ARCHIVED - Transcript, Hearing 5 November 2010

Volume 8, 5 November 2010

TRANSCRIPT OF PROCEEDINGS BEFORE

THE CANADIAN RADIO-TELEVISION AND

TELECOMMUNICATIONS COMMISSION

SUBJECT:

Obligation to serve and other matters (Formerly Proceeding to review access to basic telecommunication services and other matters)

HELD AT:

Outaouais Room

Conference Centre

Portage IV

140 Promenade du Portage

Gatineau, Quebec

Transcripts

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

bilingual as to their covers, the listing of the CRTC members

and staff attending the public hearings, and the Table of

Contents.

However, the aforementioned publication is the recorded

verbatim transcript and, as such, is taped and transcribed in

either of the official languages, depending on the language

spoken by the participant at the public hearing.

Canadian Radio-television and

Telecommunications Commission

Transcript

Obligation to serve and other matters (Formerly Proceeding to review access to basic telecommunication services and other matters)

BEFORE:

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

ALSO PRESENT:

Lynda Roy   Secretary

Alastair Stewart   Legal Counsel

John Macri   Hearing Manager

HELD AT:

Outaouais Room

Conference Centre

Portage IV

140 Promenade du Portage

Gatineau, Quebec

November 5, 2010

- iv -

TABLE OF CONTENTS

   PAGE / PARA

ORAL REBUTTAL BY:

"ISPs"

- Accelerated Connections

- Radiant Communications

- SSI Micro Ltd.

- TekSavvy Solutions Inc. 1719 / 9889

TELUS Communications Company 1758 / 10137

Gatineau, Quebec

--- Upon commencing on Friday, November 5, 2010 at 0830

9883 THE CHAIRPERSON: Good morning. Bonjour.

9884 Commençons, Madame.

9885 LA SECRÉTAIRE : Merci, Monsieur le Président.

9886 We will begin today with the joint presentation by Accelerated Connections, Radiant Communications, SSI Micro Ltd. and TekSavvy Solutions Inc.

9887 Mr. Chris Tacit and Rocky Gaudrault are appearing for the panel.

9888 You may now proceed with your 30-minute presentation.

ORAL REBUTTAL

9889 MR. TACIT: Thank you very much. Thank you, Mr. Chair, Commissioners.

9890 In this rebuttal statement, the ISPs' responses to the arguments of various parties and questions posed by the Commission continue to promote the view that in resolving the issues under consideration in this proceeding the Commission's primary objective should be to do no harm to competition or consumers.

9891 The balance of my remarks will be provided with reference to the questions posed by the Commission in the appendix to its October 8 letter, with the exception of the issues relating to local competition in the territories of the SILECs, which the ISPs are not addressing.

9892 The first question is: In which markets should the obligation to serve and the basic objective apply, if at all?

9893 The ISPs agree at the conceptual level that where multiple TSPs provide voice services in an exchange, there would not necessarily be a need for an obligation to serve or basic service objection.

9894 However, before making such a determination, the Commission must be able to satisfy itself that:

9895 (1) there are no significant pockets of uncontested customers for whom the ILEC remains the primary or only LEC; and

9896 (2) standalone primary exchange service would still be available for those consumers who do not want to take a bundle of services.

9897 The problem is that the ISPs have not seen sufficient convincing evidence on the record of this proceeding to conclude that elimination of these obligations in forborne exchanges can be accomplished without breaching these conditions at this time.

9898 Similarly, the ISPs urge the Commission to reject the suggestion made by TELUS that the obligation to serve should no longer apply in the case of subdivisions or multi-dwelling units. Such an approach would be too complex to implement and monitor and is based on the assumption that such locations will be served by more than one TSP. That may not always be the case.

9899 At the same time, the ISPs do agree with the views expressed by the cable carriers to the effect that the obligations are not truly onerous. In fact, as we have heard in this hearing, the assets employed by the ILECs to provide service in high cost serving areas are very valuable and could be used to earn monopoly profits absent regulatory constraints. Therefore, we urge caution when it comes to the removal of the obligations unless and until the Commission is convinced that the risk of harm to consumers is negligible.

9900 Two, should only the incumbent local exchange carrier be subject to the obligation to serve and the basic service objective where the measures are maintained?

9901 After reviewing the record, the ISPs continue to be of the view that only ILECs should be subject to the obligation to service and basic service objective. No other carrier in an ILEC territory acting alone can exercise residual market power in the provision of voice services.

9902 The ISPs oppose any attempt to expand the basic service objective to add new requirements, such as equal access or unlimited local calling. Doing so would only constitute interference with market forces.

9903 Three, can wireless voice service satisfy the obligation to serve and the basic service objective?

9904 There has been significant evidence tendered in this proceeding to the effect that wireless voice services are not full substitutes for wireline services, and this is particularly so in rural and remote areas. Availability, reliability and quality are highly variable depending on geography in such areas. Moreover, unlimited, unrestricted calling is uncommon for wireless.

9905 For these reasons, wireless voice service does not satisfy the obligation to serve and the basic service objective.

9906 Four, should the Commission establish a target consisting of technical specifications for access to high-speed Internet service? If so, what should those technical specifications include and in what timeframe should the target be achieved?

9907 After listening to the submissions of various parties regarding the setting of an aspirational target of technical specifications for access to high-speed Internet service, the ISPs continue to be of the view that as a matter of consistency it would be best for the federal government to set such a target and provide any funding that it believes is required to achieve it.

9908 Nevertheless, given Canada's proximity to, and integration with, the U.S., the ISPs would not object to a purely aspirational and non-regulated target set by the Commission that is no greater than the 4 megabyte per second download speed set by the U.S.

9909 The ISPs agree with those parties that submitted that the industry as a whole can benefit from better access to current, relevant and more detailed industry information which only the Commission can provide regarding the availability of broadband. However, the ISPs also caution the Commission that most TSPs do not have significant resources to dedicate to reporting purposes. Therefore, reporting requirements should be streamlined and minimal to the greatest extent possible.

9910 Five, should the Commission mandate the provision of access to such a service in areas where it is not provided?

9911 Mandating the provision of access to a target broadband service could entail significant capital costs. These are not costs that the industry can afford to bear on its own.

9912 The development of a fund to cover these costs would not be feasible as discussed in the ISPs' response to the next question.

9913 Therefore, the Commission should not mandate access to the type of service described in the previous question, where the service is not already provided.

9914 Six, should the Commission establish a fund to enable Canadians to access high-speed Internet service in areas where it is not provided?

9915 We agree with a majority of parties to this proceeding who advocate against the creation of such a fund for a number of reasons.

9916 First, due to objections of a number of parties based on legal jurisdictional considerations, a lengthy period of uncertainty would follow while this issue is being litigated should the Commission decide to attempt the creation of such a fund. Non-incumbent TSPs would be particularly harmed by such a period of uncertainty that would have a chilling effect on their ability to obtain financing.

9917 Second, even if the attempt to institute such a fund clears legal hurdles, the high cost that TSPs, and especially non-incumbent TSPs, would have to pay to fund such a program would further erode both their profitability and continued ability to invest, placing many of them in jeopardy and unduly lessening competition.

9918 Third, any such program would have to be continually updated to remain relevant and the risk of misallocation of resources would increase over time.

9919 Fourth, a contribution burden placed on the industry would be much less efficient than funding through the federal or provincial consolidated revenue funds financed through broad based taxes.

9920 Fifth, it would be difficult to construct such a fund in a manner that is fair to provinces that have already made significant investments in broadband deployments.

9921 Sixth, any kind of access subsidy whose value increases over time, as proposed by some parties, would provide an incentive for delayed entry as it is the ILECs that would most likely be in a position to take advantage of such funding and they would not have to worry about other parties beating them to the punch in many cases.

9922 Finally, it would be very difficult to establish the eligibility rules and associated mechanics for TSPs and projects to be funded by the fund. An elaborate, costly and time-consuming follow-up process would be required to address these matters.

9923 All in all, such a fund would be expensive, cumbersome and interference with market forces, contrary to the policy direction.

9924 Such a fund should simply not be established.

9925 However, if the Commission decides to attempt to establish such a fund over the ISPs' objections, the ISPs urge the Commission not to do so unless it concludes that it has the jurisdiction and undertakes to require TSPs paying into the fund to recover the payments from their end customers as separate line items on customer bills. That would at least reduce the distortionary effect of the fund's interference with market forces by allowing TSPs to recover their contribution payments.

9926 Seven, should the Commission modify the local service subsidy regime?

9927 The ISPs do not believe that the Commission should modify the local service subsidy regime, other than possibly in certain limited ways designed to eliminate it more rapidly, and without creating market distortions.

9928 For this reason, the ISPs object to the removal of the price ceiling on standalone local service in forborne exchanges unless and until such time as Commission can assure itself that the ILECs can no longer exercise any residual market power in those exchanges.

9929 Given the possibility of forbearance despite significant uncontested pockets of consumers, removing the price ceiling could result in significant price increases for consumers that have no alternative sources of supply for local services. Not only would such captive consumers be disadvantaged through the payment of excessive rates, but the excess revenues generated by an ILEC in such circumstances could be used to cross subsidize competitive activities to the detriment of competitors, competition and ultimately the public interest.

9930 For the same reasons, we urge caution when it comes to allowing ILECs to raise local rates to so-called "affordable" rates in areas where competition does not exist or is very limited in nature. The ISPs believe that such increases would not lead to rates that are just and reasonable.

9931 The ISPs also object to the broadening of the current contribution base to include Internet service revenues. Although no jurisdictional issues would be raised if the fund were used solely to fund voice services in high cost serving areas, such a change would constitute a financial shock to non-incumbent TSPs providing broadband services, with adverse consequences for competition.

9932 These negative consequences, including both reduced profitability -- even leading to losses -- and reduced investments, without which non-incumbent TSPs cannot stay in business.

9933 In this respect it is important to note that investments are not financed solely out of TSP profits. TSPs must raise capital by issuing equity and/or incurring debt in order to be able to keep pace with investment requirements. Reduced profitability jeopardizes the ability of TSPs to obtain equity and debt financing and to carry the cost of any capital raised. Thus, a reduction in profitability that may seem modest can be leveraged into a very negative outcome in the case of non-incumbent ISPs. For this reason, the base on which contribution is levied should not be expanded.

9934 The ISPs also do not agree with those parties that wish to remove the portability of the local subsidy. Doing so would be competitively inequitable, would advantage ILECs and promote inefficient competition and would give ILECs an incentive to inflate the subsidy.

9935 The ISPs are also of the view that the Commission should not discontinue the application of a productivity factor when determining the high cost serving area subsidy requirement. This factor is intended to operate on a company-wide basis and there is no reason that should be changed for costs related to subsidy calculation purposes.

9936 What would be in the public interest is for the most current margins from ILEC optional local, long distance and network access charges to be properly imputed to ILECs, thereby reducing the subsidy requirement. The ISPs urge the Commission to proceed with those adjustments.

9937 Eight, should the Commission review costs and/or high-cost serving area definitions used in the calculation of subsidy amounts?

9938 During the course of this proceeding, we have heard various ideas ranging from using a different costing methodology to determine the subsidy requirement, to updating loop capital and maintenance costs, to the creation of base rate areas, and so on.

9939 There is ample evidence on the record of the proceeding that any attempts at re-banding or any costing exercises would be lengthy, costly and of very uncertain value. The ISPs do not believe that this is where the Commission or industry ought to be focusing their efforts and attention and such a preoccupation would not be consistent with the policy direction.

9940 Similarly, the ISPs urge the Commission not to accept the proposal of the Bell Aliant companies to average all ILEC Band "G" costs.

9941 Due to factors such as topography, it is possible, though not certain, that there are significant cost differences among the operating territories of various ILECs. The cost structure we have today may not be perfect, but it is what we have, and a new costing exercise cannot be carried out within reasonable resources or timing constraints. This means that decisions must be made based on costs as defined today.

9942 To the extent that there are genuine cost differences among various ILEC territories, a simplistic cost-averaging exercise for Band "G" would create severe market distortions and interfere with market forces. The situation is not analogous to the averaging of SILEC costs which are:

9943 (1) quantitatively much smaller than ILEC costs; and

9944 (2) more uniform than the cost differences among various ILECs, given that the majority of SILECs operate in areas that are adjacent to that of Bell Aliant.

9945 Any claims that current cost calculations lead to stranded investment should be rejected as no stranded investment problem has been identified by ILECs in their publicly filed financial statements.

9946 We would like to thank the Commission for its attention and we are prepared to answer any questions you may have.

9947 THE CHAIRPERSON: Thank you.

9948 On page 2, at the very top, you say that we should be very careful to do away with the obligation to serve unless we can convince ourselves that:

"...standalone PES would still be available for those consumers who do not want to take a bundle of services."

9949 Do you have any evidence that companies are going to discontinue offering standalone PES?

9950 MR. TACIT: Well, since the situation hasn't materialized yet, no, we don't have evidence to that effect.

9951 THE CHAIRPERSON: But presumably if we made it conditional, as we said yesterday, there is no obligation to serve and there is no BSO, on conditions that the ILECs continue to offer standalone PES, then you would be satisfied?

9952 MR. TACIT: As long as you can also satisfy yourself that those uncontested pockets aren't going to have a problem generally.

9953 THE CHAIRPERSON: I wasn't talking about uncontested pockets.

9954 MR. TACIT: Yes. On this issue, yes.

9955 What you are really saying is you are narrowing the basic service objective. So yes, we would probably --

9956 THE CHAIRPERSON: We have heard from all the telephone companies that they have no intention of discontinuing standalone PES, so why not take them by their word and say fine, we do it subject to that.

9957 MR. TACIT: That's a good -- that would certainly be acceptable to us.

9958 THE CHAIRPERSON: I guess Mr. TELUS -- Mr. Hennessy disagrees.

9959 TELUS, go ahead.

9960 MR. HENNESSY: At TELUS we are all Mr. TELUS, Mr. Chairman.

--- Laughter

9961 MR. HENNESSY: Michael Hennessy with TELUS.

9962 I think that proposal on standalone PES was something Mr. Henry from Aliant raised.

9963 THE CHAIRPERSON: Yes.

9964 MR. HENNESSY: When I heard the proposal I had great difficulty.

9965 If you have no obligation to serve, then it's quite possible that there are spots where you don't serve. If, however, you agree that you will continue to provide PES service, then it seems to me you really have agreed to an obligation to serve because you would expect us on demand to provide PES service I think under this model.

9966 So I don't really get it. I don't support it, I don't get it.

9967 THE CHAIRPERSON: I was trying to separate the two thoughts that you are wording together, which is obligation to serve and standalone PES. I was trying to find out from Mr. Tacit whether he feels they are married.

9968 If you say: Look, we no longer have basic service obligation and so therefore, you know -- but one of the benefits of basic service obligation was that there was a standalone PES. We don't think you will get out of business you serve. You have said that, you have the lines there, I just think that is a theoretical, not a practical.

9969 But the thing that it really seems that people have concerns is there might no longer be an ability to buy a standalone, that you have a buy a bundle.

9970 I was trying to find out from him whether you can separate the two and say: Fine, there is no obligation to serve, I assume business reasons will make you continue to serve your customers, et cetera. You are not going to discontinue anything or if there is a business case to serve somebody you will serve them.

9971 The only question is: Is your service offering going to be all bundled or will you maintain a standalone PES?

9972 I don't know whether that helps.

9973 MR. HENNESSY: Yes. Well, we can come back to it in argument.

9974 It's just I think it makes a logical sense where you are already providing service, it may not where you don't.

9975 THE CHAIRPERSON: Yes. No, no doubt. Okay.

9976 There is a hand up behind you. I'm sorry, I can't see who it is.

9977 Yes, go ahead.

9978 MR. LAWFORD: John Lawford, PIAC.

9979 I think the Commission is courting a lot of legal work on behalf of the companies if they say you have to still have PES but there is no more obligation to serve, because it is quite easy to turn around and say the basis is -- at least in our opinion, the basis would be gone for imposing it.

9980 Perhaps this was meant to be a condition under section 24 but I don't see the basis anymore so I think you would be running a risk.

9981 Thank you.

9982 THE CHAIRPERSON: Second, on page 3, you say:

"... wireless voice service satisfy the obligation to serve and the basic service objective?"

9983 We have heard evidence here that in some areas in effect the obligation to serve is right now being fulfilled by wireless so I was somewhat puzzled by this blanket statement of yours.

9984 MR. TACIT: Well, I think what I have heard parties say is that where they have taken on CLEC obligations they inherently meet the objective, but I haven't heard, other than a few parties say, that there are not technical and cost issues that do not make wireless -- at least today -- substitutable with wireline services everywhere.

9985 I have heard lots of parties say that there are all sorts of gaps in availability, coverage, and so on, in rural and remote areas.

9986 So it's an implementation issue, what we are talking about here. The technology is just not there to do it ubiquitously in the very areas that the Commission wants to benefit in this proceeding.

9987 THE CHAIRPERSON: You just added three words that are not in your statement "at least today".

9988 MR. TACIT: Well, I mean, all the submissions we are making are meant to apply as of today and the proximate future. None of us really know how things are going to evolve given the rapid pace of development of this industry.

9989 THE CHAIRPERSON: Okay.

9990 Then on productivity factor, you feel that we should not remove it even for Bands "E", "F" and "G"?

9991 I thought we heard fairly convincing argument that in those high costs areas, et cetera, applying the same productivity factor as you apply down in the downtown really doesn't make sense. There is just not the productivity gains that you can manufacture in those areas.

9992 MR. TACIT: Well, I'm not sure that I'm convinced by that argument, but more importantly I think productivity has been assessed on a company-wide basis and the numbers themselves are based on that. So I just don't see suddenly carving out little pieces where you say the rule is going to be a little bit different here and we are just going to apply it.

9993 THE CHAIRPERSON: When you are talking about SILECs with 5,000 NAS, et cetera, you know, that's a company-wide basis or not, it's still --

9994 MR. TACIT: Well, we take no position on what the SILEC regime should be. I'm talking purely about the ILECs in this situation.

9995 THE CHAIRPERSON: So you are basically talking about Bell Aliant.

9996 MR. TACIT: That's right.

9997 THE CHAIRPERSON: Okay.

9998 Candice, you have some questions?

9999 COMMISSIONER MOLNAR: I do.

10000 Mr. Tacit, I would like to follow up on the comments you make on page 7 related to uncontested pockets of consumers in forborne areas.

10001 I guess I will give you an opportunity to maybe expand on what you believe are the concerns for those consumers in the uncontested pockets and perhaps have some of the parties who favour their obligations being removed explain to us what safeguards they believe are in place to ensure that the Commission can assure itself that the consumers in these areas would continue to receive affordable rates.

10002 MR. TACIT: Thank you for that question.

10003 I don't have a great deal to add to what is here in writing.

10004 The concern, as I have indicated to date, really stems from the fact that the competitor presence test, which is the predominant basis on which -- on the basis of which ILECs seek forbearance is a test that does allow for up to 25 percent of the lines to be uncontested and still have that exchange get forbearance.

10005 It seems to me, especially in mixed exchanges where you have the so-called doughnut effect present and you have a bigger cluster where the majority of the lines are going to be in the middle in some small urban area, that it's precisely the people in the surrounding area that could end up being disadvantaged and not having alternatives and where price differences could arise.

10006 I don't know that I can add any more to it than that.

10007 COMMISSIONER MOLNAR: So essentially the price cap that was there for standalone PES has safeguarded those consumers despite forbearance --

10008 MR. TACIT: Correct.

10009 COMMISSIONER MOLNAR: -- and so by removing that price cap the danger is the rates outside of the Timbit, or whatever it's called, there is no safeguards for those consumers?

10010 MR. TACIT: That is the most likely place where the problem will manifest itself, yes.

10011 COMMISSIONER MOLNAR: Okay.

10012 Is there anyone in the room who would like to comment on what safeguards there are in place?

10013 Mr. Hennessy?

10014 MR. HENNESSY: Yes.

10015 Just to go back to our proposal, what we had suggested and Mr. Tacit said is so complicated and we had made an undertaking, as we had suggested, that in MDUs of 10 or more apartments or condos, or in subdivisions of 10 or more households, that you would remove the BSO but you would not remove -- therefore you would not remove the BSO in other circumstances.

10016 So to me in those forborne exchanges that fundamentally ensures individual households continue to get service and that there is a level where you are expecting competitive entry to take care of the rest.

10017 So that in terms of service takes care of things.

10018 I don't think I have heard anybody suggest that rates should be totally unrestricted and I have heard nobody suggest rates increases above rates that exist in different parts of the market today.

10019 COMMISSIONER MOLNAR: To be honest, I am not sure that I understand your answer. The concern that was raised is that these are uncontested customers and there are no safeguards on where their prices might end up. Within the regulated exchanges there still is the tariffed rate for PES that will control what rates are charged, to ensure those rates are just and reasonable.

10020 In uncontested pockets of a forborne exchange, if the cap on standalone PES is removed, what is the safeguard to ensure that the rates in those areas remain just and reasonable?

10021 MR. HENNESSY: No, I hear what you are saying. I think, in practice, what we have actually seen in forborne exchanges is that the rates have been going in the other direction.

10022 COMMISSIONER MOLNAR: Mr. Daniels?

10023 MR. DANIELS: Jonathan Daniels, Bell Canada.

10024 Just to clarify Bell Canada's position on this, our belief is that in forborne areas there shouldn't be any standalone price cap. There shouldn't be any restriction. And we have outlined our position as to why.

10025 Just to reiterate, in our experience, when we enter a market, virtually the entire market is served by other competitors, and even if not, we are not able to deduce where those other people are. We don't spend the time. So we are not able to figure out: Oh, here is the doughnut, here is where we should raise rates.

10026 Having said that, yesterday, under questioning by Vice-Chairman Katz, we were asked would it be acceptable to have a limit, rather than just the limit as it exists today, which is whatever the rate happens to be when forborne -- would it be acceptable to put on an affordability limit to protect affordability, whatever the highest affordability is that is established by the Commission, and we said that that's not our preference, that's not our position, but it would be acceptable.

10027 So if the Commission is absolutely concerned that in forborne areas that is the key issue, that there could be some people who would have rates that would be unaffordable, absent regulation, then we have said that it would be acceptable to impose that obligation on us.

10028 I just want to point out, though, that in competitive markets today you see not just us, but a number of carriers offering standalone PES, and they do that for marketing reasons. I think it just makes good business sense.

10029 So I am not sure that we need this type of regulation, but having said that, it is possible. You had that type of regulation on the toll side, even in areas without equal access. You had it with the basic toll schedule for a number of years, and then you removed it. We think you can remove it.

10030 Nonetheless, if the Commission is still concerned on that basis, it is possible, and we said that it would be acceptable, as long as rather than being the rate that is forborne, it's the maximum affordable level, which is the issue that you should be worried about.

10031 I hope that helps.

10032 COMMISSIONER MOLNAR: Thank you, and I'm sorry, I forgot about the conversation yesterday.

10033 PIAC, in the back...

10034 MR. LAWFORD: Thank you, Commissioner Molnar.

10035 I would just refer the Commission back to another reason for standalone PES, and that's in the 2006-15 decision. At paragraph 377 the Commission said that their concern is the many disabled Canadians who live on limited incomes.

10036 So it's not just a matter of who is stuck in the doughnut at the bad part that nobody wants to serve except the ILEC. Yes, there are those folks, but it is an affordability issue, and it's about making companies offer you the plain old vanilla telephone service, if you will, so that if you just want to pay for that, you can do it, and it's affordable, and you don't have to take a bundle.

10037 The reason competitors match the ILECs' standalone PES is because there is a requirement for the ILECs to offer standalone PES. If it goes away, no one is going to offer it.

10038 COMMISSIONER MOLNAR: Okay. SaskTel?

10039 MR. MELDRUM: I'm sorry to sound like a broken record, but this discussion does underscore the difference between other companies' serving territories and Saskatchewan. We just can't foresee removing the obligation to serve and removing any pricing constraints in up to 25 percent of our exchanges, where there will not be any cable competitors.

10040 And I gave the example the other day of Melville, where -- I think it's 24 percent, or 23 percent of the NAS are outside the City of Melville, and as soon as you get outside Melville, it's deep, rural Saskatchewan, and cable is nowhere to be seen with 10-kilometre loops. They are not making the investment.

10041 We believe that the obligation to serve has to continue, and that pricing constraints should continue.

10042 THE CHAIRPERSON: But wouldn't you see that in the future there may be a time -- maybe not today, but where you would fulfil that obligation with wireless, rather than wireline?

10043 MR. MELDRUM: I think that takes us back to the requirement to put up something like 2,000 towers in rural Saskatchewan.

10044 We currently have 500 that blanket the entire province, and we would require 2,000 more towers to fill in the gaps.

10045 And we don't believe that technological change is going to fill in those gaps.

10046 MR. TACIT: Could I just make one supplementary remark directly addressing that point?

10047 I think it's important when the Commission is making its decision in this proceeding to make it based on what we know today, rather than speculation about where wireless will go, and whether it will or won't, because one thing we have learned is that we have often not predicted things, even big things in this industry, and they come out of left field.

10048 COMMISSIONER MOLNAR: Mr. Tacit, just following up -- and this is my last question -- the proposal that Mr. Daniels spoke about, where there would be an agreement where, fundamentally, rates -- the new ceiling would be what is deemed to be an affordable rate in uncontested markets, regulated markets, high-cost serving areas, and so on.

10049 That would seem to address the issue, don't you believe?

10050 MR. TACIT: I guess it really amounts to what we consider to be affordable. The problem I have --

10051 COMMISSIONER MOLNAR: But if we determine a rate to be affordable in an uncontested market in a high-cost area -- what we are talking about here is uncontested markets, as well, so one would assume that it could be affordable in these uncontested markets, just as they are in the regulated markets.

10052 MR. TACIT: If we were looking at strictly affordability, I would agree with you, but there are other reasons why we have a problem with raising rates to so-called affordable rates, which I have specified here and I won't repeat, unless you would like me to elaborate.

10053 COMMISSIONER MOLNAR: That's fine. Thank you.

10054 Those are my questions.

10055 THE CHAIRPERSON: Thank you.

10056 Len...

10057 COMMISSIONER KATZ: Thank you, Mr. Chairman.

10058 Good morning. I have a question on that, as well.

10059 At the bottom of page 7 you say that we should be cautious about dealing with the concept of affordable rates, and then you say that the ISPs believe that such increases would not lead to rates that are just and reasonable.

10060 Are you suggesting that we should be defining "just and reasonable" on a community-by-community basis?

10061 MR. TACIT: No --

10062 COMMISSIONER KATZ: Just and reasonable in Ottawa may be different from just and reasonable in Kanata?

10063 MR. TACIT: No, not at all. I think the linkage was to the previous paragraph, and the concept there is a simpler one than that.

10064 Right now there is a link in the contribution mechanism between the amount of the subsidy that somebody gets and pays and the actual national subsidy requirement.

10065 If you were to do it differently and say, "We are just going to let these rates rise," the problem is that there would be a break in the linkage between all of those factors that are driving contribution rates down, such as increased revenues in the industry.

10066 What it would do is, by breaking that link, provide ILECs with an opportunity to earn revenues that ultimately are in excess, over time, to what they would have received under the contribution regime, as it exists today.

10067 The problem with that is that those revenues could be used to cross-subsidize competitive activities. So it is in that sense that we are saying those rates would not be just and reasonable.

10068 I hope that clarifies it.

10069 COMMISSIONER KATZ: It doesn't.

10070 I mean, surely if there is a rate that is affordable, that is not beyond what the market would normally bear -- and in markets where there is no competition, it's uncontested, I guess it's up to the Commission to decide what is just in reasonable in that sense.

10071 But for every 10 cents that that rate moves up, the subsidy goes down by the equivalent 10 cents.

10072 MR. TACIT: But the problem is that, over time, the subsidy might actually go down faster, just through the growth of the industry. So you end up with this excess revenue pot that the ILECs could earn that could be used to cross-subsidize other activities.

10073 That's what I am worried about.

10074 COMMISSIONER KATZ: I don't understand how the pot gets bigger, because every year we re-evaluate the percent that is going into it.

10075 As an example, just last week we lowered the TSP percent from .81 to .73, for that purpose.

10076 MR. TACIT: What I am saying is, though, once you give them permission to increase the rates, if the total revenues they end up earning in 2013 or 2014 are more than what the equivalent reduction in the contribution would have otherwise been, then they are earning more revenues than they would if the current mechanism continued to work the way it does.

10077 COMMISSIONER KATZ: What you are saying is, as long as we create a one-to-one relationship --

10078 MR. TACIT: Right.

10079 COMMISSIONER KATZ: -- there isn't a problem.

10080 MR. TACIT: That's the point.

10081 COMMISSIONER KATZ: Okay. On page 8, in the middle paragraph, I guess, you say that the ISPs also don't agree with those parties who wish to remove the portability of the local subsidy. Doing so would be inequitable.

10082 Maybe I missed it, but is it your position that when a market is either forborne or deemed to be competitive, there should still remain a subsidy?

10083 MR. TACIT: If it's a high-cost serving area -- I guess it's kind of a hypothetical question. I'm not sure how much forbearance you are going to get in truly high-cost serving areas without portability, frankly.

10084 COMMISSIONER KATZ: Band "E", Band "F" -- there are an awful lot of them that have been forborne to date.

10085 MR. TACIT: True.

10086 COMMISSIONER KATZ: Are you saying that, in that environment, the subsidy should be maintained?

10087 MR. TACIT: Yes, I don't think that it should be removed, frankly. The problem is, without that subsidy, we might be rolling back a lot of the benefits of how and why those exchanges became competitive in the first place.

10088 Those exchanges might not have become competitive, in some cases, but for the subsidy being available.

10089 COMMISSIONER KATZ: Okay. Well, that's your position.

10090 At the top of page 9 you talk about the implicit contribution, and here you are taking the position that long distance and network access charges should, in fact, be used in the imputation.

10091 MR. TACIT: Correct.

10092 COMMISSIONER KATZ: You have heard over the last several days parties saying that there is no relationship between the network access charge and local telephone service.

10093 Can you expand as to why you think that it should be included, given that view of some parties?

10094 MR. TACIT: I know they take that view, but the fact is that, without dial tone, you don't get long distance, you don't get network access, you don't get local service. So I don't truly agree with that view of the world.

10095 It's having the line and the access that gives you all of those capabilities, and that leads to all of those charges.

10096 COMMISSIONER KATZ: The fact that you say that the margins should be properly imputed to ILECs, are you suggesting that it be done on an ILEC-by-ILEC basis?

10097 MR. TACIT: I don't have the data to see if there are big enough differences to justify that or not, and I don't know what policy the Commission wants to determine specifically based on the confidential data that it has available. That's not available to us, so I am not going to comment very specifically.

10098 I think, to the extent that you want to keep the system as free as possible from distortion, if you know the margins and costs of certain ILECs, within certain tolerances of accuracy, even though they may be imperfect, certainly I think that you should use the data you have that is specific to the ILEC, rather than engaging in some sort of averaging exercise that could introduce more distortions.

10099 COMMISSIONER KATZ: Those are my questions, Mr. Chairman.

10100 THE CHAIRPERSON: Before I let you go, I would like to hear from Bell Aliant on the whole business of standalone PES.

10101 Refresh my memory, did I misunderstand you, or did you say earlier that you would always offer standalone PES?

10102 MR. HENRY: I am not sure I said that we would always offer standalone PES, but I am prepared to accept what Mr. Daniels said. We don't think you need a standalone price cap, for all of the reasons he reiterated. To us it's just-in-case regulation.

10103 But if you are prepared to put a price ceiling on it, at the highest affordable rate, that's something we could live with.

10104 THE CHAIRPERSON: I'm sorry? You faded out, I didn't hear the tail end of --

10105 MR. HENRY: If you are prepared to put a standalone price cap on forborne areas, at the highest affordable rate, we don't think you need to, but we could accept it.

10106 THE CHAIRPERSON: There is a hand up over there.

10107 MR. LAWFORD: The standalone rate is supposed to be the rate that was last set in the last price cap. So are we changing that right now?

10108 THE CHAIRPERSON: Who is asking this question?

10109 MR. LAWFORD: John Lawford from PIAC.

10110 Is the standalone rate cap, which was supposed to be set at the last --

10111 We are doing that right now? That's an issue?

10112 THE CHAIRPERSON: I'm sorry, we are obviously not making any decisions here, we are --

10113 You know what the terms of reference of this hearing are, so I am not quite sure what your question is driving at.

10114 MR. LAWFORD: Mr. Chair, I guess that's my confusion. I am not sure whether, at the close of this proceeding, you could turn around and say: Yes, we have altered the terms of the price cap for standalone PES, and we are removing that, or not.

10115 I would just like to know.

10116 And we are moving it up to 36. I would just like to know if that's a possibility.

10117 THE CHAIRPERSON: Well, I don't see anything in the terms of reference for this hearing that would prevent us from doing it. Whether we want to do it is a different story.

10118 MR. LAWFORD: Okay, thank you.

10119 THE CHAIRPERSON: Mr. Daniels?

10120 MR. DANIELS: Mr. Chairman, there is just one comment that didn't get asked about on the submission, which I just, with your permission, wanted to make a brief comment on.

10121 On page 7, at the very top -- it's actually at the end of page 6 -- there is a reference to -- in terms of funding payments from end customers, that the Commission should mandate it as a separate line item on customer bills.

10122 I just wanted to make the statement, because I saw this reference that it be mandated, in terms of what should be or should not be on customer bills. I just wanted to state that Bell Canada's view is that the Commission doesn't have the jurisdiction -- or, maybe a better way of putting it is, it's a constitutionality question, or freedom of expression, to be able to say what does or doesn't go on someone's bill, in terms of how you present it.

10123 Having said that, I would also like to state that our position -- and not just related to this one issue, but any of the price changes -- our position is that what the CRTC would be doing would be giving the freedom -- the ability of competitors, of TSPs, whatever, including the ILECs, to be able to make rate changes.

10124 For example, if the Commission moved the standalone price cap, or raised the limit on the standalone price cap, or allowed us to raise rates in high-cost areas in order to reduce the subsidy, that would be the option of the ILEC.

10125 If the ILEC, for example Bell Canada, was to do that, it is Bell Canada's choice, it's Bell Canada's decision, and there is no way that Bell Canada should be attributing that to the CRTC, or saying that it's, you know, CRTC mandated.

10126 That's not our position. Our position would be that that would be a Bell Canada decision. The CRTC would merely give it the freedom, so there would be no attribution toward the CRTC on that, one way or another.

10127 THE CHAIRPERSON: Speak to your cable partners. That's a wonderful view, I wish they would share that.

10128 MR. TACIT: Could I address that last point, Mr. Chair?

10129 THE CHAIRPERSON: Yes.

10130 MR. TACIT: We don't agree that this is a freedom of expression issue, it's a section 24 regulatory issue. The Commission has ample jurisdiction to mandate charges. It does it all the time. This is nothing new.

10131 It also has the jurisdiction to require the ILECs to require parties purchasing wholesale services from them to do the same, as a condition of providing service to them.

10132 There is nothing new here at all. However, what this does point to is the difficulty of engaging in this whole broadband fund issue. So if we are going to get into these jurisdictional problems, it is yet another reason why the broadband fund is not a good idea.

10133 THE CHAIRPERSON: Okay. I think those are our questions. Let's take a five-minute break while TELUS sets itself up.

10134 Thank you.

--- Upon recessing at 0920

--- Upon resuming at 0930

10135 THE SECRETARY: Mr. Chairman, we will now proceed with the presentation by TELUS Communications Company.

10136 Please reintroduce yourselves for the record and proceed with your 15-minute oral rebuttal argument.

ORAL REBUTTAL

10137 MR. HENNESSY: Thank you, Madam Secretary.

10138 Again, my name is Michael Hennessy. To my left, you have met Orest Romaniuk and Ted Woodhead.

10139 To my right, joining me today, is Isabelle Morneau from our TELUS Quebec team in Rimouski.

10140 And, if necessary, which we hope is not the case, our lawyer, Mr. Phil Rogers, is sitting behind us, to my far left. I have no plans to use him.

--- Laughter

10141 THE CHAIRPERSON: I hope that you feel wanted and appreciate, Mr. Rogers.

10142 COMMISSIONER KATZ: Does that mean he can't charge for his time?

--- Laughter

10143 MR. HENNESSY: Oh, it's a flat rate.

10144 Mr. Chairman, members of the panel, we have discussed broadband in detail over the last two weeks, from pretty much every angle, except the goal or purpose of regulation, if needed.

10145 In our view, you cannot begin to decide whether to set mandatory targets and intervene in a highly dynamic market without first measuring performance against a set of goals.

10146 While the federal government, through its digital economy strategy, has yet to recommend goals for broadband investment and adoption, we can consider as an alternative the U.S. national broadband plan for one example of an objective for basic broadband service.

10147 That plan recommends that everyone in the United States today should have access to broadband services, supporting a basic set of applications, which include sending and receiving e-mail, downloading web pages, photos and video, and using simple video conferencing.

10148 To TELUS, this seems a fairly reasonable point of departure, or start of the journey, in that it focuses on the need to communicate, to interact, and to access basic internet applications and essential services from e-mail to e-health.

10149 The U.S. goal can be easily achieved, with relatively low speed, over multiple technologies.

10150 Delivering entertainment like over-the-top video or multi-player games is another story and would present a greater challenge.

10151 To TELUS, the critical question in this proceeding is whether, at this point in time, there is clear proof of a need for regulatory intervention in order to ensure universally accessible and affordable broadband service that meets a basic objective.

10152 In our view, the answer right now is no. Universal coverage of basic broadband service will be delivered, primarily through market forces, over the next 12 to 18 months, without the need for regulatory intervention.

10153 However, we do agree that there is value in measuring success to ensure that that goal is met across all regions of the country.

10154 TELUS considers that there is no basis to suggest that there is a growing digital divide in Canada. Year-over-year, as your monitoring reports show, broadband penetration and coverage has increased. That, too, is a measure of success.

10155 Let's look at wireless. Wireless is causing a major increase in broadband adoption and growth. As Mr. Langdon noted earlier this week, it is likely that there are at least 800,000 mobile subscribers now using broadband internet sticks. And all smart phones launched in the marketplace, which could be as many as 5 million by the end of 2012, are broadband devices.

10156 In our view, the line between fixed and mobile broadband is blurring. That is not to say, though, that there won't be barriers to broadband adoption that need to be identified and addressed. We suspect that there are real problems of adoption due to digital literacy, and poverty, that raise broader issues of government's role, and we recognize that this part of the puzzle is something the digital economic strategy can, or at least should, provide direction on.

10157 But irrespective of any resulting actions by governments in those areas, it makes no sense to us at this time to distort the market by introducing subsidies, or restrictions on services in the form of a new BSO, as long as the adoption curve continues to trend up in all parts of Canada.

10158 Again, we agree that this is an object worth measuring on a much more granular level than today.

10159 Broadband is an evolving, complex and competitive market, and this market must not be skewed by unnecessary regulation like a new BSO, unless there is clear evidence of a persistent market failure. This, to us, is a critical point. The object of a measurement program should not be to ensure that every carrier and every technology meets a minimum target, because broadband is not a monopoly business. It is highly dynamic, and all ISPs have different business plans.

10160 The objective, to us, should be to assess if all Canadians will have at least one broadband service that meets the federal government's objectives.

10161 Let me move back to wireless again. Imposing a wireline style BSO on wireless is also unnecessary. For 25 years wireless has been an unregulated service. Consumers, in large numbers, are increasingly shifting to mobility for better functionality and features than they can get from wireline.

10162 In fact, nearly 50 percent of 18 to 34-year-olds in B.C. have cut the cord already, because wireless offers overall better value. That is a signal of where the market is going, and it's a signal that we cannot ignore, because only wireless offers consumers mobility, voice and high-speed internet access in a single package. Wireline is not portable for voice or internet, and potentially, when you integrate all three functions in wireless and cut the cord, the wireless option may ultimately be more affordable than separate wireline voice, internet and mobile phone subscriptions.

10163 Fixed broadband, on the other hand, is clearly an excellent medium for video entertainment to the home. TELUS has invested billions of dollars in high-speed upgrades and hybrid fibre to offer a multi-channel IPTV service, along with faster internet, to meet consumer demand in urban locations.

10164 However, like others, we cannot afford to roll out that type of service across the whole of our territory.

10165 But we also submit that the achievement of public policy objectives around a broadband plan does not require CRTC intervention to duplicate delivery of multi-channel video entertainment to Canadians in remote and rural locations.

10166 That does not mean that some Canadians will be unable to receive online entertainment on demand, it just may be from satellite and wireless, not wireline.

10167 Mr. Chairman, let me turn to targets and reasonable expectations.

10168 We have heard all kinds of estimates of speeds to be delivered over the next few months to the next few years, and what we see is a picture of overlapping networks, with speeds from 1.5 meg to 100 meg.

10169 What will this deliver?

10170 We have given you a slide at the end of this submission -- and we have put it up on the screen -- to help understand.

10171 As you can see, even at speeds from 3 megabytes, you can receive streamed video.

10172 At TELUS, we believe that over the next 12 to 18 months we will reach the point where every Canadian has such basic access.

10173 Not only will satellite close the last gap, but for most Canadians, wireless services, including HSPA+, WiMax and LTE, will over the next few years offer broadband sufficient to stream video, just not within current exchange boundaries, but well outside such boundaries.

10174 Again, if you look at the map above, or, if it's easier, on your deck, you will see in the slide for the Province of Alberta the shaded areas where HSPA is already available. What is striking about this is that HSPA coverage today is actually far wider than traditional telephone service.

10175 Mr. Chairman, a wide variety of competitors have told you that they have business plans already in place for increased investments that will deliver even higher quality to all Canadians.

10176 What is critical is that premature government regulation -- not just the CRTC -- not inadvertently alter the economics of those plans based on presumptions that they will fail to deliver.

10177 We agree that the Commission should measure progress for the next three years, and if it appears to the CRTC that the market has fallen short, only then should we consider intervention.

10178 Mr. Romaniuk...

10179 MR. ROMANIUK: Thank you, Michael.

10180 Mr. Chairman, we believe that there is an emerging consensus that local rates in high-cost serving areas should move closer toward the true cost of providing such services.

10181 Current rates in TELUS' high-cost serving areas are, on average, approximately $28 per month, ranging from $25 in B.C. and eastern Quebec, to $31 in Alberta.

10182 We recommend that rates be increased, in a phased approached, by $2 in each of the next three years, commencing in 2011, reaching an average rate of $34 by 2013.

10183 By way of example, and to test our proposal, if the actual high-cost rates, as set in 2001 in Alberta, had been permitted to increase only by inflation, today's average rate would be in excess of $34. This substantiates our proposal that the proposed rates are reasonable and affordable.

10184 A key and necessary component associated with moving these rates closer to cost is that there must be adjustments to ILEC costs, given that they are currently based on 2002 data and have been ground down over the last nine years by $290 million in cumulative deemed productivity savings.

10185 Absent these adjustments, if rate increases are simply offset by a corresponding reduction in subsidies, that would only shift the toonie from one pocket to the other, and we would be left, as today, undercompensated.

10186 Given that since 2002 TELUS' costs have been deemed to be lower by approximately $10 per line, as noted above, while incurring a circa 20 percent decline in customers over the same timeframe, we propose that these rate increases not be matched by an automatic decline in subsidy.

10187 Further, given the large gap between price and past inflation, we suggest that the initial $2 increase be implemented in conjunction with, rather than subsequent to, a limited and focused adjustment to certain local service costs.

10188 Now, we have sensed some concern that a review of cost adjustments might consume too much time. We believe that concern has been over-exaggerated.

10189 We agree with you that costs must be reviewed in an efficient and effective manner. Fortunately, we are well ahead of the game versus where we were in 2002.

10190 Firstly, in 2008 the Commission reviewed, updated and clarified many of the tough issues associated with the current Phase II costing manual. There will be no need to debate these issues.

10191 Secondly, back in 2002 loop cost studies were based on manual records, using loop sizes of 1,000 and complex methodologies. This resulted in considerable effort for both us and the Commission.

10192 Since that date the records have been fully mechanized. Extracting cost information is now much faster and more accurate. We have virtually completed our loop survey, encompassing information on 1 million loops, all done by two staff, over a few months.

10193 We stand ready to provide you with very accurate information on the actual costs associated with these loops, consistent with your well-established Phase II methodology.

10194 A limited review of these capital and associated maintenance costs would capture more than 90 percent of the aggregate costs.

10195 Mr. Chairman, Bell has proposed a few major changes to the current local service subsidy system. Firstly, let us take a look at the resulting net gain to the Bell group of companies.

10196 TELUS estimates that Bell Canada and Bell Aliant combined would be better off by more than $50 million annually, primarily at the expense of western Canada. It's a very clever strategy from Bell's own perspective, but they distort established costing principles approved by the CRTC to get there.

10197 For example, Bell suggests imputing additional service revenues to reduce subsidies. They ignore the current declines in those revenues on a forward-looking basis. This is exactly what is happening as competition rolls out in high-cost regions, and it will only accelerate as increased satellite and wireless competition erodes our market share.

10198 Over the last two to three years, aggressive competition has come to 76 high-cost exchanges in TELUS' territories. As filed in Interrogatories 105 and 1006, revenues and, more importantly, margins from the products that Bell says should cross-subsidize local services will have decreased by between 50 to 70 percent by the time the Commission rules on this proceeding. It would make no sense to ignore this economic reality.

10199 When it comes to costing issues in this proceeding, Bell is an extreme outlier. They are telling you that, for subsidy measurement, the Commission's 20-plus years of costing work is worthless and you can't rely on it. They say that the current Phase II costing system produces erroneous results in western Canada. But, paradoxically, in eastern Canada, in Bell Aliant territory, apparently the same Phase II costing system produces correct results and Bell says you can rely on those. And, for one of its bands in Bell Aliant, they would like more subsidy. We think the Commission can see through this scheme.

10200 Mr. Chairman, we say you can continue to use your Phase II costing system with the analysis we described and you will get the right results.

10201 MR. HENNESSY: Thank you, Mr. Chairman, Members of the panel. That concludes our presentation.

10202 We would be happy to take your questions now.

10203 THE CHAIRPERSON: Okay, thank you.

10204 Just let me revisit the issue of standalone PES which you and I discussed a moment ago, and you said you were going to address it. I didn't hear anything in what you said just now about it.

10205 MR. HENNESSY: Yes. No. Sorry, no problem.

10206 You know, our position initially was that there should be no obligation to serve in forborne exchanges. We sensed from the Timmins hearing that that was an uncomfortable position for the Commission because of the existence of the doughnut effect even in forborne exchanges and proposed an alternative proposal where MDUs in subdivisions of 10 units and up would not be subject to any obligation to serve but, as an alternative the individual households are -- clusters below 10 would.

10207 So I think, in effect, that really addresses that. We have no problem, again, with maintaining the obligation to provide a standalone PES service under that model.

10208 So I think the difference --

10209 THE CHAIRPERSON: I'm looking for a bit more hearty commitment than that saying we have no problem with. Are you committed to continue to provide standalone PES?

10210 MR. HENNESSY: Under our model.

10211 THE CHAIRPERSON: Under your model.

10212 MR. HENNESSY: So we would provide standalone PES to any customer on demand within the exchange boundaries except -- you know we would have an obligation to do that. We would recognize our obligation to do that except in situations of multiple dwelling units or subdivisions of 10 units and above.

10213 THE CHAIRPERSON: Since you put that on the table, can I see what does Bell think about that, and Bell Aliant?

10214 MR. DANIELS: Mr. Chairman, I guess I am trying to understand it. I think the TELUS position has to do with when they would construct and so on. Again, our position is that there shouldn't be an obligation to serve.

10215 Having said that we have acknowledged, that we can live with the existing requirements as long as the standalone cap gets raised to the highest affordable level as determined by you.

10216 I would also note -- I mean from our perspective it's not -- it's Bell Canada Act. So it doesn't matter one way or another in terms of -- our obligation would exist based under the Bell Canada Act, to be quite honest with you.

10217 THE CHAIRPERSON: So you say as long as they kept the rates to the highest affordable level you can live with a standalone PES and you don't need the qualification that TELUS added to it? Did I understand you correctly?

10218 MR. DANIELS: Well, all I was trying to say is that for us the qualification deals with building so we have a unique circumstance in terms of the Bell Canada Act in terms of the building requirement.

10219 But I understand where TELUS is coming from, and I think in terms of as a building distinction it makes sense.

10220 MR. HENNESSY: Mr. Chairman, can I just clarify a bit --

10221 THE CHAIRPERSON: Yes.

10222 MR. HENNESSY: -- as to why -- the problem I have there?

10223 The reason that we tried to make the compromise at subdivision or the multi-dwelling unit is the problem that if there are marketing agreements or the condo owners choose a particular supplier at the beginning, you can be left with as little as 10 percent of the remaining customers that may demand service. And the cost in those situations to provision the area to serve what might be, you know, a customer you are not aware of yet, really require you to put in more facilities than for 10 percent of the customer. So it's that cost that we are trying to avoid.

10224 So the situation of saying you would still have to provide PES even in those circumstances would be of no help or solution to that problem.

10225 THE CHAIRPERSON: I see you in the corner there but I will come back to you. Don't worry.

10226 Just, Mr. Daniels, have a third try. I still didn't understand your answer.

10227 MR. DANIELS: Okay. Fair enough.

10228 So when the Commission -- in forborne areas the standalone -- the requirement is to provide standalone PES service and presumably it's also that the construction tariffs apply in terms of when you actually have to build facilities. So those are the two -- that's how the obligation to serve manifests itself in a forborne area.

10229 So what we are saying is, in terms of it's not our preference but we said it's acceptable if you allow the standalone price cap level to rise to the highest affordable level then, yes, you can preserve the requirements for our construction tariffs, as well as the requirement that we have to provide service.

10230 Having said that, I am acknowledging that TELUS' point of saying that MDUs or new subdivisions may be something that should be exempted in terms of places that we shouldn't have to go into if someone else is already providing the service, we have the Bell Canada Act so we have -- for us it's slightly different about when we have to build as compared to TELUS. So that's why I raised it.

10231 But in terms of let's put the Bell Canada Act aside, we agree, and I would support based on the caveats that I just said, the TELUS proposal.

10232 THE CHAIRPERSON: I thought I understood you until you looped totally around. You said it's acceptable and then you started talking about Bell Canada and then you said suddenly, "I'm back to the TELUS position".

10233 MR. DANIELS: Standalone price cap, an increase to the standalone price cap to the highest affordable level.

10234 THE CHAIRPERSON: Yes.

10235 MR. DANIELS: Okay. So in terms of rate I think that's our position.

10236 So now we are talking construction and under construction we have the construction tariffs that also applies. We are willing to accept that, except to say that -- TELUS is presenting to you to say it shouldn't apply in situations where there is a new -- if I understand correctly Mr. Hennessy's position -- in new subdivisions and MDUs and we think that's a reasonable exception, so yes.

10237 Does that help?

10238 THE CHAIRPERSON: Notwithstanding it doesn't apply to you because of the provisions of the Bell Canada Act is, I guess, what you are saying.

10239 MR. DANIELS: Well, the reason it may not apply to us -- take a subdivision. We only have to build if there is 62 metres of fronting. So if we don't have facilities in that subdivision we actually don't have to go in and build there today. So that's -- I don't know the TELUS regime well enough to speak to on --

10240 MR. HENNESSY: Yes. That, as I said the other day, is the fundamental difference. We have to provide service throughout the exchange subject to the $2,500 cap on the construction tariff. So if somebody builds a new subdivision 100 yards from the last pole, which often happens, then Bell doesn't have the obligation to serve there to begin with. We do. That's the fundamental difference.

10241 THE CHAIRPERSON: Okay. I see two -- there was one lady there in the corner, first of all.

10242 MR. DANIELS: Mr. Chairman, sorry. It is Jonathan Daniels here.

10243 I have just been given a clarification here that I actually I made an error in terms of saying that the construction tariffs apply with the forborne because my colleague, Mr. Abbott, is pointing out to me that actually they don't under the regime today. So I stand corrected on that.

10244 THE CHAIRPERSON: Okay. For the last time, can I have a revised, clear position of Bell Canada now?

10245 MR. DANIELS: Can you just give me one minute to --

10246 THE CHAIRPERSON: Okay. I will come back to you. I will ask the other three to come back too.

10247 Okay.

10248 MR. LAWFORD: Mr. Chair, it's John Lawford from PIAC and Janet Lo.

10249 Our other counsel has a question for Mr. Hennessy, but just to make Mr. Daniels' job more difficult, I would like to know if he is saying that the new standalone price that Bell wants is $36 for standalone.

10250 Okay. So if that's the question, is he saying that the standalone rate should be the --

10251 THE CHAIRPERSON: I thought he said affordable as determined by the Commission.

10252 MR. LAWFORD: I thought he said the same -- the highest affordable rate which I understood to be $36.

10253 THE CHAIRPERSON: Okay. We will get clarification from him. What is the other person there?

10254 MS: LO: Thank you, Mr. Chair.

10255 This question is for Mr. Hennessy.

10256 THE CHAIRPERSON: Identify yourself, please.

10257 MS. LO: Oh, sorry, Janet Lo, from the Public Interest Advocacy Centre.

10258 THE CHAIRPERSON: Yeah.

10259 MS LO: My question is with respect to Mr. Hennessy's proposition that they do not want the obligation to serve multi-dwelling units. I'm wondering if they do not want the obligation to serve low-income multi-dwelling units for standalone PES service. I'm wondering how that would work.

10260 THE CHAIRPERSON: Okay. We will come back to him.

10261 There was another flag up there in the corner. SaskTel?

10262 MR. MELDRUM: Thanks. It would be John Meldrum.

10263 It's just interesting to note that Bell's obligation to build is 62 metres and TELUS' is the first $2,500 is theirs. In our case the first $10,000 is ours. Again, I think that reflects the kinds of challenges we have in rural Saskatchewan that we have got that $10,000 bogey.

10264 That comment also goes to the cable carriers' comments that it's pretty easy to provide service in rural areas. Well, we have got the first $10,000 is SaskTel's expense.

10265 THE CHAIRPERSON: Okay, Mr. Hennessey, there were some questions for you. Do you want to answer those?

10266 MR. HENNESSY: Mr. Chairman.

10267 Okay. Sorry, the construction tariff does apply in our situation.

10268 So I don't ever remember commenting on what the cap on standalone should be, Mr. Woodhead, but I'm pretty sure I didn't.

10269 MR. WOODHEAD: There is a couple of things going on.

10270 HE CHAIRPERSON: I thought PIAC asked you about multiple dwellings of --

10271 MR. HENNESSY: Okay, well, there were about four questions.

10272 THE CHAIRPERSON: No, the other one, that wasn't addressed to you. That was addressed to -- I think the -- PIAC wanted to hear from you.

10273 MR. HENNESSY: Okay.

10274 Was our plan sort of focused on avoiding the obligation to serve low-income houses? I have got to admit we didn't approach it that way.

10275 We approached it in the fact that as a cluster of units gets greater then the attractiveness to competitors in forborne exchanges where we know there are competitors for the most part, increases. That was all we were trying to say.

10276 THE CHAIRPERSON: Okay. Mr. Daniels, have you collected yourself by now?

10277 MR. DANIELS: Yes, thank you.

10278 Okay, sorry. This is what happens when people -- I appreciate given the time to get the facts straight. So the construction tariff, as I understand it, does apply in forborne areas, just like TELUS said.

10279 So I apologize. I misunderstood what the person was saying beside me.

10280 So I am back to what you had understood before, which is that from our standpoint that today we have that obligation in terms of the rate -- I think you are clear on -- the construction tariffs if you preserve the rate, again, it's not our first preference but we would continue to apply.

10281 However, we do think that it makes sense to have the exception for the MDUs and new subdivisions generally.

10282 THE CHAIRPERSON: Okay. Back to you, Mr. Hennessy.

10283 On page 6 this morning you say in paragraph 10:

"The objectives should be to assess that all Canadians will have at least one broadband service that meets the federal government's objective."

10284 Is there anybody who takes issue with this? I mean you underlined it at least once. As I explained to you yesterday, that was always our assumption. I mean you said it's your objective is you want to make -- since it's a minimum hopefully there will be more by at least one --

10285 MR. HENNESSY: Yes, and I heard you and I took comfort in that, Mr. Chairman.

10286 THE CHAIRPERSON: Is there anybody here who disagrees with this submission?

10287 I guess not. So when you go onto the next page and you are talking about wireless and you say, "In B.C. at least 50 percent of 18 to 30 year olds have cut the cord already" we are presumably talking here about urban use, right?

10288 This is -- I mean this hearing has concentrated very much on remote and distinct and how we can assure service for them. This phenomenon which you attribute to age, the young people are less dependent on wireline than wireless, is this equally distributed through your area or is this concentrated mostly in the --

10289 MR. HENNESSY: No. I think that if you looked at it and got into the demographics you would see at this point, probably, you know down in the Lower Mainland is where you are going to see the highest penetration. It has to do with new Canadians is one of the reasons -- that have come from countries where wireless has always been there.

10290 But what I think we are also -- and you know, I agree again. This is why I say you have to have more granular measurements, we agree -- is that the number in our view is a tremendous signal because if you are seeing that kind of substitution then, in my mind, what the market is telling you is that they see a wireless product as potentially more affordable or of better value than what they can get from the wireline network.

10291 I think you have to -- you have to kind of get to that place unless everybody is totally crazy. And I don't think they are.

10292 I think it's just that the problem is, well, wireless is more expensive than wireline. In the majority of circumstances it is. It's probably wireless is probably -- actually, if you were looking at pure lifeline product, would be better.

10293 But it's the combination, right? It's the "I have got a wireless phone and I can cut the cord on a number of things and still get access to many of those things I value highest". So it's the combination of what you used to subscribe versus the value you are getting today that determines what the affordability value picture is.

10294 Wireless is clearly -- we are seeing a revolution. We are seeing a big shift in something going on that we hadn't really recognized up until the last year or so.

10295 THE CHAIRPERSON: Yes, but I was -- maybe it was a mistaken assumption that this is by and large an urban phenomenon, that this does not --

10296 MR. HENNESSY: But you have --

10297 THE CHAIRPERSON: -- manifest itself in remote and rural areas.

10298 MR. HENNESSY: We have just built networks that are broadband-based wireless networks using the HSPA+ technology that extend well beyond the wireline footprint. That is going to enable, in my view, the same type of substitution.

10299 You tend to see things rollout from the urban areas, I don't doubt that, but people will ultimately sit down and make the same decisions as to the value of the service provided. There is no reason why they don't once they have access to that product.

10300 THE CHAIRPERSON: There is a flag up there in the back.

10301 MR. WITTAL: Yes, Kym Wittal from SaskTel, the Chief Technology Officer at SaskTel.

10302 While I think what Mr. Hennessy is alluding to about, you know TELUS has good coverage in Alberta as demonstrated on the map, I think if you recall back to what SaskTel had shown the Commission back in Timmins about our coverage map, what they are neglecting to show you or tell you is this coverage map is at a lower-received level. That's highlighted in that legend, I think, at the very bottom that shows at -102 dBm. SaskTel would view that as very poor, very fringe in-vehicle coverage.

10303 So while you do have coverage, it is really not useful for the kinds of things that Mr. Hennessy is alluding to. So therefore, I think the Chair is asking the right question about the wireless substitution is truly happening in the urban areas where there is strong coverage. We see that as well.

10304 But in the wireless areas out in the rural districts, the high-cost areas, the coverage is not as good as it should be.

10305 THE CHAIRPERSON: MTS?

10306 MS GRIFFIN-MUIR: Thank you, Mr. Chairman. Teresa Muir, MTS Allstream.

10307 I just -- actually, I agree with SaskTel in terms of wireless coverage. So it's a question of clarification for TELUS, really, because what TELUS is talking about is having the wireless coverage meet some unspecified federal government standard in paragraph 10. I'm wondering if he can clarify then.

10308 Based on the fact that you just rolled out HSPA and today in rural areas probably it's not adequate to meet the same broadband or internet access available in urban areas, are you saying within 12 to 18 months this will be possible?

10309 THE CHAIRPERSON: TELUS?

10310 MR. HENNESSY: Yes. Let me start by, our 12 to 18 month window talks about all technologies in combination serving, because I agree with the SaskTel people to a point that, you know, you can't -- one technology is not going to serve everything and, you know, the further you get from a cell tower the less value there is.

10311 At the same time, as we have demonstrated in the Gaspé, you can put up cell towers and often do, in areas where there is the greatest cluster of people. So it's fine to show you a map that shows all the weak points but, you know, nobody has showed you whether there is anybody living in the weak points as opposed to cars just going by.

10312 You know, the problem I have with both the SaskTel and MTS' position is it's sort of, if you define every other potentially-competitive technology it's really not good enough for the most part, unless sometimes they deliver service through the ILEC company itself.

10313 Then what you are basically saying is, "Well, we need this really big subsidy in our area but we are going to design a model that says the only thing we think is really good is the stuff we are going to provide and therefore we will have a monopoly on the subsidy".

10314 So you can't -- you can't overlook the reason that these questions are being posed this way. No technology is going to be a complete substitute for meeting broadband.

10315 But to the extent -- and you know you can talk to people today, customers that you know use the internet sticks at their cottages, people -- we have given them out to all the MLAs in Alberta, many of them out at the ranch, and they work great. So there are going to be significant circumstances of substitution but not complete substitution.

10316 There is no complete substitute in the marketplace today. And that is the point we are trying to make.

10317 MS GRIFFIN-MUIR: Sorry, Teresa Muir, MTS Allstream.

10318 I'm actually just trying to get to your unspecified federal government objective. And I respect what you are saying.

10319 I think we would agree with you in the sense that not one technology is going to offer rural and remote customers, 4 Meg or 5 Meg service at an affordable rate. Certainly, we accept and have acknowledged that a multitude of technologies will be able to do this. It should be a technologically-neutral objective.

10320 I'm just not sure what you are saying in terms of: What are you actually telling the Commission the objectives should be and what you think within 12 to 18 months the coverage will be, either from you or somebody else?

10321 THE CHAIRPERSON: Before you answer because she faded into where exactly I was coming.

10322 You are talking about goals. You give us a nice short saying what's involved in the various speeds. What you haven't said is what I asked you to tell me what is -- whether you call it "aspirational goal", "measurement goal" "stated objective" or use whatever term you want but basically, I think in order to make this a meaningful process we have to say by year X we expect all of Canada to have Y megabits per second. We use that as a measurement to measure and to see whether we need to step in or not.

10323 So I haven't seen anything in here that gives me either the date or the speed.

10324 MR. HENNESSY: Okay. Fair enough.

10325 Let's take -- I think in the absence of the digital economy strategy reporting, and we hope some day they will but we don't know when --

10326 THE CHAIRPERSON: We all have that.

10327 MR. HENNESSY: We are all waiting for that.

10328 In the absence of that, I think as I said, as a starting point, let's use the U.S. consumer target. It's good and I think it touches on all of those situations and I think you can achieve that with 3 Meg. If you want the kind of thing that many people do in terms of --

10329 THE CHAIRPERSON: They advocate 4 Megs by 2020.

10330 MR. HENNESSY: For 2020.

10331 THE CHAIRPERSON: Yeah.

10332 MR. HENNESSY: Yeah, and that's a reasonable objective. I think that's a reasonable objective. I think that -- but you know 2020 is a long way off.

10333 I think your question is, well, what should we have you know as a starting point, right? What should we try to achieve by, say, 2015? And I would say, well, you should, you know, at least shoot for 3.

10334 Probably people out in the internet world that are still tracking this proceeding would be pulling their hair out and say, well, no, we need a whole bunch more. But I think that if you are going to start talking about things like videoconferencing you have got to have at least 3; if you are talking streaming video you have to have 4.

10335 Certainly by 2020 absolutely 4 is a target, and it's probably a very -- you know, it's potentially a very low target given how much things can change from here to now. But we think that would be a reasonable target -- a reasonable target to set.

10336 You know, the U.S. also has the 100 Megs to 100 homes by 2020. I'm not sure -- you know I have never been able to quite figure out what 100 Megs gives you but I'm sure that we will get an answer for that by 2020.

10337 THE CHAIRPERSON: Yes.

10338 MR. HENNESSY: I don't think that's as important, you know. It's an aspirational thing. I think they just realize cable would probably be able to live that anyway.

10339 THE CHAIRPERSON: Okay.

10340 MR. HENNESSY: So if you want a number?

10341 THE CHAIRPERSON: You gave me one. Okay, done.

10342 MR. HENNESSY: You got it?

10343 THE CHAIRPERSON: SaskTel.

10344 MS GRIFFIN-MUIR: Yeah, I -- oh, SaskTel. Sorry.

10345 MR. HERSCHE: Bob Hersche, SaskTel.

10346 While we are talking about 5 Mbps and we are talking about there is various kinds of technologies at work, I would like to just remind you a little bit that there are some real problems out there with the systems and what we have got.

10347 Bell Aliant yesterday said, as an example, that it loses something on the order of $10 million just doing backhaul to the northern communities for long distance.

10348 How are they going to reach a 5 Mbps target for those northern communities if they can't even get the bandwidth and they can't -- and they are thinking about whether they can deliver long distance?

10349 I think that is some of the kinds of problems that are starting to arise in northern Saskatchewan and in Bell Aliant territories, is those kinds of backhaul systems, those kinds of how to serve a whole community, are going to fall behind and market forces aren't going to do that.

10350 Thanks.

10351 MR. WOODHEAD: Mr. Chairman, it is Ted Woodhead for TELUS.

10352 The point is -- and you went through a very detailed examination of Barrett Xplore and what Mr. Hersche is describing is a complete wireline paradigm. In 12 to 18 months you are going to see and you heard from Barrett Xplore, that they are going to offer through high throughput satellites speeds for residences up to 10 Mbps.

10353 That has nothing to do with toll backhaul in northern Saskatchewan. They are going to blanket this country on two satellites with 10 Mbps, by their testimony, by the beginning of 2012.

10354 THE CHAIRPERSON: Sorry. I heard MTS intervening. So let me take it over to them and then come to you.

10355 MTS..?

10356 MS GRIFFIN-MUIR: Thank you. Teresa Muir, MTS Allstream.

10357 I think Mr. Woodhead partially answered our question which deals with paragraph 14 because Mr. Hennessy's going 4 Meg in 2020 -- and I guess that would be to cover all, I guess, unserved, underserved TELUS customers in high-cost areas, and then --

10358 MR. HENNESSY: No, no, I did not -- I did not say that.

10359 MS GRIFFIN-MUIR: Okay, sorry.

10360 MR. HENNESSY: I will be quick, Ms Muir.

10361 I think, as we discussed earlier, the target is a national target and I think it answers Mr. Hersche's question as well. There is not an expectation in these kinds of targets that every carrier for every customer has to meet the target because those problems that Mr. Hersche raised are recognized.

10362 So the target is national collectively. We as an industry deliver on the target.

10363 MS GRIFFIN-MUIR: Right, sorry. If I suggested it was -- I meant your territory as opposed to TELUS offering the service.

10364 And then at paragraph 14 I'm assuming then when we say or TELUS says 3 Meg in the next 12 to 18 months will reach a point where every Canadian has such basic access, here you are referring to Barrett.

10365 MR. HENNESSY: Well, I am referring obviously to a collection of things. The majority of Canadians according to Akamai already have a lot more than that.

10366 Yes, primarily Barrett, but as Clément Audet pointed out to you on Monday, in the Gaspé, which was an incredibly remote undertaking, we have a 1.5 target but the customers are actually generally getting 3 to 4.

10367 And that's -- my point is, you may not be able to deliver 3 to 4 along all the highways and roadways where households aren't, but where you have clusters of home in remote and rural areas you can.

10368 So it is not solely satellite, but I think that satellite by its commitment to offer at east a minimum of 5, that Mr. Maduri said yesterday, surely does cover that probably. You know, you could argue that we are perhaps short-changing ourselves by 20 if I am promising less than what I think is going to happen in the next year and a half but, you know, I am a tricky guy.

10369 THE CHAIRPERSON: SaskTel.

10370 MR. HERSCHE: Bob Hersche, again.

10371 I just want to clarify. And no, I am not looking in a wireline paradigm. We do use satellite for various purposes. If you remember Mr. Maduri's or Barrett Xplore's table yesterday, when you start talking about northern communities you are talking about an entire town that residences need to serve. If you looked at the kind of table he has, he is looking at the density of people and how they come together.

10372 For individual farmers who are off line, satellite will be the solution as it goes forward. But as you deal with towns like Stony Rapids, all of those small towns up in northern Saskatchewan or other towns in Bell Aliant territory, those are not the kinds of candidates for satellite. But a wireline solution or a fixed wireless solution might be a better kind of approach.

10373 And that is what I am saying, is there are multiple technologies, but we can't say leave some of these communities by themselves and not reaching those kinds of targets.

10374 THE CHAIRPERSON: Okay, let's move on.

10375 The other point you are making is you are advocating a limited and focused adjustment of certain local service costs. And I listened to you very very carefully, they were manual before and you have now computerized them, et cetera. I still don't understand how you can do a limited and focused adjustment on costs when you are -- if I understood it from your earlier testimony, you are talking about capital and maintenance costs which is about 90 per cent of your costs?

10376 MR. ROMANIUK: This is correct, yes.

10377 THE CHAIRPERSON: Now, how do you do this? There is some magic here that I am missing.

10378 MR. ROMANIUK: Sir, it is no magic. As an example, say if you take $1 of subsidy and you look at the components, what we are saying is focus on the key ones. Of that $1, if you look at just the feeder and distribution cable, that goes say from the central office to the house, that covers 68 cents of that dollar. So focus your efforts on analyzing those costs, the gauge of the cable, the length, the distribution, density, 68 cents is right there on that one capital component.

10379 You look at maintenance costs, that is another 8 cents of the $1. So all of a sudden you are at 76 per cent by looking at two components. So that is why we are saying if you focus your efforts, 80 per cent of the costs can be done by 20 per cent of the individual components, it is the old 80/20 rule. Look at those components, you are very very close to analyzing that full $1 of subsidy. That is what we are saying.

10380 THE CHAIRPERSON: Okay, but then the next step is you have to also -- what is included in those 8 cents of maintenance and -- right? That is what you want us to review?

10381 MR. WOODHEAD: And that is where systems has been mechanized to look at, okay, where are those costs being incurred, what type of costs are they, how frequent are they and all that information has been mechanized in terms -- we updated a couple systems, a FMS and an image and the information is much more accurate, much faster, easier to access versus where we were eight to 10 years ago.

10382 THE CHAIRPERSON: That is where you are, but where are your competitors?

10383 MR. WOODHEAD: Bell has actually completed theirs so they are in fact ahead of us. So we are sort of catching up to Bell when they did they their updated loop study. And I think that encompassed, subject to check, sort of where we did one million loops, they did five million loops, subject to check.

10384 THE CHAIRPERSON: And then for the small guys who use you and Bell and proxies, a longer term for them, is that..?

10385 MR. ROMANIUK: I can't comment on where the other ILECs are on their costing study information, but I believe of this was actually developed by Bell, so they could use that.

10386 MR. HENNESSY: And Mr. Chair, the other important thing is we are recommending you use the Commission's costing methodology that has always been used in the past, and the methodology itself has been updated.

10387 So I think you only start to run into serious problems when you try to reintroduce new costing models that nobody has ever used in the past, because then you spend as much time disputing methodology and model as you do disputing inputs.

10388 THE CHAIRPERSON: What does Bell think of that? And there is a hand up, SaskTel I believe.

10389 MR. McKAY: Yes, Andrew McKay, SaskTel.

10390 I just wanted to note that we have not completed mechanising system. However, the effort involved does not concern us. We feel we have good methods of coming up with a very reliable sample.

10391 THE CHAIRPERSON: Bell or Bell Aliant, can I hear from you?

10392 MR. DANIELS: It is Jonathan Daniels from Bell Canada. I will start, and then I will hand it over to people who can talk in more detail.

10393 Just at a very high level, the statement that the methodology has all been updated and resolved, I think that is not correct. What we had, what you undertook a few years ago, is you completed after a long process the rules regarding operating expenses for Phase 2, but not capital expenses. And in fact, what I think is being suggested here is that the vast majority of costs are capital expenses and that is a controversial issue.

10394 Our starting point, and I think there was made reference to this in Bell Aliant yesterday, is that before you can even start to say update your costs, we have to get uniformity across the country in terms of how capital expenses are applied.

10395 I don't want to get into the details and I will hand it over to -- because I am not an expert to explain it all, but we think there is discrepancies as how it has been going about which explains why there is discrepancies in the actual results that you had from a number of years ago.

10396 On top of that, there is that other issue that I mentioned about this hybrid approach that the Commission, you know, may be contemplating, at least it appears from -- which is a completely different change to how you go about doing Phase 2. So I think there is a lot of issues that have to be resolved first before you can even get into doing the actual costing itself.

10397 That is my high-level comment and I hand it over to my colleagues at Bell Aliant to provide more detail.

10398 DR. HARITON: Yes, Mr. Chairman. George Hariton, for Bell Aliant.

10399 We submitted an undertaking a few days ago, I guess on Monday, laying out what we thought was needed in the way of a costing review. I would just like to highlight three points on that, and I still refer you to the document for the rest of it.

10400 But the first point I think which is extremely important is that the costing approach you take depends upon the question you are trying to answer. There is not one definition of cost that fits all, it very much depends on what you are trying to do.

10401 Mr. Daniels has referred to some of that. We have seen that the purpose of subsidy has changed over time, has changed from one of making the carrier whole to one of incenting efficient entry, to one of incenting the efficient decisions by the incumbent. Until we resolve what exactly it is we are trying to do with the subsidy, it is difficult to know what cost you should actually define, and that is a problem.

10402 A second problem is that Phase 2 is quite ambiguous, in that it says you shall use growth-route/growth-technology, which is a shorthand way of saying go out there and look at the most efficient way that you are actually building networks.

10403 Well, for many years both the technology and the network architecture, in other words the way the network looks, were quite stable, in the voice world quite stable, and you could model what people were doing and build quite reasonable costing methods.

10404 Today, the technology is changing extremely quickly. Copper is only one of many technologies, and goodness knows not necessarily the one that you are growing, it may well be the preponderant one in the ground, but it is not the one you are growing. And similarly, the network architectures are changing. In other words, we have a lot more remotes and feeder in the network, in some cases you have no feeder at all, you go straight by satellite.

10405 All of those things are things which when you look at growth-route/growth-technology, which is the fundamental principle of Phase 2, you have to examine again.

10406 The third one, which I would stress very much, is the problem of consistency across companies. If you are going to be applying this to an application which has distributional effects, then it becomes very important to have consistency across companies.

10407 There is more, but I think for now I will stop there.

10408 MR. ROMANIUK: I would just like to respond to that on an couple of points.

10409 THE CHAIRPERSON: Hang on, let's hear one more intervention from SaskTel, and then you can do two in one.

10410 SaskTel.

10411 MR. MELDRUM: Thanks. John Meldrum, just a quick comment.

10412 The boogie man of basic discrepancies and costing that was referenced by Mr. Daniels, that flies in the face of the fact that Bell helped both MTS and SaskTel do the costs in the first place.

10413 THE CHAIRPERSON: So are you sympathetic to TELUS's position?

10414 MR. MELDRUM: We support TELUS's position. I was just trying to address the issue that there is the boogie man of underlying cost discrepancies that have to be gotten at, and I just want to remind the Commission that we were assisted by Bell Canada when we did our costs.

10415 MR. DANIELS: It is Jonathan Daniels here from Bell Canada. That comment has been made a couple of times throughout this proceeding. Now, I wasn't at Bell, but I have been told by the people who were at Bell, the cost input came from the various different companies, that is what we are talking about. Yes, we helped put together the actual formula, plugged it in, produced the model.

10416 But the actual inputs themselves, which is the issue we are talking about, came from individual companies. No, Bell Canada did not go to Saskatchewan and check their numbers. No, we did not go to Manitoba and check their numbers. We took the inputs as provided because we were working with them on that. So we cannot validate any of their comments, so that is in terms of the actual inputs themselves, and that is the issue.

10417 THE CHAIRPERSON: MTS, are you on this point or do you want to raise another one?

10418 MS GRIFFIN-MUIR: No, I am on this, sorry. I am on this point. I would say though I am more supportive of TELUS and SaskTel than Bell. I just have a bit of difficulty with Bell's position in terms of it is okay to use Phase 2 for rate-making purposes, particularly wholesale rate-making purposes, but with all the problems Mr. Hariton described it seems odd that it is -- the only thing that it is not okay for is for determining the subsidy.

10419 DR. HARITON: Could I just very briefly answer that, Mr. Chairman?

10420 THE CHAIRPERSON: Well, I think TELUS has been waiting. Let's hear them first.

10421 MR. WOODHEAD: Thank you, Mr. Chairman.

10422 Two points. Bell just indicated there is all these problems with the Phase 2. Bell was a key designer in the Phase 2. So I am just wondering when did they determine that all of sudden all these problems arose with Phase 2, because they actually drove the methodology originally.

10423 Secondly, as I think Commissioner Katz pointed out, in the recent high-cost shortfall submission that Bell did where they sort de-averaged the costs, the basis for that de-averaging was in fact Phase 2. So again, $7 million of costs removed from Bell to Bell Aliant, but they used Phase 2 methodologies to do that. So it is not good, but it is good for the submission that was just filed six months ago.

10424 THE CHAIRPERSON: Okay. Bell or Bell Aliant I think.

10425 MR. HENRY: Mr. Chairman, I can't leave that last comment unchallenged. We said in our piece that we do not accept the cost, we did not want to get into a controversial exercise because we knew the Commission wouldn't accept updated cost. We simply took the old methodology, which we said we didn't agree with, and we de-averaged it based on that. And that is why the Commission accepted it, we didn't do anything new.

10426 And one other thing I cannot leave unaddressed as well, in paragraph 23 TELUS says that:

"Paradoxically in eastern Canada, in Bell Aliant territory, apparently the same Phase 2 costing system produces correct results, and Bell says you can rely on those."

10427 Well, I certainly don't recall Bell saying that, but Bell Aliant absolutely is not saying that. We are saying the relative differences don't make sense. We are not saying whose costs are right, they probably -- you know, they could be in the middle, they could be up, they could be down, but we are not making any statement about whose are right, nor is HDR. HDR did not try to prove that the western costs were too high or that ours were too low, just that the differences were inexplicable.

10428 THE CHAIRPERSON: Dr. Hariton, did I cut you off?

10429 DR. HARITON: Just a very brief point, sir.

10430 I come back to the fact that Phase 2 is an excellent tool, but you have to specify what the objective is, what you can use the costs for. MTS raises the point that Phase 2 is being used for unbundled loops, and that is entirely proper. We know what we are doing there, we know that what we are trying to do is set a price for a facility which is going to be leased by another company.

10431 When it comes to contribution, there is a plethora of objectives and it no longer is clear.

10432 THE CHAIRPERSON: Okay, lastly, you don't say anything at all about SILECs. You have no views on this or you have heard the discussion for the last two days and the various options and proposals --

10433 MR. HENNESSY: Yes. I guess one of the questions you might want to ask is, you know, our views on the Bragg proposal, which we think is reasonable, again, we don't have difficulty with that.

10434 I think most of the, you know, comments we have made on SILECs remain. At the end of the day competition is a good thing. We have buried the local number portability devil almost 15, 16 years ago. There are probably ways to do it cheaper. We have offered our call-forwarding solution, which is not a great fix, but we were trying to offer compromises.

10435 But, you know, at the end of the day I don't think, and maybe even the SILECs have recognized that, you can't insulate yourselves from competition.

10436 Particularly one of the things I noted in this proceeding, and it is equally appropriate to those territories that I suggested where we had that were very similar to SILEC territories is that we are going to see considerable more entry because of satellite and because of the fact that other wireless competitors can come in there. That is going to have a dramatic effect.

10437 So it will have a dramatic effect on everybody whether or not you put limits on competition, because there is just so much competition and so many alternatives for advanced communications for people today, you can't close all the doors even if you wanted.

10438 THE CHAIRPERSON: Okay, thank you.

10439 Len, you have some questions?

10440 COMMISSIONER KATZ: One question, Mr. Chairman.

10441 Paragraphs 18 and 19 you talk about a proposal for this affordability and subsidy. And you make this suggestion that the increase be $2 a year for several years, but that in the first year the subsidy not change at all.

10442 I guess, just to understand this and not to disparage it, is this a backdoor vehicle for a rate increase?

10443 MR. HENNESSY: Well, yes, I mean a $2 increase is a rate increase. It is pretty out front, so I would call it front door, if you will.

--- Laughter

10444 MR. HENNESSY: But the justification for that is, you know, we go back and we say if you had not applied a productivity offset that I think a lot of people say maybe shouldn't have been done or isn't really appropriate in a high-cost area, some people say, then you could have raised prices by $6 and we would still be at the same level relative to inflation that we were, you know, prices would be at the same level relative to inflation that they were back in 2002.

10445 So doing one-third of that immediately doesn't seem to be an unreasonable shift if you are still staying below inflationary increases.

10446 COMMISSIONER KATZ: But I guess, and I will speak for myself, I am not sure that is within the scope of this proceeding to grant a $2 rate increase through this methodology, I just wonder why you just wouldn't apply for an application for a rate increase of $2 or whatever you think is necessary to meet TELUS's financial and strategic objectives? Why wouldn't you use a different vehicle for that?

10447 MR. HENNESSY: Well, I think because it has become such a focus of discussion in this proceeding that maybe we became confused.

10448 But, you know, the problem I have with that, and that is fine, if that is the path that we go. You know, I thank you for raising that. But it is the classic thing, we are dealing with costs where we worry that if we try to figure out the costs we are going to get buried in the big muddy and it just seems like an awful mess.

10449 And yet, you know, we can sit here and talk about how much revenue we impute, which is really the other side. You know, we are talking a bit in times of trying to figure affordability from what is, you know, a reasonable rate of return. It seems, you know, if we can avoid costs, but impute revenues going forward, then I would say, you know, we are still altering the regulatory bargain. And to me, cost, revenues and local prices are all part of the same thing in trying to determine what is just and reasonable.

10450 COMMISSIONER KATZ: I understand your point. I was just trying to understand what you were trying to get at here. I now understand it. What I didn't get an answer to was why you wouldn't file for a rate application for an increase, but I think you have sort of answered that part of it as well.

10451 MR. HENNESSY: Yes, I think that we will get on that.

10452 COMMISSIONER KATZ: Okay.

--- Laughter

10453 THE CHAIRPERSON: Candice.

10454 COMMISSIONER MOLNAR: I just have one question related to your broadband aspirational goals. And I guess more kind of an underlying concern and not just with your proposal, because I have heard it a little bit here.

10455 I wrote down that you said, "shoot for 3 by 2015 and, you know, maybe 4 by 2020," is what you had proposed as the targets for broadband.

10456 Here is where I have a bit of concern, so you can tell me where I am wrong.

10457 MR. HENNESSY: You are likely to be right.

10458 COMMISSIONER MOLNAR: I don't know. But rightfully so, you know, there have been many saying the market will do most, if not all, of the job with perhaps some exceptions where surgical government intervention, as exists today, you know, will continue to be needed. So in large part a target that we would set is perhaps most important where the market won't be able to achieve the goals by itself. Would you agree with that?

10459 MR. HENNESSY: Yes. And I think, you know, the 4 by 2020, if I remember correctly what the U.S. plan is actually a goal, you know, as a minimum target for rural areas. Yes, I think I would agree with everything you have said.

10460 COMMISSIONER MOLNAR: So it does become most pertinent where there needs to be intervention in the market. And I think one of the things that I have some concern with, and this is what I wanted to talk to you about, is where there are these programs -- and I think we heard SaskTel talk about accessing funding through INAC, for example.

10461 And, you know, the goal today is 1.5, and so they are asked to build a capital program to meet that objective. It is an objective that we are now talking of something different. You know, we know these rates are going to continue to increase over time and yet capital investment, it takes years to build it and, you know, we would be hopeful that it is capital that can sustain the broadband objective for a period of time.

10462 So my concern is if we set these objectives so low don't we run the risk of potentially investing to underachieve?

10463 MR. HENNESSY: Yes, that is quite possible. I think, and you know, I go back to the SaskTel point, there are current limitations on satellite in terms of how much they can do. I think the maximum I heard Mr. Maduri talk about in Timmins was, you know, the idea of perhaps 25, for business 10.

10464 If you think of urban where, you know, a shared cable system may be 100 or New Brunswick I think where they were talking about 150, you know, those kind of numbers are very different, there is a big gap there.

10465 The issue still becomes -- at some point you really are I think dependent on wireless and satellite technology to do something in a short period of time, and they are ultimately constrained by the laws of physics.

10466 So if we knew the government was, like they are trying to do in the U.S., put another 500 meg of spectrum into the market and some of it was low, you know, down 700 or below, then there is a greater likelihood, unless it is really cut up in good chunks, that you will see much bigger increases in speed on wireless networks. But if you can't and you are setting a very high target, then it becomes only a target that wireline can meet.

10467 I think as Mr. Spadotto and others have said here, it will take you many many years just because of, you know, the civils of digging up streets, the number of people you want, the return on that kind of investment irrespective of whether there is a big subsidy or not to actually get there. It might be by the time you get there that some of the wireless situations have changed. But that is the problem.

10468 I agree with you. That, you know, I am not sure -- you know, a lot of people are saying in the U.S. this is great, they set these targets, but whether they are the right targets, they are big enough, don't know. But I agree with you, if you set it too low you may be shooting under the bar for sure.

10469 MR. WOODHEAD: Commissioner Molnar, it is Ted Woodhead from TELUS.

10470 There were some in the United States that criticized the U.S. plan at 4 megabits down and 1 up on the same grounds that you have just elaborated on. And the way that I understand Commissioner Genachowski has responded to that is that they will continue to monitor periodically over the time to see if technology has outpaced those targets. That is one way that perhaps you could address your concern.

10471 MR. HENNESSY: Yes, I think that is -- I should have thought of that. Thanks, Ted, that is kind of an obvious point, you should really change your targets as technology changes.

10472 But one of the things we -- you know, and it gets to my concern that we sometimes in these things for political reasons, and I am talking more about governments, you know, they pick the 100 number or whatever because it sounds really good, but how knows what is really going to be down the road.

10473 Let me give you an example just on our platform to deliver video. So we can deliver, you know, the multichannel TV experience that cable can with a fibre, you know, the hybrid fibre network at 25 meg or even lower. And that performs the same functionality that an 800 meg cable system does, because it is different technology and it is different ways of using bandwidth.

10474 So that suggests that with technological change, you know, what you think today in 2011 you may need 100 meg for, you may very well be doing with a lot less, a lot more efficiently, a lot faster and a lot more ubiquitously, because a lot of other technologies throughout the internet have changed.

10475 So to get back to the point is, you know, set a target, you start at something that you think is reasonable, don't underachieve, I agree. But I think that periodically you have to review the target because we are in such a dynamic world that the targets we set today are almost certainly going to be wrong.

10476 COMMISSIONER MOLNAR: Thank you. I guess I am just questioning how aggressive should be the target and how quickly we review it. I mean, capital programs and investments and decisions are made today to build to a future outcome. So if we set our target, you know, to be reviewed too quickly, it can become outdated. You know, the investments made today can not be achieving our future requirements right away.

10477 MR. HENNESSY: Yes.

10478 COMMISSIONER MOLNAR: So anyway, you commented and --

10479 MR. HENNESSY: Yes, just to finish on that. We had actually initially in our rebuttal suggested a 3 to 5-year period. As you see, we have taken it down to 3. As I said, I think it is a dynamic world. To us, sort of 5 years -- 5 years kind of sounds like you are dragging your heels, I think it would sound like we were dragging our heels, I think politically it kind of sounds like you are dragging your heels.

10480 So I think you are dead on, but I think you still need -- you know, you need to get going and there is nothing wrong with reviewing. Because it may be, you know, you do a three-year review even though a lot of things aren't happening and you find out that you are just either better off or way worse than you thought you were going to be, and that I think in itself is very instructive.

10481 THE CHAIRPERSON: Tim, you had a question.

10482 COMMISSIONER DENTON: Yes. Commissioner Molnar has just asked my first question and you have answered it.

10483 The second question I have is just where do you sit on the productivity offset abolition or retention there of?

10484 MR. HENNESSY: I think what we are suggesting is that there shouldn't be a productivity offset in high-cost areas because you can't achieve urban productivity there.

10485 COMMISSIONER DENTON: Thank you

10486 THE CHAIRPERSON: Okay, I think those are all the questions.

10487 Oh, there is a flag going up. Go ahead, Monsieur Lauzon.

10488 M. SAMSON : Samson.

10489 LE PRÉSIDENT : Samson. Je m'excuse, c'est la deuxième fois que je fais la même erreur.

10490 M. SAMSON : Est-ce qu'il y a un Monsieur Lauzon ici?

--- Laughter

10491 M. SAMSON : Monsieur le Président, je pense qu'aux termes des trois jours et à l'observation de cette espèce de danse écossaise que l'on fait autour des normes minimales, que ça soit des aspirational objectives ou vous leur donnerez le titre, nous convainc, nous à la MRC de Papineau, à quel point notre stratégie, d'abord de nous doter d'un réseau de fibre optique public, non seulement pour notre propre usage, mais pour l'usage de nos citoyens, autant que la formation d'Intelligence Papineau pour le distribuer -- Intelligence Papineau, un OBNL -- est justifiée par ce que nous pouvons offrir aujourd'hui sans avoir à endurer les attentes qu'on nous propose.

10492 Même à des vitesses de 1,5 Mgb, nous pouvons offrir déjà 4 et 5 Mgb à des prix tout à fait abordables, et je pense que si on peut, par extension, parler des autres régions qui nous ressemblent au pays, il y aurait peut-être lieu de mettre un peu de muscle dans tout ça, plutôt que ces vagues promesses qu'on nous fait sur la base de toute sorte de raisonnements magnifiques, très technologiques, souvent très économiques, mais qui, finalement, au bout du compte, lorsqu'on essaie de les évaluer à titre de citoyens, représentent bien peu quand on vit dans les zones rurales.

10493 C'est ce que je voulais souligner là-dessus. Merci.

10494 THE CHAIRPERSON: Okay, any other comments before I pass it over to the Secretary?

10495 MR. HENNESSY: Just quickly then in response to that. It gets back to the question of what are the targets and, you know, if the targets aren't mandatory you can set them as high as you want. But I think as you move your target up it goes back to the question that we raised right in the first part of our paper, is what do you want to achieve?

10496 It is very different, what you want to achieve if you look at the U.S. plan for surveying institutions in a community is a very high bandwidth, whether that is to hospitals or to main centres, what you want to achieve in a business environment is very different from what you want to achieve in a residence. And what a lot of residence users really want is very intense entertainment and gaming experiences that may or may not raise public policy requirements.

10497 So it still goes back to for sure, you know, make your goal and make sure the target meets the goal. Because then and only then can we tell if we are falling behind. So I don't think I disagree with Mr. Samson, you want it to be a good goal, but you want to know why you want the goal in the first place.

10498 THE CHAIRPERSON: Yes. And you said before, you have to be realistic, if you make it too aspirational and too high or far out, then it becomes unrealistic. As I said yesterday, I think whatever we set it should be one that we expect the industry can reach and will reach, will serve the purposes that you suggest and we will monitor against it.

10499 And if, as we monitor against it, either similar -- technology advances, then it obviously should be raised. If on the other hand we find that there is a distinct inability of the market to reach that, then we will have to consider intervention. I think that is a logical way to go.

10500 Okay, I don't see anymore flags, it is the last time, so that is it.

10501 Thank you very much everybody. I want to also thank my staff for having done a yeoman's job in preparing us, going through all the interrogatories. Without your help, we couldn't ask intelligent questions, so thank you very much.

10502 Now over to you, Madame la Secrétaire, for the last word.

10503 LA SECRÉTAIRE : Merci, Monsieur le Président.

10504 For the record, undertakings are to be filed and served by 5:00 p.m. Tuesday, November 9, 2010.

10505 Veuillez noter que les engagements doivent être soumis et signifiés aux parties intéressées avant 17 h 00 le 9 novembre 2010.

10506 Le Conseil rappelle également aux parties qu'elles auront jusqu'au 12 novembre pour déposer auprès du Conseil des observations écrites après l'audience, dont elles devront, le cas échéant, signifier copie aux autres parties. Ces observations doivent comporter au plus 15 pages.

10507 Parties are reminded that post-oral hearing written submissions are to be filed with the Commission and copies served on other parties by 12 November 2010 and copies are to be served on all other parties. Written final submissions are not to exceed 15 pages.

10508 This completes the oral hearing portion of this proceeding, Mr. President.

10509 Thank you very much.

--- Whereupon the hearing ended at 1050

REPORTERS

____________________ ____________________

Johanne Morin Jean Desaulniers

____________________ ____________________

Monique Mahoney Sue Villeneuve

Date modified:

2010-11-05