary, especially now that we have had some time and experience with forbearance. Removal of this last regulatory relic would mirror what the Commission did in the long distance market when it deregulated what was known as the basic toll schedule some years after initially granting conditional forbearance to long distance.
84 In return for the obligations in regulated areas, the ILECs need an adequate opportunity to recover their investments. Today, this is achieved through a regulatory system that regulates local prices to ensure they remain affordable where competition is insufficient to do so and subsidizes any financial shortfall that results from prices being held to affordable levels.
85 That brings me to the issue of the local subsidy regime, a critical issue in this proceeding.
86 The current regime collects contribution from industry players and then redistributes that money to fund the shortfall between the cost and revenues of local service in high cost areas. It is thus highly dependent on estimates of each ILEC's service costs, as well as on local prices.
87 There are serious problems with both sides of the subsidy equation: price and cost.
88 So let's start with price. Subsidies should be minimized and used only to offset any shortfall between costs and affordable prices. Any discussion of reforming the subsidy system should thus start by examining whether prices are at the maximum affordable level before considering subsidies.
89 In Canada, through historical accident, local prices vary considerably across ILECs and even within ILECs. For example, in some of our territory, local prices are $22, and in other areas, even in the same province, they are $36.20, and there are prices in between.
90 There is no reason why a standard maximum affordable level cannot and should not be implemented across the country. And that level could easily be $36, a rate already in effect and approved by the Commission. If customers in certain regions of the country can afford $36, there is no reason to think that price is not affordable elsewhere.
91 So let's now turn to the cost side of the equation. Inexplicably, costs prescribed for subsidy purposes are significantly lower for eastern ILECs than they are for western ILECs. Bell Aliant serves almost half of all high cost lines but only receives 22 percent of the subsidies.
92 And our territory, for the most part, is every bit as challenging to serve as elsewhere. You'll recall our map and that we serve the most remote regions of northern Québec, Ontario and Labrador, for example. In fact, our territory stretches farther north than that of any ILEC other than NorthwesTel. When we look at the costs being used to distribute subsidies, there is clearly something wrong with this picture.
93 Let me illustrate by turning your attention to Slide 2. You will see there the 2009 prescribed costs for the various regions of Bell Aliant as well as for the other major ILECs.
94 In Band E, for Bell Aliant, the highest cost is just over $35 per line in Newfoundland. The costs for Band E for MTS, SaskTel and TELUS BC are approximately $49, $51 and $54, respectively. In Band G, Bell Aliant's highest cost is in the Central Region at $48.53. The corresponding costs for Band G for MTS and SaskTel are $93.74 and $60.24, respectively.
95 Now, the next slide, Slide 3, shows how these costs translate into subsidies received by each ILEC. And, Mr. Chairman, here are some numbers that are absolutely startling to us.
96 On a weighted average basis, Bell Aliant receives $2.17 subsidy per high cost line, while MTS, SaskTel and TELUS receive $13.35.
97 Now, one might speculate that our subsidies are lower because perhaps our local prices are higher. In fact, the opposite is true. The weighted average local price in Bell Aliant is $24.23 compared to $26.78 in the western ILECs.
98 So the western ILECs are receiving more than six times the subsidy per line as Bell Aliant, despite the fact that the average price is $2.55 or 10 percent higher in the west. These numbers just don't make sense.
99 So to investigate further, we retained HDR Decision Economics to perform a statistical analysis of these numbers and test what seemed intuitively apparent to us. Mr. Bruce of HDR is here on our panel today and would be happy to discuss this further during questioning but let me just highlight for you in non-technical terms what his firm found.
100 They constructed a statistical model based on the ILEC costs prescribed for subsidy purposes, as well as Canadian population densities as reported by the ILECs. Two important conclusions emerge from that analysis.
101 First, they confirmed that population density is by far the major driver of the cost of local service.
102 And secondly, they found that, based on those densities, there is less than a 5 percent probability that prescribed costs for MTS and TELUS BC could really be that much higher than those prescribed for others in the current subsidy regime.
103 In short, they confirmed that the relative differences in prescribed costs are not statistically plausible.
104 As for SaskTel, there appear to be inconsistencies in the way SaskTel measures its population densities versus the way we -- and we think others -- have done it.
105 SaskTel appears to measure its densities over an entire geographic area, including water bodies and other areas where there cannot be plant, while we measure only the specific wire centres that we serve within the larger geographic area.
106 If SaskTel's reported densities were normalized to be consistent with that of the other ILECs, it is expected that the HDR model would reach similar conclusions for SaskTel as it did for MTS and TELUS BC.
107 Let me mention just one last thing regarding this analysis.
108 In the second interrogatory round, TELUS had a new expert, Dr. Crandall, address our HDR evidence. While Dr. Crandall agrees that density is the primary driver of costs, he takes issue with HDR's statistical analysis. As a result, we asked HDR to prepare a brief report that summarizes their analysis of Dr. Crandall's piece.
109 HDR in that analysis demonstrates that Dr. Crandall's conclusions are based on U.S. data and simply do not apply in Canada.
110 But since the Crandall evidence was filed late in the process, there has been no opportunity for us to comment on it. And so, with the Chair's permission, we would like to make this HDR report available during this proceeding on the record and obviously for comment of others.
111 THE CHAIRPERSON: Are you asking me for permission now to --
112 MR. HENRY: Either now or at the end of my statement.
113 THE CHAIRPERSON: Well, can I interrupt your flow and can we deal with this right now?
114 MR. HENRY: Sure.
115 THE CHAIRPERSON: What is the timing here? I mean when was the TELUS report, the Crandall report --
116 MR. HENRY: Well, it was the last written round, so the last round of interrogatories in August, the August time frame.
117 THE CHAIRPERSON: And you had no opportunity to reply to it?
118 MR. HENRY: Well, there was no other step in the written process. So we have it here. I think it is about 12 pages and we are happy to have people look at it and comment on it in their reply, in their -- but the process didn't allow for it.
119 THE CHAIRPERSON: Okay, fine. Since they are going to have written replies at the end anyway, I guess people can then take issue with it.
120 MR. HENRY: Exactly.
121 THE CHAIRPERSON: So go ahead, file it.
122 MR. HENRY: Okay. Thank you.
123 All of this analysis, Mr. Chairman, confirms that the differences in costs used in the current subsidy regime are simply not plausible.
124 This state of affairs has probably resulted in part from the fact that each set of ILEC costs has been developed independently in a silo, without a comparative review to ensure consistency of application and interpretation across ILECs.
125 We also know that the Ontario/Québec costs used for subsidy purposes are way out of date and understated.
126 So all of this brings us back to the central question: How do we fix this system?
127 One obvious option is to fix the costing -- and that is clearly an option.
128 However, there are a lot of issues associated with that approach. It would be time-consuming and controversial, no doubt.
129 The Commission would inevitably be drawn into a debate about which types of costing principles are appropriate for subsidy purposes, how to redefine bands, especially in light of phenomena such as the so-called doughnut effect, the effect realized when competitors enter the lower cost centre of a geographic area and leave the outlying areas to the ILEC.
130 The Commission would also have to perform a comparative analysis aimed at ensuring absolute consistency of approach among all ILECs or perhaps even consider developing some sort of uniform cost to be used by all ILECs.
131 All of this would take a lot of effort as well as time. And frankly, we can't afford a lot of time. We feel that the need to address the current inequities is not only real but urgent.
132 So if the Commission were to keep a broadly-based subsidy regime, we feel we would need some kind of temporary and immediate solution to address the current inequities, pending an in-depth costing review.
133 However, to avoid all of that, we have developed what we think is a much better option and one that is strikingly simple. It is based on two fundamental propositions.
134 The first is that local prices should be at a maximum affordable level, and they currently are far from it.
135 And the second is that any approach to this issue should minimize reliance on controversial cost estimates and rely more on the market.
136 And starting from these two propositions, a rather simple solution emerged: remove the constraints keeping prices below affordable levels and eliminate subsidies in all but the most remote high-cost areas of the country, namely Band G.
137 This proposal simply completes the rate-rebalancing job started by the Commission back in the nineties, where local prices increased and the subsidy from long distance decreased.
138 Now, we have suggested that an affordable price is $36, for reasons I have mentioned.
139 As to how this price justifies the elimination of subsidies, I would caution that determining this cannot be regarded as a precise mathematical exercise based on ILEC-specific costs. There are just too many controversial and unresolved issues associated with the currently prescribed costs.
140 However, our high level analysis supports the conclusion that at a $36 price ILECs will be able to serve Bands E and F profitably without subsidy and that our proposal is reasonable, taking into account a number of tangible as well as intangible factors.
141 As to Band G, it is a special case, characterized by very high operating costs. While we would propose that prices be permitted to rise to the same $36 level, we recognize that some level of subsidy for these areas will continue to be required. Given the limited number of lines in these areas, the total subsidy level should be relatively small and manageable.
142 However, in order to eliminate the huge differences in prescribed Band G costs across the ILECs, we propose that the Commission simply average all ILEC Band G costs and use that same average for all ILECs serving Band G.
143 We have also proposed that the costs of some interexchange facilities used to reach Band G also be eligible for subsidy.
144 For example, we have very expensive long haul facilities that are used to provide access to long distance service from Band G and help us to meet the BSO. These costs are not currently covered in the subsidy regime.
145 As a result, our operations in Band G are currently provided at a financial loss to us, estimated to be in the $10M range annually. This is concerning to us and we can no longer afford to leave this situation unaddressed. In short, we think these facilities should be eligible for contribution.
146 I couldn't leave the local service subsidy topic without re-emphasizing our overall conclusion regarding the subsidy system. The current system is broken. The good news is there is a simple and effective solution.
147 So let me turn now to the broadband issue and start by saying that the Commission plays an important and effective role in monitoring the state of broadband today. In fact, we would support any efforts to improve the information reported in the exercise of that role.
148 However, that does not mean that the Commission needs to regulate broadband by setting targets for service characteristics or mandating expansion or upgrades. Such a notion seems to ignore Canada's track record in the advancement of broadband without regulation, a very strong track record.
149 So let's examine that record. I draw your attention to Slide 4. As you can see, on a national basis broadband availability has accelerated tremendously since the late 1990s and early 2000s.
150 Earlier this summer, the Commission released its latest Monitoring Report. According to the 2009 statistics in that report, approximately 95 percent of Canadian households can access broadband using landline or fixed wireless. Including 3G wireless extends this reach to approximately 96 percent; and including other wireless and satellite technologies extends it even further. And progress will continue in the future.
151 These are impressive statistics by any standard. The model in Canada of private investment supported by targeted Government programs has worked and continues to work remarkably well.
152 So let me address specifically the problems we see if the Commission were nevertheless to mandate broadband obligations or to set service targets.
153 Let me say at the outset that, in our view, the Commission has no legal jurisdiction to mandate the provision or upgrading of broadband, but that's a topic I will leave to our extensive written materials.
154 Quite apart from that, however, the notion of regulating broadband in these ways would be contrary to the Policy Direction. When we see what the marketplace has accomplished without regulation, it would truly be a departure from that path to start regulating broadband coverage or service targets.
155 The characteristics of broadband have changed and will continue to evolve. A definition that might be appropriate today will not reflect the realities of tomorrow. There is no doubt that any technical target would be a "moving target": difficult to hit and destined to misallocate resources.
156 Mandating broadband coverage would also raise practical difficulties. For example, who should be mandated to provide the service? Is it the incumbent cableco or the ILEC or some other provider?
157 It's hard to fathom how implementing a complex regulatory system that establishes targets or service obligations, especially in the face of these issues, could possibly be regarded as complying with the Policy Direction's call for a reliance on market forces to the maximum extent feasible.
158 In addition to legal and Policy Direction issues, mandating expanded or upgraded broadband coverage could harm the industry, and particularly companies like ours. While it may seem to the casual observer that we should be able to easily spend more capital in rural areas, or at least divert it from more urban to more rural areas, let me explain why that is not the case and why an obligation to expand or upgrade broadband coverage could actually be counter-productive.
159 Today, Bell Aliant's revenue and profitability are in decline, while in many areas, including our urban markets, our services and network are less advanced than those of our cableco competitors who can offer higher internet speeds and are well established incumbents in the TV distribution business. We also do not have a mobile wireless business in most of our territory.
160 Our strategy to turn around our financial situation and return to modest growth down the road is to aggressively roll out our fibre-to-the-home technology, or FTTH, naturally in the more populated areas of our territory initially.
161 As you know, we lead the country in this regard, having been the first provider in Canada to blanket an entire city with FTTH and with plans to cover over 600,000 homes and businesses by 2012. I might add that I think this is the first anniversary today of turning up FTTH in Fredericton.
162 We need to do this to give us a fighting chance and catch up to our competitors. And, even with these aggressive plans, we will still only be serving approximately one-third of the competitive footprint in our serving territory with FTTH by the end of 2012.
163 Now, if we were faced with an obligation to expand or upgrade broadband, this would increase our capital spending even if the service were subsidized. In today's financial markets, capital funds are limited. If capital spending exceeds investor expectations, the equity markets will punish the company, with serious financial consequences.
164 Broadband obligations, even if subsidized, would inevitably divert capital away from projects such as FTTH and upset a delicately balanced capital program, one that is designed to regain a path to modest financial growth through FTTH, while at the same time spending adequately to serve customers in all our regions.
165 The result of diverting capital away from more urban areas would be to impair the company's ability to remain competitive in those areas, which in turn could put the company on a dangerous downward financial spiral and impair its ability to serve all customers, including the more rural ones who were the very object of the obligation.
166 There are additional issues that would make a subsidy program for broadband problematic.
167 First of all, there is no free lunch. Any subsidy program instituted by the Commission amounts to a tax on the industry who would be required to source the funds. It is well established that an industry tax is economically inefficient and that the most efficient source of any subsidies required for social purposes is the government's consolidated revenue fund.
168 And it's imperative to understand that to date governments at all levels in Canada have recognized this and doing exactly that, funding broadband expansion in those pockets of the country where it has been uneconomic for industry to serve.
169 To institute an industry tax would reverse this process, let governments "off the hook" and revert to an economically inefficient system. It would also penalize the citizens of those provinces who have already implemented programs to expand broadband to 100 percent of their citizens, namely Nova Scotia, New Brunswick and PEI.
170 In summary, the Canadian model for broadband deployment comprised of private investment, supplemented by specific, targeted government programs has worked exceedingly well. It is inconceivable to us why we would contemplate replacing this model with a costly system that would distort the market and burden the very industry that we are trying to promote and stimulate.
171 Policy makers would be far better off to concentrate their efforts on policies to encourage adoption and use of broadband rather than on the supply of broadband, given that adoption lags availability by a wide margin.
172 I will now ask Michel to address our comments on the SILECs.
173 M. GILBERT: Monsieur le Président, Mesdames et Messieurs les Conseillers.
174 De notre point de vue, le Conseil doit continuer à autoriser la concurrence dans le territoire des petites entreprises de service local titulaires. Ces entreprises ne doivent pas être traitées isolément du reste du marché, protégées des forces de la concurrence.
175 Nous notons que plusieurs petites entreprises sont entrées en concurrence à l'extérieur de leur territoire historique, notamment dans le territoire de Bell Aliant.
176 À titre d'exemple, la compagnie Wightman installe des fibres optiques jusqu'au foyer dans le territoire de Bell Aliant. Qui plus est, Wightman dessert environ trois fois plus de services d'accès au réseau dans le territoire de Bell Aliant que dans son propre territoire historique.
177 Ce n'est pas une plainte, c'est plutôt un constat démontrant qu'il est trop tard pour revenir en arrière. La concurrence existe et il n'est pas nécessaire de protéger certaines entreprises de ses effets.
178 Cela dit, nous reconnaissons, par exemple, que les coûts d'implantation de la portabilité des numéros peuvent s'avérer onéreux pour une petite entreprise. Bell Aliant a d'ailleurs proposé des solutions pour pallier cette situation.
179 En ce qui a trait au régime de subvention et aux tarifs du service local, Bell Aliant propose que le même régime s'applique tant aux grandes qu'aux petites entreprises. Dans le cas de ces dernières, nous ajoutons cependant une exception importante.
180 Nous sommes préoccupés depuis longtemps par le niveau élevé des tarifs d'interconnexion des petites entreprises, à savoir les tarifs de raccordement direct et ceux applicables aux circuits d'interconnexion.
181 Les tarifs actuels incluent, de l'aveu même des petites entreprises, une subvention implicite à l'égard des services locaux fournis par ces dernières. Il appert que seulement les fournisseurs de services interurbains interconnectés avec ces entreprises, soit principalement Bell Aliant et Bell Canada, défraient présentement cette subvention implicite, et ce, par le biais des tarifs élevés dont je viens de parler.
182 Afin d'éliminer cette anomalie, Bell Aliant propose que le tarif d'interconnexion soit ramené à un niveau concurrentiel, et que les petites entreprises récupèrent le manque à gagner ainsi créé au moyen du Fonds de contribution national.
183 Cette approche a d'ailleurs été développée à l'origine avec les petites entreprises elles-mêmes. Cette proposition convertira la subvention implicite, payée par les fournisseurs de services interurbains, en subvention locale explicite, tout en favorisant la concurrence interurbaine dans le territoire des petites entreprises.
184 À toi, Denis.
185 MR. HENRY: Mr. Chairman, that brings me to our conclusion.
186 We hope that we have been clear in enunciating our views on the very important issues before you. As the largest ILEC in rural Canada, these are issues that are very near and dear to our heart and in which we have a vital interest. And we believe some of them need urgent attention.
187 We also believe the Commission is at a bit of a crossroads. You have an opportunity to continue down the road to regulatory reform by eliminating outdated regulatory mechanisms, relying on market forces, completing the rate rebalancing job, resisting calls to regulate broadband, and continuing the path to competition. Or you can head in the opposite direction, which is where many parties would have you end up with their recommendations. We think it is clear which path to choose.
188 We thank you for your attention and welcome any questions you may have.
189 THE CHAIRPERSON: Well, thank you for your presentation.
190 We are obviously starting with you because of the very thing you said, that you are the largest provider in rural Canada and so your views are important.
191 Thank you for your comprehensive presentation and also your submission. I read the stuff that you presented to us in written form very carefully. Let me go through it sort of systematically.
192 Obligation to serve. You say it should only be in forborne areas, it should not be -- it should only be in regulated areas, not in forborne areas.
193 Why? Why do you feel that -- I mean we have competition, but the competition, as you know, is spotty and it doesn't necessary mean in all areas of a serving area. So why do you feel we can dispense with an obligation to serve?
194 MR. HENRY: Well, because once you have competition the customer has choice so it seems to us you no longer need to pick out somebody to have an obligation to serve -- it's not clear who that party would be -- and customers are protected through competition.
195 THE CHAIRPERSON: Mr. Henry, you know as well as I that our forborne formula works on a statistical basis, but that doesn't mean that every single client in that area has a choice, that he has competition.
196 I mean, I don't have to walk you through the formula, but it's quite possible that you have a forborne area but you still have clients amounting to whatever, 10 percent or so, who do not have the benefit of competition.
197 MR. HENRY: Well, let me answer that this way: I think it's a theoretical problem more than a practical problem.
198 Yes, the formula is 75 percent wireline coverage, in practice it's way above that. The cable companies enter and in our experience it's like 98 percent is typically covered. So if there are any captive customers there are very, very few of them.
199 Second, you have wireless substitution, increasingly so. When we set the rules four years ago wireless substitution was a twinkle in everybody's eye, it was very controversial, I think today it's beyond dispute that wireless substitution is there. So that's another discipline.
200 We also have to remember that when the Commission had the original concern, their concern was based on a framework that set forbearance for very large what were called local forbearance regions. There was something like only 85 of them. We then shrunk those to the exchange level. There are thousands of exchange levels. So the possibility of captive customers in those area because they are so small is very small.
201 So I think that's one of my main reasons.
202 THE CHAIRPERSON: But I mean you are talking about rural areas to say that your wireless substitutability is -- it's a little bit of an assertion, isn't it? I mean yes, you will have it in some of the denser areas, but in some of the very remote areas you don't necessarily have wireless substitutability.
203 MR. HENRY: Well, first of all, we are talking about areas that are forborne, so in areas that are forborne they are typically not the most remote areas and so wireless is likely to be there.
204 Now, I can tell you as a company who doesn't have wireless, wireless substitution is very real. It's a worry to us and increasingly so.
205 THE CHAIRPERSON: Okay. What does obligation to serve mean for you in terms of dollars and cents? You want us to lift it in forborne areas, assuming we do that what do you stand to gain? Because you will be the first one affected.
206 So if we say, "Okay, Mr. Henry, we buy this", we lift the obligation to serve in forborne areas. You are the ILEC in those forborne areas, you suddenly no longer have an obligation to serve, what advantage do you get?
207 MR. HENRY: I don't think that can be quantified. It depends very much on market conditions.
208 THE CHAIRPERSON: I find it hard to believe that you advocate something that you can't quantify. Surely you have thought about what the benefit of this is, otherwise you wouldn't advocate it.
209 MR. HENRY: Well, and there are two parts to our proposal. One is, eliminating the price cap as well. The price cap and the obligation to serve go hand-in-hand.
210 And then you can eliminate contribution. If you don't eliminate -- if you keep the price cap and the obligation to serve in forborne areas, then I think you are going to have keep contribution in forborne areas. So you have an opportunity to eliminate both on the basis of competition and then eliminate contribution in those areas. Of course we have given you a recipe to do it everywhere in any event.
211 THE CHAIRPERSON: So it's really the price cap that's biting you? I mean if you take the obligation to serve away then you no longer have the price cap in those forborne areas.
212 MR. HENRY: That's certainly part of it.
213 THE CHAIRPERSON: You also say that the obligation to serve every retainer should only for ILECs, it should not be for all competitors in the area.
214 I read through your materials, I didn't quite see the reason why. You say sort of ambiguously it would be difficult to understand who would have to have the obligation to serve.
215 Why do you feel that is -- why couldn't one be just and say all the competitors in a forborne area have the obligation to serve?
216 DR. HARITON: If I may, Mr. Chairman?
217 If you have an obligation to serve on multiple carriers in a given location or a given area, I believe that would lead to inefficiency in the following sense: Every carrier has to have a complete coverage to be able to serve customers on demand, which is the nature of the obligation to serve. If you do that, then what you have is you will have multiple facilities where perhaps multiple facilities are not necessary, where customers are being served by a carrier, look as if they are going to be served by a carrier, but because I have an obligation to serve I have to have plant there to be able to serve them just in case they decide to switch carriers on basically very short notice.
218 THE CHAIRPERSON: So regulation would force redundancy is what you are saying?
219 DR. HARITON: That's correct.
220 THE CHAIRPERSON: Okay.
221 Now, is this obligation to serve becoming over time more irrelevant anyway because, I mean, it is for basic service and I presume most of your customers nowadays have more than basic service and a bundle, et cetera, et cetera.
222 So has the time come that we can actually do without a basic service or do we need this as a security blanket? How do you feel about this?
223 MR. HENRY: Well, we don't have any problem with keeping it as a security blanket. Do you really need it? I'm not sure you do, but we don't have a strong problem with keeping it, but you make a valid point.
224 And it's true that many customers are buying bundles and they are buying other services and it is a different world today.
225 THE CHAIRPERSON: And you want to maintain it in the regulated areas and you are willing, as the ILEC in most of those areas, to carry that burden, if I understand it.
226 MR. HENRY: Yes, indeed.
227 THE CHAIRPERSON: What is the advantage to you of doing that?
228 MR. HENRY: Well, we think, again, the obligation or the entitlement to contribution actually stems from the obligation to serve. So if there were a contribution regime, again, it seems for policy reasons, you would want an obligation to serve where there is no competition and in return for that we would get a contribution under the current rules. Of course we have given you a recipe to, at least in bands "E" and "F", give us the flexibility to go to $36 again in return for the obligation to serve.
229 THE CHAIRPERSON: I will be coming to that in a second.
230 Okay, then the basic service obligation. If I understand you correctly, you basically say keep it as it is, don't enlarge it to broadband. But in the way it is structured right now it by and large works and don't touch something that is working well. If I misunderstand you, please correct me, but that's what I gathered.
231 MR. HENRY: No, no. That's right. That's right, yes.
232 THE CHAIRPERSON: Now, then broadband. You are against including it.
233 First of all, how do you define "broadband"?
234 MR. HENRY: How do we define it?
235 THE CHAIRPERSON: Yes.
236 MR. HENRY: Well, that's one of the very problems. I mean today it's 1.5 megs generally is what governments have been looking to in subsidy programs. That seems to be in terms of the far reaches of the country and the kind of basic needs that you think you would want consumers and small businesses to have the ability to do and to even think about subsidizing, it seems that the 1.5 megs is adequate for those purposes.
237 That doesn't mean that in more urban areas there isn't going to be higher speeds and that will eventually creep out further and further. We see announcements from satellite talking about 40 megs next year, and so on, and --
238 THE CHAIRPERSON: We are only talking about the minimum. Obviously you will offer more when the market supports it.
239 In your submissions you talk throughout about broadband but you don't define it. You are saying when you speak about broadband you are talking 1.5 meg, if I understand it. That is the concept that you use in this discussion?
240 MR. HENRY: Twenty-five did you say?
241 THE CHAIRPERSON: One-point-five
242 MR. HENRY: One-point-five, yes. Yes.
243 THE CHAIRPERSON: That's down presumably. How much up is the up?
244 MR. HENRY: Oh, what is the up with it?
245 MR. HENRY: Yes, 640K up.
246 THE CHAIRPERSON: Six-forty K up. Okay.
247 So for the purpose of discussion with you and with others when we talk about broadband I think that was generally how the industry thinks of it. If not, other people please correct it if you have a different understanding. I wanted to make sure we have a common definition for the purpose of discussion.
248 MR. HENRY: Yes.
249 THE CHAIRPERSON: Now, I don't have trouble understanding you saying that we shouldn't -- by your own admission 94 percent of the country has access to broadband and a smaller portion, somewhere in the 60s, avail themselves. But if 94 percent already has access, we are talking about 6 percent, giving them access through a basic service obligation.
250 Why are you so vigorously opposed to it, in light of the fact this is considered internationally, not over here alone, the absolute key building stone for a new connected society for having economic growth, et cetera?
251 I mean, we looked at other countries, every single country, United States, South Korea, Finland, Australia, Denmark, Ireland, France, Germany, Italy, United Kingdom, they all have set broadband targets at speeds ranging anywhere from 4 to 12 percent, et cetera, and given target dates. They all recognize that that is something that a modern economy needs.
252 Here comes one of our biggest providers, we are talking about doing 6 percent of the country, and you say we are definitively opposed to it, it makes no economic sense, it penalizes the industry.
253 I don't get it. Explain it to me.
254 MR. HENRY: Okay. Well, first of all, it's 95 percent and that is wireline and fixed wireless. You add 3G to that, that's 96 percent. Add satellite to that, it's virtually 100 percent, and satellite is getting better and better. There have been announcements as to major improvements coming, starting this year and next year.
255 THE CHAIRPERSON: We are going to hear from Barrett after you.
256 MR. HENRY: Yes. So we are getting up there without intervention.
257 Now, the other thing is, we have governments in this country -- governments funding programs. We just did a big one in eastern Ontario. Eastern Ontario is going to be blanketed. I think there was $55 million in subsidies and that's just Phase 1. There is going to be another phase.
258 We are working on some other projects with governments. Unfortunately I can't speak to them because they are not public yet, but they are close to being finalized and they are going to be in the same kind of magnitude.
259 We have the Maritime Provinces that went from lagging the country to 200 percent through their initiatives partnering with industry.
260 So now what happens? The Commission puts in a subsidy regime, but there seems to be this notion out there that somehow the Commission has money just like governments. The Commission doesn't have money; it comes from us.
261 THE CHAIRPERSON: You don't have to tell me that.
262 MR. HENRY: So the money is going to come from us.
263 I go back to the TPRP Report, the Telecom Policy Review Report, that said Canada should subsidize broadband in unserved pockets of the country. They also went on for a page and a half to say why doing it through contribution would be a terrible mistake. It's inefficient.
264 And if you look at Canada's success, you know, in terms of speed, we have the lowest population density in the G8, I think we have the second highest speeds, our prices compare favourably, if you look at your Wall report, and the CRTC numbers from the Monitoring Report, they don't even include the broadband Canada initiative, they don't include the EOWC one that I talked about, they don't include the deferral account, there is other Infrastructure Canada programs, it just seems that the market is solving and then we have this policy direction that says don't intervene, the market is solving.
265 If you put in place a program I guarantee you the governments will just stop them.
266 THE CHAIRPERSON: You say it would be inefficient to do it this way. Why would it be inefficient?
267 MR. HENRY: Maybe I will let Dr. Hariton expand on it, you are taxing the very people which -- the industry. So that money gets passed on in rates, so now that reduces consumption of the very products across telecom services because their rates are higher.
268 THE CHAIRPERSON: Every consumption tax works that way. Next you are going to say GST is an inefficient tax.
269 MR. HENRY: No, no.
270 DR. HARITON: With due respect, Mr. Chairman, I won't comment on the GST.
271 DR. HARITON: But on the broadband programs and the government's role, I think the trade-off is between broadly defined and broadly administered subsidies of the kind that we have seen in the voice market and the more narrowly defined very targeted subsidies which we have also seen in the broadband market in Canada where the needs of specific communities are identified, often in discussions in collaboration with the communities, and that is the basis of the funding. So the funding is very much tailored to the individual community.
272 I note in passing that in the United States well indeed the FCC has put out a National Broadband Plan with targets, and so on and so forth. That plan is very grandiose. There is a report by the General Accountability Office, the U.S. GAO, recently to Congress which looked at ways of implementing the National Broadband Plan.
273 They looked at seven countries as role models, if you will, or good things, and Canada was one. What they particularly liked about Canada was programs like the Brant(ph) Program, programs like Connecting Canadians and the Broadband Canada, because they were a collaboration between government and communities.
274 So I mean even within a national plan it depends, there are different ways of implementing it. One of them is to have these narrowly targeted programs where there are gaps, the other one is to have very broad programs. Broad programs tend to be more expensive.
275 THE CHAIRPERSON: But that's exactly what we are talking about, narrow problems dealing with gaps. The market will look after most of the densely populated areas.
276 I mean we have the very example of what we did before with Internet dial-up, we put it in the basic service obligation and it worked, you delivered. Now you are just talking about 1.5 as broadband and basically most Canadians have access to it. We are now talking about the very removed areas where for some reason it isn't there yet and to make sure it gets there.
277 I'm losing the rationale here. Because picking up on exactly what you said, targeted programs for remote areas dealing with the areas that the market doesn't serve. Why would that not be part of our task and why would that be economically inefficient? Why wouldn't it make sense? I'm sorry, I just don't follow.
278 DR. HARITON: Well, let me try again in that case.
279 As I understand my client's position, we are certainly not opposed to government subsidies in these areas and they have been happening and we think the mechanisms are in place to keep them happening.
280 One of the things that's happening of course is that the definition of broadband and the needs -- not only the definition but the needs in the applications in different communities may vary from community to community and the program which actually is national in scope in the sense that it sets standards which have to be applied everywhere at the same time is a one-size-fits-all which may not take into account the problems of different communities.
281 Let me give you a very quick concrete -- let me try to be very concrete.
282 If you have a farming community it's broadband needs may not be the same as a community which essentially is a commuter community which is not that far from a large centre. The commuter community may need a lot more telecommuting and facilities for that, the farmer may have different needs.
283 If you have a community which is mostly cottages the needs may be very different from one where it's permanent residency.
284 These are distinctions which have to be made. They could be made I suppose by one central program, but in general it's better if the programs are brought down closer to the actual communities, and so on.
285 THE CHAIRPERSON: All that is not an answer. I mean every program is not going to be perfect for everyone. When you do national programs what you establish is minima and that's what we are talking about here and just making sure that nobody is left out.
286 I appreciate your example that the suburban area or bedroom community may have different needs than a farming community.
287 But to some extent, obviously, as much as possible, we want to rely on the market. But you want to at least establish common minimal costs so that everybody has access to that.
288 Let's take, for argument's sake, Mr. Henry's definition of 1.5. At least everybody has that. So you have access to broadband, and if you need more, you can decide whether it's worth your investment or not.
289 Everything you said, as far as I can see, clashes with every national program that we have.
290 MR. HENRY: Let me try it this way. It's the source of the funds. The economists, the TPR Report, will tell you that if you are going to have a subsidy, the least distorting way to do it is to take it from the broadest base as possible. The broadest base as possible is the Canadian population, the Consolidated Revenue Fund, where governments can make priorities, and it's the broadest base.
291 If you tax a particular industry, you are going to add more distortions, because those costs get passed on, not to consumers of every good, but to consumers of telecom.
292 So now they might spend less minutes on their wireless, because they have to fund this program.
293 In addition to that, we have the problem of any obligations you put on us, even if it's to pay -- and it's not us who has to build, but we have to pay into a fund. Now we are going to pay for that, and it is going to divert money away from our other programs, which we desperately need to try to remain competitive.
294 THE CHAIRPERSON: I guess we are not going to see eye-to-eye on this one.
295 You are also making some startling assertions that we have no legal jurisdiction to manage the provisional upgrading of broadband.
296 This is news to me. Why do you say that?
297 I mean, we could do it for dial-up, but we can't do it for broadband? Where does --
298 MR. HENRY: We don't think you have the jurisdiction to order the building of new services. That is laid out quite --
299 The obligation to serve is to provide existing services along existing lines of supply. You have no jurisdiction -- and I have been of this view for a long time, and Mr. Ryan supports it -- to order expansion outside of existing lines of supply. You don't have jurisdiction to do that.
300 THE CHAIRPERSON: No, I agree with you, it's within existing lines.
301 MR. HENRY: Okay, within existing lines. Ordering new services, like a new speed, we don't think you have jurisdiction to do that, and the fund that we are talking about for subsidizing, that you have the ability to set up, is for subsidizing continuing access to basic service.
302 The view of Mr. Ryan and us is that that meant basic service, as it was defined at the time; continuing access, not new services.
303 THE CHAIRPERSON: Mr. Henry, try to simplify that for me, I didn't get that.
304 We can set a basic service obligation, you don't dispute that. We have done it in the past. We have -- whenever it was -- expanded it to include dial-up. Why can't we expand it now to include broadband at 1.5?
305 MR. HENRY: Because you have no ability to order us to build facilities.
306 The only section that gives you the ability to order the building of facilities is a section that is ancillary to other sections. It is not an independent section, it can only be exercised in the exercise of other powers.
307 THE CHAIRPERSON: Are you saying that when we established the basic service obligation, including dial-up, we actually exceeded jurisdiction?
308 Because it did, undoubtedly, have consequences for you, in terms of your network and in terms of how you operate. You probably did have to improve it in some areas in order to get the...
309 MR. HENRY: Yes, certainly to the extent that it involved building basic service outside of existing communities -- and it did -- we did believe that that was beyond jurisdiction.
310 We didn't challenge it because there was a reasonable arrangement that we both came up with to fund that, but we didn't think that you had the legal authority to do it, no.
311 THE CHAIRPERSON: You mentioned wireless and satellite and the substitute, and I am trying to -- and I know we will hear from others, but your view of this industry is key, because it undoubtedly drives your investment decisions, et cetera.
312 Wireless and substitute -- speaking only in terms of broadband -- are they a substitute right now? Are they becoming one? What is the timeline? How do you see this developing?
313 MR. HENRY: I think it's a continuum. I think they are a substitute. I think, particularly if you look at remote areas and you ask yourself, "Am I going to order an over-build of a broadband DSL network, when wireless is already there," no.
314 I think, from a public policy point of view, that you have to look at it.
315 The prices, I think -- and this is just for Bell Mobility -- they are coming down every day, but right now, I think, it is $35 for 3 gigs, $45 for 5 gigs, $60 for 10 gigs.
316 Our average usage for a customer is 5 gigs a month.
317 So, you know, for 5 gigs, $45, it provides a pretty reasonable service. You are going to be able to certainly do all of the things that we would think about subsidizing and using public funds for getting people to do all of the applications. You can certainly do all of those kinds of applications on wireless, and it's getting better every day, and satellite is -- according to Barrett's --
318 THE CHAIRPERSON: Let's stay with Bell Mobility for a second. After all, you know this firsthand.
319 For $45, in a rural area, I get 5 gigabytes -- 5 megabytes?
320 MR. HENRY: Yes.
321 THE CHAIRPERSON: For how long?
322 I mean, isn't there a time limit for that $45?
323 MR. HENRY: That's a monthly rate --
324 I am not sure that I understood the question. Sorry, Mr. Chairman.
325 THE CHAIRPERSON: If I live in a remote area and I am your customer on Bell Mobility, and I use it to access the internet from my computer, I can have it on for 24 hours, all month long, and I pay $45?
326 MR. HENRY: To a maximum use of 5 gigs. If you want to go to 10 gigs, it's $60.
327 You can have it on 24 hours, but if you are not downloading movies for 24 hours...
328 THE CHAIRPERSON: Let's say that I am a businessman and I need it in order to get the information to deal with my customers, or the suppliers, and all of that, et cetera. As long as I do not use more than --
329 MR. HENRY: Right.
330 THE CHAIRPERSON: How does the 5 gig, then, kick in? I am trying to --
331 MR. HENRY: After the 5 gig -- and you can monitor the usage -- then there are charges above that.
332 THE CHAIRPERSON: And how would that compare with buying it from you or buying access to the internet from Bell Aliant, in one of the areas you serve?
333 And I'm a wireline customer. You are serving me through ADSL, or whatever.
334 MR. HENRY: I think we have a $46 price for 25 gigs.
335 THE CHAIRPERSON: But, you see, therein lies a problem. I mean, I think that wireless, in terms of consumer use, may be a substitute, depending, obviously, on how much you download, et cetera, but in terms of business use, can you really --
336 The prices that you just quoted me, you are doubling the price and the capacity is fivefold.
337 MR. HENRY: But that gap is -- you know, if we sit here a year from now, we will probably find that those prices are different and the gap is closing.
338 It's closing all the time. So you have to ask yourself: Okay, so maybe I don't get quite as much usage just yet, but I am living in more remote areas, I pay more for other things in those areas.
339 You have to look at the difference, how big it is. The gaps are likely going to close in the future.
340 And, then, as policymakers, we have to ask ourselves, "If we like the technology and, gee, we would just like the price a little bit more," are we really going to try to put in a subsidy program and order an overbuild of another network, just because we don't like the price by a few gigs, and it might change in a few years?
341 By the time we build that new network that you are going to subsidize, the wireless prices will probably be down there, comparable.
342 THE CHAIRPERSON: Do you, right now, have any profile of how many of your Bell Mobility customers are businesses and how many are personal?
343 MR. HENRY: I don't. We could check.
344 THE CHAIRPERSON: Obviously, if you want to give it to us in confidence, then that's fine.
345 I think that would be very useful.
346 When you are telling me that this is coming on, it's a wave that is going to come, whatever evidence you have to show that, indeed, it's not just consumers who use wireless as an access, but businesses, it would be very useful for us.
347 MR. HENRY: Yes, we will do that.
348 THE CHAIRPERSON: Now, you were going to say something about satellite, and I'm sorry, I interrupted you.
349 MR. HENRY: Just to say that satellite seems to be improving all the time. We had the Barrett announcement. I think -- I think -- it's 40 megabytes, improving to over 100 megabytes by next year.
350 And, with WiMAX and satellite technology, I don't know why we wouldn't wait and see what that brings. That sounds pretty promising, as well.
351 THE CHAIRPERSON: I guess we are going to hear from the wireless people.
352 Let's move to the subsidy regime. First of all, your charts are very helpful, and you also, in your written submission, went to great lengths over the perceived injustice that your costs are lower in the west, and as a result of that you make higher contributions -- you get lower contributions.
353 Why is that?
354 MR. HENRY: That's a very good question, and I think it would take you a few years to probably resolve that, which is what really bothers us about this.
355 I don't ascribe any blame to anybody, but I think, if you look at how these costs were done over the years, they were done, originally, by individual companies doing their own costing for pricing purposes, and I am not sure that anybody stood back and did an audit and tried to figure out why there are all the differences.
356 We know that ours are very, very outdated.
357 I am sure there have to be inconsistencies. In fact, I think that Mr. Dilworth could probably tell you about our own company, which was an amalgamation of four separate Atlantic companies, at one point, and then the Ontario-Quebec territory.
358 MR. DILWORTH: Yes, I am now responsible for the costing in Bell Aliant, and it is the amalgamation of seven companies. We would have had the four companies in Atlantic Canada, we have Télébec and Northern, and of course the Bell central territory, and we do see differences in the way that each of those companies would have done loop length calculations, how they would have done calculations of loop makeup and construction mix, which is an important ingredient in calculating the cost.
359 There were differences in materials and installation costs, different ISIT systems and financial systems.
360 None of them are huge, but they are all driving for inconsistencies.
361 Of course, we did have the large difference in the central territory with the outdated loop sample, which did cause a significant impact.
362 THE CHAIRPERSON: What am I missing here? I mean, those are your cost figures. You are never shy to come to us and say that we got it wrong. Why don't you bring an application saying, "You underestimated our costs"?
363 MR. HENRY: We did.
364 THE CHAIRPERSON: You could have done it for the last ten years, how come you haven't done that?
365 You are living with this, according to your chart, gross inequity.
366 MR. HENRY: We did. We raised the outdated costs of the loop sample in 2001.
367 I say "we", it was the former Bell at the time.
368 Again, because costs are controversial, for whatever reason, that got put off. It was put on the side and they said that we would deal with it in the price cap case.
369 And, then, after the price cap case the Commission said, "No, we will kick off a proceeding and we will do that."
370 That proceeding kicked off in 2007. So we went through a proceeding and we got some new costing principles. As soon as we got those costing principles, we filed updated loop costs, which are before you, again leading to all kinds of questions, debates: Is it embedded in Phase 2? Is there a hybrid?
371 All kinds of debates with Commission Staff, all legitimate, because these are very complicated issues.
372 So we are where we are, and it's many years later. I can tell you, from the moment I arrived at Bell Aliant in January 2007, this has been my number one priority, how do we fix this.
373 And, then, about that time, the Commission said that we were going to have a contribution proceeding.
374 So we have been preparing for this and waiting for this day. It took a little longer than we would have liked, but we are where we are.
375 But we did start trying to fix the costs back in 2001. Part of the reason that we are saying, if we can minimize or get rid of reliance on these cost estimates, that has to be a better course than this. This has just been going on too long.
376 THE CHAIRPERSON: Yes, but what you are saying is: Let's adjust prices. Let's have all that's average, et cetera. But you are not saying -- I would have thought you would come forward here saying --
377 The only evidence you have given me, unless I missed something, is that the differential between your prices and the western prices is statistically improbable, but you really haven't explained to me why your prices are so inadequate.
378 Sorry, your costs.
379 MR. HENRY: There are two things. If we look at this chart, we say that's implausible, just intuitively implausible.
380 So then we start looking at it, and we have expert statistical evidence which says: You know what, you're right, they are implausible.
381 So, for whatever reason, we are where we are. So what do we do about it?
382 We tried to give you a simple way out, but I will be the first to admit that it's not going to be science, because the very costs that we say are hard to rely on, for all of these reasons, you're not going to be able to mathematically say, "Oh, yeah, 36 bucks, absolutely. Every single penny here and there is covered," and so on.
383 But if you don't like that, if you don't want to do that, then that's fine, we will do a costing review. We will be there, we will be the first ones there, we will show you what our costs are compared to others, and we will have the debates. But, in the meantime, we need something to address the inequities that we think we have demonstrated, again, supported by statistical analyses that just don't make sense.
384 THE CHAIRPERSON: You also make the point -- you are saying that the costs are wrong, but they also don't reflect the consequences of the merger between you and the Bell Google service areas that you took over.
385 MR. HENRY: Right.
386 THE CHAIRPERSON: I'm sorry, I don't get the connection here. Why would the fact that you transferred certain rural areas from Bell to Bell Aliant have an impact on -- I mean, the cost structure is the same whether you own it or Bell, isn't it?
387 MR. HENRY: No, the cost structure -- everybody has their own costs for the bands. If we have Band E, Bell would have kept the more urban -- not the more urban, but the more dense areas of Band E, and we would have picked up the more rural.
388 Everybody has their own costs, so we have to redo cost studies to pull out the -- ours go up and Bell's go down. In fact --
389 THE CHAIRPERSON: So you just took over Bell's costing area, and they are artificially inflated because they had the --
390 MR. HENRY: Ours are artificially deflated and theirs are artificially inflated.
391 But, having said that, there was a decision yesterday where we finally -- we just wanted to get some kind of progress. We did propose to take what we think are the old, outdated, bad costs and avoid a debate by doing something very simple, and just taking the old ones and de-averaging them.
392 And that was approved yesterday, so that's where we are on that one.
393 THE CHAIRPERSON: Your remedy, then, is to increase the price, increase it to $36, rather than dealing with the cost side.
394 First of all, why $36? Is that the average price?
395 I thought it was around $32, why are you going to $36?
396 MR. HENRY: The $36 is because we think -- the principle was: Let's go to the highest affordable rate, the maximum affordable rate.
397 And we think that because you have approved it somewhere in Canada, and there has been no particular evidence of any churn from those customers that is out of the ordinary, if customers in Val-des-Monts -- and I forget what the other exchange is -- can pay it, why should it be different across the country?
398 THE CHAIRPERSON: Val-des-Monts is yours?
399 MR. HENRY: Val-des-Monts and --
400 MR. GILBERT: Actually, I will just correct that, it's Val-des-Bois.
401 This raise is in effect in Val-des-Bois and Notre-Dame-de-la-Salette, two exchanges.
402 THE CHAIRPERSON: Your logic about affordability is, you approved $36 and nobody complained about it, so $36 must be affordable.
403 MR. HENRY: Absolutely.
404 THE CHAIRPERSON: Assume for argument's sake that I say, "Yes, Mr. Henry, that seems to me to be a good solution," what would actually happen? How would you go from your present prices to $36?
405 MR. HENRY: That's a good question. I think we --
406 THE CHAIRPERSON: You would have some very unhappy customers, of that I'm sure.
407 MR. HENRY: Well, there is substitution and there is wireless and so on, but let me get to your point.
408 We kind of recognize that there is probably a need for a transition period, but we think it should be reasonably short, two to three years, and during that period what we suggest you could do is take the difference between the price that you allow in Year 1 and the $36 target and allow everybody to recover that contribution on that basis.
409 So $36 is your target. If you allow me to go to $30 in the first year, everybody gets a $6 contribution. If you go to $33 in the second year, every body gets a $3 contribution. If you go to $36 in the third year, there is no more contribution in E and F.
410 Now, parties don't have to put in the price, and they probably will do so depending on market conditions, but you would set as a bogey: That's the price this year, and you are going to be imputed to get it in contribution.
411 THE CHAIRPERSON: Okay. So a three-year average -- I am looking at Band F in New Brunswick, which is $26.33 right now. So you would say: Raise it by $3.30 each year?
412 MR. HENRY: Yes.
413 THE CHAIRPERSON: And if you don't raise it for competitive reasons, too bad, we impute that on --
414 MR. HENRY: Yes, exactly.
415 THE CHAIRPERSON: Then that, obviously, has an effect on reducing the subsidy. I am trying to --
416 If we adopt your scheme, as the net effect the whole subsidy would be reduced, but the cost differential that you talked about would still be there. Right?
417 MR. HENRY: Yes, but you wouldn't be relying on costs for contributions.
418 THE CHAIRPERSON: We basically ignore costs.
419 MR. HENRY: Yes.
420 THE CHAIRPERSON: I am trying to understand --
421 MR. HENRY: Yes. You ignore costs, on the assumption that history has shown that if it's going to be a huge, long, controversial process, we are not sure we will get to the right answer because --
422 I can tell you, I have experts here, and we debate: What are the right principles? Are they Phase 2? For contribution purposes there are problems with Phase 2.
423 Are they Phase 3 and embedded? Definitely not.
424 Are they hybrid? Maybe; the Commission is looking at that.
425 Get away from all of that debate, and then we don't have to have them.
426 Now, except for Band G. Band G -- there is very few in assets where there is no road to access. We think you could focus in on that.
427 In fact, our simple solution for that one is just to average costs in Band G. That's what you did for the Silecs. You just took the average of all ILEC costs. Recognizing that they didn't have costs, you are probably not going to get it right anyway.
428 Is it perfect? No. Is it rough justice? Yes.
429 THE CHAIRPERSON: And you have said, alternatively, if we don't do this, it would be to average the costs between you and the westerners and establish one uniform cost.
430 MR. HENRY: Yes.
431 THE CHAIRPERSON: Presumably, that also means that we lower the costs for some of the westerners.
432 Is that right?
433 MR. HENRY: Absolutely, that's the law of averages.
434 THE CHAIRPERSON: I just wanted to make sure that I understood you correctly. You are not just raising your own, you are lowering the other ones.
435 Now, about the Silecs, and what do we do with competition there, as I understand it, you are saying that we should continue to authorize competition in small areas, et cetera. How do we avoid the doughnut effect?
436 As you know, that's why we stopped authorizing competition, because it's obviously going to have the doughnut effect and the small companies will have to have not only competition, but they will lose their most lucrative market partially to competition. That doesn't seem to --
437 Since you are talking about trying to make sure that everybody has access and everybody gets the same service, as much as possible, by taking away the main source of income of the Silecs, we are putting them in jeopardy.
438 What is your solution to this?
439 MR. HENRY: We are not sure -- the doughnut effect is a bit of a moving target. We have experienced it somewhat, but then, when we look at it, we say: But wireless substitution is continuing, not only in fact, but certainly as a discipline in the outer ring.
440 And I guess the other thing is, we are not convinced that the Silecs are going to experience the doughnut effect to any material degree different than the ILECs.
441 We have a lot of territory that, in fact, is more remote than theirs, so I am not sure that it's a problem unique to them.
442 MR. GILBERT: Actually, the situation of the Silecs regarding the doughnut effect -- as Mr. Henry said, they may experience it in a way; in other cases, it might not happen in the same fashion. But we have similar territories as they have, in the southern part of the province, for example, and it may happen --
443 THE CHAIRPERSON: That's exactly why --
444 MR. GILBERT: -- but it's not a sure thing, necessarily.
445 Each company has to make business decisions as the market evolves.
446 THE CHAIRPERSON: So, essentially, you say: Ignore the doughnut effect, authorize competition, and let the chips fall where they may.
447 MR. HENRY: We don't think that they will -- we are experiencing -- to the extent it exists, it exists just as much in our territory as in their territory. It is something that we all have to struggle with.
448 It's early days yet. It's not clear to what extent it happens; and, in any event, to what extent it is ameliorated by the wireless substitution.
449 And, frankly, the only other way to try to deal with it is to try to redefine your bands to cost it, and we think that is a mug's game, for all of the reasons that we talked about.
450 It's a difficult problem, I agree with you. It's not an easy one to solve, and we are not convinced that it is absolutely demonstrated to be a problem yet.
451 THE CHAIRPERSON: But the difference between Silecs and you is that you have all sorts of territories. You may have experienced the doughnut effect in one of your remote areas, there is no question about it, but this is not your entire lifeline, you have this whole big company; whereas the Silecs, in effect, all of their income comes from this one service area. Therefore, the doughnut effect could potentially put the whole company in jeopardy.
452 MR. HENRY: My colleagues will comment in a second, but this notion that the ILECs can have nice pots of money from different parts that they can subsidize -- those days are gone. These things have to stand on their own. That's why our Band G --
453 THE CHAIRPERSON: No, no, that wasn't what I was suggesting. I am not suggesting that you cross-subsidize, but you are, after all, Bell Atlantic. You also have Bell Mobility. You also sell mobile services, et cetera. The Silecs don't have that. Your ability to compete is much better than that of the Silecs.
454 MR. HENRY: Actually, a lot of the Silecs have mobility; we don't.
455 THE CHAIRPERSON: You don't sell Bell Mobility?
456 MR. HENRY: Only in Northern, KMTS and Télébec. Bell Aliant does not have a mobility service. We have business arrangements to sell as an agent for Bell.
457 THE CHAIRPERSON: But, for me, as a customer, can't I get a bundle from you?
458 MR. HENRY: Oh, yes.
459 THE CHAIRPERSON: So, effectively, you --
460 MR. HENRY: It helps promote other products.
461 THE CHAIRPERSON: Yes.
462 MR. GILBERT: If I may, Mr. Chairman, the proposal that Bell Aliant has put on the table regarding competition in the territory of the SILECs is two-tiered. There is one for the SILECs that serve more than 20,000 NAS and one for SILECs that serve less than 20,000 NAS.
463 In the case of the smaller SILECs -- and basically we say competition should be allowed everywhere. Customers in those territories should have the benefits of competition.
464 But in the case of the smaller SILECs we have proposed that the Commission -- obviously, you are going to study each request for competition individually so it's going to be done on a case-by-case basis according to our proposal. As a mitigation we have suggested that maybe local number portability should not be implemented.
465 So we are mindful of the situation that can happen in the SILECs' territories. Our proposal in that sense carries some measures and the Commission will have to look at each entry individually and make an assessment as to how.
466 THE CHAIRPERSON: Under 20,000.
467 MR. GILBERT: Sorry?
468 THE CHAIRPERSON: Under 20,000.
469 MR. GILBERT: Under 20,000, yes.
470 THE CHAIRPERSON: Over 20,000 basically the normal rules apply.
471 MR. GILBERT: Yes, just like it did at TBayTel and NorthernTel for example.
472 THE CHAIRPERSON: You are obviously not a regulator because I mean if you put a scheme in like that says under 20,000 will be done on a case-by-case basis, I would like to see the case where you say no, number portability is a must. I mean it's just not possible. You are effectively saying no number portability under 20,000.
473 So everybody will come forward and saying, "You know, in our situation" --
474 MR. HENRY: No, we didn't quite say that. We said either -- one option is no number portability.
475 THE CHAIRPERSON: Yeah.
476 MR. HENRY: The other option is if the CLEC says, "No, I really need it" then a cost-sharing arrangement. So the CLEC would have to pickup part of the cost.
477 THE CHAIRPERSON: And all of this is under 20,000?
478 MR. HENRY: Yes, yes.
479 THE CHAIRPERSON: And over 20,000?
480 MR. HENRY: There is only, I think, two or three SILECs over 20,000, isn't there? So most of them are under 20?
481 MR. GILBERT: Yes.
482 THE CHAIRPERSON: Why maintain there is an obligation for local number portability at all? I mean you are going into the heart of the SILECs, et cetera. Why couldn't one say, "Fine, you can compete but the price of it is, as I say, the customer will have to switch numbers"?
483 Imposing number portability obligation on the SILECs given the cost involved with it is just disproportionate to the size of the operation and the market opportunity.
484 MR. HENRY: You know if you prefer that to -- it's just a variation of what we said. We said look at it on a case by case for under 20,000 and if the cost is prohibitive then either prohibit it or look at cost sharing.
485 You could -- if in your wisdom you say, "We are satisfied that for anybody under 20,000 that is the case" then that's something -- definitely a decision you could make.
486 THE CHAIRPERSON: And what about portability of the subsidy? Would the new entrants get the portability I mean of the subsidy?
487 Or should we say, "Well, you know, that subsidy was there because it was a non-competitive market. Now, that it obviously is competitive you are entering into it. You are thinking there is no reason you should have a subsidy".
488 MR. HENRY: Well, our position for SILECs would be the same as for ILECs. If competition comes in and it's sufficient to grant forbearance --
489 THE CHAIRPERSON: Sorry, can you please come closer to the mike?
490 MR. HENRY: Yes.
491 If there is sufficient competition to warrant forbearance then you would have no obligation and no subsidy and it would not be portable.
492 THE CHAIRPERSON: Okay. But can you just turn back to subsidy for a moment? I was struck by the fact that you didn't at all say anything about inflation, about productivity, about the imputed cost factors in the mechanics of calculating the subsidy.
493 I mean when you -- a lot of other people have suggested that we do something to improve the formula, that we should -- for instance perhaps the imputed costs of 6 percent is understated and should be -- that the rate should be subject to inflation or something like that.
494 You are completely silent on it both in your written submission and this morning. I'm struck by this absence.
495 MR. HENRY: Well, for Bands E and F we are proposing to get rid of subsidies so we didn't have to address that.
496 For Band G we are proposing to keep a subsidy and base it on average costs. We do believe, as do some of the others -- and I will let my colleagues speak to this -- that one of the problems in these high-cost areas is indeed the so-called productivity factor.
497 We agree with others that it's an unrealistic assumption to assume that over these years we have been able to get that kind of productivity in those areas and when we look at Band G that's particularly so. But perhaps I will let either George or Peter speak to that.
498 DR. HARITON: Just to speak to the productivity factor, Mr. Chairman, the productivity factor was last set in 2006 on the -- 2007 in the third price cap case. At that time the Commissions maintained a productivity factor.
499 We had argued that with loss of lines productivity would become very difficult to achieve and at that time the Commission didn't see loss of lines in the high-cost serving areas. They are starting to materialize now whether through competition or through facilities-based or wireless substitution and the number of lines has started to come down.
500 So productivity is extremely difficult. The 3.2, I think, overstates what the companies can do. We have to remember 3.2 productivity is relative to the economy, that's how much better than the economy can do.
501 The other thing that has happened is there has been some factors on the input price level like the price of copper has been going up very quickly.
502 So my recommendation would be that if you do keep an X factor it should be set at zero. This was my same recommendation the last time.
503 THE CHAIRPERSON: For the future?
504 DR. HARITON: For the future, yes. Yes, for the future.
505 THE CHAIRPERSON: And we are talking only Band G here?
506 DR. HARITON: Oh, I would talk to any band to which you would decide to apply this kind of regime. Bell Aliant's position is that subsidies -- you could do without subsidy in E and F. If you do put in a subsidy in E and F there are many things to look at. X is one. You could look at it at that time.
507 THE CHAIRPERSON: Okay, but assume that I take Mr. Henry's second best option which is averaging costs rather --
508 DR. HARITON: Right.
509 THE CHAIRPERSON: -- than allowing him to raise the prices, then you would still have subsidies for E, F and G.
510 DR. HARITON: Correct.
511 THE CHAIRPERSON: And you say, "Fine, but forget about the productivity. Those markets are so remote and so you cannot apply national productivity against those remote areas".
512 DR. HARITON: That's correct, basically.
513 THE CHAIRPERSON: What about the imputed costs, the imputed factor, the $6.00?
514 MR. HENRY: Oh, the margins. We think you have got -- we have no problem with margins being imputed from options and features simply because those are tied to the line you have to be -- not just the line. They are tied to local service. You have to buy local service to get them.
515 And if you want to update them I think there is confidential information on the record as to what they are. They have probably gone up a little bit, not huge amounts but we are fine with that -- update them.
516 THE CHAIRPERSON: But for those -- following up Dr. Hariton's argument about productivity, I am just not clear whether the -- are those imputed costs in those remote areas also understated or also relatively stable or they do increase with the further penetration of wireless, et cetera?
517 So you are saying that there should be a formula but the formula is confidential.
518 MR. HENRY: Yes. The margins are, yes, indeed. They are on the record. I think it's CRTC 101.
519 But you would have them by band there so you could look at them.
520 THE CHAIRPERSON: Okay. I think that's the end of my questions. I'm sure my colleagues have a lot of questions so let's take a 10-minute break and then we will deal with that.
521 Thank you.
--- Upon recessing at 1109
--- Upon resuming at 1125
522 THE SECRETARY: Order, please. Á l'ordre, s'il vous plaît.
523 THE CHAIRPERSON: Okay, before I pass you on, just a couple of clarifications.
524 First of all, I allowed you to submit this additional document. As you know, we have a strict limit on the amount of pages you can do in your final reply. Now, this is an extra document. So because people have to deal with it I will give people an extra five pages to deal only with that specific document, okay?
525 MR. HENRY: Sure.
526 THE CHAIRPERSON: So normal reply is 15. Now, this new document was tabled by Bell Aliant and if people want to take issue with it they can spend five pages taking issue with it.
527 MR. HENRY: Okay.
528 THE CHAIRPERSON: Secondly, I spoke to you about the implicit contribution. I said $6.00. I meant $5.00 of course.
529 But the real question, Mr. Henry -- I'm not sure I understood your answer -- is that implicit contribution, should it not be higher or should we not have a formula because it was set 10 years ago, a different market?
530 We have all sorts of other new products now that are being sold by you and your competitor, et cetera. So is that implicit contribution not understated and should one not escalate it and if so how?
531 MR. HENRY: Okay. The margin was set to be the margin associated with options and features. We have no issue with you updating that number. We do have issue with you extending the margins to other services.
532 For example, long distance services, our competitors don't have to take all their margins and throw it into a pot. I mean, I think the Commission recognized this a long time ago. The difference with options and features is that they are tied to the line. You can't buy them without buying local service but long distance service you can buy it without.
533 So that's my position on that.
534 THE CHAIRPERSON: Do you have a formula, assuming no new services but updating that implicit contribution or escalating it by a formula, et cetera? Do you have a proposal how to do it?
535 MR. HENRY: Well, I'm not sure you would escalate it by a formula. I think you would look at the information and say, okay, it was $5.00, I don't know how many years ago. Maybe it's $6.00, $7.00, whatever the numbers show. Maybe you periodically ask for the data and update it that way.
536 THE CHAIRPERSON: Well, just for your information, if you applied the inflation factor for the time it has been in place it should be $6.20 right now. My staff actually did the number.
537 So I mean at the very least you should presumably inflate it but that assumes that the number of services that you can sell on top or the benefit you get remains the same which is a bit artificial because we know that market has exploded.
538 MR. HENRY: It doesn't sound unreasonable.
539 THE CHAIRPERSON: And lastly, when we spoke about the broadband goal, et cetera, you said we should not set it and make it part as the basic service obligation.
540 Do you feel that we, as a nation, should have a goal for national broadband access, et cetera, and even if you don't set it as a -- make it part of the basic service obligation we should set it sort of as a target, as an aspirational target so that all the industry could set it up and saying, yes, the regulator at least feels the national interest would be best served if we all strove to come to a minimum target of X.
541 And if you say "yes" what would that X be?
542 MR. HENRY: Well, that's the trouble I have is setting X. I think, as I said in my statement, I think the Commission plays a valuable role in monitoring broadband. I think if that could be improved with more speeds and so on, well, we would be happy as an industry, I think, to work with you to make it better.
543 I would hesitate to put an actual target in there because that target may change. But if you have got the facts and you have got them reasonably finite and granular then we can look at it in two, three, four years, whatever you might want to set as a time, and we can look at and see in light of what industry standards are at that time and if there are any what does this look like. If we got finite enough data we will be able to do it.
544 The advantage of this is right now we get all these competing reports, kind of advocacy reports; one that says Canada is way behind and others that say Canada is way ahead and others that say -- I mean they are all over the map. The value that you bring to the table is it's independent, it's factual and I think that's where we should concentrate efforts.
545 THE CHAIRPERSON: But I mean I always feel we live in North America and we do ourselves a big disservice if we ignore our neighbours to the south. Let's face it, the influence is very large and they provide a lot of equipment which you use, et cetera, and so on. They said universal speed should be 4 megabits download by 2020. They set that as a target.
546 You know, wouldn't it make sense if we at least, as an aspiration say, yes, that makes sense to us? We live in North America. 90 percent of our population live just north of the American border, et cetera.
547 MR. HENRY: Yeah.
548 THE CHAIRPERSON: The market is north-south anyway, et cetera. So if possible, at least as an aspirational goal we should try to emulate them?
549 MR. HENRY: I put it slightly differently but I don't disagree.
550 I wouldn't object if you said, look, we are going to set -- we are going to track and for the sake of argument we are not sure what appropriate targets should be but let's look at it in a North American context. If the Americans are doing this let's measure ourselves against that and let's decide when we do that. Maybe it's a good thing to be there, maybe not.
551 But I don't have a strong objection to doing that on an aspirational basis.
552 THE CHAIRPERSON: Thank you.
553 Len, you have some questions?
554 COMMISSIONER KATZ: Yes, Mr. Chairman, and good morning.
555 I want to go back, I guess, to a period of time when Bell Aliant and Bell Canada exchanged territories and just get an understanding from you to the extent you can share it with us, what value if any was placed on the subsidy that Bell Canada was getting when it was serving its rural areas and sold it to Bell Aliant.
556 Was there any consideration given to the fact that X millions of dollars is being generated from the contribution regime?
557 MR. HENRY: I think the analysis was probably done at a much higher level and looked at, you know, the revenues at a more aggregate level.
558 So I'm not aware but I am -- I have to say I don't know for sure but I'm not aware that the analysis would have got that granular. Maybe Peter knows more.
559 MR. DILWORTH: From my knowledge -- and I worked a little bit on that acquisition, there was no explicit examination of that, albeit contribution is part of our revenues and so it was considered in the overall valuation of the revenue generation capability of the business and the EBITDA and cash flows.
560 MR. HENRY: I can say those revenues are declining probably faster than we had expected when we made those calculations.
561 COMMISSIONER KATZ: Would you say that if we were here today, without that transaction having taken place, that the contribution that is being imputed in these subsidies would be exactly the same if it was Bell Canada as opposed to Bell Aliant?
562 In other words, would the subsidy be higher or lower in total for Bell Canada and Bell Aliant under the old model as opposed to the current one or would they be exactly the same?
563 MR. HENRY: I think they would be close to the same. It is kind of de-averaging. But let me just check.
564 MR. HENRY: In large measure they should be the same. When you de-average it's complicated, and I never quite understand why but they don't come out exactly the same, but they are very close. You know, an aggregate, it should be pretty close to the same.
565 COMMISSIONER KATZ: Could you in your final remarks provide some clarity as to if it's just marginal and it's just rounding then that's fine, but if there is something that would have changed had the transaction not taken place and market forces not prevailed on Bell and Bell Aliant to do what they did?
566 I just want to understand the outcome of that deal as it affects the contribution regime.
567 MR. HENRY: We will see what we can do.
568 COMMISSIONER KATZ: Okay.
569 Now, on that same point just a quick question. Bell Canada operates under the Bell Canada Act as well which has with it an obligation to serve. When those properties were transferred in rural areas to Bell Aliant does that obligation to serve pursuant to the Bell Canada Act carry with it to Bell Aliant or does Bell Aliant feel that there is no obligation anymore to meet that Bell Canada Act obligation?
570 MR. HENRY: There is a short answer to that. We said when we came to you -- who had to approve the transaction -- that we would keep the obligation in Ontario and Quebec even though legally it might not have otherwise applied. And we incorporated that in our tariffs.
571 So you now have control over that and our tariffs say that the Bell Canada obligation applies to us in Ontario and Quebec.
572 COMMISSIONER KATZ: Okay, thank you.
573 MR. HENRY: By the way, that's a very limited obligation in our view, but that's a different debate.
574 COMMISSIONER KATZ: Getting to this cost/revenue/implicit contribution formula, I will take them one at a time.
575 The costs that were there that were created in 2002 and maybe amended since that time, were all based on what was historical terrestrial technology. We now have, and I think you talked about it as well, wireless as a solution in some cases.
576 Would it be appropriate for this Commission to look at the costs not only borne by the ILECs' historical terrestrial costs? I don't want to get into costing but should we be looking at wireless as an alternative?
577 If, for example -- I don't know which one it was -- in Band G, and I will just pick MTS where the cost is $93.74 and someone comes along and says, "I can provide that same service at that same level for less than $93.74", should we be looking at the least cost obligation or technology to provide to those people that need that service and need to be subsidized?
578 MR. HENRY: Well, in theory you are right. A subsidy regime could be based on the least cost provider. The Commission chose not to do that because --
579 COMMISSIONER KATZ: Well, there wasn't one back then. In 2002 there really wasn't the least cost provider other than land-based technology.
580 MR. HENRY: Yeah, but it could be a cable company, for example, might have had a lower cost and you could have looked at that.
581 But the point is that now you are adding -- it's theoretically fine in practice. Now, you have added even another level of complexity because you are going to have to decide what the least cost technology is in various bands, in various companies. I think that was one of the reasons you rejected that approach and said, well, at least we know the ILEC costs, or at least you thought you did, and let's use those as a proxy for everybody else's.
582 But you know the theory was that the ILEC costs were a proxy for everybody else. So in theory your question is right.
583 COMMISSIONER KATZ: Okay. I guess we will pursue it through appearances by other parties, but clearly when I look at something like $93.74 I wonder whether there isn't a more efficient technology that can provide that same basic service to people on a subsidized basis, albeit a slower subsidized basis, which would ultimately mean that the general population of Canadians wouldn't have to subsidize as much.
584 MR. HENRY: That's one question one would ask. The other question I would ask is maybe the costs aren't right.
585 COMMISSIONER KATZ: Okay.
586 I guess you talked with the Chairman with regard to the likelihood of moving the local prices from, I guess, in your case you said $22 roughly a month for PES service to something higher than that in the $30 range. I guess you put forward the notion that maybe it should be done over a period of time in order to mitigate the cost to the general public of those rate increases.
587 MR. HENRY: Yeah, I think our average rate is more in the $24 range but, yeah.
588 COMMISSIONER KATZ: Okay. I think it was your number that I was quoting from. I think you have $22 somewhere in here.
589 MR. HENRY: Oh, we have $22 at the low end, yeah.
590 COMMISSIONER KATZ: Yeah, in paragraph 21.
591 MR. HENRY: Yeah, I thought you were talking about an average. Sorry.
592 COMMISSIONER KATZ: Yeah, okay.
593 And maybe this is an unintended consequence of the contribution regime but if in fact the way the contribution regime was set up was cost minus revenue minus implicit contribution and the revenue, the ability to move revenue up was limited as well, is there an unintended consequence that there really is no incentive for the ILECs to move rates up and face the wrath of consumers when if they don't do that they are going to get it anyway to the contribution regime?
594 MR. HENRY: There used to be that incentive but you fixed that by prescribing an inflationary increase in high-cost areas --
595 COMMISSIONER KATZ: Yeah, just --
596 MR. HENRY: -- whether you take it or not.
597 COMMISSIONER KATZ: Yeah, but it's a limited amount. It's just the inflation year over year.
598 MR. HENRY: Well, yes.
599 COMMISSIONER KATZ: As opposed to anything more than that.
600 MR. HENRY: Right. And our proposal here, if you had a transition period for two or three years, the proposal I made was to say, okay, we will subsidize you for the difference between the target rate in year one of, say, $30 and $36 whether you get there or not. So I am proposing that to give the incentive to get there.
601 COMMISSIONER KATZ: Okay. Now, you talked with the Chairman a few minutes ago with regard to the notion of the implicit contribution and the fact that optional services may in fact have -- the margin may have in fact increased over the last number of years. You also said I think that you are not in favour of increasing the number of services that are deemed to be in that basket of implicit contribution.
602 And I guess I would ask you to list for us the new services that you have introduced since, I guess, 2002 when this implicit contribution was first arrived at, that you now offer as an adjunct to the basic local service that have been introduced since that time.
603 MR. HENRY: Well, I guess the main one is high speed internet because we would have had some at that time. So there is probably no new --
604 COMMISSIONER KATZ: But high speed internet is directly related to PES.
605 MR. HENRY: Well, no, it's not. It's not.
606 COMMISSIONER KATZ: I'm looking for services that are, like the reason --
607 MR. HENRY: Oh, you mean like a new option --
608 COMMISSIONER KATZ: New optional services, yeah.
609 MR. HENRY: Okay. I would have to take an undertaking on that. I don't know if we have but we can certainly find out.
610 COMMISSIONER KATZ: Okay, could you?
611 And along those lines one of the services you touched upon a few minutes ago was access to the total network, your network access charge.
612 MR. HENRY: Right.
613 COMMISSIONER KATZ: Which I would imagine carries a large contribution margin because it's a standby charge effectively.
614 MR. HENRY: I think the numbers are on the record but they speak for themselves.
615 COMMISSIONER KATZ: Okay. It's your position, I gather, that it should not be included in the implicit contribution, notwithstanding arguments that go to the effect that you can't -- it only exists because you are buying the local access service to start with. You can't get network access service without effective local.
616 MR. HENRY: It exists because you are subscribing to our long distance service.
617 COMMISSIONER KATZ: But you can't get it. You don't pay that service without subscribing to your basic local service. Actually, it's an optional service to find through that mechanism. You can only buy it as an optional service and subscribe to it if in fact you are a local customer.
618 MR. HENRY: I will have to check on that.
619 COMMISSIONER KATZ: Okay.
620 MR. HENRY: Well, the competitors can have a NAC too and not have to --
621 COMMISSIONER KATZ: Yeah, all I am looking at right now is --
622 MR. HENRY: You have to take long distance from us to pay that. It's not something that -- if you take local and you don't take long distance I don't believe you pay the NAC.
623 COMMISSIONER KATZ: If you don't pay the NAC I think you pay a much higher long distance charge.
624 MR. HENRY: Well, if you take it from us.
625 COMMISSIONER KATZ: Yeah.
626 MR. HENRY: But you don't have to take it from us.
627 COMMISSIONER KATZ: But it is no different than voice mail or call waiting services.
628 MR. HENRY: No, but if you --
629 COMMISSIONER KATZ: If you don't take it from you either but if I did take it from you --
630 MR. HENRY: No, but if you want it you have to take it from us because it's associated with the line. Like call display, if you want call display you have to take it from your local provider. That's my understanding.
631 COMMISSIONER KATZ: I was just quoting from what you said here. You have to buy local service to get the optional services.
632 MR. HENRY: Right.
633 COMMISSIONER KATZ: And I guess what I'm saying is, you have to buy local service to get the network access capability which is your network access charge.
634 MR. HENRY: Right.
635 COMMISSIONER KATZ: Otherwise you don't get access to your total network.
636 MR. HENRY: Yeah, let me check on that. I didn't think that was the case.
637 COMMISSIONER KATZ: Okay.
638 You mentioned the notion of adoption lacks availability on broadband. I'm trying to find the words you used.
639 MR. HENRY: Those sound pretty close.
640 COMMISSIONER KATZ: Paragraph -- no, it's not that paragraph -- 54, in your last sentence:
"Policy makers would be far better off to concentrate their efforts on policies to encourage adoption and use of broadband rather than on the supply of broadband given that adoption lacks availability by a wide margin."
641 Do you have any data to support that statement?
642 MR. HENRY: It's in your report. The number that sticks in my mind is 75 percent of the people take it when there's 95 percent availability.
643 COMMISSIONER KATZ: Okay.
644 MR. HENRY: And when we build out DSL we find we get about a 35 to 40 percent people take it now. They may take it from a competitor so it's not quite the same thing, but, you know, if you ordered us to have an obligation to build out DSL we would only get 35 percent of the customers of the homes passed.
645 COMMISSIONER KATZ: Yes. So I guess the competition gets the other half of that as well, the same amount and --
646 MR. HENRY: Or people don't buy it. Twenty-five percent of people probably don't buy it.
647 COMMISSIONER KATZ: Okay. And the reason they don't buy it is because they don't need it, they can't afford it, they don't know how to use it, a combination of all three?
648 MR. HENRY: A combination of all those things.
649 You know, one thing I think some of the governments in the Maritimes found was people couldn't afford computers so they put in some programs to subsidize people buying computers. People had a reluctance maybe to use it for certain things, the elderly and so on, and there are programs to -- the elderly will adopt, but you may need some programs to push them in that way.
650 Small and medium business in this country is a big problem. That's where if you look at ITAC and others say that part of our problem in this country is the lack of adoption of ICT by small and medium business. That's where, frankly, we hope that the government and their digital economy strategy looks at addressing those things.
651 COMMISSIONER KATZ: Is there anything that Bell Aliant is doing itself to educate the population who have yet to adopt?
652 MR. DILWORTH: In Atlantic Canada we have a PC purchase program that we have where customers can purchase a PC along with high-speed and amortize the payments over a period of time.
653 MR. GILBERT: And the same thing applies in NorthernTel territory and Télébec for example.
654 COMMISSIONER KATZ: Okay.
655 The issue of setting targets you discussed with the Chairman as well and the notion then of subsidization.
656 Do you see a distinction between the setting of a target and actually the fulfilling of that target through subsidies?
657 I know you objected to the CRTC creating a subsidy regime for broadband services, but I guess I question whether you draw that distinction or whether your views are broader than that?
658 MR. HENRY: Well, we had a bit of that discussion.
659 I guess in my opening statement why I was so opposed to setting targets was in part by my fear that if you are going to set a target you are going to regulate to it, which I think is a huge mistake.
660 I think I have less problem if it's an aspirational target as I said, although I still have a hard time trying figuring out what it is, but if you want to pick what the Americans are doing and saying we are not sure it's right or wrong but let's measure to it just and see where we are in three years, I don't have an issue with that.
661 COMMISSIONER KATZ: Okay.
662 Those are my questions, Mr. Chairman.
663 THE CHAIRPERSON: Thank you.
665 COMMISSIONER CUGINI: No.
666 THE CHAIRPERSON: Candice... ?
667 COMMISSIONER MOLNAR: Thank you. Good morning.
668 I want to begin just for clarity to ensure I understand some of what you have proposed.
669 First of all, did I hear that the $36 is charged in only two exchanges within your territory?
670 MR. GILBERT: At this time, yes. Yes.
671 COMMISSIONER MOLNAR: So what sort of subscriber base? How large are those exchanges?
672 MR. GILBERT: Oh, these are two exchanges located not very far from here in the Outaouais area. I could look it up here, but we are talking -- probably it's 6000-7000. I could check on that, but that's the figure.
673 COMMISSIONER MOLNAR: Do you happen to know the history as to why the rate is at that level?
674 MR. GILBERT: It got to $36 following two rate increases of $.95 each and the specific rate increase was linked to a deferral account that has nothing to do with the big, big deferral account that everybody knows about, it was specific to Télébec.
675 And prior to that there is a whole history actually -- a long history of various changes. The biggest one that occurred dated back in the '90s when at the time the rate was set with two different parts, there was the basic rate and then there was the EAS rate, okay, extended area calling. So when we added the Ottawa area as an extension of the local calling area, that stepped up the rate quite a bit and then after that --
676 COMMISSIONER MOLNAR: Thank you. Actually, you know what, that is exactly what I wondered, is if that rate that's at $36 was a consequence of things such as EAS surcharges or something to that effect.
677 MR. GILBERT: Yes. At the time that was the case, but when we came under price cap everything -- all the rates were blended in and there are other areas that have similar high rates. We have areas that have rates as high as $34 and it varies from like $27 up to $36, so yes.
678 But initially in the early 2000 when price cap came to be and we established the rate bands, all those rates were just blended in so there was no more distinction between ES and the basic rate.
679 They were blended in because also there was another program put together by the Commission for extension of local area calling areas that came to be later.
680 COMMISSIONER MOLNAR: Okay. I think it's an important -- and we will need to ensure that we understand the history of that rate because it has been used by many people in this proceeding to say, you know, here is the target, this rate has been deemed to be affordable and if it's affordable in these two exchanges in Canada it's affordable across Canada, but if it is a local rate that provides free local calling into Ottawa it's not potentially equivalent to a high-cost area within, you know, northern Manitoba that isn't provided free local calling to one of the major centres in this country.
681 So I just question to what extent that is the marker of affordability if the service that's being delivered with that rate is not equivalent to what other high-cost areas receive?
682 MR. GILBERT: Well, first of all, there is an interrog that we answered specifically on those two areas, that rate, the reason why this rate came to be at that level.
683 At the time and in the old days there was a concept called the -- remember me, George -- yes, the value of service concept. Yes, right. And with the advent of competition the Commission and the companies have changed the way the rates are being set and they are gearing them more to the market really. And Denis talked about this huge rate rebalancing that occurred as part of the price cap regime so that comes into play as well.
684 COMMISSIONER MOLNAR: Okay. Just to carry on, if I understand correctly you have proposed to move rates across the country within high-cost serving areas to this $36 and after doing that eliminates subsidies to bands.
685 Is that correct?
686 MR. HENRY: Yes.
687 COMMISSIONER MOLNAR: So when I'm looking at the attached presentation that you provided us, slide 2 where you show the costs by company, many of these companies -- if I look at band "E", many of these companies have costs today that exceed that $36 mark.
688 Is your proposal that with the $36 those subsidies -- all subsidies are eliminated?
689 MR. HENRY: That's our proposal. And I tried to explain this earlier, you have to start from the proposition that there is a problem. I think we have demonstrated that to you with our charts. After that there is no science to it.
690 We think our statistical analysis, just if the Commission eyeballs that chart, the very next chart, the inescapable conclusion is that there is something wrong with the costs so you are not going to be able -- you can't use those costs to necessarily justify it.
691 So we think on average people aren't -- there is not going to be a huge fluctuation of different companies costs around some kind of median.
692 If you look at $36, we think that the amount of savings -- you have to remember, let's take the western ILECs, if they go to $36 they will get the extra revenues from customers of going there and they will eliminate the payments out.
693 If you take those two things into effect they largely offset anything they lose.
694 COMMISSIONER MOLNAR: Have you done that analysis? Because some of these numbers are significantly higher than $36.
695 MR. HENRY: Yes, we have.
696 COMMISSIONER MOLNAR: You have done the analysis --
697 MR. HENRY: Yes
698 COMMISSIONER MOLNAR: -- and they net out equal?
699 MR. HENRY: It's not a perfect net, but it's not material.
700 COMMISSIONER MOLNAR: Okay. Some of what you have based this on is the costs are wrong. All of what you have based it on I supposed to a large part is the cost.
701 MR. HENRY: Well, our primary proposal. And, as I say, you know, if we want to fix the costs we will do that too, but we need a temporary solution.
702 But yes, our primary solution is based on the costs are wrong.
703 COMMISSIONER MOLNAR: And the conclusion, while you haven't said it, you have said there is a problem with your costs, but why do you believe there is a problem with other companies costs, just because of that density analysis that you done? I mean if the problem is with the Aliant costs --
704 MR. HENRY: Well, that's part of it, but we would be the first to admit that, as Mr. Dilworth said, trying to get this absolutely right across every company, even with our own companies from Newfoundland to New Brunswick to Ontario and then trying to do that across the country and make sure that everybody has done it exactly right, and then also try to figure out the doughnut effect and do the bands, and debate whether or not its Phase 2 or embedded or some hybrid, which we are having a debate with the Commission right now on loops, that's the analysis we have to go through to fix this.
705 COMMISSIONER MOLNAR: So let me ask you, we have obligations to ensure rates remain affordable, universally affordable. We also have an obligation to ensure rates are just and reasonable. So how, without any information on the cost of service, are we to feel confidence that our rate of $36 is just and reasonable?
706 I mean if I look at the costs you have at this point in time it doesn't appear to support a rate of $36 in high-cost areas.
707 MR. HENRY: Say that again. If you look at $36 it doesn't --
708 COMMISSIONER MOLNAR: I said if I look at the costs you have in some of your high-cost areas in some of these bands today --
709 MR. HENRY: Right.
710 COMMISSIONER MOLNAR: -- it wouldn't appear to support a rate of $36.
711 MR. HENRY: Right. Again, we believe that if you go through that long, complicated cost analysis that I just talked about you are going to end somewhere in some kind of a common number or one that varies very little. What it is I can't tell you for sure.
712 I can tell you that if we do that people aren't materially off from where they are today when they look at the benefits. We are going to get rid of regulatory risk. There is a huge regulatory risk to us in getting this wrong. We are going to get rid of regulatory administration.
713 When you look at all those factors we think it's reasonable.
714 But I will admit to you, you cannot -- unless you do the costing and get it right -- and we are not even sure you can get it right -- then unless you do that you are not going to come up with mathematical precision.
715 The only other way to do it is to do the costing and give us a temporary solution in the meantime. That's it.
716 I mean if you don't like that proposition we will see you at the costing proceeding and let's have an interim solution very quickly.
717 And, you know, you have done rough justice in the past. Look at SILECs, you said SILECs don't have costs. You took the ILECs costs and averaged them and then you said they don't have quite as much scale so we will bump it up by 7.5 percent.
718 Well, that wasn't scientific, that was rough justice. It's been there for several years.
719 COMMISSIONER MOLNAR: But if we were to accept your proposal, we would be approving very significant rate increases across virtually all high-cost areas, with the exception of two exchanges in the whole country on the basis of rough justice that these rates are just and reasonable because we believe the costs are wrong and it's too much work to fix it.
720 MR. HENRY: Not out of line -- too much work and not in keeping with the policy direction. I mean it's a huge regulatory task.
721 And the kind of increases we are talking about are not out of line with the kind of increases you have implemented in the past. You have had programs where there has been 5 and 5 and 4 and 5, and I think Bell had one where there was 11 in 2 years increases. This was some time ago, so it's not as if consumers are getting this on the heels of that, that happened back in the late '90s and early 2000. So it's not out of step with what you have done before.
722 COMMISSIONER MOLNAR: Let me go back to the costs.
723 MR. HENRY: By the way, when I say a temporary solution should be to average costs I should have said, if I didn't, that you should also work on the price angle, too. So let's say you were to average costs in the meantime, you should be trying to get prices up at the same time, not just leave them where they are. You know, move them to the average costs if that's what we are going to use.
724 COMMISSIONER MOLNAR: Okay.
725 I accept what you say that updating the costs would be a huge exercise and we do want to minimize regulatory burden on everyone. Have you, outside of doing simple averaging, which I don't think can ever be assumed to reflect anybody's costs --
726 MR. HENRY: But you used it for the SILECs.
727 COMMISSIONER MOLNAR: Yes, but we are not talking the SILECs here, we are talking 80 percent of the subsidy not the minimalist amount that has been provided to SILECs.
728 MR. HENRY: Okay.
729 COMMISSIONER MOLNAR: Have you given any thought to options in the middle, between doing a simple averaging to doing a full wholesale cost update? Are there ways of maybe correcting some of the costs --
730 MR. HENRY: Yes. Well --
731 COMMISSIONER MOLNAR: -- that would allow us to have a targeted review and have these costs more accurately or reasonably reflect the true cost without us going through the full review?
732 MR. HENRY: There is another option, and that would be to use the -- if you are worried about the western costs coming down -- if you accept that we have a problem and you are worried about the western costs coming down, a short term solution pending a costing review might be to use the average for us and leave the western costs where they are. Leave the western costs where they are bring ours up to the average.
733 COMMISSIONER MOLNAR: Although there are western companies who also say the costs are not right.
734 So I understand that might be an interim measure, but if we were to look at a de minimis cost review, if you will, hitting on sort of some of the more significant issues that have taken place with costing or changes that have occurred in the last 10 years, is there something that we could do building on the costs that were established in 2001 where we could feel that we have more accurately reflected the costs of service besides doing an absolute full-scale cost review?
735 Are there elements in those costs that we could update without updating all?
736 MR. HENRY: And this would be as an interim step while you are doing a bigger --
737 COMMISSIONER MOLNAR: No, I'm saying instead of a --
738 MR. HENRY: Maybe not an interim.
739 COMMISSIONER MOLNAR: Instead of a full-scale cost review is there some way that we can do something instead of a full-scale cost review?
740 MR. HENRY: Well, I gave you one, but let me give that some thought, if we could, and get back to you.
741 COMMISSIONER MOLNAR: Yes, please do.
742 MR. HENRY: Okay. Yes.
743 COMMISSIONER MOLNAR: Thank you.
744 I just have a couple of other questions. I do want to ensure, did you say that you would tie the subsidy to the obligation to serve?
745 MR. HENRY: Yes, provided that the obligation to serve and the price ceiling is removed. Obviously if our rates are --
746 COMMISSIONER MOLNAR: Sorry, in the high costs areas, in the regulated areas.
747 MR. HENRY: Yes, if it's forborne and you remove the obligation to serve and the price ceiling then there would be no subsidy.;
748 COMMISSIONER MOLNAR: In regulated areas are you suggesting that we tie the subsidy to the obligation to serve?
749 MR. HENRY: Yes.
750 COMMISSIONER MOLNAR: And therefore it's not portable?
751 MR. HENRY: Yes, absolutely. Sorry, I misunderstood. Yes.
752 COMMISSIONER MOLNAR: So if we were to accept that recommendation there are today competitive local exchange carriers who receive subsidy within regulated exchanges.
753 What would you see happening there? Is there a transition measure or do we just grandfather what's in place?
754 MR. HENRY: It's not clear to us that those competitors would have made their entry decision on the existence of subsidy, but if you thought that were the case you could grandfather. That would be one option.
755 COMMISSIONER MOLNAR: Okay. Just one more question related to the SILECs.
756 NorthernTel is considered a SILEC today?
757 MR. HENRY: Yes.
758 COMMISSIONER MOLNAR: This was an experience that I -- you know, I learned something -- I learned a lot actually about the small ILECs through this proceeding and looking and I was very surprised to learn NorthernTel is considered a SILEC, given it's affiliations with the largest company in Canada.
759 MR. HENRY: Well, NorthwesTel is considered something altogether different and it's also owned by Bell, so it's not unusual to have different regimes for different players. And then Télébec is something again, it's neither a SILEC nor an ILEC, it's what Michel affectionately calls an "MILEC", a medium ILEC, and there are special rules for it.
760 COMMISSIONER MOLNAR: So if we were to treat NorthernTel as another -- well, it is an affiliate, it is owned by Aliant, could you agree that it should not be considered as a SILEC for purposes of regulatory, if we are concerned about things such as the ability to cross-subsidize, and so on?
761 MR. HENRY: No, I wouldn't. But let me give you this comfort.
762 We have said basically that the SILEC regime should be the same as the ILEC regime, so to the extent you go with that and treat all SILECs as ILECs under our proposal, then NorthernTel would have that treatment.
763 Now, if you are going to keep special treatment for SILECs, NorthernTel is a SILEC and it should have the same special treatment it has.
764 COMMISSIONER MOLNAR: But why is it a SILEC? Tell me, why is it --
765 MR. HENRY: Well, why is Krusell or why is Thunder Bay Tel a SILEC, because it's history they had higher costs, they serve different territory.
766 COMMISSIONER MOLNAR: They were small and independent I think was one of the key --
767 MR. HENRY: But if you are telling me the minute -- the minute that we buy one -- like we bought KMTS, we came to see the Commission, it was agreed that it would continue to be a SILEC -- independent of corporate structure, we keep a separate brand, and so on -- you know, that would be another factor in any future business transactions if you say, "Oh, just because you buy it now you have to cross-subsidize it from the rest of our company".
768 MR. GILBERT: If I may, the SILEC situation is not new with regards to having a company being an affiliate of Bell Aliant in this case and/or Bell Canada. Télébec was founded in 1969, a fully owned subsidiary of Bell, and it has always been treated as whatever -- let's call it a MILEC. And NorthernTel was bought by Bell in 1966 and it's a corporation and it was considered as a part of the SILEC regime all those years, or what would have been called the SILEC regime.
769 Sogetel for example has been consolidating in Québec buying many smaller companies. If I infer or I go along the thought that you are expressing about the lack of cross-subsidization, well then you would have to reconsider Sogetel's status somehow because through their growth they are getting more critical mass.
770 TBay Tel for example is larger than NorthernTel and is considered a SILEC. So this is all to take into consideration I think.
771 COMMISSIONER MOLNAR: Thank you.
772 And is there anything wrong with taking that into consideration?
773 MR. GILBERT: No.
774 COMMISSIONER MOLNAR: Okay. Thank you.
775 Those are my questions.
776 THE CHAIRPERSON: Thank you.
778 CONSEILLÈRE LAMARRE: Merci, Monsieur le Président.
779 Je vais poser mes questions en français. Sentez-vous bien libre de répondre dans la langue de votre choix, en autant que c'est une des deux langues officielles du Canada, et je vais bien comprendre votre réponse.
780 Mes collègues avant moi vous ont posé des questions quand même assez détaillées. Je vais vous dire franchement que moi, au niveau de ces détails-là, je n'y suis pas encore tout à fait rendue parce que je bute sur certains principes qui nous sont présentés autant dans votre mémoire que dans votre présentation de ce matin. Je vais y aller en ordre.
781 Le premier, c'est au paragraphe 15 de votre présentation de ce matin, où est-ce que vous dites que dans les marchés déréglementés, on devrait éliminer l'obligation de servir.
782 Comment est-ce que, en tant qu'organisme réglementaire, je peux réconcilier ça avec l'article 7b) de la Loi sur les télécoms, qui prévoit que la politique sur les télécoms va permettre l'accès aux Canadiens dans toutes les régions du Canada à des services de télécommunications?
783 MR. HENRY: Well, because there is competition and competition will provide all the benefits that any obligation to serve would provide. It's just you don't need it.
784 CONSEILLÈRE LAMARRE: Sauf qu'on a aussi entendu, ce matin, monsieur Gilbert dire que chaque entreprise doit prendre ses propres décisions d'affaires.
785 Alors, qu'est-ce qui empêcherait une entreprise, à un moment donné, qui s'est installée à un endroit pour promouvoir la concurrence, pour offrir de la concurrence aux citoyens, de se mettre à mettre fin à certains services dans certains territoires ou une partie de son territoire s'il n'y a pas d'obligation de servir explicite réglementaire?
786 MR. HENRY: Well, that's not what has been happening. When they enter they typically offer standalone local service, they offer bundles, they offer everything, and they typically enter in the whole exchange. So you don't need to single out somebody to have an obligation to serve.
787 Who would you single out? Who would it be? It's not obvious to us. You can only have one obligation to serve because it goes -- well, first of all it goes legally with the practical monopoly and there is no practical monopoly.
788 So either from a legal point of view or a policy point of view it doesn't seem to make sense to create an obligation to serve and from a practical point of view you would have to figure out who to give it to.
789 CONSEILLÈRE LAMARRE : Mais présentement elle existe encore, même dans les marchés déréglementés.
790 MR. HENRY: Today it does, yes.
791 CONSEILLÈRE LAMARRE : Et vous estimez que ce n'est plus du tout nécessaire. Vous avez une foi totale dans les vertus de la concurrence pour vous assurer que tous les Canadiens qui aujourd'hui reçoivent des services de télécommunications vont continuer à les recevoir?
792 MR. HENRY: In forborne areas, yes. The sky will not fall.
793 CONSEILLÈRE LAMARRE : O.K. O.K.
794 Maintenant, je veux parler de la relation entre la concurrence, dont vous faites clairement l'apologie là, autant dans votre mémoire que dans votre présentation, et les services dans les territoires des petites titulaires et l'obligation de servir spécifiquement dans ces territoires-là.
795 Alors, je vous rappelle, pour fin de mise en contexte, qu'au paragraphe 7.1 de votre mémoire, vous nous dites :
"Benefits of competition should be available to all Canadians."
796 Au cours de vos discussions ce matin, vous avez reconnu -- avec réticence et réserve, j'en conviens -- l'effet de trou de beigne qui peut s'installer dans certains marchés.
797 Maintenant, il faut aussi penser à ce qui nous vaut l'existence aujourd'hui des petites titulaires. C'est le retard historique de grosses titulaires, qui bénéficiaient d'une situation de monopole, à déployer dans ces territoires faiblement peuplés les services qui étaient déployés ailleurs.
798 Je vous rappelle ce que monsieur Gilbert a dit :
"Chaque entreprise doit prendre ses propres décisions."
799 Et monsieur Hariton a insisté sur le fait que de la duplication d'infrastructure, ce n'était pas nécessaire partout.
800 Donc, à ce moment-là et en gardant toujours en tête l'article 7b) de la Loi sur les télécommunications, compte tenu de tout ça, est-ce que la solution pour promouvoir la concurrence pour le bénéfice de tous les citoyens dans les territoires des petites titulaires, ça ne serait pas d'imposer une obligation de servir autant aux compétiteurs qu'aux titulaires sur l'ensemble du territoire?
801 M. HARITON : D'abord, une petite interprétation. Quand je dis que la duplication n'est pas nécessairement efficace, je veux dire par là une duplication qui a été mandatée ou ordonnée dans le sens que chaque concurrent va calculer ses chances et construire des facilités de câble là où il pense qu'il va pouvoir avoir le marché.
802 Une fois que... d'après mon expérience, une fois qu'une compagnie est dans le marché, le gros des dépenses, c'est pour l'infrastructure physique là, les boucles, et caetera.
803 La décision de se retirer de ce marché-là demanderait une très grande perte, parce que, finalement, une fois que la boucle est là, vous devez couvrir les coûts d'opération. Du moment que vos revenus couvrent les coûts d'opération, vous allez continuer le service.
804 CONSEILLÈRE LAMARRE : Mais ma question ne porte pas sur le retrait possible du compétiteur. Ma question porte sur la nécessité possible ou non -- et c'est là-dessus que je veux vos commentaires -- d'ajouter une obligation de servir tout le territoire des petites titulaires lorsqu'un compétiteur s'amène dans ce marché-là, et non pas seulement la portion du territoire qui est hautement rentable.
805 M. HARITON : Bien, c'est-à-dire qu'une fois qu'un concurrent arrive dans une circonscription, ça dépend de la nature du concurrent. Si c'est un concurrent à connexion fixe là, c'est possible qu'il va cibler certaines parties. Si c'est un concurrent mobile, il va couvrir typiquement la circonscription entière.
806 Pour le premier, ce qu'on va avoir, c'est, en effet, des clients sélectivement qui vont aller vers le concurrent. Mais ce n'est pas différent de ce qui se passe dans les grosses compagnies.
807 CONSEILLÈRE LAMARRE : Je le sais que ce n'est pas différent.
808 M. HARITON : Oui.
809 CONSEILLÈRE LAMARRE : Mais dans les territoires des petites titulaires, il y a une chose qui est différente. C'est que si les petites titulaires existent aujourd'hui, c'est que c'était des territoires coûteux à desservir, alors même qu'il y avait des titulaires en situation de monopole. Alors, aujourd'hui, il y a encore des parties de ces territoires-là qui sont coûteuses à desservir.
810 M. HARITON : Est-ce que vous parlez de nouveaux... de prolongation du service ou...
811 CONSEILLÈRE LAMARRE : Non, je ne parle même pas de prolongation du service. Je parle uniquement de duplication de ce que font les petites titulaires présentement.
812 Et ma question -- je m'excuse de la répéter -- mais est-ce qu'on ne devrait pas exiger lorsqu'on permet à un concurrent de rentrer dans le territoire d'une petite titulaire, d'exiger de ce concurrent qu'il offre le service à tous les résidants?
813 M. HARITON : Sur demande.
814 Moi, je pense que justement, c'est là que vient le gaspillage, qu'une fois qu'on impose cette obligation-là sur un concurrent aussi bien que le transporteur présent, c'est là que tout le monde va devoir construire des réseaux qui vont servir une très petite proportion peut-être, dans le sens que si je pense qu'il y a cinq...
815 Disons qu'il y a cinq concurrents, chaque concurrent va avoir peut-être 20 pour cent du marché, mais tous vont devoir construire des réseaux complets à 100 pour cent. Donc, il va y avoir une capacité excédentaire de 80 pour cent. Ça, c'est inefficace.
816 S'ils doivent rentrer, au moins qu'ils puissent rentrer là où ils pensent que c'est profitable et rentable. La petite compagnie, le incumbent là, eux autres, ils vont devoir ou bien ajuster ou bien ils vont louer des boucles dégroupées à ces nouveaux concurrents ou bien il y aura un ajustement des prix dans le marché.
817 CONSEILLÈRE LAMARRE : Mais, de facto, ce que vous dites, c'est qu'on doit prendre pour acquis qu'il y a une partie de la population pour qui il n'y en aura jamais de concurrence?
818 M. HARITON : Non, je ne pense pas que c'est vrai, ça, parce que moi, je pense que -- et on a eu le débat avec le président -- les compagnies sans fil viennent rapidement un peu partout, et que ce soit un substitut adéquat ou non aujourd'hui, je pense qu'on verra que ce sera un substitut très adéquat, plus qu'adéquat, dans quelques années.
819 CONSEILLÈRE LAMARRE : Donc, vous, vous estimez que le sans fil va permettre de combler cette lacune-là...
820 M. HARITON : Absolument.
821 CONSEILLÈRE LAMARRE : ...si je peux me permettre d'utiliser le terme?
822 M. HARITON : Absolument.
823 CONSEILLÈRE LAMARRE : Merci.
824 M. GILBERT : J'ajouterais peut-être...
825 CONSEILLÈRE LAMARRE : Oui.
826 M. GILBERT : ...si vous le permettez.
827 Lorsque vous exprimez le fait que les territoires des petites indépendantes étaient des territoires que les grandes compagnies ne voulaient pas desservir nécessairement, Télébec est le fruit d'une série d'acquisitions de petites entreprises. Elle exploite elle-même des territoires coûteux. NorthernTel a aussi grandi de cette façon-là.
828 Les territoires des petites sont enclavés pour une large part à l'intérieur du réseau, soit de TELUS Québec dans la Beauce, de Bell Canada ou de Bell Aliant au Québec, et même chose en Ontario.
829 Donc, on dessert aussi des territoires qui sont également... qui se comparent largement à maints égards, surtout lorsqu'on pense, si je regarde la situation du Québec...
830 CONSEILLÈRE LAMARRE : Je m'inquiète aussi pour vous, Monsieur Gilbert.
831 M. GILBERT : Oui. Et la proposition qu'on a faite, on est conscient de ce qu'elle comporte, bien sûr.
832 CONSEILLÈRE LAMARRE : Sur un autre sujet, au sujet de la disponibilité d'Internet à large bande, je vous ramène rapidement à ce que vous avez dit un peu plus tôt et que je crois avoir bien compris. Vous me corrigerez si je me trompe.
833 Vous n'êtes pas tant objecté à ce qu'on fixe des cibles de service, vous êtes objecté à ce qu'on les réglemente, parce que vous estimez que la concurrence va permettre de les atteindre pour à peu près tout le monde.
834 Sauf qu'il demeure que 4 à 5 pour cent de la population présentement au Canada -- quant à moi, c'est même une estimation optimiste, mais prenons-le pour acquis -- 4 à 5 pour cent de la population n'a pas accès à des services d'Internet large bande, que ce soit par un service avec une bonne vieille ligne de cuivre ou que ce soit par un système sans fil fixe.
835 Et je mets, à dessein, de côté la question du satellite. Je veux vraiment concentrer ma question sans qu'on parle du satellite.
836 Au paragraphe 46 de votre présentation, vous dites ce matin que compte tenu des instructions qu'on a du gouverneur en conseil, on devrait se reposer sur les forces du marché dans la plus grande mesure possible.
837 Ayant fait de la gestion de spec pendant plus de 20 ans et ayant dû vivre avec ces 4 à 5 pour cent là qu'il fallait rejoindre à tout prix, est-ce que ce n'est pas justement là qu'on l'a atteint, la limite des forces du marché dans la plus grande mesure possible, et est-ce que ce n'est pas dans ces cas-là qu'on devrait fixer des cibles de marché, et non seulement les fixer, mais peut-être même les réglementer?
838 MR. HENRY: Not at all. We haven't reached the limits. They're changing every year. Every year they go up. We have government programs that are doing the job.
839 We just had one for $55 million of subsidy. We had a broadband Canada program at $225 million. These aren't even included in the Commission's figures.
840 We have more to be announced and these are both provincial and federal across the country. So those programs will continue.
841 And in addition, I don't dismiss as quickly as others the satellite option. We see what's coming.
842 So no, I don't think -- I think from a consumer point of view we're nearly at 100 percent and it's going to change and is continuing to change.
843 So if we try to solve -- even if you say there's a percent remaining and we try to solve that through an industry subsidy, then we have an industry subsidy instead of a government subsidy.
844 The economists, the TPRP on which -- the Telecom Policy Review Report, which is what the policy directions stem from, says specifically -- it has a page and a half on why a contribution mechanism is the wrong way to do it.
845 CONSEILLÈRE LAMARRE : Donc, si je comprends bien votre position -- parce que c'est important que je la comprenne bien -- c'est que, d'une part, vous, vous estimez que les services satellite sont très prometteurs à court terme pour permettre de combler ce 4 à 5 pour cent là, et, d'autre part, si, effectivement, il faut encourager un déploiement plus rapide, ça devrait être fait via des subventions gouvernementales générales et non pas via un tarif qui serait imposé uniquement à l'industrie des télécoms?
846 M. HARITON : Et je voudrais signaler, Madame Lamarre...
847 CONSEILLÈRE LAMARRE : Est-ce que c'est correct? Est-ce que mon...
848 M. HARITON : Oui.
849 CONSEILLÈRE LAMARRE : Oui, c'est correct.
850 M. HARITON : Mais, Madame Lamarre, je voudrais dire aussi que ces programmes sont prometteurs. Nous pensons qu'ils sont très prometteurs. Qu'ils vont résoudre le problème, c'est possible. Je ne le crois pas. C'est possible qu'ils ne vont pas le résoudre. C'est possible.
851 Alors, à ce moment-là, c'est encore temps pour le Conseil d'agir, mais je pense que ce serait imprudent d'agir maintenant, avant qu'on ait vu le résultat de ces programmes, avant qu'on ait vu les capacités des nouveaux satellites, avant qu'on ait vu la dynamique de ce marché, qui, finalement, évolue extrêmement rapidement, avec différentes vitesses, et caetera.
852 Alors, moi, je dirais qu'au minimum, je veux dire c'est important de fixer les objectifs "aspirational," mais de les mettre en force, on ne sait même pas quelle technologie dont on va pouvoir se servir à l'avenir. Ça évolue.
853 Certains commentateurs disent que le DSL est une technologie mourante. Forcer des gens d'investir dans cette technologie serait peut-être une erreur. S'ils le font eux-mêmes, c'est leur erreur. Si c'est quelqu'un qui les force, c'est une autre affaire.
854 Alors, c'est simplement une industrie qui évolue rapidement du point de vue technologique, du point de vue de différentes demandes pour les services et des différentes forces du marché, n'est pas assez mature.
855 La subvention pour le service de voix a été mise en place à une époque où le service était assez mature. On pouvait savoir quelles étaient les technologies, quels étaient les besoins, quels étaient les réseaux et tout le reste. Ce n'est pas le cas avec le service à haute vitesse.
856 CONSEILLÈRE LAMARRE : Je vous remercie. Ce sont toutes mes questions.
857 Merci, Monsieur le Président.
858 THE CHAIRPERSON: Thank you.
859 Just before I let you go, the first one always has the joy of being the most extensively interrogated so that everything is covered.
860 You said you wanted --
861 MR. HENRY: We're flattered.
862 THE CHAIRPERSON: You wanted to do away with the obligation to serve in foreborne areas and you also think the current price ceiling on standalone service should be removed.
863 Are you still planning to offer standalone service in foreborne areas and how do we assure ourselves -- basically the same thing as my colleague just asked -- how do we assure ourselves that vulnerable customers have access to affordable service in the foreborne areas?
864 MR. HENRY: Well, first of all, I don't think there -- given the size of the exchange being small, given the coverage of the wireline competitor who typically comes in and blankets the exchange, given the wireless substitution effects, I don't think there are going to be captive customers, and therefore, competitive forces will ensure that you needn't have that cap.
865 THE CHAIRPERSON: So the answer is you don't intend to offer standalone basic service?
866 MR. HENRY: Oh! We have no intention not to.
867 THE CHAIRPERSON: But at whatever the market bears, at market price basically?
868 MR. HENRY: Yes, of course. Yes.
869 THE CHAIRPERSON: Okay. And secondly, in answer to Commissioner Molnar when we talked about raising prices to $36, why would you pick $36 rather than the average of urban areas? I mean you want to see if -- I think it's around $32 in urban areas. Why wouldn't you pick that as a price so that there is no discrimination between remote areas and urban areas?
870 MR. HENRY: Well --
871 THE CHAIRPERSON: Why would you pick the single highest one that we authorized under special circumstances?
872 MR. HENRY: Well, because it is affordable, number one, and because these areas, we all recognize, are highest cost. We just can't figure out exactly what the costs are but we know they are higher costs. The Commission -- I mean --
873 THE CHAIRPERSON: You are still getting a subsidy because it's a higher cost. The question is what you could charge.
874 MR. HENRY: No. So now we would propose to eliminate the subsidy and go to $36.
875 THE CHAIRPERSON: Because it's not comparable to urban areas?
876 MR. HENRY: Right. Exactly. As I say --
877 THE CHAIRPERSON: Sorry, sometimes I'm slow. It's early morning here.
878 So let's break now for lunch. Thank you very much.
879 We will resume at 2:00. Thank you.
--- Upon recessing at 1229
--- Upon resuming at 1403
880 THE SECRETARY: Order please.
881 LE PRÉSIDENT: Commençons, Madame la Secrétaire.
882 LE SECRÉTAIRE: Merci, Monsieur le Président.
883 We will now hear the joint presentation by Barrett Xplore Inc. and Barrett Broadband Networks Inc.
884 Please introduce yourselves, after which you will have 25 minutes for your presentation.
885 MR. MADURI: Good afternoon, Mr. Chairman, CRTC Commissioners, Commission Staff.
886 My name is John Maduri, I'm the CEO of Barrett Xplore Inc. and President of Barrett Broadband Networks. Joining me on this panel are C.J. Prudham our Chief Legal Officer and Laurence Dunbar who is Partner of Fasken, Martineau Law Firm and our outside regulatory counsel.
887 Thank you for the opportunity to address the Commission on what we consider to be an issue of national importance impacting the future economic prosperity of all regions of Canada.
888 Our oral comments this morning will focus on the three questions posed by the Commission in its letter of October 8 concerning the role of the Commission with respect to high-speed internet access.
889 This is the issue that affects our companies to the greatest degree, this is the issue on which we have knowledge and experience and on which we believe we can add value to the public debate.
890 Mindful, however, of the Commission's desire to have public input on the other issues raised, we have provided brief comments on those issues I Appendix 1 to the written version of these comments.
891 So let me start. Determining the role of the Commission with respect to high-speed internet access. At a high level, this part of the proceeding is about three things; coverage of broadband, associated service levels, and affordable pricing.
892 The three specific questions posed by the Commission on these topics are: Should the Commission mandate access to high-speed internet in areas where it is not provided? Should the Commission set technical specifications for access to such a service? Should the Commission establish a fund to enable Canadians to access this service when it is not provided?
893 Put another way, these questions ask whether a regulatory model with mandated construction, regulated service parameters and price supports represents the best model to extend high-speed internet to 100 per cent of the Canadian population.
894 As I will discuss in greater detail in a moment, we do not believe that a CRTC regulatory model is required to finish the job at hand. We do not believe that such a model would stand a greater chance of success than would reliance on market forces, and we do not believe that it would produce more benefits for consumers.
895 Let's start with the issue of coverage. The Commission's 2010 Communications Monitoring Report indicated that 95 per cent of Canadians had access to broadband services, excluding satellite coverage. Not surprisingly, the Commission's statistics indicated that the 5 per cent of Canadians that currently do not have access were located in rural areas. One hundred per cent of Canadians have access to broadband service in urban areas, 84 per cent in rural. It is this 5 per cent of the Canadian population that do not currently have access to broadband service that are the focus of my company.
896 As we have stated in previous appearances before the Commission, Barrett already serves the vast regions of Canada where this 5 per cent of the population reside, we do so using satellite and wireless technology. Rural areas of Canada are comprised of both moderate-density areas, such as towns or clusters of homes, and low-density areas where the population is more widely dispersed. We used wireless technology and satellite to service low-density areas.
897 If you look at our coverage map in Appendix 2 to this presentation you will see that we cover every nook and cranny of Canada with our current satellite footprint. Regulatory intervention is not required to extend coverage, our country is already covered.
898 The time as come to stop including the caveat, excluding satellite from the Commission's statistics. There is no longer a need to qualify the numbers. There is 100 per cent availability now without any caveat.
899 We recognize that there has been a historical bias in this country against satellite technology as being inferior to DSL or fibre coax. However, as I will discuss in a minute, that bias is no longer supported by the facts.
900 When you look at a map of Canada and ask yourself how in the world we are ever going to provide broadband access to everyone who wants it no matter how remote their location, you will inevitably have to conclude that the only way to finish the job is by satellite. Satellite is not only the best-fit, least-cost solution for much of the unserved population, it is in many cases the only solution.
901 In Australia where the government is spending over $40 billion to try to achieve the same objective that Canada is pursuing, satellite will be used to serve the areas with the lowest population densities.
902 This is true even in the European countries that we generally think of as having high-population density. Satellite is part of the broadband programs in the United States, Germany, Ireland and other countries. And as the Chair noted, these are the same countries that are holding out very aggressive goals for broadband availability and speeds.
903 We are not the only company in Canada to recognize that satellite is the way forward. Our service is used by Sasktel to fill in gaps in its own broadband coverage, we are being asked by municipalities for the combination of urban and rural areas to do the same thing for them. Even the City of Ottawa has contracted with us for the rural areas within their boundaries.
904 The provinces of New Brunswick and Nova Scotia included satellite technologies in their solutions. I think EOWC was mentioned earlier today. The Government of Canada included several satellite solutions from Barrett and at least three other companies as part of its Broadband Canada: Connecting Rural Canadians program.
905 Having concluded two transactions for high throughput satellites, I can tell you that the largest manufacturers of satellite equipment in the world competed aggressively for our business. They clearly see satellite as the solution to the provision of broadband services in low-density regions and they are devoting considerable resources to pursuing this strategy, including the development of new satellite platforms that address both the capacity and cost issues historically associated with satellite.
906 This really comes down to does the Commission accept, as have our customers, as have Canadian and other governments across the globe, that satellite provides high-quality broadband? If it does recognize that satellite is the way forward and that it is already available everywhere in Canada, the need for regulatory intervention to mandate wireline or wireless construction is negated.
907 Second issue, regulated technical specifications. The Commission has asked whether it should establish a target consisting of technical specifications for access to high-speed internet. Our answer is emphatically no. In our view, advances in technology and competition among suppliers will eventually drive upload and download speeds higher without regulation. I emphasize competition. In the markets we serve across Canada we have competition, we are not the only provider.
908 The high-speed internet market has been competitive from the start and has been characterized by a number of technologies. Whether you look at cable, DSL, fixed wireless, mobile wireless, HSPA or satellite, the service has never been static. Upload and download speeds have constantly been improving. Our own wireless and satellite-based broadband service is a good example of the progression.
909 Our initial service, starting in 2005 -- we had a 512 kilobit package for satellite and that will be advancing to the point where next year we will be offering packages with speeds up to 10 megabits for residential consumer use and up to 25 megabits for business users at prices comparable to urban wireline. Dramatically improved packages will be available mid-2011 on the first of our two new high throughput satellites.
910 On the wireless side Barrett is taking similar action to upgrade its existing technology and to expand coverage. Through technological advances and the construction of additional towers we are anticipating a tenfold increase in capacity and a substantive reduction in the cost per megabit, a critical statistic in our business, cost per megabit.
911 As recently announced, Barrett will bring online the first 4G network in Canada starting this December. In technology terms, rural Canada will have the opportunity to leapfrog urban Canada. We are doing this now because of a regulated mandate, but as a response to the anticipated needs of our customers and competition. This evolution will not stop in 2011 or 2012, we are already looking at the next next generation technologies that will continue the trend of increasing capacity and driving down cost per megabit.
912 In this environment any attempt to mandate targets is unnecessary and might lull suppliers into complacency. It should also be recognized that one size does not fit all. Bandwidth directly affects price and for those users who only want internet for low-bandwidth applications such as email, there should be an option to take a lower priced lower bandwidth solution.
913 One of the historical knocks against satellite technology has been the latency resulting from communication travelling at the speed of light up to a satellite and back down to the earth. While this latency is unavoidable, advances in associated electronics have reduced additional latency that used to be caused on the terrestrial portion of the service to a point where satellite latency is only marginally greater than what you experience using a cell phone.
914 If you would like to test the latency inherent and cellular networks, I suggest that you make a cell to cell call to someone that is standing beside you. While you will find the cell phone latency to make such a call difficult when you are within hearing range of the other party, it is barely noticeable when you are out of hearing range. The same is true of satellite-based voice services.
915 Consumers have found this level of latency acceptable whether it is in their terrestrial or satellite networks and, in doing so, have set the market standards without any external guidance.
916 In a competitive market bandwidth will continue to expand to meet demand. In a subsidized single supplier environment there is much more chance of a regulated service remaining static at the regulated or target speed. Canadians in rural areas deserve better than this. They deserve to receive the benefits that a competitive market can provide.
917 Third, should the Commission establish a fund to enable Canadians to access high-speed internet service in areas where it is not provided? Again, our answer is no. In our view, such a fund is not necessary and could prove to be counterproductive.
918 As I have already mentioned, Barrett will be providing its new high throughput satellite services at prices that are comparable to urban prices for DSL and cable-based services.
919 One of the advantages of satellite service is that it costs the same to provide the communication portion of the service in rural or urban areas, and this is in stark contrast to wireline services and actually wireless services as well that increase in cost as they are extended out from the central office or the existing fibre coax network. With satellite-based services the cost that varies with density or distance is distribution and the cost of providing ongoing service and support.
920 Barrett already has a distribution network in place that is geared to providing a national service in rural areas. This distribution network includes over 3,500 dealers and certified installers or technicians located across all provinces and territories of our country. Our business focus is on unserved and underserved areas of Canada and that is where our distributors are located.
921 To inject a new layer of CRTC regulated subsidy into the high-speed internet market at this stage of its development could result in a reduction of private investment, which is contrary to the policy objective being pursued.
922 As demonstrated in the deferral account process, a CRTC subsidy system would add a new layer of risk to investors of private capital who might face the prospect of subsidized entry into markets that they already serve. This prospect alone could forestall investment decisions and arrest network expansion plans, again contrary to the Commission's intentions.
923 I can tell you from Barrett's own experience, that it was impossible for us to raise new capital to expand our network for a full year after the initial deferral account decision until there was more clarity as to the extent of the areas that would be subsidized.
924 Despite the best intentions of the Commission, it is our view that the deferral account decision did not result in the deployment of least-cost, best-fit technology. By way of example, Bell Canada and Bell Aliant received a subsidy of $306.3 million to serve an estimated 61,000 premises using DSL technology. This amounted to a subsidy of more than $5,000 per household.
925 In contrast, in a competitive bidding process Barrett received a one-time government subsidy of $13 million to provide service to an estimated 39,000 households in New Brunswick in the most physically demanding terrain covering a geographic area of approximately 73,000 square kilometres, a subsidy of approximately $333 per subscriber or only 7 per cent of the Bell deferral account subsidy per customer.
926 Most importantly, we rolled out service in 18 months and we achieved a dramatic increase in adoption I believe from about 0 per cent adoption at the start to well in excess of 33 per cent. Comparing this to the deferral account process, which has taken almost five years to finalize and is yet to be rolled out in the Bell territory.
927 To the extent that subsidies continue to be required, their primary purpose is not to extend service, but to make service more affordable. We believe that the policy considerations that drive the decision to make internet more affordable should continue to be made and funded by governments. They should continue to be the subject of competitive bidding processes and they should encourage least-cost, best-fit technology.
928 There are already numerous such government-funded broadband expansion programs created by the provincial governments and municipal governments. These one-time subsidy programs are open to all qualified service providers in a competitively neutral bidding process.
929 For the Commission to layer an additional and I emphasize reoccurring subsidy on top of these existing surgical funding mechanisms would likely disrupt the government-funded initiatives and interfere with the policy objectives of federal, provincial and municipal government programs.
930 Since the Commission does not have access to other sources of revenue to finance broadband expansion, funding would inevitably have to be generated by increases to contribution levies or cross-subsidies from increased rates charged to urban customers.
931 Inevitably, these rate increases would be paid for by consumers and business users. This would prove to be damaging to Canada's position in world markets as higher telecommunication costs lead to decreases in productivity and a worsening of Canada's comparative position in world markets.
932 In the current environment in which privately financed companies, including hundreds of ISPs, are already extending their networks using a combination of their own capital and targeted government subsidy plans that are administered in a competitively neutral manner a new CRTC regulatory regime which involves another layer of subsidies could prove to be both highly disruptive as well as a heavy administrative burden.
933 Like the deferral account regime, it could easily divert carriers away from the business of rolling out their networks in an economically efficient manner and force them to concentrate on how to either benefit or avoid being seriously hurt by a new and complex regulatory regime. This will be particularly difficult for small carriers that may not even be engaged or aware of the regulatory process.
934 I will speak to a forgotten part, an important part of the broadband access equation. While 5 per cent of Canadians might not have access to wireline-based broadband services according to the Commission's Monitoring Report, approximately a quarter of Canadians who do have access available to them choose not to take the service.
935 If Canada wishes to include all Canadians in the digital economy, there is a need for increased digital literacy in this country. In our view, more attention needs to be paid to this issue. Increased digital literacy will lead to a higher subscription to broadband services by the Canadian public and ultimately will lower the per-unit cost of service. It would also enhance knowledge and use of internet-based tools for businesses and consumers and further Canada's goal of achieving a national digital economy.
936 There is a particular need for rural digital outreach programs to ensure that Canadians in rural areas are not left behind in the transition to a digital economy.
937 In conclusion, we urge the Commission not to include high-speed internet access in the definition of basic service, not to try to define the service in static terms, and not to create a new subsidy regime. To impose such a scheme would fundamentally damage an existing competitive market.
938 Unlike telephone services in rural areas, next door neighbours can and do have different ISPs because wireless and satellite can be used to serve the same locations. There is no tethered wire to tie everybody down, they are not the same economies of scale. A new regulatory regime that defines high-speed internet as part of basic service would inevitably work to the disadvantage of companies that do not offer basic local telephone service and it would work to the advantage of the ILECs that do.
939 Consistent with the direction of the CRTC on implementing the Canadian telecommunications policy objectives the Commission should rely on market forces to complete the job of extending broadband to the Canadian public. Through a combination of private investment and targeted surgical P3 government initiatives Canada has achieved 100 per cent broadband availability and coverage.
940 Advances in technology have now improved the value proposition for consumers and small business to a point where rural and urban customers will be able to receive comparable broadband services at comparable prices.
941 We know that this Commission is responding to the growing international call for access to broadband being recognized as a right, as critical infrastructure. We believe that this Commission can report good news to Canadians, that notwithstanding Canada's size and low population density, the soundness of our regulatory framework together with incredible innovation and risk-taking from the private sector means that all Canadians by 2011 will have access to broadband. That job is done.
942 I would like to thank the Commission for this opportunity to present our views. We are now available for questions.
943 THE CHAIRPERSON: Thank you very much for your presentation.
944 First of all, let me understand what you are talking about. When you say broadband are you, like say Bell Aliant before you, talking about 1.5 up and 640 down?
945 MR. MADURI: We are talking about services that would range from 1.5 -- would include 1.5, 3, and 5 megabit packages generally for consumers as well as packages that would go beyond that.
946 And in fact, the equipment that we are putting at the customer's residence with your new high throughput satellites is dimensioned for residential consumer use of 10 down and on the business side 25 down. So our entire strategy and the focus of these new satellites and what we are putting at customer residences is equipment that will allow us to go to those speeds.
947 THE CHAIRPERSON: I happen to be your customer as we speak. I have high-speed internet via satellite at the cottage because it is the only way I can get access. It says 5 megabytes, but actually it is up to 5 right? Well, I imagine it is usually around 3.5, 3.2 et cetera. Is that what you are talking about?
948 MR. MADURI: I am referring the speeds. And I will emphasize as well --
949 THE CHAIRPERSON: When you said you are rolling out new up to 10, et cetera, that is --
950 MR. MADURI: Right, that is speeds, megabits per second.
951 THE CHAIRPERSON: Right.
952 MR. MADURI: Right. But equally --
953 THE CHAIRPERSON: It is "up to" right?
954 MR. MADURI: Correct.
955 THE CHAIRPERSON: And the actual speed that you deliver is what?
956 MR. MADURI: The answer to that question, in the acid test, is in the throughput and usage. So today, in the CRTC Monitoring Report, I believe the average usage for broadband customers in Canada across all platforms is about 9 gigabytes of monthly throughput. Today we see well in excess of that on our wireless, on our satellite we are less than that.
957 The goal with the new pricing packages that we will bring into the market will be to see throughput, allowable throughput, of well in excess of 10 to 20 gigabytes for our base level packages. So you are absolutely right --
958 THE CHAIRPERSON: Well, that is the throughput. But I was talking about delivery or speed. If somebody goes on, et cetera, and he signs up with you as I have and it says up to 5, it is usually -- given viewers, the number of customers you have, et cetera, it really means a person gets something around 3, 3.2, something like that?
959 MR. MADURI: Correct.
960 THE CHAIRPERSON: Okay. Now, explain to me the satellite business, because I don't understand what you say. You talked here, for instance, about what you did in New Brunswick and how you did it at a far lower cost. What do you actually mean by when you say you installed it? I mean, you have your satellites up there --
961 MR. MADURI: Right.
962 THE CHAIRPERSON: -- it covers all of Canada. So what did you do in New Brunswick when you say "we rolled out service in 18 months?"
963 MR. MADURI: We built out a wireless network, we made a determination with the province. First of all, the province was insistent on $99 up front, nothing more. The province was insistent on a baseline package regardless of technology, so technologically neutral of 1.5 in speed.
964 We built a wireless network consisting of about 100 sites, we made a determination of where wireless made economic sense. The balance of the province we serve with satellite.
965 So it was the construction of the packages, the pricing, it was the construction of the wireless network, it was training our distribution channel in every nook and cranny of the province of New Brunswick, it was the community outreach programs. So that not only did we have the service there, but that we had individuals, businesses, residences aware that the service would be available to them, the educational effort to make people aware of what broadband can do from a productivity personal application standpoint. And then the effort to basically sell, install and provide ongoing support.
966 And what we have seen, and I think this is quite an accomplishment, it is one thing -- you know, we always here about what is happening in the U.S. and other parts of the world. In 18 months we went from concept to the construction of a network, and in 18 months we went from 0 per cent, so there was no broadband available in this area of 39,000 residences or 40,000 residences and currently we are sitting, after about 18 months, with over a third of that population subscribing to service.
967 THE CHAIRPERSON: Now, when you say you built a wireless network, how is it being fed?
968 MR. MADURI: We either built towers or we used what we called existing vertical real estate, we engineer the radios and install the radios at the top of the tower. Actually, in this case I think it was a good example of collaboration with Aliant. So, you know, we talk about competition, there is also collaboration within the industry. So we were able to work with Aliant on the backbone network our data into the internet.
969 And then basically, you know, once we had the wireless network up we were ready to start selling, creating the awareness, creating the demand or driving demand and ultimately installing.
970 THE CHAIRPERSON: You said, for instance, even the City of Ottawa has contacted us for these services. So what Ottawa does is something similar to the -- in effect, you build wireless in the remote part of Ottawa to make sure that people there have access to it?
971 MR. MADURI: Yes. In the case of Ottawa, I think that was back in 2007, there was a competitive process, some of the largest providers, a lot of local providers, and it was predominantly a wireless build. We had a period of time, I think it was about eight months to build out a network of towers in the rural areas around the city, the rural areas that had been annexed by the city, and the same sort of construct. Once we had the network built, we started making people aware of it, selling, installing and servicing.
972 THE CHAIRPERSON: So the uptake is up to you, to generate it and market, et cetera?
973 MR. MADURI: Correct.
974 THE CHAIRPERSON: And lastly, before I pass you over to my colleague, you are against setting a target. You heard me earlier speaking to Bell Aliant and, you know, the target is minimal, not maximum. Obviously, you are going to offer more, et cetera. Don't you feel that we should not at least -- I will use the word inspirationally or set a target for the Canadian industry? Let them use their ingenuity and get there.
975 But I mean, you don't know -- to just say, well let's see how the market evolves, et cetera inevitably means that the urban areas will get there and the rural ones will be left behind. So doesn't it behove us to set a target, even if it only means that industry will try to meet it so that we don't regulate something like what you obviously don't like us using, a subsidy scheme, et cetera?
976 But I would have thought that it is value in establishing a minimal goal at least for the nation.
977 MR. MADURI: I think at the end of the day we have been in this business for five years, we have invested in three different terms of wireless technology, so we are now -- I think we have announced, you may have seen the articles about our deployment of 4G technology.
978 THE CHAIRPERSON: M'hmm.
979 MR. MADURI: So again, in five years we have gone through three platforms on the wireless side; on satellite, same thing.
980 I think what we are missing here is that there is competition in this market. So what is driving us to deliver packages, to actually dimension our equipment -- and there is a cost to dimensioning equipment for 5, for 10, for 25 megabytes. There is a cost to that. We are not doing it because someone is telling us to do it, we are doing it because, if we don't, we lose customers.
981 I think that's a fundamental point. There are, literally, hundreds of ISPs -- and, again, one of the challenges is that a lot of them just don't have the resources to participate in these proceedings, but at the end of the day we face competition in our satellite category and in our wireless category.
982 One of the key reasons for churn, for losing customers, is competition.
983 So what is driving us to invest -- we have invested well in excess of $240 million in private capital to date, and we will be investing hundreds of millions of dollars in the new satellites. What is driving us to make these decisions isn't someone telling us that this is what the min or the max or the aspirational goal should be; what is driving us is what our customers are telling us, what our dealers are telling us in their marketplace to be competitive.
984 It's the market and the competition that is driving us to these results.
985 One of the fundamental concerns that I have about setting these targets is, if we go too low, I think we do a disservice to the customers and the market. If we go too high -- this is a business, this is a sector, that relies on private capital, and if we cause private capital to go, "Okay, now, what does that mean?" -- and the ultimate example, and I don't mean to continue to reinforce it, is the deferral account. For a year -- for a year -- we couldn't raise a nickel --
986 THE CHAIRPERSON: Stop with the deferral account. I am on the public record of killing this thing, getting it out of the way, it was a bad idea. Done. Okay? You don't need to beat me up with it any more.
987 THE CHAIRPERSON: I didn't create it; I got rid of it. Okay?
988 I'm sorry, but what I don't understand -- your own announcement about the 4G, et cetera, says that there are gaps that are not covered, yet in the same breath you are telling me that satellites cover everything.
989 Are you overselling or not, et cetera?
990 If we had a goal, a national goal, then at least that would be something that would be absolute. This way, I never know whether I get it or not.
991 On the one hand you are telling me that you cover all of Canada, and I assume you meant that everything covers it. At the same time, your announcement about 4G says that it will address existing gaps.
992 So, obviously, there are gaps.
993 MR. MADURI: If I could, we cover 100 percent of Canada with an existing value proposition. With 4G wireless and the next generation of satellite, we are injecting more capacity into the network, so that we can, basically, elevate the value proposition, give more bytes per dollar of pricing.
994 If we weren't clear in our communication, our goal with 4G wireless, our goal with the new high-throughput satellites -- two separate developments -- is basically to take a footprint that covers -- provides a ubiquitous coverage of Canada, and add more capacity and drive down the cost per megabyte, so that, again, we can get to every Canadian, but also with an improvement in the value proposition. That is the goal.
995 THE CHAIRPERSON: Rita...
996 COMMISSIONER CUGINI: Thank you, Konrad.
997 Good afternoon. Since we are talking about your coverage, could I ask you to look at the map that you have filed with us as Appendix 2, and help me to understand how to read this map so that, in fact, I see that it is 100 percent coverage of Canada?
998 Because I see huge chunks of Ontario that are neither circled nor in blue.
999 MR. MADURI: The grey colouring is our first footprint, which is called Telesat Anik F2. Our first satellite deployment gave us ubiquitous coverage.
1000 Then, from that point on, what we have basically been doing is acquiring additional satellite capacity in areas where we have demand and need more capacity.
1001 So, no surprise where you see those beams across the U.S./Canadian border --
1002 I forget the exact statistic. Is it 75 percent of the Canadian population that lives --
1003 COMMISSIONER CUGINI: Right.
1004 MR. MADURI: So, as we need more capacity, we are layering in -- feathering in more capacity through the new high-throughput satellites, and also with wireless technology.
1005 COMMISSIONER CUGINI: Okay. So coast to coast to coast, Canada is covered.
1006 MR. MADURI: We have customers in population densities of one home per square kilometre.
1007 COMMISSIONER CUGINI: Thank you very much for that clarification.
1008 I am going to start my questioning with what is most important to you, that is, broadband, whether or not to include it, and then we will move on, if we have time, to the other areas that are included in this proceeding.
1009 Now, you just said to us that by next year you will be offering packages with speeds of up to 10 megabytes per second for residential customers. When I read "next year", does that mean within 12 months, does that mean by the start of the calendar year?
1010 MR. MADURI: First and foremost, on wireless, we will commence deploying new sites with 4G -- new towers, if you want to think of it that way -- basically, I think, in December of this year.
1011 So as we roll out, we will be rolling out, roughly, another 600 new towers on wireless, and we will have an improved value proposition there, and then we will be going back to retrofit an existing 600 towers that we already deliver service on.
1012 So that's wireless.
1013 On the satellite, the satellite is schedule for deployment in April. The satellite is constructed, it's in thermovac, so basically being sealed and prepared for launch.
1014 So between April and, I believe it is basically the middle of 2011, we will be doing our final system testing.
1015 There are at least two other satellites of the same construction being launched before us in Europe -- actually, all in Europe -- so that a lot of the system testing that we would otherwise have to do on our own is going to be undertaken in those market examples.
1016 So, in essence, starting now -- literally, now -- on wireless and satellite, we will be adding more and more capacity and improving our value propositions.
1017 COMMISSIONER CUGINI: To what percentage of your customer base will 10 megabytes be available?
1018 MR. MADURI: To all of it.
1019 COMMISSIONER CUGINI: Everyone?
1020 MR. MADURI: Yes.
1021 COMMISSIONER CUGINI: Because you don't offer that now, correct?
1022 MR. MADURI: Correct.
1023 COMMISSIONER CUGINI: Our staff has done a little bit of a search, and they say that here, in Timmins, you offer speeds of up to 1 megabyte.
1024 MR. MADURI: Correct, yes.
1025 COMMISSIONER CUGINI: And in Chelsea it's up to 5.
1026 MR. MADURI: Correct.
1027 COMMISSIONER CUGINI: So now both Timmins and Chelsea will be able to, if they want, get up to 10?
1028 MR. MADURI: Once the satellites are up, we will have the ability to offer 10 to customers.
1029 COMMISSIONER CUGINI: Now, one of the things you didn't talk about were upload speeds. How important is that in the equation?
1030 MR. MADURI: Very important. We will fashion -- we are in the process of finalizing our packages, but basically we will fashion the down and the up based on the demand that we see in the network.
1031 COMMISSIONER CUGINI: What will be the ratio once the 10 is available?
1032 MR. MADURI: Today I know that we are at 1.5 down and 500 up, and we will look at -- basically, we are in the process right now of looking at our current usage, our customer usage, to make the determination of what the right mix is.
1033 COMMISSIONER CUGINI: Again, let's go back to the two examples of Timmins -- and you can tell us whether or not these ratios would be comparable once 10 is available.
1034 So you have, like I said, 1 down, 265K up in Timmins, and in Chelsea it's 5 down and 800 up.
1035 Would that be a comparable ratio?
1036 MR. MADURI: I don't think we have finalized it. I don't think it will be -- that will be the baseline. We could offer more upload speed, but, again, it will be a function of our marketing team looking at what is the demand -- what is the best use of the capacity.
1037 MS PRUDHAM: And, forgive me, there is a difference between the residential and the business packages. They are slightly better up on the business package.
1038 COMMISSIONER CUGINI: And what would it be for the business package?
1039 MS PRUDHAM: It tends to be closer to a 3:1 ratio, so it's a little higher.
1040 COMMISSIONER CUGINI: Now, in your written submission you say, obviously, that you are opposed to any extension of the basic service objective to include high-speed internet, and you say that it would actually stifle competition and innovation.
1041 Would you care to elaborate on that statement, please?
1042 MR. MADURI: If I look at our business plan, in essence, I have laid it out. We have a plan to bring a lot of capacity into the country. It's absolutely critical to bring a lot of capacity to get the cost per megabyte -- that's really the key statistic -- to improve that statistic.
1043 I don't see a lot in what you are going to do with a new regulatory regime that, frankly, at the end of the day, would slow us down.
1044 We are on our way. I guess that's the key message. We are on our way to finishing the job.
1045 And inasmuch as we are here talking about the new satellites that are going to go up, and the deployment of 4G technology on our wireless towers, the reality is that we have people in a room looking at the next satellite deployment.
1046 We have two scheduled deployments. We are not sitting back and saying, "That's it, we're done," we are thinking about, "When is the next opportunity to bring a quantum of capacity into Canada?"
1047 We are going through the machinations of: Will that be better economics than what we have in the current -- in the deployments that are coming up in the next year?
1048 I think what I am struggling with is, there is nothing that you are doing with a new subsidy regime -- well, there is something, I guess. You will cause us to have to refocus not on the financing, the technology, and the partnering discussions that we have to engage in to launch those services; we will be focused, frankly, in rooms like this, talking about definitions, abstract things like that. It is really taking our eye off the ball.
1049 COMMISSIONER CUGINI: And you wouldn't accept the argument that it would just mean that you would be ahead of the game if we were to include it in the BSO?
1050 MR. MADURI: I have really struggled to understand how I would be ahead of the game.
1051 In fact, the challenge we have had to date with subsidy -- I don't think there is an example where we have asked for a subsidy program. In fact, I think our dialogue with provincial governments, federal governments, has been around: Help us with backbone, help us with spectrum, and help us with adoption.
1052 Those are the most competitively, technologically neutral ways to get more broadband into our markets and to get more Canadians using broadband.
1053 We haven't been at the table asking for subsidy, but because we offer service to 100 percent of Canada, the moment you put subsidy in my market, I am fighting for it. I have to fight for it because your subsidy regime, the proposed subsidy regime, overbuilds me.
1054 So, in essence, you are taking some form of public capital -- public subsidy -- and using it against Barrett and a whole host of other providers, and I think you have seen it -- and I won't mention the deferral account.
1055 But I think, if you were to talk to your colleagues at Industry Canada, Broadband Canada, I think they did a very diligent job, and it took months -- a long time -- to map the country, to make sure that with their public subsidy they weren't overbuilding areas where private investors had committed their own capital.
1056 When you start talking about subsidy, I freeze. I freeze and, unfortunately, investors freeze. What does this mean?
1057 We have momentum in the market. We have raised $240 -- $250 million in capital. We need to continue to raise -- we need a fluid flow of capital to this business if we are going to continue to roll out more capacity and more services.
1058 And I want to emphasize that there is so much dialogue in Canada and the U.S. about the access service -- right -- subsidizing the access, the technology. Right?
1059 We spend more per new customer to create demand, make the market aware of the services available, make the market aware of the benefits -- you know, this concept of digital outreach. We spend more on that.
1060 There is windshield time in the rural market. This isn't Toronto or Vancouver, where it's block-to-block for my installer, this is 25 kilometres, 50 kilometres of windshield time.
1061 So, again, we have to -- hence why we are so focused on: We have to stop talking about the technology and the access. We believe it's there, and it's getting better, and it will continue to get better with competition. We have to get the focus on the other variable, which is the New Brunswick example: How do we go from 33, 35 percent to 80 percent?
1062 There are some challenges. I think someone mentioned today -- the folks from Bell mentioned that 20 percent of households don't have computers. There are demographic issues that we have to address.
1063 As one of our government partners mentioned when we talked about digital literacy, we have to get to 100 percent digital literacy. Right? That's the game.
1064 We haven't got to 100 percent fundamental, basic literacy.
1065 These are the challenges that we see: Not enough computers. Not enough understanding of the benefits of broadband.
1066 COMMISSIONER CUGINI: I think your position is quite clear.
1067 Some of my other colleagues may have further questions on this issue, but I am going to move on to some of the other things that were raised in the proceeding.
1068 Now, I haven't gone through the appendix that you provided. I am assuming that it is pretty much in line with your written submission.
1069 Your position hasn't changed?
1070 MR. MADURI: No.
1071 COMMISSIONER CUGINI: I want to talk about the obligation to serve in non-forborne markets. You take the position that the obligation to serve could be eliminated where the area is served by alternative providers of local telephone service, and you cite as an example VoIP as such an alternative service, especially in low density areas of Canada.
1072 MR. MADURI: Right.
1073 COMMISSIONER CUGINI: Do you have a timeframe in which these high-quality VoIP services will, indeed, become a viable alternative?
1074 MR. MADURI: Our primary focus right now is to get the new satellites up and our 4G network built. Telephony is on our roadmap. Today we offer a VoIP service. We put it in market primarily as a test. We are continuing to offer the service, but in a limited fashion.
1075 We have about 2,000 customers. They take our service. The packages are $29.99 up to $49.99.
1076 And, again, I would suggest that the bulk of our customers are probably in the most challenging parts of Canada to reach.
1077 Those price points -- unlimited local. Long distance is 100 minutes, all the way up to unlimited, and all features, calling line ID and voicemail.
1078 So we offer a service today. Again, it's on our roadmap. I would say that we are incredibly keen on adding more services -- telephony, TV, other services that will generate more revenue and will help us to address the fact that we are in the most challenging set of economics in telephony -- or telecom.
1079 And, finally, every research report I have seen from our marketing team and our product team says: Customers in rural want choice.
1080 So when we talk about all of the -- I'm sorry -- the forborne, the obligations, it's very simple for me: wherever I have broadband, everywhere. I have the potential to deliver a quality voice service, and it's on my roadmap.
1081 COMMISSIONER CUGINI: But is it within 24 months, 48 months...?
1082 MR. MADURI: Twenty-four months.
1083 COMMISSIONER CUGINI: Again, I will be making references to your written submission.
1084 On page 6 you say that the obligation ought not to apply where the ILEC in question has no facilities in the vicinity and the cost of providing local telephone services is excessive.
1085 Do you know of any markets where this is, indeed, the case?
1086 I was a bit confused about this statement, and I didn't quite understand where I could apply this.
1087 MR. MADURI: I don't --
1088 MS PRUDHAM: I'm sorry, which paragraph are you talking about?
1089 COMMISSIONER CUGINI: It's on page 6 of your written submission, and it's in the first paragraph -- the second sentence in the first paragraph.
1090 MS PRUDHAM: I think what we were attempting to speak to are circumstances where you are talking about people in some of the most remote possible areas. Running a landline to someone in a cabin in northern Quebec might, indeed, be quite a challenge. We were suggesting that perhaps there might be other solutions in those circumstances.
1091 COMMISSIONER CUGINI: But if they have an obligation to serve, doesn't that take care of that circumstance?
1092 MS PRUDHAM: I suppose it does, but I think all we were suggesting is that there might be room for considering new technologies to meet that obligation.
1093 COMMISSIONER CUGINI: Okay. Thank you.
1094 On the same page of that submission, again referring to alternative means of providing local service, you say that those might already be made available to customers through technologies such as fixed or mobile wireless or satellite-based VoIP. We have already touched upon VoIP, but is it your position that today fixed and mobile wireless are indeed alternatives to local telephone?
1095 MS PRUDHAM: In combination with a VoIP service, yes.
1096 I mean, obviously, mobile has a voice component to it, so it could certainly be -- and a fixed wireless with a VoIP could be an alternative.
1097 COMMISSIONER CUGINI: The combination of the two.
1098 MS PRUDHAM: Yes.
1099 COMMISSIONER CUGINI: Thank you very much, so those are my questions.
1100 THE CHAIRPERSON: Thank you.
1102 COMMISSIONER KATZ: Thank you, Mr. Chairman.
1103 Good afternoon. I am going to go back to the famous Appendix 2 again, because I think that I still don't get it.
1104 On this map, and in the chart to the right of the map, you lay out different satellite evolutions, and the two at the bottom, where you have "high-throughput satellites coming on board in 2011 and 2012, HTS 1 and 2," you have the footprints on the left-hand side on the map.
1105 Those Canadians living in that area will have access to the high-throughput satellites, and presumably with the quality of service that you have talked about. The rest of the country, which is in the grey footprint, which is in the Anik F2 footprint, how would they get access to high-speed broadband with a high throughput, at reasonable prices?
1106 MR. MADURI: Again, Step 1 coverage, you've got that. The next step is to layer in more capacity, better economics.
1107 As we do that, we will be taking existing customers -- we have learned something from the cellular world, we take care of our existing customers. We will be taking existing customers, thoughtfully, strategically, off of their existing platform -- Anik F2 -- and moving them to the new platform.
1108 We will also be doing the same thing with wireless, as we bring on more 4G wireless, with more capacity, more towers. As I said, we currently have about 600 towers across Canada with wireless service. We are going to go, likely, to another 600 new builds, and then we will retrofit the historical builds.
1109 As we do that, we move customers. That's just part of the game. We do that today. We will be taking customers off older launches or deployments, like Anik F2, F3, Hughes Spaceway -- we will be taking them off those birds and freeing up capacity, so that the remaining customers on that platform can subscribe to a better service.
1110 COMMISSIONER KATZ: So if you have the capacity -- and I understand the capacity issue -- can you also provide them with increased speeds on that technology?
1111 MR. MADURI: When I refer to capacity, I am referring to the capability to deliver the gigabytes and the speeds -- the megabytes per second -- yes.
1112 COMMISSIONER KATZ: So it's both.
1113 MR. MADURI: Yes.
1114 And, again, the economics. There will be a transition period for customers, but we don't envision, at the conclusion of our migration programs, having all of these different price plans right across the country. So at some point we will have customers migrate to comparable pricing.
1115 COMMISSIONER KATZ: But as you move customers onto your newer technology, those that start off on the older technology, if I can call it that, will still have the capability of getting the same throughput, the same access, the same speed, the same legacy?
1116 MR. MADURI: Right.
1117 Currently our marketing team is reviewing where existing customers are, their usage profile, and we will have targeted efforts to reach out to those customers -- to customers who want the most bandwidth, the highest packages -- move them off -- we will take a smaller number of the highest users off those beams, move them to the new beams, the new high-throughput satellites, and that will free up capacity for existing customers to be upgraded.
1118 COMMISSIONER KATZ: So when you knock on my door, as a current Anik F2 customer, and you tell me that you have this great new product for me and you want me to move over because you are going to give me access to state-of-the-art, the latest and greatest, what more am I getting than I'm leaving behind?
1119 Because my question then will be: What will these new customers you are going to load on there not have that the customers that have moved onto the new technology do have?
1120 MR. MADURI: My goal -- the goal of our marketing team -- would be to ensure that we move the customers who have the highest propensity -- the highest usage profile, because they will be sitting with gear that is capable of, in the case of residential, 10, and in the case of business, 25; whereas the capability of existing hardware on Anik F2 would be about 5.
1121 COMMISSIONER KATZ: So there is a difference in the throughput and the capacity that I would be getting.
1122 MR. MADURI: No. Again, we are making a determination of what we think the customer will subscribe to. If a customer puts up their hand and says, "I want a 5 megabyte package," "I want a 7 megabyte package," whatever, then we will roll a truck and change that equipment.
1123 We are going to make an educated guess or forecast initially, but then we will respond to the needs of customers.
1124 If a customer wants to pay me more for more bandwidth, we are going to make that call.
1125 THE CHAIRPERSON: Did you say that you have to roll a truck? You can't just switch them over?
1126 MR. MADURI: Different equipment.
1127 COMMISSIONER KATZ: Mr. Maduri, you are a businessman. As a businessman, you measure your performance and your team's performance on a weekly, monthly, annual basis, as well. There are metrics that guide your business, and you compare yourself to other companies in the same business, and you have to respond to analysts and investors, private or public, whatever the case may be, and explain why you are or are not as good as or better than other people.
1128 Why are you so against this country setting targets from which politicians and others can measure Canada's success in achieving competitive capabilities worldwide, if, in fact, the arguments that I am hearing are true; that is, innovation and productivity can only be gained through advances in the digital economy?
1129 And if you don't set a metric and you don't set a target, how do you know what you are doing and how well you are doing?
1130 MR. MADURI: I think you can look at the actual result.
1131 Again, in the next 12 months, the next 24 months, our execution will tell the story.
1132 My experience with subsidy programs is that --
1133 COMMISSIONER KATZ: I am not looking at subsidy here, I am just talking about setting a target.
1134 MR. MADURI: I know, but if you set a target -- you know, this is a competitive market and it's a market where the bulk of the capital in my business has come from private investors, and it's their reaction to targets.
1135 If we set a wild target -- look at the extremes. If we look at a wild target, the market freezes. How do we get to that? Is it practical?
1136 And you have private investors saying: Let me pause for a moment. Let me pause. Let me think about that. Can we do that?
1137 If we are at one end of the continuum or extreme on the upper side, we are going to have private capital freezing, and if there is one learning I have had in this business -- in this business, at other cellular companies and broadband companies -- it is that I need a constant flow of capital into my company to allow me to have that fluid investment profile and to bring more capacity into the country.
1138 If we go to -- and I think that the U.S. had this in their initial broadband program -- was it 750 kilobytes or a megabyte down -- you are setting a target that is meaningless. It's a joke.
1139 And, again, we will continue as a country to look at what the U.S. is doing. I think we stack up quite well to what the U.S. is doing.
1140 COMMISSIONER KATZ: But I guess that targets are moving targets, especially the further out you go. I mean, a number of these targets around the world that we are looking at are targets for 2015, 2018, 2020. I mean, they are targets that will change, as well, as technology changes, as competitive pressures change, as industries change, as the banking community changes.
1141 They are going to change anyway. The issue only is, right now, many countries around the world, virtually all democratic countries, have set an objective, a target out into the future.
1142 That doesn't mean that everybody has to sit here right now and figure out how to spend the money to get there, it's an objective.
1143 All we are saying is, for this country to basically say, "Leave it with industry, we will take care of it," at the same time what we have seen over the last five to seven years, in every report we have seen, is that Canada has lagged behind, and part of the reason is because there is nothing quantifiable to measure against.
1144 So if you set a target, yes, you may have to change the target. It's no different than you, as a businessperson, changing your budget and your outlook two years, three years out, based on changing circumstances.
1145 But at least it's something that this country can be measured against, and be measured relative to other best practices in the rest of the world, from an innovative and a productivity perspective.
1146 MR. MADURI: But, Mr. Katz, we can be measured based on our actual performance, and I think that our actual performance stacks up.
1147 Further, I would say that we keep forgetting about the key target, adoption. I haven't heard anyone -- we have talked about availability, coverage; whose is talking about the target for adoption?
1148 COMMISSIONER KATZ: And it's an issue, there is no doubt about it. But the reason it's an issue is because it's quantifiable. We have quantified it and we are measuring it, and we now know that -- whatever the statistics say -- 95 percent of the people have access, but only 70 percent have adopted it.
1149 So you have quantifiable numbers.
1150 MR. MADURI: No, no, no. You are indicating that we know what our current state is, what our current metric is. I don't know, is there a target for adoption?
1151 COMMISSIONER KATZ: As far as I know, no, not yet.
1152 MR. MADURI: If we set our target for adoption, if we focused on the types of applications that we need broadband for, I think that would drive the behaviours in the market to get us the coverage, to get us the megabytes, the gigabytes, that will ultimately allow us to be leaders in digital.
1153 Let's start with the adoption.
1154 COMMISSIONER KATZ: Thank you.
1155 THE CHAIRPERSON: Peter...
1156 COMMISSIONER MENZIES: I am trying to simplify this, as much for myself as anything. What I am trying to get a sense of is, everything you can offer --
1157 I will just kind of give you a scenario. I want to start a fishing lodge in Hay River, on the territories. According to your website, it's 196 kilometres, as the crow flies, to your nearest dealer in Yellowknife.
1158 I want phone service. I want internet service. I want to be able to run my website out of it.
1159 My primary clients are all wealthy telecom executives and they can't stay away from their BlackBerrys and they want -- and their laptops -- and they want that access too.
1160 Can you give that to me?
1161 MR. MADURI: Yes.
1162 COMMISSIONER MENZIES: How much?
1163 MR. MADURI: Current pricing would be roughly $55 for a half meg. In the next year, in 2011, that will improve by a factor of three. Roughly we are in the process of blocking down specific pricing but the bits per dollar will change by a factor of three.
1164 I would also offer that there is probably more than one provider in that region through satellite who can deliver service. So you have the potential.
1165 You mentioned the location of the dealer. We have dealers who batch-up orders. It is a different process. It's different than serving downtown Calgary or downtown Toronto or downtown Edmonton but it would likely mean a contact to a dealer. Dealers will call into a market batch-up orders and literally we have dealers that will fly into a market to complete the install. We have locations where people who feel sufficiently comfortable to do their own installation will shift gears.
1166 So there is different ways of serving that customer but that's the way it would happen.
1167 COMMISSIONER MENZIES: How long would it take?
1168 MR. MADURI: It would be a phone call. I can't speak to the specific of that example but it really works -- it really would require a discussion with the dealer to make arrangements for the travel.
1169 COMMISSIONER MENZIES: A year, two years, a month?
1170 MR. MADURI: No, no.
1171 MS PRUDHAM: Dependent upon weather conditions and that when you are in the far north but typically less than a month.
1172 COMMISSIONER MENZIES: Okay, thank you.
1173 THE CHAIRPERSON: Candice?
1174 COMMISSIONER MOLNAR: Thank you.
1175 Could you tell me; first, you offered the combination of fixed wireless and satellite. Can you share with us what the breakdown is of your customers, between the two?
1176 MR. MADURI: Out of 135,000 customers 50-50.
1177 COMMISSIONER MOLNAR: And is it the customer's choice which of those services they subscribe to?
1178 MR. MADURI: Today the value proposition on wireless is better than satellite so if wireless is available customers will tend to wireless.
1179 As we move into 2011 we expect our pricing between the two platforms to be fairly consistent, in which case it will be a combination of the discussion between the dealer, our representative in the market and the customer.
1180 MS PRUDHAM: Actually, if I could just offer one small thought. What we discovered in New Brunswick, John alluded to the fact that the province had been very specific about the customer offering and the pricing.
1181 In that province the price is with five dollars between fixed wireless and -- so it's 1.5, I believe, or 44.95 or something like that for fixed wireless and 49.95 for satellite.
1182 The satellite was launched first because, as the commissioner pointed out, we didn't have to build the satellite. It was available first while the towers were going up.
1183 What we saw in that circumstance was really quite eye opening for us. It became very clear to us that the customers are technology agnostic. They will take what's there and they didn't care. They really didn't care whether it was satellite or fixed wireless.
1184 We expected a fair amount of conversion, people going okay once the satellite -- well, we will move off satellite into fixed wireless. We didn't see that in huge numbers.
1185 Because we, perhaps like everyone else, had always assumed fixed wireless was the preferred choice but when we made the prices equal the customer was agnostic.
1186 COMMISSIONER MOLNAR: Despite the fact that there are service characteristic differences, such as the latency and so on between the two?
1187 MS PRUDHAM: Yes. The latency isn't really all that material when you compare it with the network latency that's inherent in any network whether it's wired or otherwise.
1188 MR. MADURI: We tend to focus on that issue for satellite but, you know, again if we are thinking in rural terms as opposed to urban, terrestrial technologies have their challenges. We have weather impacts -- not just satellite. It impacts terrestrial networks. Ice storms impact towers. Tractor fade impacts terrestrial networks, in other words cutting a fibre in rural Canada. You know my telecom partners can talk about the timetable to get that repaired.
1189 So all technologies face a series of issues in rural Canada.
1190 Power outages impact terrestrial networks.
1191 COMMISSIONER MOLNAR: And line of sight impacts wired -- fixed wireless. So when you are saying you have 100 percent coverage is that by using satellite where your line of sight --
1192 MR. MADURI: Correct.
1193 COMMISSIONER MOLNAR: -- is not working?
1194 MR. MADURI: The strength of our business model is that we have both technologies.
1195 So I talked earlier about windshield time and the cost of actually acquiring the customer or tracking the customer. The challenge that we have with wireless is we will roll the truck. 25 kilometres later if, for whatever reason of line of sight -- we refer to the wireless towers -- is each tower has its own personality depending on typology and terrain.
1196 If we can't get a customer the last thing we want is a dealer driving back 25 kilometres unable to satisfy a customer. So that's where satellite combined with wireless offers tremendous strength. We avoid that lost -- that opportunity cost or that -- well, actually physical cost as well as we don't disappoint a customer.
1197 COMMISSIONER MOLNAR: Okay. I wanted to ask you to expand a bit.
1198 You spoke about the surgical government initiatives that have gone on in the past to extend service and, as you noted rightfully, those have occurred at the federal, provincial and municipal level. I believe I heard you say that where you felt government intervention was most appropriate or where you looked for help was as it regarded the backbone, the spectrum and adoption.
1199 You did elaborate somewhat on adoption here but could you elaborate for me the issues of the backbone and the spectrum and how those are the most -- if I understood you correctly -- the most appropriate components to be looking at to support the broadband build?
1200 MR. MADURI: Okay. We will start with spectrum. We have markets in Canada where we are out of spectrum; no more spectrum. Prepared to invest private capital. I don't want subsidy but I can't get spectrum.
1201 So the challenge we have is that not having enough spectrum will impact our ability to upgrade packages. Despite the fact that we have this wonderful 4G technology we will not be able to upgrade.
1202 Now, the challenge for spectrum, there is lots of discussion about spectrum as it relates to the mobile business and the discussion that's been going on about 700 megahertz and 2.5 megahertz.
1203 Well, the challenge for us as a rural provider -- and I will use Calgary or Edmonton as an example -- the licence area for those two cities is such that the urban population and, again, let's use Edmonton, call it a million people. 90 percent of the population is in 10 percent of the land mass, even less, maybe 5 percent. The licence includes a significant rural doughnut around the city with maybe 100,000 population.
1204 So if I want to buy spectrum or participate in an auction process to get spectrum, I have to compete with the largest providers in the industry, all the big names that are going to be represented here today and I have to buy Edmonton to serve the 100,000 rural population around the city.
1205 So what we have been, I think, quite vocal on is we need to find a way to partition urban and rural so that the literally hundreds of rural broadband service providers who are prepared to invest private capital, who see wireless as the appropriate, best fit, least cost solution for their market will have spectrum.
1206 It's again, lots of discussion about -- what do they call it -- a set-aside for these new entrants and those new entrants. But what we are asking for is a dialogue around how do rural providers.
1207 How do we create some sort of effective partitioning scheme so that we can get access to spectrum because it's the life blood? We can't deliver service without spectrum.
1208 So I think that's --
1209 COMMISSIONER MOLNAR: Thank you.
1210 MR. MADURI: I don't know. I hope that addresses spectrum.
1211 The backbone -- probably the least competitively intrusive or the most competitively neutral way to encourage broadband is through backbone. At the end of the day we are a last mile provider. We go from the PoP site and deliver service to the homes from our tower locations.
1212 You know, if there is an investment in backbone network -- if there is a desire to put subsidy into the market to accelerate the process of getting broadband to rural Canadians by investing in backbone, I would offer that government or government bodies affect or accelerate in the least competitively intrusive way because all providers -- and the best example I think is SuperNet in Alberta -- all providers can benefit from that that cost benefit, that reliability benefit, the capacity benefit.
1213 COMMISSIONER MOLNAR: Thank you.
1214 I just have one more question then, kind of flowing from that.
1215 There has been a lot of discussion about extending service for service in -- but broadband perhaps more than any other service I know is very dynamic and capacity requirements continue to increase continually. So where there has been investment to extend service the issue is that is there now a business case to maintain service at increasing demands over time?
1216 And I guess part of that, if I go back to what you are saying is, part of the equation is not just the last mile but the backbone and so on.
1217 Do you believe there has been sufficient investment in those backbones to support ongoing service to rural and remote areas?
1218 MR. MADURI: I think backbone is one of our biggest challenges today. I think it will continue to be the biggest challenge for the broadband industry, and I don't mean just rural.
1219 I think if you were to talk to the mobile operators given, you know, the usage increases or the demand -- increasing demand for mobile broadband -- I think that that would be an issue for the entire industry is access to more cost-effective, reliable backbone.
1220 COMMISSIONER MOLNAR: And is there any role you see for the Commission in that?
1221 MR. MADURI: I mean I think just the fact that backbone is going to be an issue; spectrum is going to be an issue. I'm not sure how that plays into your mandate.
1222 COMMISSIONER MOLNAR: Okay, thank you.
1223 Those are my questions.
1224 THE CHAIRPERSON: Suzanne?
1225 CONSEILLÈRE LAMARRE : Merci, Monsieur le Président.
1226 Vous avez fait allusion tout à l'heure à l'impact de la météo sur les services, en disant que les services terrestres aussi étaient affectés par ça. J'en conviens, mais si je m'abonne à votre service, et là où je suis, je peux uniquement m'abonner au service satellite, avez-vous des données sur le pourcentage de perte de service moyen que je peux devoir subir dans une année due aux conditions météo?
1227 MR. MADURI: Yeah, I will answer that.
1228 The network equipment is engineered in the same way that it's engineered for fibre and other terrestrial networks, five nines, 99.999 percent availability. The actual experience is 99.9 percent.
1229 So I would have to figure out what 0.1 percent is of the year.
1230 CONSEILLÈRE LAMARRE : O.K., ça va.
1231 Deuxième question, rapidement.
1232 Anik F2, c'est un satellite qui a été lancé en 2004, un satellite à, grosso modo, une vie utile d'une quinzaine d'années. Donc, en 2015, il va falloir commencer à penser à le remplacer.
1233 À long terme, est-ce que vous pouvez nous en parler, avez-vous des plans pour ça? Parce que présentement, c'est Anik F2 qui vous permet de couvrir -- si je peux retrouver votre expression là -- tous les petits coins de pays qui existent. Donc, est-ce que vous allez toujours être là quand viendra le temps de remplacer Anik F2?
1234 MR. MADURI: Doing well so far. I mean, at the end of the day the company has done well from -- let's look at the entirety of the telecom industry. How many companies have gone from nothing five years ago to over 100 million in revenue?
1235 I think we have got a very healthy company on the financial side and, again, unless there is some strange events and challenging events we will continue to raise capital. We have got a good track record of raising capital. We will raise capital to deploy broadband.
1236 I think the other thing to take note of is we are not the only satellite provider. There are at least two other -- three other satellite broadband providers in Canada.
1237 CONSEILLÈRE LAMARRE : Merci. Ça répond à mes questions.
1238 THE CHAIRPERSON: Tim?
1239 COMMISSIONER DENTON: Good afternoon, Mr. Maduri. You are obviously the master of your brief and you know exactly what you are doing.
1240 So when you say something that triggers my wakefulness I wanted to bear in on the issue of the notion that the CRTC should not set targets for broadband penetration and capacity. And I'm not talking here about regulated targets. I'm just talking about exhortations that in such and such a year Canada ought to achieve a certain level of broadband penetration at certain capacities.
1241 The argument you gave was that even to set targets of this nature, which would not be regulated but merely be targets that we would like to see achieve, the notion you said that this scares capital and since we are broadly pro-capitalists at the Commission I didn't understand that issue and I want to understand it better in case we do something stupid -- or correct.
1242 So I would like to hear your argument again.
1243 MR. MADURI: Okay. I think the challenge along the continuum of options for targets -- and to be clear, we have participated with various industry associations on relevant targets.
1244 My experience is we either shoot way low, which is -- well, it's almost comical some of the numbers that have been set. And I think what we saw in the U.S., the first round of the U.S. broadband stimulus program, 700 kilobits if I recall, was the number which is -- that's not competitive. That shouldn't make them proud. Now, they have bumped that limit to 4 megabits.
1245 If you go too high, if you set unrealistic goals -- and the challenge is who knows what is going to happen with technology? I mean we will continue to monitor the environment. We will continue to push our vendors. All providers will to get more bits per dollar of capital.
1246 So unfortunately, again, if we go too high my concern is we will cause private capital to say and say, "Well, let's think about that. Is there a business model at that construct at that point in time?"
1247 So you know that's my concern is on one hand it's either trivial or we trivialize the target, and that has tended to be the case more often than not -- or if we set the targets that are unrealistic. Ultimately who knows what the right target is?
1248 What we would like to do is have more discussion around whatever construct of capacity, economics we have. We should be much more focused on 100 percent adoption, the actual -- there is availability. Get to 100 percent adoption and more dialogue around the types of applications that rural Canadians need and what that will mean for how many megabits they need, the speed, and for how much throughput, the gigabytes per month, the throughput that they need.
1249 COMMISSIONER DENTON: But that to me sounds like simply more sophisticated intelligent targets.
1250 MR. MADURI: Okay. I will stop with that then.
1251 COMMISSIONER DENTON: Okay, I hear you.
1252 MR. MADURI: Can I just if I could offer --
1253 COMMISSIONER DENTON: Sure.
1254 MR. MADURI: I mean there is so much discussion about what the U.S. is doing, $7.2 billion that's been discussed in their broadband program versus our 225. Much if it has gone the middle mile. So they are on the first leg of the journey which is backbone. That's what middle mile is as opposed to the last mile.
1255 No mapping done so that, you know, there is really no determination of where -- at least I don't think in the first round -- no determination of where private operators are currently deploying service and where the white space is or the un-served areas.
1256 So inasmuch as, you know, we can talk about what's happening in other countries, I can give you numerous examples whether it's broadband in Canada, EOWC, our experience in New Brunswick -- I am sure the other providers here have examples where we have gone from an award, like having the competitive process an award into deployment and adoption.
1257 Like the New Brunswick example; 18 months award, execution in terms of the build-out and making service available and getting from zero to 30 plus percent adoption.
1258 I think if we are looking to demonstrate how far Canada is ahead or our position relative to other countries, let's focus on those sorts of examples.
1259 COMMISSIONER DENTON: And the examples again were, you said, adoption rates and what else?
1260 MR. MADURI: It's really a -- yeah, it's -- the ultimate success in broadband is adoption and capturing advantage from broadband.
1261 COMMISSIONER DENTON: And you say that that should be in some sense specific to particular regions of the country or specific --
1262 MR. MADURI: If we are going to get into targets we could say well, sure, if we could deliver 10 megabits into a rural area.
1263 The question is the cost. What are the applications that households and businesses need? Or actually I meant 100. You know, would be nice to have a 100 megabits in rural? Absolutely. The question is what are the applications that residences, consumers and businesses need to justify that speed?
1264 COMMISSIONER DENTON: Thank you, sir.
1265 THE CHAIRPERSON: Well, let's get back to our job. Adoption rate is not part of our domain, as you well know.
1266 Did I hear you right saying about voice, that you can actually get voice over satellite now?
1267 MR. MADURI: Yes.
1268 THE CHAIRPERSON: So I have your voice service. I can use Skype on it?
1269 MR. MADURI: Yes.
1270 THE CHAIRPERSON: And there won't be any latency?
1271 MR. MADURI: Ours is a service, a quality-based -- a quality of service based -- service on our network. Skype is an entirely different service. Now, you can use Skype. We do have customers who use a plethora of --
1272 THE CHAIRPERSON: Well, that's why I was wondering. The latency doesn't make the use of --
1273 MR. MADURI: Yeah, we have -- when we look at our network we have lots of customers who are using other providers over the top -- voice services on top of our broadband.
1274 THE CHAIRPERSON: Your satellite?
1275 MR. MADURI: Yeah.
1276 THE CHAIRPERSON: Okay. Now, back to what you were just talking with all of my colleagues about your goals, I take serious issue with some of the things you were saying. You tried to divert the subject to adoption. We are talking here not about adoption. We are talking about provision.
1277 Let's stay to provisioning. You say setting goals will divert things, will cause a freeze, et cetera. You talked satellite and you say it's too low.
1278 Australia has just announced. I just came from Barcelona where I met with my Australian counterpart who tells me that it's just the opposite. They have geography very similar to us with basically the interior empty and the population on the periphery. They have publicly committed that they will supply remote regions by satellite, exactly what you want, and their satellite business has gone through the roof.
1279 Why wouldn't that same thing happen here? Why do you say that us seeing -- that it would freeze the market or freeze your ability to -- I mean I just do not understand the logic and I don't understand the examples.
1280 MR. MADURI: Well, sir, is the example in Australia not a public initiative? Isn't the $46 billion Australian going into a public initiative, not a private initiative?
1281 THE CHAIRPERSON: Absolutely, yes. But you still have -- you are setting --
1282 MR. MADURI: Well, then they are not worried about where they are getting their capital, are they?
1283 THE CHAIRPERSON: I made it now several times clear. I'm not talking about a subsidies scheme. I'm talking about setting a goal and you have clearly said that you are against us setting a goal because it will screw up the financial markets for you.
1284 MR. MADURI: No, no. But, okay, park the subsidy.
1285 I'm talking about a situation where pronouncements are made and it causes capital to say, "Can we deliver? Is there a business case? Is it effective to deliver that speed within that timeframe?"
1286 And I would emphasize. I believe we are up before Australian on our new satellite.
1287 THE CHAIRPERSON: Okay. So then I don't understand you because I have a feeling you are talking past -- sorry, I'm not annoyed with you. Just I'm annoyed that I'm not getting on top of the subject.
1288 MR. MADURI: That's all right.
1289 THE CHAIRPERSON: If we set -- the U.S. had said 4 megabytes -- they determined it a national goal. We accept that. We say we want to see everybody by 20-whatever, 2018, to have 4 megabytes, et cetera. Obviously that would be delivered by whatever technology is possible.
1290 Why would that cause you, a satellite provider or fixed wireless provider, any problems? That's what I just don't get.
1291 MR. MADURI: Because I think we are on our way to beating that. Again, I think you -- on the continuum you are on this side of the continuum.
1292 THE CHAIRPERSON: Okay. Assume for argument's sake it's a low target. Then why does that low target hurt you?
1293 MR. MADURI: It doesn't hurt me but I think it --
1294 THE CHAIRPERSON: Well, you just said it did.
1295 MR. MADURI: It's irrelevant.
1296 THE CHAIRPERSON: You just said it would freeze capital markets and it would cause you quite a bit --
1297 MR. MADURI: If you are up at this end of the category.
1298 So you have just given me an example. It is a different example in that they are funded through a private mechanism. They are not worried about making a pronouncement that it's a 100 megabits by 2015 and the impact to private capital because it's been funded by $46 billion Australian.
1299 Second, I believe, and we will confirm this for the Commission, our satellite -- I believe they are deploying a K Band high-throughput satellite. Our satellite, I believe, is going to be up earlier than theirs.
1300 And then if the -- what was the other point? I guess those are the two points.
1301 THE CHAIRPERSON: I get that. I just do not understand why this would -- if you are ahead of the curve in effect and you can deliver better, presumably your customers will go to you because you have a superior product.
1302 Why does our announcing a target which in this context you think is short of where you actually are, would hurt you in the financial markets? I guess this is where --
1303 MR. MADURI: Again, if the target is low you are right, it's irrelevant. If the target is unrealistic or at that point in time something that cannot be ascertained or determined, then we are going to have an --
1304 THE CHAIRPERSON: So you are only worried about the upper end. The low one is irrelevant?
1305 MR. MADURI: Right.
1306 THE CHAIRPERSON: Okay. I understand that and that's fine. I couldn't understand why low target would cause you problems.
1307 MR. MADURI: Mr. Chairman, it's really important to again state it's easy even in business --to Mr. Katz's example of business it's always easy in business to set a simple target. Sometimes setting a simple target can create more dysfunction or goal incongruence within an organization. The same can be true of this discussion.
1308 A harder thing for us to do when we talk about broadband and getting to 100 percent is picking the more challenging goal, which isn't delivering a technical service, which is actually getting 100 percent of Canadians to be digitally literate, getting them the speeds, the throughputs, the technical characteristics that will support the specific applications that we think are important for personal --
1309 THE CHAIRPERSON: You made that point several times. We got it. Thank you.
1310 MR. MADURI: Thank you.
1311 THE CHAIRPERSON: Okay. Thank you very much. We will take a 10-minute break before we hear from the last group.
--- Upon recessing at 1524
--- Upon resuming at 1542
1312 THE SECRETARY: Order, please.
1313 LE PRÉSIDENT : O.K. Commençons, Madame.
1314 LA SECRÉTAIRE : Merci, Monsieur le Président.
1315 Before we start, just for the record, I wish to inform you that Bell Aliant has submitted the HDR Report, as permitted by the Commission this morning. This document will be added to the public record and copies are available in the examination room.
1316 We will now proceed with Northwestel Inc. Appearing for Northwestel Inc. is Mr. Paul Flaherty. Please introduce your colleague. You will then have 25 minutes for your presentation.
1317 MR. FLAHERTY: Thank you, Madam Secretary.
1318 Mr. Chairman, members of the Commission. My name is Paul Flaherty. I am the President and CEO of Northwestel and present with me is Dallas Yeulett, Senior Regulatory Manager.
1319 Northwestel appreciates the opportunity to appear before the Commission in this public consultation regarding the Basic Service Objective, Obligation to Serve, Contribution Regime and other matters.
1320 We appear today to provide our perspective on these matters as the communications service provider for the Far North.
1321 Northwestel provides communications solutions as the Incumbent Local Exchange Carrier to all 96 communities in Canada's Far North, consisting of a population of 115,000 people, which is 0.3 percent of Canada's population.
1322 Northwestel's traditional telecommunications operating area is the largest in Canada, comprising nearly 4 million square kilometres, 40 percent of Canada's land mass, and includes Yukon, Northwest Territories, Nunavut, northern British Columbia and Fort Fitzgerald, Alberta.
1323 There are important differences between the environment and the provision of telecommunications services in the Far North in comparison to the rest of Canada, including the SILEC operating territories, and as a result the provision of communication services in northern Canada poses special risks and requires consideration of unique approaches to regulatory frameworks.
1324 The focus of our presentation today is to provide a brief overview and understanding of:
1325 1. the challenges to providing telecommunications in the Far North;
1326 2. the differences established in Northwestel's current regulatory framework to accommodate these distinctive challenges;
1327 3. an appreciation as to why it is more important than ever to continue to maintain unique regulatory considerations for the Far North; and
1328 4. issues that the Commission will need to consider in the next regulatory framework review for Northwestel to be conducted at the conclusion of this consultation.
1329 In the past, the Commission has reviewed how or if regulation approved in the South could be implemented in the North in a separate proceeding for the North.
1330 Consistent with that practice, regardless of the rules introduced for the rest of Canada as a result of this proceeding, any changes to the current Northern regulatory framework will need to be considered in the context of the North so as not to undermine the carefully balanced regulatory framework established by the CRTC to ensure the sustainability of the Northern telecommunications infrastructure.
1331 In summary, Northwestel is not seeking changes to its regulatory framework in this proceeding.
1332 The Far North is a Unique Environment. It is unique for its extreme climate, vast distances between communities and extremely low population density, all factors that contribute to the ongoing challenges of providing reasonably similar telecom services at reasonably similar prices in the northern environment relative to that available in the South.
1333 The map included as Attachment 1 at the back of this presentation provides an illustration of the vast distances between communities we serve.
1334 Northwestel's communities are comparatively very small, 78 percent of Northwestel's communities have less than 500 telephone lines and 88 of 96 have less than 1,500.
1335 Take, for example, the community of Arctic Bay as shown in Attachment 2, which is very typical of Nunavut communities. It has a population of 690 people and 279 phone lines. Businesses in this community include two small general stores, two air charter companies at the local airport, two churches, one bed and breakfast and a small inn with 10 rooms. There are no banks.
1336 The community also has government provided services, including the RCMP station, a nursing station, a local government office, a community hall, one school and a library. One of the largest structures in town is our 5-metre satellite dish. The picture attached shows most of the town.
1337 Moreover, Northwestel, unlike other ILECs, does not have larger low-cost urban centres, as would typically be found in the rest of Canada. In fact, our largest centre, Whitehorse, has only 25,000 people and is much smaller relative to many southern Canada's communities. For example, it is close to half the size of Timmins, Ontario.
1338 In addition to being extremely small, our communities are separated by vast distances. For example, the nearest hospital for Grise Fiord is in Iqaluit, approximately 1500 kilometres in distance. Grise Fiord is located in the high Arctic and can be found at the top of the map in Attachment 1.
1339 Northwestel maintains nearly 8000 kilometres of microwave radio transport and another 4000 kilometres of fibre transport facilities to serve 53 terrestrial communities supporting 56,000 NAS. This fact further emphasises the difference between Northwestel and the operating environments of the small ILEC's that a simple density factor does not fully capture.
1340 Small ILEC territories do not have the great distances between communities that Northwestel has, nor do they maintain the diverse network infrastructure that Northwestel must maintain to serve its various communities that are as diverse as the landmass of Canada.
1341 In addition to the terrestrial transport supported communities, Northwestel's remaining 43 communities rely on high-cost satellite to transport all communications traffic outside those communities. In addition, 45 percent of our communities are accessible by air only as there is no road access. These characteristics are completely unlike any serving territory in Canada.
1342 Northwestel's satellite communities are illustrative of the high costs to provision communications services to the North.
1343 In addition to the high annual costs of satellite transponders, regardless of the size of a community, all satellite communities require minimum equipment such as a digital switch, RF equipment, required software, IP equipment, satellite earth stations, in some cases up to 9-metre diametre dishes, buildings and HVAC power equipment.
1344 Grise Fiord, Nunavut, as shown in Attachment 3, for example, is, as I mentioned earlier, 1500 kilometres by air from Iqaluit and has 118 telephone lines and a population of 161 people.
1345 Northwestel's capital investment in this community is $3.5 million or $27,746 per subscriber line. The cost to service this community is also highlighted by the cost of return airfare to Iqaluit, which for a regular flight, twice a week only, is $4,359.
1346 The challenge of servicing communities in the Arctic is also highlighted by the challenges in getting material to these communities. Because there are no roads these communities are serviced by sealift twice per year in the summer.
1347 The company must organize its shipment several months in advance of the shipping dates as materials must arrive in Montreal two weeks prior to shipping. Then it takes 45 days to ship material from Montreal to Grise Fiord.
1348 If the material misses the sealift the company would need to fly the shipment from Yellowknife or Iqaluit at a premium. For example, it could cost up to $50,000 dollars to ship a single 2000-pound reel of cable by air.
1349 Northwestel must generate its own power at 95 of 137 microwave sites because no commercial power is available at these locations. Many of these sites are helicopter access only and fuelling requires diesel fuel to be transported by helicopter.
1350 A typical remote microwave transit site is Parsons, Northwest Territories, 50 kilometres north of Inuvik, as shown in Attachment 4. Fuel must be transported from Inuvik up the Mackenzie River by ice road and then slung by helicopter from the river to the tower on a ridge overlooking the river delta.
1351 Capital invested at this transit site required to generate just our power is over $1 million. Moreover, the company spends about $76,000 in annual operating costs at this site, which includes fuel and maintenance trips required to support the power-generating facilities at this site.
1352 As a result of these community characteristics, providing quality communications services in the North requires significantly greater investment on a per subscriber basis than for the South.
1353 To illustrate this, consider Northwestel's historical cumulative telecommunications investment per subscriber line, which is about 250 percent higher than in the South. In addition, satellite transport costs for toll connect services are seven times higher than our own terrestrial-based toll connect facilities.
1354 Given the unique characteristics I have described, the Commission has continually determined over many years that Northwestel requires unique regulatory frameworks that accommodate these conditions.
1355 With respect to Northwestel's current price caps regulatory framework, first, in that framework we talk about the Service Improvement Program.
1356 One striking regulatory difference between ILEC's in the South and Northwestel is how the Commission implemented the Basic Service Objective for the Far North. The Commission recognized that Northwestel could not accomplish the BSO under the same terms and conditions that were established for southern ILECs.
1357 The Commission approved a substantial Service Improvement Program which totalled $85.3 million over five years, nearly matching the normal capital investments our company would make to telecommunications infrastructure at that time, and approved a unique subsidy worth $10.1 million annually to cover the ongoing carrying costs of this program.
1358 Unlike other ILECs, Northwestel's SIP not only included the extension of local access services but also included significant upgrades to transport and switching facilities to improve the quality of communications services in the North.
1359 The second piece within our framework relative to price caps.
1360 In 2007, the Commission first introduced Price Caps Regulation to the Far North. This framework includes a number of unique elements, including subsidy mechanism, basket structures, Carrier Access Tariff (CAT), unique quality of service standards and continued reliance on implicit cross subsidies.
1361 Northwestel's high-cost area subsidy includes the shortfall between revenues and costs for the provision of residential line access in 94 of the company's 96 communities.
1362 The Commission approved residential access phase II costing for the company, including a single unique high-cost serving band uniquely for the North, called Band H1. This simplified banding structure for the North reflects the unique nature of Northwestel's operating territory and strikes an appropriate balance between reflecting cost differences and the ability to implement and administer that type of framework.
1363 Another unique element of Northwestel price caps subsidy framework is the level of implicit contribution from optional services the Commission has recognized for Northwestel's residential subsidy requirement.
1364 The Commission approved a lower implicit revenue contribution than the other ILECs at $4 per network access line. In setting this level of implicit contribution for the purpose of devising an appropriate subsidy on residential access, the Commission recognized that 40 communities did not have basic calling features like call display and only 17 of our communities actually have voice mail.
1365 While the costs of provisioning calling features may not be significant on a per NAS basis for southern companies, the costs of adding features to small communities in the North was the reason why the Commission denied Northwestel's request to add call display to about 40 communities in its Service Improvement Program.
1366 The Commission also approved a distinct Carrier Access Tariff of $0.0415 per toll minute per end, very high relative to southern companies Access Tandem rates, which are typically under $0.01 per minute.
1367 Northwestel's CAT rate recovers switching, equal access and toll connect trunk costs and is an average rate for all geographic areas in the North, including Northwestel's lower cost fibre routes in the West.
1368 Given the differences in operating environment and the adjustments the Commission has made to the regulatory framework of the Far North, the Commission will need to ensure these differences continue to be recognized. These unique circumstances will continue to demand both certain modifications and a greater degree of flexibility to ensure Northerners, particularly those living in remote high-cost areas, continue to have access to reliable, affordable and sustainable telecommunications services.
1369 With respect to risks to the sustainability of this framework, in addition to the national subsidy and other elements of the price caps regulatory framework implemented in the North, Northwestel's business model utilizes cross-subsidies from high-margin services in its largest communities to sustain reasonably comparable services at the same or reasonably comparable rates across all communities in the North.
1370 Many services, for example, long distance and business access, are uneconomic in many of our remote high-cost communities and are currently cross-subsidized from services provided in larger communities.
1371 While other ILECs have largely eliminated implicit cross-subsidies, Northwestel still relies on higher margin services, including legacy data services and toll and business access in our larger centres, particularly Whitehorse and Yellowknife.
1372 However, these traditional sources of implicit cross-subsidies are declining as consumers take advantage of technological change and utilize lower margin IP services, including VoIP. For example, Northwestel estimates that VoIP calling has grown in our territory by 40 times since 2006 and now represents nearly 10 percent of our customers' long distance calling.
1373 Another major factor creating risk to sustainability of the current framework is the impact of government subsidy programs to support IP broadband competitive duplicate networks in highly uneconomic regions.
1374 As a result, there are two major adverse impacts: first, a significant decline in revenue that has contributed to funding the high-cost network, particularly in the eastern Arctic, and secondly, an increase in the cost of residential access.
1375 The federal government, through various programs, has provided approximately $98 million that has subsidized duplicate data networks along with subsidized transport over satellite in the N.W.T. and Nunavut.
1376 Moreover, the Government of Nunavut is building its own local access fibre network in most communities with federal funding. Thus the subsidized network is not only being used to provision high speed Internet and data services but will soon be used to provide local and long distance voice services for the Government of Nunavut, resulting in significant revenue losses that Northwestel relied upon to sustain the provision of services to remote high-cost communities.
1377 As such, Northwestel submits that there is an important role for the Commission to provide input to government agencies that have future plans to provide funding for communication services in the North so that they have a clear understanding of the impact that these programs may have on the provision of telecom services and to account for those as an important factor on deciding how to roll out their programs.
1378 Government agencies should coordinate efforts and ensure that the best results are achieved at the lowest possible cost and lowest possible adverse impacts on existing telecommunications services.
1379 Northwestel's ability to make up cross-subsidies through pricing on other traditional services is limited because prices are already high. For example, a price comparison with a small northern B.C. community in TELUS territory indicates that the price of a typical basket of telecom services for a small business customer may be as much as 400 percent higher in Northwestel's territory.
1380 Decline in traditional toll traffic is also destabilizing another important component of Northwestel's framework, the CAT. Recovering toll connect costs and maintaining the flow of implicit cross-subsidies through an average per minute based CAT rate that is experiencing significant declines in traffic is becoming increasingly difficult as more traffic travels over alternate IP Networks, including the subsidized competing network in the eastern Arctic.
1381 In Northwestel's next framework review, the Commission will need to give serious consideration to replacing the cost-based CAT with a rate that uses industry average access tandem rates and a sustainable subsidy to make up the difference, particularly for the high-cost satellite transport links.
1382 With the declining implicit cross-subsidies and the significant market disruption caused by competing subsidized networks in uneconomic regions, Northwestel will not have the means to maintain the Obligation to Serve and to be a full service provider in uneconomic areas without further modifications to the subsidy mechanism.
1383 With the cost of providing toll in satellite communities at approximately $0.17 per minute relative to an average revenue of about $0.12 per minute, with a continued decline in revenues expected as a result of losses caused by these duplicate government subsidized networks, a toll subsidy for the eastern Arctic will be required.
1384 In addition to changes to the subsidy regime for the Far North that will be proposed by Northwestel in a review of its regulatory framework, a number of proposals have been made to revise the subsidy regimes for the small and large ILECs of southern Canada.
1385 In general these proposals are not appropriate for Northwestel as they do not address the unique conditions of the telecommunications environment of the Far North.
1386 The appropriate mechanism for distributing subsidy for the North must continue to reflect the unique high-cost nature of providing telecom services and the regulatory framework of the North.
1387 As I explained earlier, Northwestel's operating territory is characterized by very small exchanges separated by large distances.
1388 An example of the high costs that Northwestel must absorb is commercial power. Northwestel pays as much as $2.50 per KWH for power which compares to about $.08 cents per KWH for a service provider in the northern B.C. community of Fort St. John.
1389 At Nahanni Butte, a community with 51 access lines, our monthly cost for power is $6,000 a month. Just as an anecdote, the revenue we get from those 51 subscribers is about $2,300 a month.
1390 As explained previously, the Commission has designed a unique H band for Northwestel's high-cost residential access and approved phase II costing for these NAS. It would be appropriate to continue to use Northwestel's costing rather than arbitrarily using costing from the large ILECs.
1391 With respect to the Obligation to Serve and what it means to Northwestel, in the North the Obligation to Serve has been and will continue to be an important component towards achieving the policy objectives of the Telecommunications Act.
1392 An Obligation to Serve is no longer required in areas forborne from economic regulation on local access where effective competitive entry provides consumers with choice and reasonable rates.
1393 However, given the unique challenges of serving high-cost areas and the lack of economic incentives to provide service, the Obligation to Serve, along with access to supplementary funding where reasonable rates are not high enough to recover the costs, ensures that all Canadians will have access to affordable basic telecommunications services.
1394 Maintaining quality of service levels also comes at a cost to the company. In the North, the Commission has established unique quality of service reporting where Northwestel is required to report on a community level basis for a number of service indicators and must meet out-of-service trouble reports cleared within five working days for remote communities at a 90 percent standard or more. No other phone company in Canada has these standards in its remote communities.
1395 A subsidy framework for the North must recognize these costs and a fair balance between subsidy and rates must be maintained to ensure that high-cost serving areas continue to receive similar services at similar rates and at similar quality as the rest of Canada, as outlined in the Telecom Act.
1396 Competitors do not share the same obligations I just mentioned, including extending service to high-cost customers and high-cost areas. So from our perspective, they should not have access to subsidy.
1397 With respect to reexamining the modified BSO for Northwestel, in Telecom Decision 99-16 the Commission established the Basic Service Objective as a minimum level of service to ensure all Canadians have access to reliable telecommunications services.
1398 Although Northerners have benefited immensely from access to improved services that the BSO and the corresponding SIP delivered, bringing similar services to those available in southern Canada, the BSO for the North was modified to exclude the provision of enhanced calling features in about 40 communities.
1399 In Telecom Decision 2000-746 and in Telecom Decision 2003-39, the Commission concluded that the costs of equipping smaller exchanges would be too high to justify the expenditure.
1400 Privacy call features are very important to citizens in remote communities to reduce abusive calling, as reflected in the penetration rates for eastern Arctic communities, which often exceeds 60 percent on residential lines where Northwestel provisioned calling features.
1401 The Commission, in our view, should reevaluate the inclusion of call display to remaining northern communities in the next regulatory framework review for Northwestel.
1402 With respect to the National Basic Service Objective we do not believe it should be modified. In this proceeding, there have been varying positions on whether or not the BSO needs to be expanded to include broadband Internet. It is Northwestel's view that this is not necessary as market forces and targeted government programs are resulting in continued rollout of Internet service and improvement in speeds and bandwidth in the Far North.
1403 Forty-seven communities with 70 percent of the North's population currently have access to high-speed Internet with speeds of a minimum of 1.5 Mbps download.
1404 Based on currently announced Industry Canada Connecting Rural Canadians program funding, this number will be increased to 77 communities in the near future.
1405 Moreover, Northwestel is in discussions with Industry Canada which will result in an additional 13 communities served, which, when all is said and done, we will have 90 communities with 99.5 percent of the North's population served with broadband Internet capable of speeds at a minimum of 1.5 Mbps download.
1406 Northwestel submits that it is not necessary for the Commission to make Internet part of the BSO or to provide subsidies to provision broadband Internet in high-cost serving areas.
1407 In conclusion, Northwestel looks forward to the Commission's consideration of a number of necessary changes to the regulatory framework of the Far North in the next regulatory framework review for Northwestel scheduled to occur after the conclusion of this proceeding.
1408 This would include reviewing how the company can achieve the current Basic Service Objective, for example, introducing call features to a number of communities that to date do not have access to basic call features.
1409 In addition, consideration of a number of sustainability concerns such as the decline in revenues used to support services to remote high-cost communities, including toll services, and replacing the company's cross-territory cost-based Carrier Access Tariff with a combination of sustainable rates and subsidy.
1410 The Commission has in the past recognized that Northwestel's serving area is unlike any other in Canada and a continued recognition of this is necessary along with a regulatory framework that accommodates these differences.
1411 Other than Northwestel, not one party to this proceeding has submitted or considered changes to Northwestel's framework. As such, changes to the subsidy regime that may come about because of this proceeding must be reviewed in the context of the Far North so as not to undermine the carefully balanced framework and ensure the continued provision of high quality telecommunication services to all 96 communities across the Far North.
1412 Thank you, Mr. Chairman. I would be happy to respond to any questions that you may have.
1413 THE CHAIRPERSON: Thank you.
1414 You make several times reference to the review of the Northwestel framework which will be conducted at the conclusion of this consultation.
1415 MR. FLAHERTY: That is correct.
1416 THE CHAIRPERSON: That is news to me. Is that your wish? Have you made a submission to that or something? I mean there is nothing scheduled at this point in time.
1417 MR. FLAHERTY: My understanding was that in consultation with staff we had postponed our price caps framework review until after this proceeding.
1418 THE CHAIRPERSON: Okay.
1419 Your submission today basically says whatever you do as a result of this hearing, don't apply it to us, we are special, we in the North, and whatever you do to us should be done as a result of that framework review that will follow, not as a result of this hearing. That, grosso modo, is what I understood you to say.
1420 MR. FLAHERTY: That is correct.
1421 THE CHAIRPERSON: Okay.
1422 You make this one reference about the Government of Canada primarily, Industry Canada and also the Government of Nunavut having their own subsidies programs which basically interfere with the carefully balanced cross-subsidies that you have worked out in your territory.
1423 And then you suggest we could be helpful in doing what? That is the part I didn't get.
1424 MR. FLAHERTY: What we would like to see happen is some dialogue with the CRTC and Industry Canada or Infrastructure Canada or any of the federal departments that are providing funding into communications in the North.
1425 It is clear through some of the work that Industry Canada has done, they have done so without understanding the implications of doing so.
1426 So things like the implications on the RESPES(ph) subsidy that is going to be required as a result of some of these investments, our view is that our costing is going to change now and it is going to become more expensive, therefore requiring a higher subsidy.
1427 THE CHAIRPERSON: And those programs have been launched without consultation with you?
1428 MR. FLAHERTY: By and large, no, we weren't asked to consult on what are the positive or negative benefits of those programs. No.
1429 THE CHAIRPERSON: I see. Okay. Thank you.
1430 Peter, I believe you have some questions.
1431 COMMISSIONER PATRONE: That would be me, Mr. Chairman.
1432 THE CHAIRPERSON: Oh, sorry. Marc. Sorry. My apologies.
1433 COMMISSIONER PATRONE: It is all right. Thank you very much.
1434 Thank you for your presentation and I appreciate you moving the sign because I couldn't see your face there during your presentation.
1435 I mean essentially you have painted a portrait of a business model that is caught really in a squeeze between customers moving on to new technologies and this threat as you see it of duplicate networks being constructed, and in that context you still argue for the status quo.
1436 I guess the question is: Is the status quo enough for you to maintain your obligations, given the fact that if you consider these various other factors, that they have to a degree or are in the process of undermining what you say is the carefully balanced regulatory framework established by the CRTC to ensure the sustainability of the northern telecommunications?
1437 I guess that is kind of a roundabout way of saying: Is the status quo going to be enough to allow you to continue to provide the services that you do?
1438 MR. FLAHERTY: Within our next proceeding, we will provide updated cost studies that will show that the subsidy will have to go up in the Nunavut Territory, for example, where these duplicate networks have been portrayed.
1439 One of the concerns that I have is that even the alternate networks are not sustainable. You know, there have been recent press announcements by some of the providers that say in 2012 they will require more funding as well.
1440 So I do think there needs to be a coming together of minds on how will the future look as we go forward.
1441 But from Northwestel's perspective, we will update our cost studies and it will reflect the need for a higher cost subsidy.
1442 COMMISSIONER PATRONE: In paragraph 12 of your written submission you say that Northerners have benefited immensely from access to improved services as a result of the Service Improvement Program, but you point out as well during your oral today that the BSO for the North was modified to exclude provision of enhanced calling features in about 40 communities. Thus, the national BSO was not fully achieved and you would like the Commission to reevaluate those costing decisions.
1443 Do you feel that the cost of rolling out some of those services has changed somewhat since the decision was made not to provide enhanced calling features in those communities?
1444 MR. FLAHERTY: The current number of communities that don't have it is 29 communities. So the cost has changed to some degree in those communities and where it has made sense we have done it.
1445 However, in some of the others -- and the one that I lobbied the most about is a community by the name of Gjoa Haven. So the federal Health Minister, that is her riding.
1446 The cost of providing calling features there entail a replacement of the switch and it is about $425,000 to do it for a relatively small community. So in that case, the cost has actually gone up since the last proceedings.
1447 COMMISSIONER PATRONE: As you said, there are 29 remaining?
1448 MR. FLAHERTY: That is correct.
1449 COMMISSIONER PATRONE: Have you costed out the expenses associated with rolling out those services to those outstanding communities?
1450 MR. FLAHERTY: We haven't at this time.
1451 COMMISSIONER PATRONE: On page 5 of your oral today, further to that point, when you talk about the Commission approving a lower implicit revenue contribution at $4 per network access, I was wondering if you anticipate that that number would change once those services were rolled out.
1452 In other words, were there to come about a remedy as far as providing those services to those other communities, would you anticipate that that would change?
1453 MR. FLAHERTY: It may change. In some of the answers to interrogs that we provided, our current estimate of the margin we get in those communities is $1.50 from optional features. So we are being imputed $4.00 but our costing models would say that we are actually only receiving $1.50.
1454 But to your specific question, yes, if we were able to offer it in more communities, we would see more. It would be on both sides of the equation. We would have more costs and then more revenues as well.
1455 COMMISSIONER PATRONE: But it wouldn't be a graduated thing, would it, where the more communities were supplied those services, then --
1456 MR. FLAHERTY: Not necessarily.
1457 COMMISSIONER PATRONE: Yes.
1458 MR. FLAHERTY: As I say, the costs -- there are going to be significant costs that would be added as well.
1459 COMMISSIONER PATRONE: But you are not sure about those costs?
1460 MR. FLAHERTY: I don't have them at this time.
1461 COMMISSIONER PATRONE: On paragraph 14 of your written, you state that:
"Future service improvement plans to replace obsolete and/or unsupported infrastructure in the North should be anticipated given the Commission's objectives of ensuring that consumers in remote high-cost areas continue to have access."
1462 I am wondering how pressing in terms of a time frame are those repairs needed. Can you qualify or quantify that for me?
1463 MR. FLAHERTY: I will give you an example, if I may.
1464 COMMISSIONER PATRONE: Yes.
1465 MR. FLAHERTY: One example would be the system that we use to provide long distance services over satellite. It is offered by Hughes and the Hughes network -- TES is the brand that goes with it. The Hughes network is manufacture discontinued now. There is a limited amount of support available for that network today. We believe by 2013-2014, there will be absolutely no support, nor any spare parts available for it.
1466 COMMISSIONER PATRONE: Sorry, what was that year again?
1467 MR. FLAHERTY: 2013-2014 time frame.
1468 COMMISSIONER PATRONE: Okay.
1469 MR. FLAHERTY: It manages all long distance services for every one of the 43 communities that are satellite-served, so almost 50 percent of our operating territory.
1470 So that is an example of a significant step function in investment that would be required and a program such as SIP may or may not be required to support that.
1471 COMMISSIONER PATRONE: You sort of answered this question when the Chairman asked you, but I want to acknowledge first off that your comments regarding broadband funding programs can result in market distortions, as you have said.
1472 You talked a little bit about what your expectations are in terms of what the regulator can or cannot do and you feel that some kind of an advisory role insofar as it applies to Industry Canada would be helpful in that regard.
1473 Can you elaborate a little bit more for me?
1474 MR. FLAHERTY: Absolutely.
1475 I was recently with Industry Canada and we were talking about the digital economy and I commented to them that I found it unfortunate that they provided the amount of money they did and there wasn't a lot of consultation with people like yourselves on the impacts that that funding could have.
1476 To be honest, I don't think they had really thought about it. We are a unique jurisdiction from any others and it wasn't front of mind to them that that was something that they should be thinking about
1477 COMMISSIONER PATRONE: What is your comfort level around supporting some targets? You have heard this discussed from the other intervenors. We are talking abut download and upload speed, bit caps, monthly usage allowances and that sort of thing.
1478 Do you have a level of comfort in terms of being able to say whether you support those going forward?
1479 MR. FLAHERTY: Well, interestingly enough, Industry Canada of course in this latest round of funding more or less set a target of 1.5 down and so I'm struck with the position of which entity would set these targets. Like Industry Canada seems to have unilaterally gone on their own in doing that so what's their role relative to the Commission's and that's not for me to judge for sure.
1480 I think as Mr. Maduri indicated --
1481 COMMISSIONER PATRONE: You are bobbing and weaving a little bit there, Mr. Flaherty.
1482 MR. FLAHERTY: As I say, it's not clear to me whose jurisdiction it really is, so that's why I'm bobbing.
1483 COMMISSIONER PATRONE: I guess I'm asking you for your opinion.
1484 MR. FLAHERTY: Well, to date Industry Canada has sure put a lot of money in northern Canada in terms of high-speed Internet services and so I would look to them, if they are providing that kind of money, they should be the ones who are defining it, at least my experience thus far.
1485 COMMISSIONER PATRONE: You heard Barrett's intervention and their presentation today. And it has been stated that satellite services may be a suitable substitute in terms of technology when it comes to delivering high-speed Internet access in sparsely populated areas.
1486 I guess my question to you is -- and I have read what you have said up to this point, but what criteria do you think should be applied in determining whether this is appropriate? And when I'm talking about criteria I'm considering issues like how sparsely populated an area has to be, geographic Considerations. You know, at what point do costs become too prohibitive as far as that is concerned.
1487 Where do you stand on this issue, Mr. Flaherty?
1488 MR. FLAHERTY: Are you referring to the cost of providing high-speed Internet and where should it be provided?
1489 COMMISSIONER PATRONE: The cost of using this alternate technology.
1490 How do you think it stands as a potential substitute?
1491 MR. FLAHERTY: Mr. Maduri didn't mention, but we are one of the other providers of Ka band satellite Internet service as well --
1492 COMMISSIONER PATRONE: Okay.
1493 MR. FLAHERTY: -- so we do use the service, we provide it in a number of locations.
1494 As Mr. Maduri's map more or less indicates, in the high Arctic it's not really a suitable substitute just because of the footprint of the satellite, but outside of those very high Arctic communities, and there are probably only three or four of them, it is a suitable substitute and it's a substitute that we use in a number of communities as well.
1495 COMMISSIONER PATRONE: Going forward you see that as perfectly acceptable?
1496 MR. FLAHERTY: It is. That type of service is a solution for some of those really remote high-density areas.
1497 You know, the other alternative in those areas is to provide a larger satellite dish like what we would do in Iqualuit today. So in Iqualuit we would have a 9 m satellite dish versus an individual residence that might have a 1/2 to 2 m dish and that large capacity dish we would then fan out in a traditional DSL deployment, but it's still backhauled over satellite. So the notion that satellite won't provide quality Internet services, if we take that premise we won't have 43 communities that won't have broadband.
1498 So that's not our experience today. We have many customers for example in Iqualuit who utilize that service today and it is done through satellite, just not through Ka, it's done through C-band satellite.
1499 COMMISSIONER PATRONE: Okay.
1500 I want to go back a little bit to the duplicate infrastructure issue that you spoke about. I have maybe a couple of more questions after that.
1501 Are the services being offered on what you term duplicate networks identical to those offered by NorthwesTel or are there substantial differences, i.e. speeds and other aspects?
1502 MR. FLAHERTY: To be clear that in many communities -- for example, in the Nunavut Territory the only community that we both offer services, us and the competitor, is Iqualuit.
1503 COMMISSIONER PATRONE: Okay.
1504 MR. FLAHERTY: All the other communities, they provide the service. We don't provide a broadband Internet service.
1505 COMMISSIONER PATRONE: But going forward there is the possibility that that will happen more and more?
1506 MR. FLAHERTY: I'm sorry, that which would happen more and more?
1507 COMMISSIONER PATRONE: You raised issues around duplicate networks. You feel going forward that the possibility that will happen more and more looms large for your company
1508 MR. FLAHERTY: That's why I have suggested that it would be very helpful if the Commission could --
1509 COMMISSIONER PATRONE: Got involved. Got it.
1510 MR. FLAHERTY: -- intervene with Industry Canada to coordinate this a little bit more closely. So I would hope that no, with that intervention, that would not continue.
1511 Today it basically is in every community in the Nunavut Territory, 25 communities, they all now have duplicate infrastructure.
1512 So back to some of the pictures that I have shown you, you know, think of those large dishes, the 5 m dish there in the first community, my competitors built a federally funded competitive dish more or less next to mine for that small community and if you look at the cost of providing service in that community you really shake your head and say why.
1513 COMMISSIONER PATRONE: I have two more questions for you.
1514 Normally you would rely on high value services like data services to cross-subsidize those which are less economically viable for you.
1515 Is that correct?
1516 MR. FLAHERTY: That's correct.
1517 COMMISSIONER PATRONE: Have improvements in technology lessened the need for that kind of cross-subsidy? In other words, has there been a change in the number of communities deemed uneconomic?
1518 MR. FLAHERTY: I would say no. If anything, as I highlighted, some of the power rates, I talked about the fact that in our highest cost community in the north we are paying two-fifty per kilowatt hour for power and the Government of Nunavut is currently considering a 21 percent increase in power costs in 2011. So our costs are going up, they are not going down.
1519 COMMISSIONER PATRONE: Has your argument largely been in terms of saying that you are not receiving the degree of subsidy that you need in order to allow you to continue to meet your obligation to serve? Does it boil down to that?
1520 MR. FLAHERTY: I suppose in a way you could look at it from the perspective.
1521 One of the challenges -- like the framework that the Commission put in place back in 2007, our most recent regime, it balanced things reasonably well.
1522 The challenge is, though, some of the cross-subsidy is from the toll services, but with the VoIP bypass that's going on, it's now up to 20 percent of our traffic, you can't count on that subsidy to cross-subsidize any further, so our access to those implicit subsidies has been shrinking for sure. So it is putting more pressure on our ability to continue to provide that service.
1523 COMMISSIONER PATRONE: I want to thank you for your answers today. I appreciate it.
1524 Mr. Chairman...?
1525 THE CHAIRPERSON: Thank you. I believe those are all our questions.
1526 Before I let you go just to set aside my idle curiosity, the last page of your submission has a big microwave tower in Parsons, Northwest Territories, it is totally encrusted with ice. I thought if you had that sort of ice crust you can't send the microwave through, you need a clean antenna -- you need a clean dish. Does that mean that somebody has to climb up and clean the dishes on these things or how do they work in these conditions?
1527 MR. FLAHERTY: No. They will work in those conditions. It will shorten the distances that you have between towers to be able to make it work properly, but they will continue to work.
1528 In the highest ice build-up areas we have actually tried something a little bit innovative, we built a cocoon around the microwave site and as the wind vibrates the fibreglass cocoon it shakes the snow and ice off. But we have only had to do that in one location so far.
1529 But as things change, if we see more snow and ice build-up, we may have to do more in the future, but so far we have limited it to one of our 137 sites.
1530 THE CHAIRPERSON: The pictures, as usual, is worth 1,000 pages. I'm most impressed with what you guys are doing up north.
1531 Thank you very much. I think that concludes our session for today.
1532 Madame la Secrétaire, what time do we start tomorrow morning?
1533 THE SECRETARY: We will resume at 9:00 a.m. tomorrow, Mr. Chairman.
1534 THE CHAIRPERSON: Okay. Thank you.
--- Whereupon the hearing adjourned at 1625, to resume on Wednesday, October 27, 2010 at 0900
Johanne Morin Jean Desaulniers
Monique Mahoney Sue Villeneuve
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