ARCHIVED - Transcript, Hearing 4 October 2011
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Volume 1, 4 October 2011
TRANSCRIPTION OF PROCEEDINGS BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION
Review of price cap regulatory framework for NorthwesTel Inc. and related matters
The Yellowknife Inn
5010 49th street
Yellowknife, Northwest Territories
4 October 2011
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
Review of price cap regulatory framework for NorthwesTel Inc. and related matters
Anthony McIntyreLegal Counsel
John MacriDirector, Telecommunications Policy
Christine BaileyHearing Manager and Manager, Telecommunications Policy
The Yellowknife Inn
5010 49th street
Yellowknife, Northwest Territories
4 October 2011
- iv -
TABLE OF CONTENTS
PAGE / PARA
1. Northwestel Inc.6 / 41
2. SSi Micro Ltd.177 / 989
3. Government of the Northwest Territories263 / 1520
4. Government of Yukon277 / 1582
5. Government of Nunavut297 / 1656
6. Utilities Consumers' Group331 / 1854
7. PIAC/CAC (Public Interest Advocacy Centre (PIAC) and the Consumers Association of Canada (CAC))341 / 1921
- v -
PAGE / PARA
Undertaking127 / 714
Undertaking171 / 944
Undertaking171 / 946
Undertaking173 / 963
Undertaking261 / 1507
Undertaking399 / 2229
Yellowknife, Northwest Territories
--- Upon commencing on Tuesday, October 4, 2011 at 0902
1 THE CHAIRPERSON: Good morning, ladies and gentlemen, and welcome to this public hearing.
2 Bonjour, Mesdames et Messieurs, et bienvenue à cette audience publique.
3 My name is Len Katz and I am the Vice-Chairman of Telecommunications at the Canadian Radio-television and Telecommunications Commission. I will be presiding over this hearing.
4 Joining me on the panel are my colleagues. To the right:
5 - Elizabeth Duncan, Regional Commissioner for the Atlantic provinces and Nunavut; and
6 - Peter Menzies, Regional Commissioner for Alberta and the Northwest Territories.
7 On my left:
8 - Candice Molnar, Regional Commissioner for Manitoba and Saskatchewan; and
9 - Stephen Simpson, Regional Commissioner for British Columbia and the Yukon.
10 The Commission team assisting us today includes:
11 - Christine Bailey, Hearing Manager and Manager of Telecommunications Policy;
12 - John Macri, Director of Telecommunications Policy;
13 - Anthony McIntyre, our Legal Counsel; and
14 - Lynda Roy, our Hearing Secretary.
15 Please speak to Ms Roy if you have any questions about the hearing procedures.
16 Before we begin, I'd like to tell you how happy we are to be here in Yellowknife and how much we appreciate all the hospitality afforded us.
17 Over the next two days, we will be discussing a number of telecommunications issues that are of great importance to Northern Canadians.
18 We appreciate your views, including those submitted in writing in advance of the hearing. Thank you for taking the time to share them with us.
19 In 2007, the Commission established a simplified regulatory framework that takes into account NorthwesTel's operating circumstances, while ensuring that people living in the North receive basic telephone service at a reasonable rate.
20 This hearing is being held to review the regulatory framework as it exists today. The panel intends to discuss a number of issues relating to this framework, including:
21 - whether competitors should be allowed to offer local telephone service in the North;
22 - NorthwesTel's proposal to increase the rates for residential and business local telephone service by $2 a month;
23 - the appropriate amount of subsidy NorthwesTel should receive to provide local telephone service in high-cost areas; and
24 - the service quality offered to consumers in this region.
25 We look forward to what promises to be a very interesting and informative hearing.
26 Mahsi cho, Quyanainni, thank you.
27 I will now invite the Hearing Secretary, Lynda Roy, to explain the procedures we will be following.
28 THE SECRETARY: Thank you, Mr. Chairman, and welcome to everyone.
29 Before beginning, I would like to go over a few housekeeping matters to ensure the proper conduct of the hearing.
30 When you are in the hearing room, we would ask that you please turn off your Smartphones and beepers as they are an unwelcome distraction and they cause interference on the internal communication systems used by our translators and our court reporter. We would appreciate your cooperation in this regard throughout the hearing.
31 The hearing is expected to last two days. Phase I is expected to last one day, followed by the rebuttal phase on the second day. We will begin each morning at 9:00 a.m. and we will advise you of any scheduling changes as they occur.
32 Please note that there are extra seats in the Examination Room where the public can listen to the hearing. The Examination Room is in the Garnet room, located near the exit, the room's exit on your left. The phone number of the Examination Room is 867-920-7810.
33 We will also be tweeting the documents during the hearing at the @CRTCGCCA using the hashtags #NorthwesTel ou le mot-clic #Norwestel.
34 Please note that simultaneous interpretation in English and French is available during the hearing. English is on channel 1 and French is on channel 2. L'interprétation en français se trouve au canal 2.
35 You can obtain an interpretation receiver from the sound technician at the back of the room.
36 We would like to remind participants that during their oral presentation they should provide a reasonable delay for the interpretation while respecting their allocated presentation time.
37 There is a verbatim transcript of this hearing being taken by the court reporter sitting in front of me here, which will be posted daily on the Commission's website. If you have any questions on how to obtain all or part of this transcript, please approach the court reporter during a break.
38 We will now proceed with Phase I of this Hearing, Mr. Chairman. We will hear the presentations in the order of appearance set out in the agenda.
39 We will start with the presentation by NorthwesTel Inc. Appearing for NorthwesTel this morning is Mr. Paul Flaherty.
40 Please introduce your colleagues and you will then have 30 minutes to make your presentation.
41 MR. FLAHERTY: Thank you, Madam Secretary.
42 Good morning, Mr. Chairman, my name is Paul Flaherty. I am President and CEO of NorthwesTel.
43 To start with, I would like to introduce my colleagues appearing with me:
44 - to my right is Jason Bilsky, the Chief Financial Officer and VP Corporate Services;
45 - to my left is Muriel Chalifoux, formerly our Director of Regulatory and Carrier Services, now assisting the Company as a consultant; and
46 - Phil Rogers, external regulatory counsel to the company.
47 Supporting our panel in the second row are:
48 - Dallas Yeulett, Senior Manager, Regulatory;
49 - Bob Nishikawa, Manager Network Planning;
50 - Lea Halliday, Senior Financial Analyst; and
51 - Mark Needham, Product Manager.
52 Mr. Chairman, Commissioners, we welcome the opportunity to review the regulatory framework for NorthwesTel and we are pleased that this hearing is being held here in the North, where we and our customers live and work. We believe that this hearing represents an opportunity to review and understand the unique circumstances of life in the North.
53 In that regard, I would note that over many years and many decisions the Commission has recognized that conditions in the North are different from southern urban Canada where most Canadians live.
54 To illustrate, I'll refer you to Attachment 1, a photo of Grise Fiord, which is a satellite-served community in the high Arctic. It has a population of 150, fewer than 50 homes and only 115 access lines. The capital invested by our company in this very small community is over $3.5 million.
55 As you would expect, to support telecom services, this community is heavily dependent on subsidies, either explicitly from the National Contribution Fund or internally from within the company.
56 As we go through this hearing, it is useful to always keep in mind communities like Grise Fiord, which is very typical of many communities in the North.
57 The North has the lowest density of customers of any region in Canada. About 40 percent of our communities are accessible only by air. About 75 percent have less than 500 lines. This region has the harshest weather in Canada. Extreme storms often disrupt everyday activities or planned travel.
58 These are the facts of life in the North. Because of these conditions, telecommunications plays a critical role as an essential service in the North, likely more so here than anywhere else in Canada.
59 We are meeting today in Yellowknife. This city and Whitehorse are, by northern standards, relatively large communities. They are not at all representative of the vast majority of the 96 communities served by NorthwesTel. We must always keep in mind the need to continue to sustain a broad range of services in very small communities like Grise Fiord.
60 In the past, the Commission has recognized the differences between the North and southern Canada and has consistently adapted the regulatory models developed in the South to conditions that reflect the costs, distances and population realities of the North. With this approach in mind, the company has developed proposals in this proceeding by adapting from the models developed by the Commission in the South.
61 For example, our proposal with respect to the price caps basket structure is largely aligned with the most recent decisions by the Commission respecting the basket structure for companies in the South. We propose that the price constraint on Other Capped Services be inflation with no productivity offset.
62 The Commission has previously determined that there will be no productivity offset applied in similar circumstances in the South. NorthwesTel's ability to achieve productivity gains in the communities we serve, such as the one we just referred to, Grise Fiord, is even more doubtful than for companies in the south. This is primarily due to the fact that very small populations separated by vast distances result in a lack of economies of scale.
63 We also propose to revise the price constraint on residential access to inflation, effective June 1, 2014. This approach would be consistent with the pricing constraints that the Commission approved for the residential Primary Exchange Service for companies in the south in the recently issued Obligation to Serve Decision. In addition, the company proposes to cap increases at 5 percent per year at the rate element level.
64 In regards to rates, NorthwesTel is proposing a $2.00 rate increase for residential access and a $2.00 rate increase for business, which would be partially offset by a decrease in business teleconferencing rates. While many parties oppose these rate increases, the company has attempted to strike a balance among competing objectives: recognizing our high-cost operating environment, reducing unsustainable implicit cross-subsidies, minimizing the impact on the National Contribution Fund, and ensuring that the impact on consumers is reasonable.
65 In this regard, residential rates have been frozen for the last five years and, despite inflationary pressure of over 10 percent during that period, NorthwesTel is proposing a relatively modest increase of 6 percent.
66 Notwithstanding NorthwesTel's uniquely high-cost operating environment, our local rates are not the highest rates approved by the Commission. Furthermore, without the proposed rate increase, the company's annual H1 Band residential PES subsidy requirement would increase by $0.5 million and rates in Band D would not cover their costs plus approved mark-up.
67 In our view, our proposal is consistent with the Commission's policy that customers should pay at least a part of the increase in costs of subsidized services.
68 With regard to Business Access Services, which are not eligible for contribution funding, the company notes that its single-line business rate is below cost plus mark-up. It is also significantly below the highest tariffed rates for other ILECs in their high-cost areas.
69 With declining sources of implicit cross subsidies, NorthwesTel must, where feasible, seek opportunities to "rebalance rates". The company has submitted evidence that it's teleconferencing service has been a source of implicit cross-subsidy. However, given the competitive nature of this service, rates are being driven down, thereby eliminating this source of internal subsidy.
70 Consequently, we propose to increase business access rates and partially offset that with a rate reduction in teleconferencing service. This is an important step toward removing an unsustainable implicit cross-subsidy and moving rates closer to cost.
71 One of the main objectives of the Telecom Act is:
"...to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada".
72 Meeting this objective in northern Canada relies on a balance of reasonable rates, sustainable sources of implicit cross-subsidies and access to the National Subsidy Mechanism.
73 The key reality of providing telecom services in this vast operating area is that NorthwesTel relies extensively on higher-margin legacy services, such as toll service and digital private line, from our two largest centres, to cross-subsidize the provision of services to remote uneconomic communities. However, these sources of internal cross subsidy are declining and are jeopardizing the sustainability of this approach.
74 Consequently, in addition to the rate increases mentioned above, the company's proposal includes two changes to the subsidy mechanism, which we will now describe. These changes are designed to ensure that even those living in the most rural and remote regions will have access to quality services at reasonably comparable rates to the rest of Canada.
75 The first proposed change to the company's subsidy mechanism is in regard to residential satellite toll connect links.
76 Given the nature of NorthwesTel's remote satellite-served communities, the long distance network is essentially an extension of the local network. Over 40 percent of our communities are served by satellite technology. Satellite toll links connect the toll switches in Whitehorse and Yellowknife to the local switches in these remote communities. The cost of these satellite links is nine times higher than the cost of terrestrial toll collect links that use fibre or microwave radio.
77 These costs today are averaged and recovered across all toll minutes -- originating and terminating -- and include minutes that do not use any toll connect links. For example, Whitehorse and Yellowknife toll traffic to and from the south do not use toll connect links, but make up the majority of the total minutes.
78 The current regulatory model relies on an important flow of cross subsidy from the large, higher-margin immunities to high-cost satellite communities. While this model has worked well in the past, with the rapid evolution of IP services, such as VoIP, the reliance on this "average cost-based approach" and internal cross subsidy flow is not sustainable.
79 NorthwesTel's toll traffic in Whitehorse and Yellowknife has decreased 16 percent over the last two years, and this trend will continue. Carriers interconnecting with NorthwesTel are seeking alternative IP-based arrangements. These trends result in further declines in CAT revenues and, as a result, reductions in the implicit cross subsidy embedded within CAT revenues. However, the need for the cross subsidy remains as satellite toll connect costs have not been declining.
80 With VoIP bypass increasing at an exponential rate, it is evident that NorthwesTel is unable to recover the costs of these satellite toll connect links without access to a more sustainable source of subsidy, specifically the National Contribution Fund.
81 Consequently, the Company has proposed to assign a portion of these satellite toll connect links, specifically the portion used by residential consumers to the access network. The costs would be assigned to the Residential Primary Exchange Service for the calculation of the High Cost Serving Area Subsidy. This results in an incremental impact of $2.8 million on the 2012 Subsidy Requirement.
82 The company notes that most parties to this proceeding support this proposal. In fact, some parties suggested that we ought to go further and include the business portion of satellite toll connect links. However, at this time, the company chose an approach that has less impact on the National Contribution Fund.
83 With a portion of these costs being assigned to the access network, the cost-based CAT would be reduced from its current level of $0.0415 to $0.029, representing a 30 percent reduction.
84 The second proposal for additional funding from the National Contribution Fund is with regard to a new Service Improvement Plan. It has two components.
85 The first component includes the investment in Enhanced Calling Features, particularly Call Display, in all remaining 29 communities that do not currently have access to this element of Basic Service.
86 As indicated in the comments of elected community leaders and the northern territorial governments, privacy calling features are particularly important to citizens in remote communities, largely due to abusive calling issues in many of these communities. These communities have told us that there is a social problem that needs to be addressed and when calling line ID is introduced the problem is resolved. Thus, the provision of Enhanced Calling Features to these remaining communities will not only ensure that all northerners will finally have access to this element of the Basic Service Objective, but will also provide them the tools to control abusive calling to their homes.
87 The second component of the company's proposed Service Improvement Plan is to replace an obsolete, unsupported and non-compliant radio system, the SR500 System in the Upper Halfway Region of Northern British Columbia. This replacement poses some unique challenges, given that it is highly uneconomic. The project is estimated to cost $3.8 million to serve only 250 NAS spread over a wide rural area.
88 The Company faces challenges in finding sources of cross-subsidy to fund such large uneconomic projects. Support from the National Contribution Fund is required to ensure that these 250 customers in this high cost rural area continue to have access to basic services.
89 The company proposes to support both of these Service Improvement Plan initiatives with an annual subsidy of $964,000 from the National Contribution Fund.
90 Like all companies obligated to serve in High Cost Serving Areas, NorthwesTel requires funding for its Residential high cost NAS, which are in Band H1.
91 In this proceeding, updated residential Primary Exchange Service costing has been filed. Based on the lower costing results filed by the company on September 9th, the costs have only increased by 5 percent or $3.00 from the 2007 costing submission. In this regard, the company notes that it has proposed a $2.00 rate increase to partially offset this cost increase.
92 With regard to the company's subsidy requirement associated with its Service Improvement Plan completed in 2005, the Commission approved an annual SIP subsidy requirement of $10.1 million to recover the initial capital investment and associated costs over the 18 year average life of this equipment. As the average remaining life is approximately 10 years, the costs associated with this initial SIP are not fully recovered and the annual subsidy requirement of $10.1 million remains appropriate.
93 In total, NorthwesTel's estimated Subsidy Requirement for 2012 is $24.3 million. The increase from the current level of $20.8 million can attributed largely to the company's proposal to add the residential satellite toll connect link costs to the Res PES Subsidy, and the funding associated with the new Service Improvement Plan that I have described.
94 There is no question that the role of the National Contribution Fund is critical to the north, likely more so here than anywhere else in Canada. It is an important mechanism to ensure that all Canadians -- including those living in the most remote northern communities, like Grise Fiord -- have access to reasonably comparable services at reasonable rates.
95 There have been a few suggestions raised by parties that NorthwesTel may not have been making capital investments in the North at the rate or to the extent that it should. That view is not supported by the facts.
96 The standard industry measure of the rate of capital investment by a company is called capital intensity, which is calculated as capital invested in a year as a percent of total revenues. By that measure, compared with other telephone companies, our capital intensity rate of 19 percent in 2010 is at the higher end of the industry range. For example, BCE and TELUS report capital intensity ratios of 16 percent and 18 percent respectively for the same year.
97 One of the many issues in this proceeding is whether or not it's in the public interest to implement facilities-based local competition in the north.
98 The company does not believe that the right conditions are in place at this time to introduce local competition. Of the 96 communities that we serve, 94 are not simply high-cost, they are among the highest cost communities in all of Canada. It is uneconomic for even one service provider to serve them, let alone two or more.
99 Furthermore, the two largest communities, Whitehorse and Yellowknife, generate sufficient revenues over cost from certain services that they provide a large cross-subsidy that supports and sustains services in the smaller communities. We estimate this cross-subsidy to be over $10 million per year.
100 In our view, a prerequisite to local competition is finding a mechanism to eliminate the current dependency on this large internal cross-subsidy from the two major centres to the remaining 94 communities.
101 If local competition were to be introduced, but restricted to Whitehorse and Yellowknife, there is no doubt that the higher margins generated from certain services and lower cost customers would be the target of the new entrants. That is the usual pattern.
102 But that would have the effect of cutting the flow of internal cross-subsidies that currently support the other 94 communities.
103 The Commission was clear in its recent Basic Service Objective Policy Decision that one and only one service provider, the incumbent, will continue to have the obligation to serve all customers, regardless of the extent of competition. Unless there is a change in the Commission's policy, this means incurring the costs of maintaining the network and standing ready to serve 100 percent of the customers, even though the revenues and subsidies to support all of those customers have been lost.
104 Our concern is that the current model to sustain service throughout the north depends heavily on a combination of internal and external cross-subsidies. The 94 communities are very dependent on those subsidies.
105 If the internal cross-subsidy is eroded, it would increase the need for external funding from the national fund. If both sources of subsidy were eroded, the result is even worse.
106 It is worth noting that this is the second time the Commission has considered this issue. In the 2006 Framework Proceeding leading to Decision 2007-05, the Commission considered the issue, and it is worth recalling the words of the Commission in that decision.
"The Commission notes that in order to implement facilities-based local competition, NorthwesTel would be required to implement significant modifications and enhancements to its network. The Commission also notes that the associated costs would be substantial and that the company might not be able to recover these costs."
107 Based on its review of costs and potential benefits, in particular the high network costs and the doubts about how and from whom these costs would be recovered, the Commission concluded in 2007 that it was not in the public interest to mandate facilities-based competition in the north. The facts on which the Commission based its conclusions were true then, and those facts have not changed.
108 Essentially, the Commission concluded that, having regard to the very high costs of network changes and the very small base of customers over which to recover these costs, it was not in the public interest to require that such expenditures be made and entry opened.
109 As we have said in our evidence, we think that the Commission's conclusion in 2007 was sound and valid, and when reconsidered in light of the facts today, you will find that your analysis and conclusion remain valid.
110 The costs would be high relative to the base over which they could be recovered, and it is not clear how the loss of revenues and cross-subsidies could be replaced in a way that would continue to sustain the whole network.
111 I would like to focus for a moment on the specific estimates of the costs of implementing local competition. The total capital cost to make the necessary changes to implement local competition would be $31.7 million. This cost is largely driven by the need to implement local number portability.
112 Additionally, ongoing operational costs would be $1.5 million per year.
113 These costs are high. Furthermore, when you consider these costs in the context of the north, it is important to bear in mind that if you compare the 94 small communities we serve, most of which have only a few hundred lines, similar communities in the south generally do not have facilities-based local competition.
114 While it is permitted under certain conditions, in practise it is rare. Why is that the case?
115 The answer is that both the incumbent and potential new entrants know that long-term, sustainable, facilities-based entry by a second or third provider in such small communities is very unlikely to be viable.
116 I would like to make a few comments on the interconnection plan recently presented by SSi in response to Commission interrogatories. Based on our understanding, I can comment on several points.
117 First, their proposed interconnection plan is very different from the standard model developed for the south. While their unique IP-based network approach may work for them, it may not be suitable for other new entrants in the north.
118 The Commission is currently exploring alternative interconnection arrangements in another proceeding, which may lead to new models of interconnection being available.
119 Second, even without LNP, as they propose for the first stage of competition, there would still be costs incurred by NorthwesTel, both in terms of capital expenditures and ongoing costs.
120 Third, in terms of customer impacts, their proposed interconnection plan would undo the critical social benefits of Calling Line ID when customers call from one company to the other in remote communities. As I described a few minutes ago, in those communities Calling Line ID is strongly supported by the population as an important safety tool to control abusive calling.
121 Fourth, under their local interconnection region model, which we don't think is appropriate for this territory, NorthwesTel would need to carry their local carrier-to-carrier traffic from Yellowknife back to the local community. Specifically, local traffic would now travel over the long haul transport network. This would necessitate capital upgrades to our thin route microwave systems to handle the additional traffic.
122 Fifth, in terrestrial communities, they plan to backhaul all calls, including local calls, to their switch in Yellowknife. However, if the link to the community fails, their customers would lose all services, including local calling to such critical numbers as emergency services or the local medical station.
123 Lastly, we understand that they proposed that they should not have to pay any of the capital costs for changes to NorthwesTel's network to implement local competition. In our view, their approach is simply not reasonable for the north. The costs of the necessary changes would clearly have to be recovered in some manner over the company's small customer base.
124 To the extent that such costs are not paid by new entrants, they will have to be borne, directly or indirectly, by customers, including those in the communities where no competitive entry occurs.
125 During the recent Basic Service Objective Proceeding, the Commission heard a lot of testimony about the donut effect. Ultimately the Commission recognized in its decision that ILECs that serve mostly rural areas are more vulnerable to targeted entry into only the core, i.e., the lower cost, higher margin centres.
126 The same donut effect arises in the case of NorthwesTel with Whitehorse and Yellowknife. These two major centres have lower costs and much higher margins, which is why they receive no subsidy.
127 The higher margins from these two major centres are used to support toll, business access service, and other services in the remote communities. If there were to be targeted entry into Whitehorse and Yellowknife, that source of internal cross-subsidy would be eroded, thus requiring additional funding to sustain services in these remote communities.
128 Such additional funding would have to come from either the National Contribution Fund or a combination of rate increases in those remote communities and increased national subsidy.
129 To conclude on the matter of local competition, the Commission carefully assessed the costs and benefits in 2007. The fundamental economics of local telecom services in the Arctic haven't changed. Absent substantial subsidies, both from the national fund and internal cross-subsidies from the larger centres, most services in most remote communities would not exist.
130 Mr. Chairman, Commissioners, it is important to remember that there isn't an economic basis for even one service provider in these communities, let alone two or three. The only reason another network operator has developed in these communities is because they have received government subsidies.
131 The Commission has faced an analogous problem in the last few years in its deferral account funding of broadband in rural and remote areas. In implementing that funding program, the Commission took great pains not to provide any funding where there was an existing or planned provider of broadband. The Commission clearly understood that in rural and remote areas, network facilities are, at best, marginally economic, if not uneconomic.
132 It simply made no economic sense to the Commission to subsidize multiple competing networks in these areas.
133 The same economic principles apply to network facilities in general in the far north, yet we now have the prospect that there may be dual networks, both subsidized under different programs, competing in small villages, where even one network cannot be sustained without subsidy.
134 The key issues for the Commission to decide on are:
135 What new costs could reasonably be added or imposed in the north to achieve this possible entry?
136 How and from whom could these costs be fairly and reasonably recovered?
137 And, given what we know about the north, and the pattern of facilities-based entry to date in the south, do the costs, the risks, and the anticipated benefits make the proposal worthwhile and sustainable?
138 This hearing is important for the future of telecommunications services in the north. The vast majority of communities rely on a carefully balanced framework of rates, internal cross-subsidies, and external funding from the national fund.
139 This model was developed by the Commission over many years. It has been very successful in supporting and extending basic service across a vast, thinly populated area, with the most extreme weather in Canada. Everyone who lives and works in the north knows how challenging and costly it is to provide goods and services here that are taken for granted in the south.
140 These are the realties that northerners are familiar with. The north is unique.
141 In this proceeding, the people and communities in the north will be looking to the Commission to ensure that a telecommunications framework for the north continues to support and enhance the services available to them, even in the smallest, most remote locations, like Grise Fiord.
142 We welcome this opportunity to work with the Commission and all parties to help achieve that objective.
143 Thank you, Mr. Chairman. My colleagues and I would be happy to respond to your questions.
144 THE CHAIRPERSON: Thank you very much. I appreciate your views and your candour.
145 When I read all the submissions I found a somewhat common theme, obviously with the exception of the position of NorthwesTel; whether it is consumer advocates, territorial governments, competitors or individual residents and businesses who took the time to write in, they all believe that service it the north needs to improve.
146 Whether it is maintaining basic service, offering enhanced services, including call-management services, some of which you touched upon, or providing better broadband services, they all believe the model that exists today is not serving the north well.
147 I believe we will be spending a lot of time today and tomorrow looking at these views and, if confirmed, how we can improve service to the north while providing residents with fair and reasonable rates.
148 You touched upon a couple of issues here that maybe I can start with in terms of my questions. You talk about capital investment and capital intensity. And I guess my first question would be how does NorthwesTel actually go about forecasting capital expenditures? What is considered and how do you prioritize that capital that you have available to invest?
149 MR. FLAHERTY: Thank you, Mr. Chairman.
150 The first consideration in prioritizing the capital investment is maintaining its existing service. I would say the second priority is making sure that we have capacity to meet demands into the future. And then, thirdly, we're looking at business opportunities to continue to grow and expand services to customers in new areas.
151 THE CHAIRPERSON: So in looking at your statement about capital intensity, at what point in time do you look at the distinction, if there is a distinction, between regulated services and unregulated services?
152 MR. FLAHERTY: We don't necessarily differentiate between the two. As I mentioned earlier, we look to ensure that, first, we can continue to provide quality service to customers, so the maintenance of the network, for example.
153 So an example of that could be upgrading power facilities, another example could be implementing upgrades to fuel systems that we have as well. So those are some examples of work we may do on the maintenance side.
154 In terms of the growth side, increasing the capacity of transport networks would be a large component of our capital spending as well.
155 THE CHAIRPERSON: So when you say that your capital intensity rate is 19 per cent, that is taken as a whole?
156 MR. FLAHERTY: That is correct. I don't have an exact breakdown, but approximately, if you looked at just what we might call the telco-type services, they would be at a higher rate than the 19 per cent. So what we might invest in our other lines of business, for example, video and wireless, would be at a lower rate.
157 THE CHAIRPERSON: Can you take your -- in 2010, somewhere here I have your number for capital expenditures, $41,272,000, are you able to break that out as between what you have invested in in terms of the regulated side of the business versus the unregulated side of the business?
158 MR. FLAHERTY: We don't do a detailed split that way. Generally I would say, you know, we think it is approximately somewhere in the neighbourhood of 20 to 21 per cent of the revenues in the regulated side that would be invested in capital for that business.
159 Part of the challenge of course is some of these facilities serve multiple needs. So, for example, a transport network isn't there just for the regulatory side, but it is equally important for the regulated side as well. So, as I say, it is not an exact science.
160 But just to give you an idea of some of the spending. For example, in 2010, we spent about $21 million in terms of meeting the demands for our service; $11 million of that was on the transport side, almost $5 million of that was on the access side, and that access side would almost all be purely regulatory services, regulated services, whereas the transport side would have a mix of the two, data services would be something in the neighbourhood of $4 million. So that gives you a bit of the flavour of, you know, a large chunk of it is there.
161 On the business support side, more of that would be to support the regulated service. So, for example, network elements that continue to be upgraded are $3.1 million, power is a huge one at $2 million, just continuing to have power. So we have a very large number of sites, somewhere in the neighbourhood of 90 sites that we have to maintain and generate our own power systems.
162 So again, largely support at the regulated side, but potentially supports other sides as well.
163 So it is a wide variety, as you might imagine. We are serving 40 per cent of Canada's land mass and, you know, you've got buildings, you've got towers, you've got power systems. There is quite a variety of things that have to be addressed.
164 THE CHAIRPERSON: To the extent that some, perhaps a lot, of your expenses are fungible, that is it can be used for different purposes, both regulated and unregulated, power being one of them, access being another one.
165 How do you draw a distinction between what the regulated side of the business needs and has to get a return on versus the unregulated? And I guess, to be more specific on my question, when I look at the growth in your business over the last four years, it has grown dramatically, and it hasn't grown on the regulated side, it has grown all on the unregulated side.
166 So if I was to make a superficial comment, it would be that the price cap regime has worked quite well for NorthwesTel and its investors to the extent that your profits have gone up.
167 And I take your comment about how your business isn't economically viable I think you said in a couple of place here. Yet, when I look at your financials, you are making a fair chunk of change on your return. So there is a return going back to your shareholders. But yet, when I look at the growth in the business and the sustainability of the existing infrastructure, it looks like it isn't happening.
168 MR. FLAHERTY: I don't think the pattern that you are seeing here would be much different than what you would see in other telephone companies in the country. I can't imagine that in the types of regulated services that we see that you are going to be finding a lot of growth in areas.
169 You know, you think of things like in Southern Canada, wireless substitution. If anything, I would think if I were to look at a similar statement for a southern telco I would actually see declining revenues in these regulated services, where our revenues have stayed relatively flat.
170 So, yes, they are not growing. But, as I said, in Southern Canada I would suggest that you would actually see a pattern of declining revenues in these areas, not flat revenues.
171 THE CHAIRPERSON: I am not so concerned about the fact that the regulated revenues aren't growing as much as your unregulated business, which runs on the backbone of your regulated business, is growing dramatically.
172 And to what extent is your capital investment going towards the unregulated services while NorthwesTel continues to extract whatever value they can from the regulated side of the business without investing in it?
173 At paragraph 47, there is a sentence in here that says, "There isn't an economic basis for even one service provider in most of these communities."
174 But when I look at all your communities, all 99 of them roughly speaking, and I look at the last four years of profitability, your income from operations has grown dramatically, it is very profitable.
175 Your capital expenditures are virtually flat in an environment where DSL internet is growing dramatically and your revenues I am sure from your broadband services and your internet services has grown by 50 per cent over that period of time.
176 And yet, you are not investing in the infrastructure that is the engine of all this, which is the backbone at work, which is the regulated network where all the investments have been funded and supported by the residents of the far north as well as the National Contribution Fund, all for the purpose of providing good quality service to residents in the north.
177 And when I look at the switches that you have, they have all been written off years ago I would imagine, they are all 25, 28 years old, some of them are 20 years, but that is a long time for switches that either don't have the capability of being upgraded anymore. And so the residents are living with technology that is obsolete, that can't be upgraded.
178 You commented yourself here, that you are looking for a subsidy in order to provide call management services, calling-line ID services that you should have offered years ago if you were really focused on your customers. And if there was competition here, it would have been offered by now.
179 MR. FLAHERTY: So again, I think it comes back to the economic nature of the communities that we serve. So, for example, in Gjoa Haven the cost of providing calling features there are somewhere in the neighbourhood of $380,000 for that one community.
180 The revenues we would generate from the service would only cover the operating costs, they wouldn't even cover our contribution to the capital costs. So there is no economic reason or justification to be spending there.
181 In terms of the investment that we make in our switches, our goal is to make sure that we meet the basic service requirement. The basic service requirement doesn't identify a technology requirement, it identifies services that be provided.
182 In 2000 and again in 2002 we came before the Commission to talk about putting calling features into these communities. At both of those proceedings the CRTC identified that they were too expensive to do and more or less agreed to a modified basic service objective for those communities at that time by the exclusion of those programs.
183 So I don't think that we are ignoring them. I think we are well aware that there is a desire by people to have them. The challenge is, there is no economic case to do it.
184 MS CHALIFOUX: If I may just add to what Paul was saying.
185 I think we have to keep in mind the unique network nature of the north here. So given the vast distances between our communities, like Norman Wells, for instance, on the Mackenzie River here is, you know, 850 kilometres from Yellowknife. Our satellite communities, we have 40 per cent of them all satellite communities.
186 So diversity is not an option in this type of territory. So as a result, we end up having to have local switches in each and every one of our communities. So even if it's 100 NAS or perhaps larger, you know a 750 NAS community, you have to have a local switch in each and every community.
187 You're not going to find that type of switching network architecture in the rest of Canada where they can rely a lot more extensively on host/remote switching architecture that makes it much easier for them, if you will, to upgrade their generics.
188 So you really can't look to what occurs in the South and assume that that will occur in this case here and we just don't have anywhere near those same economies of scale that you might be used to seeing in Southern Canada.
189 THE CHAIRPERSON: It's not the issue of economies of scale. It's the issue of, as you said, and we'll come to your statements about internal cross-subsidies, but when you're running a business and you are trying to serve your customers sometimes you make investments for the good of the customer and not necessarily for the good of the shareholder.
190 When I look at your returns for the last four years, and after reading and seeing some of the comments from everybody who has commented at this hearing, it appears as though you have balanced the investments towards your shareholders or towards your corporation as opposed to towards your customers.
191 Like I said, sometimes you make investments for the good of the customer overall, which ends up being for the good of the corporation but in a different way.
192 And what I'm getting is you haven't done that. You're saying you came to us four years ago and asked us for approval for call management services and calling line ID. We turned it down. I don't believe we turned it down and said, "Don't give it to the consumers". We said, "We're not going to fund this" but it doesn't mean you shouldn't be looking internally at your own business.
193 And when I look at the financing results of your company, there is lots of money there. It's not as if you're losing money. You're making money.
194 Why wouldn't you turn that into brand advantage for your company and give your customers and your residents, both residential and business, services that they want?
195 MR. FLAHERTY: So clearly customers want services. I'm sure if I went to Red Lake in Northern Ontario they would tell me about services they would want to. There comes a practical issue of how are those services paid for.
196 You seem to be implying that we should be taking services from the non-regulated side and subsidizing the regulated side. So to my understanding, nowhere in Canada has the Commission actually implied that model.
197 If you look at larger companies like TELUS for example, they receive $30 million of funding from the National Contribution Fund. I'm sure TELUS is making huge profits on their wireless business. So why, in our case, would you suggest it's appropriate for us to move money from a non-regulated side to a regulated side but in terms of a company like TELUS you would actually provide funding externally?
198 The same argument could be made for every company in Canada. Why do we have explicit subsidies for high-cost areas if that's the case?
199 THE CHAIRPERSON: Do you have customers that subscribe to more than one service?
200 MR. FLAHERTY: Yes, very much so.
201 THE CHAIRPERSON: You were commenting about how things really haven't changed since 2007. Clearly, the demographics of the North haven't changed but I believe the landscape and the industry has changed.
202 Technology has changed. There is new technologies, fixed wireless; satellite services. People are now buying bundles of services. The notion of a $31.33 a month customer carrying costs associated with that of 60-odd dollars results in a subsidy.
203 Many customers, and I will ask you shortly to tell me how many, either publicly or privately, purchase bundles of services. There are many, many customers in the South and I need to hear from you in the North that subscribe to multiple services and have bills of $150.
204 It begs the question to what extent do those customers need a subsidy at all when you have the profitability from your broadband services, which I think is quite significant based on my estimate of the data that's on the record.
205 And so it begs the question to what extent is all these unregulated services, recognizing they are unregulated, and I agree with you, living off of the benefits of the customer who has been a monopoly customer for many, many years and now is being bundled together in a larger package?
206 MR. FLAHERTY: I am not quite sure. You seem to be suggesting that non-regulated services are benefiting somehow from the regulated services and I'm not sure I understand how.
207 In all the costing that we do and in the current framework of course, we are not in a rate of return framework. We are in a framework that looks at costing and rates associated with high-cost areas as well as, of course, price caps on services.
208 So, clearly, we are not assigning costs associated with services that are not regulated to any of these regulated entities. So the suggestion that somehow the non-regulated area may be getting some benefit from the regulated area, you know, I don't agree with that premise to be honest.
209 THE CHAIRPERSON: Do you allow customers to purchase DSL service, broadband service, without being a local exchange customer?
210 MR. FLAHERTY: No, we don't.
211 THE CHAIRPERSON: Doesn't that address the point you just made that you disagree with that I made, that I think you just confirmed? Every one of your unregulated customers has to subscribe to your regulated service.
212 MR. FLAHERTY: That's true, but that doesn't mean that the pricing is not separated in a way that they are paying.
213 We don't charge them the one fee for the DSL service. They pay a separate and distinct fee for DSL service and that's reflective of the costs and the proportion of the service that's required for that service.
214 THE CHAIRPERSON: Your DSL service is unregulated so I don't want to necessarily focus on the rates of the service.
215 My understanding is the rates that are charged by NorthwesTel for DSL service are significantly higher than the rates in other jurisdictions including those that are in high-cost serving areas.
216 MR. FLAHERTY: Our rates are definitely higher. Our costs are much higher too.
217 So, for example, just in the Yukon alone just in 2010 we spent $15 million upgrading internet services in there. Again, internet is not really a part of our discussion here today but I don't want people to think that for some reason that, you know, there is not costs that are driving those prices. Absolutely they are driving those prices.
218 You know, we have put in a $10 million fibre just for redundancy because of all the fibre disruptions we were getting in Southern Canada. That affects both regulated and non-regulated services. There is no more revenue coming as a result of that fibre going in.
219 $10 million only for redundancy only protects us from Hay River and Fort Nelson South. Any fibre cuts for the North we are still exposed. But that's an example of an investment we had to make that both sides benefit equally in terms of that element.
220 THE CHAIRPERSON: When I look at your balance sheet, again the submission you made late last week that was put on the public record for 2010 and the previous years, if I look at property, plant and equipment for the last four years, it's virtually flat.
221 You are telling me you are making investments for growth in your business. You just told me you put $10 million into some infrastructure for growth purposes because the broadband backbone network is growing.
222 To the extent that it is growing and you're making all these investments, your net plant is pretty well flat, which means something else is not being invested in or you're living off of older technology and not upgrading.
223 It speaks back to that interrogatory that you filed where the life of some of these switches that are in place right now are well over their useful life and they haven't been replaced.
224 MR. FLAHERTY: So again, the balance sheet I don't believe we have actually filed publicly so I'm not sure what you are referring to. So maybe we could take that offline.
225 THE CHAIRPERSON: Called "Balance Sheet Data"? Did you not file this page titled "NorthwesTel Selected Financial Highlights, Consolidated as of December 31st"? It says 2011 on here.
226 And there is five years of data from 2011 to 2010 to 2006 and the first categorization is "Selected Financial Results" and then you have got "Balance Sheet Data" and other statistics.
227 MR. FLAHERTY: That's right. And the one we have has "Total Assets" on it.
228 Do you have something that's broken down further?
229 THE CHAIRPERSON: Sorry, the one I have has got a line item called "Property, Plant and Equipment Net of Depreciation".
230 MR. FLAHERTY: I apologize. I don't have that in front of me.
231 Back to your question, though, about the switches --
232 THE CHAIRPERSON: But did you file that page? If you did, I'm going to quote the numbers.
233 MR. FLAHERTY: Yes, there is that. Those numbers are on that sheet.
234 THE CHAIRPERSON: Okay. So if we take a look at it, the line called ""Property, Plant and Equipment Net of Depreciation" in 2010 the total was 308.8 million, in 2009 it was 305.4, in 2008 it was 306.4 and 2007 it was 305.5; pretty flat.
235 And, yet, what you just said a few minutes ago is you made some significant investments in transports, in capacity in order to serve your growth side of the business.
236 So it begs the question what are you investing on the rest of the business? It appears as though you're not.
237 MR. FLAHERTY: Again, I just reiterate. You seem to be hearing that I am investing it all in the growth side of the business.
238 As I said, the transport facilities that we are putting in or not for voice alone. So, for example, this duplicate -- this redundant link that I put in place, one of the biggest services it's doing is providing backup to voice services.
239 When we had a fibre cut in northern Alberta -- we had four of them last year -- customers, businesses in the Yukon in particular, lost access to all their 1-800 calling and that 1-800 calling was all of the numbers they used for point-of-sale machines. They basically had to shut down their doors.
240 So to say that somehow that investment is for the growth part of the business, it's very much going to benefit the regulated side of the business.
241 THE CHAIRPERSON: But, yet, your total investment in plant and property is flat.
242 MR. FLAHERTY: I guess I would remind you that it is net of depreciation, like if you look at the capital investment that's further up on the page that you're referring to, you know, you see significant amounts of capital that have been invested, you know, 38, 39, 40, 41 million dollars that have been consistently invested year after year.
243 So, you know, the other one, I'd be very cautious. We'd have to go in and look at what's happening on the depreciation side to really understand that one.
244 THE CHAIRPERSON: I took the liberty of finding a very old annual report that's still lying around on the Internet. It wasn't on your site. But it's an annual report for 2003 for NorthwesTel and it's titled "In Your Community." In there you have capital expenditure information from 1997 to 2003.
245 You're saying you're making significant capital expenditures and in the data you filed that we use to refer to, there was $41 million spent in 2010.
246 I'll read you the numbers in 2003 and 2002. Your capital expenditures in 2003 were $45.6 million, in 2002 were $44.5 million, in 2001 were $44 million.
247 So since that time, in fact, your annual capital expenditures have gone down, and since that time the Internet business has gone quite through the roof, and so you've had to have made significant investments in capital in your backbone unregulated businesses, which again leads me to believe there has been less invested in your regulated side of the business.
248 MR. FLAHERTY: So the period that you're referring to in 2003, of course, is right in the middle of the period that we had the five-year service improvement program that the CRTC approved. Now, the CRTC had us invest $85 million, the largest service improvement program of any company anywhere in Canada, relatively speaking, and that was right in that period.
249 So we increased our capital expenditures for that five-year period specifically to address that $85 million of investment over that five-year period. So that's why you're seeing that significant piece.
250 Again, I'd come back to those switches that you keep referring to. Those switches are meeting the needs of customers today for the services.
251 As I said -- you gave the example of call display -- there's no economic business case for putting call display into a community like Gjoa Haven, for example; $380,000 to put it in and you're going to generate probably about $10,000, if you're lucky, a month (sic) in revenues from those customers -- a year. I said a month, it's a year. So there's no business case to put that in.
252 In terms of the existing service, as they continue to operate, we continue to use them. As they get to be more problematic, we change them.
253 Two of those switches has been replaced this year, which aren't in the list of what we've been asking for, the switches in Fort McPherson as well as in -- I'm trying to remember the other. There's a second one that we've replaced. Hall Beach was the other one. So we've replaced those two switches because they were starting to become problematic so very much, you know.
254 I don't buy a new car just because I want a new car. In my particular case, I buy it because the old one no longer meets my needs. Those switches continue to meet our needs.
255 Again, we could go and increase the cost substantially there. What's the impact that it ultimately may have on the National Contribution Fund and the subsidy there?
256 THE CHAIRPERSON: I guess where I'm coming from, and it's a view that I have, is that NorthwesTel has failed to make investments in its regulated side of the business, which is why everybody seems to feel that there needs to be change and it's probably one of the reasons why everybody is so focused on bringing in more players in the market.
257 I understand the views of NorthwesTel saying there are costs associated with opening up the market as well, and you've delineated an awful lot of those costs.
258 That being said, what I'm hearing you say is if there's no rational business case to do something, you're not going to do it, and so it begs the question.
259 If the only other way of doing it is to create a competitive environment that would draw some of these benefits to the residents, it's a scenario that's being put forward by not just the competitors here -- and I saw your comments with regards to some of these competitors and some of the concerns that we also have with regards to them coming in.
260 But when I see territorial government submissions coming in saying we need more competition, we're not satisfied, there has to be some truth to some of these things as well. People aren't just saying these things for the sake of saying them. They're candidly not comfortable with the level of service they're getting.
261 And you're saying it's not profitable, so I'm not going to give it to them.
262 MR. FLAHERTY: I think you made the comment that I wouldn't do it if it wasn't profitable. That's not exactly what I said.
263 I said that if the switch, for example, does not meet the needs on a go-forward basis, so, for example, if it becomes problematic, if we can't -- if we're spending huge amounts of money to maintain it, we're obviously going to replace the switch. As I just cited, we are doing two of them this year. So we're doing it in a way that we think is a pragmatic way and it's appropriate as we go forward.
264 Again, I come back to you seem to be suggesting that there should be some form of cross-subsidy that goes from the non-regulated side to the regulated side, which is almost back to sort of a broad rate of return kind of basis. We moved away from that model.
265 This problem exists exactly the same in southern Canada. It's a bigger issue in our territory, I agree, because we have more high-cost areas.
266 But as I said, use the example of TELUS. Why does the CRTC provide $30 million in subsidy to TELUS for high-cost serving areas when, again, if you want to take the same example, I could go to TELUS's bottom line and show you way more returns and profits than what NorthwesTel has? Yet, you don't do it in that environment. Yet, you seem to feel that it's appropriate to do it in this environment.
267 THE CHAIRPERSON: I guess what I'm saying is there are customers out there that are looking for services. You're saying, if they're economically viable, I'll offer them; if not, I won't.
268 You gave the example back in 2007 and again now, as part of your SIPs you're asking for funding in order to provide calling line ID, which is a serious issue in this community. You even comment on the benefits of calling line ID as well. But you come back and you say, it's not economically viable. CRTC, if you fund it, we'll make it available; if not, it's not going to be there.
269 MR. FLAHERTY: I guess that's the --
270 THE CHAIRPERSON: We're talking about how much money?
271 MR. FLAHERTY: In the one community of Gjoa Haven it's $380,000 for one community. If you look at the total amount, I think it's $2.6 million for all of the communities.
272 THE CHAIRPERSON: So it's $2.6 million for all the communities.
273 And again, when I go back to your financials and you're telling me that it's not financially viable to offer services in the North, you have free cash flow of -- this is public information -- in 2010 of $13.7 million, in 2009 of $22 million, in 2008 of $27 million, and unless the Commission orders you to do it and funds it, there is no interest by NorthwesTel to provide its residents with a service that it needs for security purposes?
274 MR. FLAHERTY: Again, I come back to we're being -- we're looking at it exactly the same way it's looked at in every other community in southern Canada as well. There are services that aren't available in remote areas of other telephone companies as well. The same kind of rules apply.
275 So for some reason you seem to want to suggest that the non-regulated side should be subsidizing the regulated.
276 I guess my question would be: So does it go the other way too if I introduce the cell service? Many of the Northerners have indicated they would like to see more cell service. So if it's not profitable, then we're prepared to go and say, on the regulated side we'll jack up rates to subsidize a service like that.
277 I'm sure the answer is no. So it just strikes me as odd that you would have asymmetrical kind of thoughts that non-regulated areas should subsidize regulated areas.
278 THE CHAIRPERSON: I'm not sure that necessarily the word is "subsidize" but a recognition that there are some synergies there and a recognition of what the contribution is.
279 But I want to come back to one of the comments you made.
280 On the one hand, you make statements that this is how the Commission has done things in the South, and therefore the same should hold in the North. On the other hand, if it doesn't suit you, you come along and say, but we're different in the North, we need to have a different regime in the North than there is in the South as well.
281 And so the job of the CRTC is to look at all these issues and see where there is a need for a distinction and where there isn't.
282 But I mean when I heard you provide your testimony this morning, the same thread runs through this. In a lot of places you want to be treated the same way we do it in the South, and in other cases you're saying, we are different, the Commission has recognized we're different as well.
283 And all I'm saying is when I look at the North, when I look at what we did in price cap regulation in 2007 and I look at the output that comes out of it based on the financials that are here, it appears as though NorthwesTel is quite a healthy operation, and yet, consumers are arguing about the fact that they're not getting the level of service they want.
284 I think the picture would be very different if you weren't financially successful based on this data -- and if I'm misinterpreting the data, please tell me -- but based on the numbers that I'm looking at here, you've been very successful for the last four years under this price cap regime, and yet, consumers aren't happy, and that's a decision, I guess, that you and the board have made of NorthwesTel.
285 MR. FLAHERTY: So I think you also have to think about -- you keep referring to consumers are not happy. There are some consumers in very small communities like Gjoa Haven, for example, that are quite outspoken about the need for call display, but if you were to survey the entire population, call display is not the big issue.
286 Internet services, wireless services are where people are going to highlight that they would like to see more in the future, and again, you find similar challenges in those kinds of environments as well.
287 Most of the communities in the North still -- or many communities in the North, I should say, still do not have wireless, and where they do have it, it often has been subsidized to make it happen.
288 Internet services, the same thing. Huge amounts of subsidies have gone into providing Internet services.
289 So I think it's important to recognize that what consumers -- you're lumping it all in and saying the biggest issue that consumers have -- or at least suggesting the biggest issue consumers have is call display. Obviously, in a community like Gjoa Haven it's a big issue, but if you took the majority of our consumers, you're not going to be hearing about call display. You're going to be hearing about cellular and Internet, which again aren't part of this.
290 You know, another approach, which is kind of taking us a step back, should we have a framework that's rate of return based for all of northern Canada? It's quite different than where we are today, but if that's your concern, I suppose that's a way of looking at it and say, should we regress to that kind of -- because you're hinting that that's where, you know, we should be acting as a communications company.
291 Obviously, in 2007, you know, the decision was made that we should go on a price cap framework. Price caps were very specific about looking at a set of regulated services and determining how prices change. Any subsidies that we have, they come from looking at costs in those high-cost subsidy areas. That's the framework that we have and that's the model that we've been working under.
292 You know, we're no different -- as I say, if I went and analyzed all of the large telcos, even the small telcos, in southern Canada, I'd find similar patterns to what we're talking about here. So I don't think what we are seeing here is unlike anywhere else.
293 To the degree, as you point out, that the north is quite different, you know, an option is to go back and look at should we have some kind of broad rate of return type regulation. But then the question is, from what you're looking for, you're saying, "Well, we better include television, we better include cellular, we better put them all in here", because you are suggesting at least that there should be cross subsidies.
294 And they are cross subsidies. Gjoa Haven does not support a switch to put call display in there at this point in time. Somewhere in the future the current switch will no longer meet meet our current needs, we will have to replace it. When that happens, sure, that will make a difference at that point in time.
295 THE CHAIRPERSON: But when NorthwesTel came before the Commission and we took a look at basic service objectives a number of years ago, I'm assuming that Gjoa Haven and all these other communities were included in your coverage area.
296 MR. FLAHERTY: That's correct.
297 And, as I said, back in 2000 when we first looked at this framework we put all the communities in. We talked about all of the services that would be provided and what it was going to take to make that happen and the Commission was of the view at the time that it was uneconomic. I think those are some of the exact words that were in the decision.
298 We came back in 2002, the same thing and the result was the Commission approved, I think it was four communities that we would go and put call display in. After that the Commission said, again, not economic, we don't support going forward.
299 So again, I don't want to suggest that we haven't looked for ways to do some of this, definitely we haven't looked at using non-regulated services to cross subsidize. We haven't, nor has anyone else in the country to my knowledge.
300 MS CHALIFOUX: I'm sorry, if I may, just to keep it in the context.
301 We do provide these features to 67 of the communities, so these remaining 29 communities are less than 5 percent of our NAS. So that's where you sort of really hit that economic challenge. So for the last 5 percent the costs are today very high, and they were when we looked at this previously with the Commission very high, and that's why at that time the Commission modified, if you will, the basic service objective for those remaining 5 percent of the NAS.
302 That's where again we are here today to see if there is a way where we could get that remaining 5 percent of the NAS with those features.
303 THE CHAIRPERSON: And from your perspective the way to get it is for the CRTC to fund it through either the National Contribution Regime or to approve increases in rates?
304 MR. FLAHERTY: That's our position.
305 THE CHAIRPERSON: Let me ask you this question: If you refer to NorthwesTel SSI July 7th interrogatory 7 -- and I won't go into specifics -- you list all the switches here that I guess require local number portability, among other things. These switches are anywhere from 15 to 25 years old or more, some are 28 years old.
306 What happens when upgrades aren't available when there's no ability to maintain these?
307 MR. FLAHERTY: In terms of the DMS technology, let's start there.
308 As SSI pointed out there is the potential for an upgrade in a DMS switch today that has a life of about four years and we are saying that doesn't make sense, let's replace it with a different switch.
309 As you will see by the mix of technologies that we have highlighted, we often will use REDCOM technology instead. REDCOM technology supports these features in these small communities. So there are other alternatives.
310 Longer-term there's IP technologies, media gateways, things of that nature that could be used as well.
311 Part of our hesitation in looking at that is, that technology is still evolving. Some of the media gateways that we have looked at before aren't survivable if they lose their host remote link and hence services in the community would not function if the link failed. The switches we have today maintain local calling in those communities if the transport link fails.
312 So we are looking at new technologies, there are options, though, in terms of -- we have proposed actually what we would do to replace those switches and upgrade them -- not upgrade, but replace them with a different technology.
313 THE CHAIRPERSON: Would you be coming back to the CRTC looking for SIPs for them and funding for them, or would you invest in upgrades or new switches from your operations?
314 MR. FLAHERTY: As I indicated before, when we get to the point where the switch is becoming too expensive for us to maintain, we do change those switches. We are doing two of them this year, we are replacing old DMS switches with REDCOM switches. So we do do that.
315 The challenge is, of course, many of them continue to work perfectly fine and continue to allow us to meet those goals, so as long as they continue to do that we will continue to use them. At that point in time when they become large maintenance costs and are driving our costs up, that's the time we look at changing them.
316 THE CHAIRPERSON: And when you change them, do you change them with the intent of having the functionality that would provide the services that perhaps from a competitive perspective would be required, or would you limit your functionality to just replacing the service, but not providing for any capabilities that normally today I would imagine are software defined and come with the switch anyways?
317 MR. FLAHERTY: So from a feature set, like you get call display for example, definitely when we change them we would incorporate that into the new switches. So, for example, the two I mentioned were doing that today.
318 One of the big costs that's leading to the $32 million that we have identified as requiring upgrade to the network for local competition is the need to put in CCS7. There is only CCS7 in six communities in all of northern Canada. Again, back in 2000 we put that in front of the CRTC. At that time it was going to cost us $40 million to put CCS7 into every community in the north.
319 So I believe, subject to check, that necessarily replacing the switch doesn't automatically give CCS7 into those locations.
320 THE CHAIRPERSON: Why don't we take a small break.
321 We will resume in 15 minutes.
--- Upon recessing at 1019
--- Upon resuming at 1037
322 THE CHAIRPERSON: Thank you.
323 I want to move to another topic, and that is the issue of cross-subsidization, internal and external.
324 You have made several statements in your remarks this morning with regard to the risk that might exist if, in fact, local competition were made available in the bigger cities of Whitehorse and Yellowknife, and you referred to these internal subsidies.
325 Let me ask you the first question, which is just a definitional one. My understanding of the way the subsidy regime works is that there is a cost associated with providing the service that you file and we support and approve, and from that we deduct the revenues that are charged to the consumer, the implicit contribution that exists from optional services, and that difference becomes the subsidy, per NAS times 12, to get to the subsidy total.
326 Is that correct?
327 MR. FLAHERTY: That's correct.
328 THE CHAIRPERSON: So when you refer to the fact that opening up the market to competition in Yellowknife and Whitehorse would impact the internal subsidy that flows between services, I don't quite understand.
329 You have put a number on it of $10 million, I believe, as well.
330 MR. FLAHERTY: That's correct.
331 Basically what we are saying is, the cost of providing services in our larger centres, Whitehorse and Yellowknife, is not as high as, obviously, the cost of providing them in those remote centres. So the margins that are actually -- it is actually margin generated, and the margins there are well above cost, and that excess, in places like long distance revenues, capped revenues we have talked about specifically, and digital private line revenues, those are higher.
332 Likewise, if I go into the communities -- I talked about those satellite toll connect links, for example -- very, very, very expensive.
333 The revenues that we are generating on toll in those satellite communities by no means cover costs. The revenues that we generate on business access in those communities don't cover costs at all, by a large margin.
334 So it is those cross-subsidies from services like toll and digital private line, and, arguably, business access service in the major centres, that are helping to offset the high costs and the losses that occur in those other areas.
335 The contribution that you talked about from the national fund, of course, doesn't address any of those areas.
336 THE CHAIRPERSON: So the $65 -- for argument's sake let's say it's $65 -- for the cost of providing service in your H1 high cost serving area, that nets out the contribution that comes from the Band D, Whitehorse and Yellowknife contribution?
337 MR. FLAHERTY: No, just to be clear, on the residential side, the methodology that you spoke of earlier is exactly correct.
338 So on the residential network access side, that is the case. There is no subsidy coming from anywhere else, there is a subsidy specifically from the national fund that provides that.
339 What I am saying is, in those small communities, the cost of providing toll service, the cost of providing business access service, the cost of providing data services that are regulated -- none of those revenues are covering the costs in those high cost regions.
340 So it's the revenues from those similar services in the very large populated regions, like Whitehorse and Yellowknife, that go to cross-subsidize.
341 It's implicit within our organization, shall we say, that that implicit cross-subsidy occurs.
342 THE CHAIRPERSON: I think I understand what you are saying.
343 I am going to stop here and pass the questions on to my fellow Commissioners, and I may come back at the end.
344 COMMISSIONER DUNCAN: Good morning. I have a number of different questions, and I know that everybody wants to ask you questions, so I guess we are going to be here for a little while.
345 SSi Micro has suggested that there may be circumstances where the new competitor, assuming that competition is allowed, would be willing to undertake the obligation to serve a community, and that would relieve NorthwesTel of that obligation.
346 I am just wondering if you consider that to be feasible, and how you would see it working.
347 It is different than in other instances, where we have had people suggest that the subsidy should be transferable. This is the obligation to serve, so the whole community would be transferred to the new provider.
348 MR. FLAHERTY: I guess that NorthwesTel is in business to provide service to the north. We don't have a desire to step away from these communities, so I am not sure why NorthwesTel would want to see something like that.
349 That is almost like saying: Well, we don't like this person, so we will put some other person in there today.
350 We are the provider in those communities, and we are expecting to stay in those communities for the long term.
351 COMMISSIONER DUNCAN: That, of course, wouldn't be our decision, to draw that kind of logic, it is just that they indicated that they would be willing to take it on.
352 But you are happy to keep it.
353 MR. FLAHERTY: That's correct.
354 COMMISSIONER DUNCAN: Okay. Thanks.
355 With respect to the Radio Access Network, the SIP that you are proposing for High Valley, it's in British Columbia?
356 MR. FLAHERTY: Upper Halfway.
357 COMMISSIONER DUNCAN: That seems to be a town that is hard to keep in your head.
358 There was money originally from the Government of British Columbia there, and I think the Yukon government has raised the question: Why would the National Contribution Fund contribute to that, and not specifically the Province of British Columbia, at least to the same extent they did the last time.
359 MR. FLAHERTY: At this point the Province of British Columbia has not indicated any willingness to do that. It's not a normal course of action that provinces and/or territories agree to provide funding for basic telephone service.
360 COMMISSIONER DUNCAN: So you haven't asked.
361 MR. FLAHERTY: We have been dealing with politicians in that area, and they have not been forthcoming. They are the ones coming to us saying: You need to find a solution.
362 COMMISSIONER DUNCAN: Is that the way it was done initially, do you recall?
363 Did you have to ask, or did somebody come to you and say: You do it, we will give this much.
364 MR. FLAHERTY: I think it was a combination of the two. I think, at that time, there was no service in the region whatsoever. It was before my time, but my understanding is that there was no service and the government came and said that, based again on the local politicians, they were looking for service to be provided in the area, and they stepped forward.
365 We have had other examples where governments have stepped in to provide funding, but I assume, even in the Yukon's example, that they aren't committing to fund telecommunications in perpetuity because of one contribution.
366 COMMISSIONER DUNCAN: No. Okay, thank you. I didn't realize that there had been no service there to start with.
367 In your evidence, at paragraph 70, you state that advances in IP technologies and competing technologies are displacing toll traffic, and you refer to a decline in toll traffic in Whitehorse and Yellowknife -- and I think you have probably talked about that already here -- and an increase in toll traffic in satellite communities.
368 I am wondering, since SSi is operating in all of the communities in Nunavut and in the Northwest Territories, can I conclude from that that their presence is not impacting your toll revenues in those satellite communities -- not satellite, but the ones outside Yellowknife and Whitehorse?
369 MR. FLAHERTY: At this time we are not seeing a lot of change there, no.
370 COMMISSIONER DUNCAN: The next thing I wanted to talk about was quality of service. I read the Government of Nunavut's submission, and I found that they were extremely critical of the service provided by NorthwesTel. They state: They have the lowest service standards, even lower than the rest of the north, and the highest cost in Canada.
371 I will ask my questions, maybe, a bit out of order. I shouldn't probably do that, but I was also struck by the fact that, in the other two government submissions -- the Yukon government and the Government of the Northwest Territories -- neither of them, I don't believe, commented on quality of service; and, for certain, didn't leave me with the impression that it was desperate.
372 I would like, first of all, at the higher level, to have you comment on what the circumstance might be that would explain that away.
373 MR. FLAHERTY: In the letter you refer to, they are not explicit on the services they are talking about.
374 In the discussions that I have had with the Deputy Minister, they are actually talking about cellular service in Iqualuit as one example. Bell Canada actually provides that service, not NorthwesTel.
375 The other concern that I have heard expressed over time is internet service in the community of Iqualuit, as well. NorthwesTel doesn't provide that service.
376 I have never heard of issues with quality of service in terms of the traditional services that are regulated that we are here to talk about today.
377 COMMISSIONER DUNCAN: Okay. When we have an opportunity to talk to them I could perhaps ask them further about that then.
378 What I'm wondering about, just dealing with the -- because I noticed in your submission you comment on the challenge and difficulty of having technicians in place, getting them trained and retaining them. And I'm just wondering, that obviously is a problem that you have always had but I'm wondering how you propose to address it so that you can offer more reliable service.
379 MR. FLAHERTY: Again, we would argue that we are offering reliable service, so I guess I would start with that premise.
380 In terms of technicians, not just in these areas but across our whole company and not just technicians, turnover is a big issue as many companies in Canada are facing with the aging baby boomers. You know, the company's turnover rate is somewhere in the neighbourhood of 15 to 18 percent on an annual year, so it's much higher than what you see in Southern Canada.
381 And that comes from a variety of reasons. In some cases it's people have other job opportunities that occur in the North. In other cases they have come from the South, drawn back to the South. So turnover is a big issue for us.
382 One of the ways that we have tried to be innovative is we established the Community Service Technician Program a number of years ago. So we have 36 communities that we have community technicians in but even there, to be perfectly honest, we have turnover.
383 Last year we had 10 people leave us so that's more than 25 percent of the group left for a variety of reasons. Some got out of the jobs. Some, their priorities were different from our priorities, shall we say.
384 COMMISSIONER DUNCAN: M'hmm.
385 MR. FLAHERTY: So it is an ongoing challenge; no question in terms of staffing these types of areas.
386 COMMISSIONER DUNCAN: So you mentioned --
387 MR. FLAHERTY: Yes.
388 COMMISSIONER DUNCAN: -- just for my own education here, you mentioned 35 communities have community technicians. So what about all of the others? They have employees. How does that --
389 MR. FLAHERTY: There are 74 remote communities. We serve 96 in total.
390 COMMISSIONER DUNCAN: M'hmm, yes.
391 MR. FLAHERTY: So of the 96, 22 if I do my math correctly, have fulltime technicians in them and then 36 have these community technicians which are part-time positions. So that would leave another 38 communities that don't have technicians in them.
392 Part of the issue we get into is the volumes.
393 COMMISSIONER DUNCAN: Sure.
394 MR. FLAHERTY: The volumes are very small. If I take, for example, the remote out of service indicator, the volumes per community are 2.1 tickets a month.
395 So the dilemma is even having a part-time employee that I guarantee 40 hours that's essentially one week of work. It's for, on average, two tickets a month.
396 COMMISSIONER DUNCAN: Oh, okay. And those -- so I think it's -- just to go back maybe on a question that the Chairman was asking you, they are also supporting other services. In some of those communities you must -- you offer other than basic phone service.
397 MR. FLAHERTY: In most of the remote communities -- there are a few. I don't have the exact number, but I would say that most don't have many other services in them.
398 There may be the odd case where you may have something. I'm thinking of Arviat, for example, in Nunavut. We have self-service there. We don't have internet. We don't offer internet service. We have self-service.
399 But I think in all of Nunavut we might have self-service in maybe five communities out of 25. So the other 20 communities, if my numbers are correct, they wouldn't have anything beyond basic service.
400 COMMISSIONER DUNCAN: Okay, thank you.
401 I noticed the Government of Nunavut stresses that the available bandwidth is already inadequate. You know they talk about the government's needs itself are not supported. The needs of the citizens, they talk about people doing banking and the banking shutting down and not having enough capacity.
402 I'm just wondering. I know this is not -- well, I'll let you answer it. I guess I would like to understand what you are going to do to improve that bandwidth situation which is so critical.
403 MR. FLAHERTY: So again, generally when people are referring to bandwidth they are referring to internet services.
404 COMMISSIONER DUNCAN: Yes.
405 MR. FLAHERTY: So again they don't apply generally. Like we don't have an issue of not enough bandwidth to provide telephone service or to provide the services, the basic services that we provide. That's not an issue whatsoever.
406 I think the government is really talking about things like data and IP-type services and how they can change. You know, there is a simple solution to that. You just buy more satellite space. The trouble is, it's very expensive, you know. That's the challenge.
407 But, again, in terms of providing the basic regulated telephone services we are not bandwidth-challenged at all in providing those services.
408 COMMISSIONER DUNCAN: On the other side from the basic, though, on the other services if someone was willing to pay the rate, there is capacity there for them?
409 MR. FLAHERTY: That's correct. Like, for example, in Iqaluit we increased the capacity. We charge a higher rate for internet service in Iqaluit than we do any other areas because the bandwidth is much more expensive.
410 But again, you know if we were to add more -- if people were willing to pay 20 percent more, you know, that would help us add more bandwidth to that. It's available to be purchased as well. So it's a question of economics, at the end of the day.
411 COMMISSIONER DUNCAN: They also mentioned a problem with redundancy and, again, maybe that is not a basic phone service issue. It's the other services, IP and --
412 MR. FLAHERTY: So that could be related to basic phone service as well. So the satellite network today we have at home in Yellowknife into Whitehorse and then it goes south from there, so long distance traffic for example.
413 So last year, as I mentioned, we had four fibre cuts that were actually outside of our operating territory. They were in Grande Prairie, Alberta. They actually disrupted the flow of PSTN traffic, 1-800 traffic, and that would have affected banking machines in Nunavut. It's hard to believe that a fibre cut in Grande Prairie could impact Iqaluit but it's by the way that each architect or the network is architected.
414 That being said we have since invested $10 million to go from Fort Nelson to Hay River to be able to bypass that entire region. It's a heavy oil and gas region. There is lots of digging going on there. So we invested $10 million. No more revenue to come from it but we have seen -- this year we had no disruptions south of Whitehorse this year due to fibre cuts at all after that investment.
415 COMMISSIONER DUNCAN: So the redundancy issues that they are concerned about in their presentation have been addressed, I guess, is what you --
416 MR. FLAHERTY: Not necessarily. I'm just simply referring to the ones related to telephone site service. There are still redundancy issues around things like cellular service in the community. Bell provides it but, again, it's a single link to that community.
417 Data services that they would get either from NorthwesTel in Iqaluit or from SSi in the other communities, there aren't necessarily redundant links into every community there.
418 So that doesn't mean they can't be put there. They can. It's just a --
419 COMMISSIONER DUNCAN: Cost.
420 MR. FLAHERTY: -- question of what cost.
421 COMMISSIONER DUNCAN: Okay, thank you.
422 The Yukon Government in their submission states, "There is no evidence that" -- this is with respect to the proposed $2 rate increase in the high-cost band -- "There is no evidence that affordability was taken into consideration".
423 So I'm wondering if you did do any kind of study or what kind of study you did to satisfy yourself that the consumers could afford to pay the extra $2 a month.
424 MR. FLAHERTY: To be honest, we didn't conduct any specific studies to that fact. You know, I guess we rely on the Commission. The Commission generally approves just and reasonable rates and, you know the rate we are asking for on the residential side is just marginally higher than a rate in TELUS that's already at $32.76.
425 So our view is that the Commission has already deemed that $32.76 to be an affordable rate and that rate was approved in June 2010. So we are thinking the small increment from $32.76 to $33.33 is a small piece.
426 Again, I would reiterate. I think you made the comment that it's just for high-cost areas. We are proposing a $2 increase for all residents.
427 One of the issues we face is even in D Band we don't believe that the rates cover the costs plus mark-up even in D Band today.
428 COMMISSIONER DUNCAN: So in here, TELUS -- you brought up the instance of TELUS. Is that an apples and apples comparison? Is the community where they have that rate identical to these communities that we are talking about in Band H?
429 MR. FLAHERTY: They may actually be bigger communities. I don't know the exact size of those communities.
430 COMMISSIONER DUNCAN: So it's not just a rate itself. Consideration, I think.
431 MR. FLAHERTY: It's their highest cost band, shall we say. So that's the band we looked at.
432 COMMISSIONER DUNCAN: Okay, thanks.
433 So I'm just thinking -- this is my last question, I guess, at this point.
434 I'm looking at the subsidy formula. So if the Commission doesn't accept your proposal to recognize the satellite toll connect links as a residential cost, if we don't accept that premise, and there really would be or what would be the justification for raising the rates $2 for the consumer?
435 Because all I see would happen in that instance is that the subsidy would benefit, would go down and would benefit the payers into the fund. I don't see a benefit coming to NorthwesTel, if I look at that formula.
436 MR. FLAHERTY: Yeah, I am not sure I understand your question.
437 If the money wasn't recovered and there were -- like if the subsidy wasn't -- are you saying if the rates don't go up by the $2?
438 COMMISSIONER DUNCAN: I'm saying -- well, this is my question. If we don't accept your suggestion that those toll costs should be considered residential expenses the Phase II costs that gets dealt with other -- you know, anyway.
439 But if we don't accept that premise then it seems to me there is no reason, justification for increasing the rate $2 for the consumers because in the subsidy formula the cost hasn't changed at all. And it's reduced by the rate which would be $2.
440 So the subsidy would actually be reduced. That means that the larger companies in the South would not be contributing, but the consumers here would be paying $2. And I would have a problem justifying that.
441 MR. FLAHERTY: Let me try and see. I am not sure if we're at the same page yet, but let's try.
442 COMMISSIONER DUNCAN: M'hmm.
443 MR. FLAHERTY: Our current subsidy is 10.7 million for Res PES. So with the new cost subsidy, absent the toll connect piece, it goes to 10.9.
444 COMMISSIONER DUNCAN: M'hmm.
445 MR. FLAHERTY: With the $2 increase it drops to 10.5, so that does make sense?
446 So if you don't grant the $2 increase then the subsidy at a minimum has to go from 10.7 to 10.9 reflecting the new -- assuming you agree with our new cost studies.
447 COMMISSIONER DUNCAN: Right, m'hmm.
448 MR. FLAHERTY: So the subsidy would still -- the $2 really doesn't relate at all to the satellite toll connect link. It's a totally different situation; different issue.
449 So 10.7 today --
450 COMMISSIONER DUNCAN: Yes.
451 MR. FLAHERTY: -- 10.9 without talking about satellite toll connect, if we put the $2 in, the 10.9 raises the 10.5 and then satellite toll connects added on top of that after the fact.
452 COMMISSIONER DUNCAN: So the subsidy with the satellite toll in it would then be what, 12 point something?
453 MR. FLAHERTY: 10.5 plus 2.8, so it would be 13.2. 10.5 -- with the $2 that is 10.5, plus 2.8 --
454 COMMISSIONER DUNCAN: I guess I am thinking that the National Contribution Fund could absorb or would absorb your Phase 2 cost increases. Those are the only increases that are in your costing increases, right?
455 MR. FLAHERTY: So that would take it from 10.7 to 10.9, that is right. So the issue though of course on the satellite toll connect links is that the CAT is subsidizing those links. Those links are very high-cost links, they are nine times more expensive than the terrestrial links. And today, the subsidy comes from the CAT.
456 The volume of minutes in the CAT alone in the last two years has dropped by 16 per cent. So arguably, that cross-subsidy is going away very very rapidly. And either we dramatically increase the toll rates in those remote communities or we look for an alternative like the National Contribution Fund, and that has been our proposal.
457 COMMISSIONER DUNCAN: So the toll connect link costs though, it is my understanding that those costs, however they should be paid or subsidized, are truly long-distance costs. Is there any other place in the country where they are treated as residential costs?
458 MR. FLAHERTY: The issue there is even back in 2000 the CRTC recognized at that time that we should take our toll connect costs and have them as part of access. So there is some precedent even within NorthwesTel for that at that period of time.
459 You know, Muriel talked about earlier in the south often the architecture is a host remote kind of architecture. Because of the nature of our area, we don't have that. But essentially, it is an extension of the local network to allow people to access the basic service objective items like toll, for example. That is our argument, is that it is quite unique in our operating territory.
460 You know, Grise Fiord to Yellowknife, 2,000 kilometres for a community of, you know, 150 people. In southern Canada you wouldn't have a separate standalone switch there, you wouldn't have a lot of things there the way and which we do it today. But if you don't, you end up with a double satellite hop, so the delay would be just inappropriate for a call if you like.
461 COMMISSIONER DUNCAN: Okay, I think that helps me understand. I will reserve the right to ask you another question if I come up with something else. Thank you very much.
462 THE CHAIRPERSON: Thank you. I will now turn to Commissioner Molnar.
463 COMMISSIONER MOLNAR: Thank you.
464 Good morning, everyone. I too have a number of questions.
465 I'm going to start with the issue of local competition. On page 17 in your opening remarks you talk about that in discussing -- I think you are discussing SSi Micro's proposal's and you say, "Second, even without LNP, as they propose for the first stage of competition, there will be costs incurred by NorthwesTel, both in terms of capital expenditure and ongoing costs."
466 Have you filed what those costs are?
467 MR. FLAHERTY: I don't believe so. I think we filed costs that are LNP, with local number portability and without, not specific to the model that SSi has proposed.
468 COMMISSIONER MOLNAR: So can you tell us now what those costs are?
469 MR. FLAHERTY: What scenario would you like to talk about? In terms of SSi in all communities, SSi in which communities?
470 COMMISSIONER MOLNAR: I want to talk about what you have stated here within your evidence, where you are saying that under their proposal there will still be costs, both in terms of capital expenditure and ongoing costs.
471 How can you tell me about those costs? Can you tell me by community, by region, by SSi Micro's proposal? What are the costs, as you have examined them, to make this statement.
472 MR. FLAHERTY: So in SSi's proposal they have talked about not having a local number portability initially. So again, I am not sure what I should read into that.
473 If local number portability was ultimately to be required in using the SSi model, we estimate it would be about $30 million thereabouts.
474 If local number portability wasn't included anytime, then we estimate that that could drop down to something like $2-2.5 million. And these are broad estimates, detailed engineering hasn't been done on them.
475 COMMISSIONER MOLNAR: So that is your capital. And what about your ongoing costs?
476 MR. FLAHERTY: The ongoing costs in the first scenario where LNP was offered everywhere would be somewhere in the neighbourhood of $1.5 million. And in the case of no LNP being offered, it could be something in the neighbourhood of $400,000.
477 COMMISSIONER MOLNAR: Across your region?
478 MR. FLAHERTY: Across the region.
479 COMMISSIONER MOLNAR: And does it matter as to scale, as to how many communities or anything else, or is this..?
480 MR. FLAHERTY: No. It would depend on -- depending on which communities and which location. One thing that it doesn't include -- you are referring to the second concern -- the fourth concern that I talk about, it has to do with the idea that all local calling now across the two carriers, from what we understand of SSi's proposal, has to now be carried on the long-haul network.
481 Those costs aren't included in what I just said, because we don't know -- it depends on which communities. An individual community could require a transport upgrade of maybe $200,000, another one could require a million, depending on the facilities available.
482 So again, it is because the nature of what they are doing is they are taking all that traffic out to Yellowknife to their soft switch, we have to take it back on our transport network, back to the community.
483 And so those transport links have to be big enough to handle not only just the toll traffic as they have done in the past, they now have to handle this company to company local traffic as well.
484 COMMISSIONER MOLNAR: So is that the satellite transport costs you just told us are scalable?
485 MR. FLAHERTY: To be honest with you their proposal, as we understand it for this regional type model, only applies to the terrestrial side. So, no, it doesn't have anything to do with the satellite side.
486 COMMISSIONER MOLNAR: Maybe you could just explain that?
487 MR. FLAHERTY: Sure. In the model that we understand that SSi has proposed, is in the satellite communities they would put a media gateway in there. So largely being able to have local traffic stay local. There is a caveat there that maybe I can come back to later.
488 In the terrestrial communities, they have proposed this local interconnection region where they would take the traffic back to one central switch. And because they have made that choice, that is where you get into local traffic now having to be carried on the long-haul network.
489 So I am not sure how they would get it there, maybe they would use their satellite facilities to get it to Yellowknife, it comes to our switch and then we say okay, but it is going to the person across the street who happens to be a NorthwesTel customer in the community. Now I have to carry that traffic back on the transport network, the terrestrial transport network, to the community.
490 But their suggestion on the satellite side doesn't use that model. And the reason they don't, I believe, is because they are trying to avoid the double hop satellite link, which again would be very poor quality of service if you did that.
491 So it doesn't apply to satellite, it only applies to the terrestrial.
492 COMMISSIONER MOLNAR: Okay, thanks.
493 And I do want to understand this, local competition is a big issue here. When you are saying the terrestrial network, so you are talking about fibre, fibre transport?
494 MR. FLAHERTY: Wishful thinking, microwave.
495 COMMISSIONER MOLNAR: Microwave.
496 MR. FLAHERTY: By and large there may be the odd community, but generally the communities where SSi is referring to, they are generally -- there are some in the southern part of the Northwest Territories that might have fibre to them, but they would be a very small percentage. The majority will be microwave and, of course, Nunavut is all satellite.
497 So it is not fibre or very few places it would actually be fibre, most places it would be microwave. And the costs I was referring to earlier that would need to be incurred are the microwave costs. So we don't believe there would be costs associated with fibre to speak of.
498 COMMISSIONER MOLNAR: And you need to make a greater investment, you need to expand your microwave capacity? Is that what you are saying?
499 MR. FLAHERTY: In certain cases, that is right. Because it was sized to carry the toll traffic, and they are thin small routes, so like you might go into a community like Nahanni Butte that may have a few hundred people. So the capacity that we need for local toll traffic would be relatively small.
500 But now all of a sudden let's say they got 30 per cent market share in that community, I am going to potentially have to deal with that 30 per cent of customers wanting to call their neighbour, but their call has gone back to Yellowknife and carried back to the community on the transport network. So I need to make sure that transport network can meet that capacity.
501 COMMISSIONER MOLNAR: Right. And you just made the point, they are thin small routes and there is 30 per cent of a community that is perhaps 200 or 300 or 400 customers. It is not a lot of traffic. So --
502 MR. FLAHERTY: No, but again, a lot of these radios, by the nature and sizing of them, they weren't sized to have a lot of excess capacity.
503 Again, we are trying to find ways -- in everything we do we are trying to look at balance, how do we make sure that we don't drive unnecessary costs?
504 So if I came back to the Commission and said, you know, trust me I put microwave routes in that are at 50 per cent capacity, I am sure you would challenge me and say that is not responsible.
505 So generally, they are at very high levels of usage now, so there is not a lot of room for growth shall we say. But it depends, obviously if I have reached a point where capacity exhausts, I may have just implemented something new in that community. But I have other places where they are very tight and that would drive it.
506 So I am not saying in every community, there are some communities.
507 COMMISSIONER MOLNAR: Do you have an estimate today -- again you have put it here and you spoke of the cost -- do you have an estimate, some idea of what sort of cost we are speaking of where you need to upgrade these microwave transport links?
508 MR. FLAHERTY: Again, it would depend on the communities they chose and the time at which they chose it. So, for example, if all of a sudden long-distance traffic increased and my capacity that I have there today isn't available a year from now, that would be a community that would have to be done a year from now. So I guess it would depend --
509 COMMISSIONER MOLNAR: So it is a potential cost, but it has not been sized or scoped?
510 MR. FLAHERTY: I can only give you some examples. We looked at a couple of routes, for example, and they are in the neighbourhood of $200,000, two of the ones we looked at. One of them is another larger centre and will require a million dollars.
511 So again, it varies and it depends on the time at which the service is requested.
512 COMMISSIONER MOLNAR: Okay.
513 Page 20, you speak specifically about SSi Micro in saying that "..yet we now have the prospect that there may be dual networks both subsidized under different programs, competing in small villages where even one network cannot be sustained without subsidy."
514 Having said that, two dual networks do exist today.
515 MR. FLAHERTY: That's right.
516 COMMISSIONER MOLNAR: And so, you know, we can't go backwards and say there should only be one network because two exist.
517 And so what I would like from you is a sense as to really how is it that the communities or the customers within those communities where the dual networks exist today, how are they best served if we don't enable them to use both networks, if we don't enable choice within those communities?
518 MR. FLAHERTY: I guess we can look at it from two points.
519 You're asking in particular about the customer side, and of course the question is there's no reason why all of the services can't be provided on a single network.
520 The challenge becomes neither network is sustainable today. Both networks get subsidy today and both networks will need subsidy in the future.
521 So the question is: Does it make good sense to have subsidized competition in a high-cost serving area? That's really, I think, at the end of the day the question.
522 Because it's not a case of all the costs have been paid for, there's no more costs ever again for the future. I'd be very surprised if SSi said, you know, that their network is entirely sustainable. They've asked for the contribution to be portable, suggesting they at least need that component.
523 So the two networks that exist today, neither of them can stand on their own. Both of them require funding to continue in perpetuity. So it's really back to: Does it make economic sense to subsidize competition in these areas?
524 COMMISSIONER MOLNAR: So, as you know, within the Obligation To Serve decision we determined that subsidies should not be portable.
525 Does that give you some comfort if that was to be adopted here?
526 MR. FLAHERTY: Well clearly, especially with the obligation that you also kept on us to be the provider of last resort, you know, arguably I need more than the subsidy to keep the network going.
527 If you think, as Commissioner Duncan mentioned earlier and the Chair as well, what makes up the funding of the network is the contribution from the national fund and the revenue from subscribers. Without both those elements, you haven't covered your cost, and yet, I don't see any reduction in my cost by losing an individual subscriber.
528 So, for example, on the satellite side, you know, I have a 15-year contract with satellite facility providers. So I don't have any way of lowering that cost and I have to stand ready to provide that customer with service if for some reason they decide they want to come back to NorthwesTel a week, a month, a year from now.
529 So yes, I feel better that at least I'd have that, but arguably, as I say, you need both the revenue and the subsidy. That's what covers the cost at the end of the day. It's not just the subsidy that covers the cost.
530 But again, I still come back to the principal argument that does it make sense, although the funding is coming from two different places -- you know, ours arguably from the Contribution Fund; the funding that the networks that SSi has built with the help of their non-profit groups like QINIQ and Falcon come from the federal government.
531 So do both parties continue to subsidize duplicate networks in these communities on a long-term basis? And I would suggest I don't think that's appropriate.
532 COMMISSIONER MOLNAR: And I would suggest decisions by provincial and territorial governments to fund networks is not within our jurisdiction.
533 So within our jurisdiction, you know, I think that what we have control of is whether or not competition exists and what sort of subsidies and what are the terms and conditions of that competition.
534 So now, assuming that we were to allow competition, have you -- what I see in front of us in your proposal is -- you know, you've put forward a scenario that says no local competition and then a price cap framework that's aligned with that sort of a scenario.
535 Under the scenario that there would be local competition, have you given thought to the terms and conditions that you would require? And I do want to talk about the price cap basket separate.
536 But under the terms and conditions that you would require in order to open the market to local competition -- you know the terms and conditions that exist within the rest of the territory. So what are the specific differences that you would require here in order to enable you to continue to meet your obligations and open up for choice?
537 MR. FLAHERTY: So again, I guess I would come at it from two perspectives.
538 One, I just reiterate the one I mentioned earlier. In the high-cost areas it's not economic for one provider, let alone two. So I don't see that it makes a lot of sense to create competition for two subsidized networks in those areas.
539 In the larger centres of Whitehorse and Yellowknife, we're not opposed to competition in those communities. I guess the request that we would have is help us have a framework that allows us to address those cross-subsidies that exist there, that support those high-cost rural communities.
540 The worst thing we could do is leave everything as it is today, introduce local competition, erode the cross-subsidies, because I think the only option we then have is to dramatically increase rates in the high-cost areas, and I'm not sure that's necessarily in everybody's best interest either.
541 But that would be another alternative, you know. Left to our own devices, the only options we have are to de-average rates and increase them in the high-cost areas.
542 So again, I come from the premise -- and you may have a different view, I'm sure -- but I come from the premise that it doesn't make sense to have duplicate networks. You know, I have to maintain a satellite infrastructure network in that place and so do my competitors.
543 COMMISSIONER MOLNAR: Just to be clear, I understand your point that it doesn't make sense, but my question was: If we were to enable competition, did you need some specific terms and conditions? So just answering that there shouldn't be competition isn't going to help you.
544 MR. FLAHERTY: So again, I said that was our starting position, that we didn't think it made sense in the high-cost areas, it makes more sense in Whitehorse and Yellowknife, need to deal with the cross-subsidy issue.
545 Part of the issue I'm interested in hearing through the rest of today is what do the other parties say, you know, because one of the ways, as I said, of reducing the cross-subsidy is to dramatically increase rates.
546 So the effective competition -- competition has the effect usually of driving rates closer to cost. That's generally the way we've seen it in other places it's been occurring.
547 So we already know the cost is substantially more today in these high-cost regions. So again, does everybody understand that even if we say, okay, we're going to go down the path of having duplicate networks that are subsidized by different groups, does everybody understand the view that if rates are going to go closer to cost, rates are going to go a lot higher in those small communities, absent more subsidy being brought in?
548 So again, I don't think I said that we're opposed to competition. We're suggesting that Whitehorse and Yellowknife makes sense. First, let's deal with the issue of cross-subsidy.
549 But, as I say, I'd be interested in hearing what others have to say and be prepared to offer something in reply tomorrow in terms of, based on what we hear, what would our proposal be.
550 COMMISSIONER MOLNAR: Okay. That's very fair.
551 And when you're talking about your proposal, are you also talking about your price cap proposal? Because you put in front of us a proposal for a different basket and different basket constraints. Would you see under a scenario of local competition that you would need to change that price cap proposal?
552 You spoke -- for example, gave an example of rate de-averaging as an example. Would you have a new price cap proposal under a scenario of local competition?
553 MR. FLAHERTY: So to be clear, we don't believe that we need to change anything in our price cap proposal today to deal with de-averaging. We believe that the rules allow that to occur today. We haven't applied that but we believe the rules would allow us to do that today.
554 But to your broader question, I think we would have to see as the day goes along with questions from others, again, would we have to revisit that.
555 But if your specific question is do we need to have a different rule to allow de-averaging, it's our understanding that that flexibility exists today.
556 COMMISSIONER MOLNAR: Okay. I want to move on to the issue of your SIP proposal and particularly your proposal to add the custom calling features.
557 I will tell you, for my part, I have a sense of discomfort in what I understand to be adding software, you know, doing software enhancements to what is really in some cases quite old switching equipment.
558 I know I heard you say it's unique in the North and this is the pragmatic way of managing our network, but I wonder if you have a network evolution plan that you might be able to share with us to give us a sense as to if we weren't going to do this, if we weren't going to add this software onto these -- you know, in some cases they're 1980, 1985 switches, I believe -- what would be your plan?
559 What is your network evolution plan and particularly as it regards the remote communities? Do you see -- you made a comment about IP and some of the fallbacks from that. But what is it? How do you see evolving your network in these remote communities?
560 MR. FLAHERTY: It's an interesting challenge that you speak of. Today we use a system called Hughes to manage all of our long distance network over satellite. Alaska, AT&T Alaska uses the same network as well. Telesat uses it to provide service for Bell in Northern Ontario as well.
561 The Hughes system is arguably not going to be along for many more years and so we're going to have to figure out a different way in which we're going to carry long distance traffic.
562 So IP technology potentially holds the possibility of that. So the idea of moving to a model longer term with IP gateways, for example -- or media gateways, sorry, that would be an opportunity.
563 One of the reasons that we've avoided some of it is because today, in some of the things we looked at, they didn't necessarily have, as I said earlier, survivability in the local community and we think that that's going to change as time goes on.
564 There are some parts of it where it's survivable on the line side but not survivable on the trunk side or it's survivable on the trunk side only in one direction. So there's still, if you like, advancements to occur in some of this IP technology.
565 But I think longer term we probably see IP in the management of a long distance network occurring over some kind of a platform like that.
566 But, as I say, the technology still continues to evolve to the point where, you know, we're not comfortable that we could guarantee the service that we have today with something new just yet. But we continue to monitor it and look at it.
567 If you said where do you think you would be in the next five to 10 years, it's likely in that -- more in that kind of space in that period of time.
568 COMMISSIONER MOLNAR: Thank you for that.
569 As you move to an IP-based platform, is it something that you would see -- you mentioned that you would lose your support on your existing platform. So you would see it being more of a network-wide upgrade versus a community-by-community upgrade?
570 MR. FLAHERTY: Exactly. You might be able to do a few communities at some point in time. If you did -- let's say we did a couple of communities like it, you have to maintain all of the old as well and it gets expensive then having it being able to go back and forth between the two different networks. But essentially you would be having two networks at that point in time.
571 So ideally you would move to it en masse, but that's no easy task either. You know, we have debated whether or not to put forward a request for a service improvement plan for that as well, but we think we can continue to live with what we have for a number of years yet.
572 But it's not a small task shall we say.
573 COMMISSIONER MOLNAR: It's not a small task. It's in the 5-to-10-year framework and it's really a leapfrog, if I understand. You will leapfrog up to the new IP platforms and the range of services that are enabled through IP.
574 Is that true?
575 MR. FLAHERTY: I should be careful when you say "range of services", that's always a dangerous thing. It depends what one talks --
576 COMMISSIONER MOLNAR: Well, the CCF and all of the --
577 MR. FLAHERTY: The features.
578 COMMISSIONER MOLNAR: -- the features that are available. I mean whether it be IP or -- I mean they have been available on many of the traditional networks for --
579 MR. FLAHERTY: The piece I was hesitating about was things like if you now include broadband. That's where I hesitate, because of course broadband includes a lot of bandwidth and of course satellite bandwidth, for example, is very expensive bandwidth as well.
580 But in terms of features that you're talking about, absolutely, they would be available in the new platform.
581 COMMISSIONER MOLNAR: Right. But the IP platform you're moving to would enable broadband, it's just a matter of the cost of the backbone really that you would need to sort out over time?
582 MR. FLAHERTY: That's correct.
583 And to be honest --
584 COMMISSIONER MOLNAR: Yes. So there's some economies there as well in delivering your full range of suite of services to these communities?
585 MR. FLAHERTY: Economies. Like today I can put broadband over satellite the same I can with toll. So I wouldn't say there's a lot of economies of scale, if that's what you're thinking, that all of a sudden I could use as much smaller bandwidth pipe. I wouldn't say that, no.
586 COMMISSIONER MOLNAR: So if we were to approve this SIP, it would be essentially grandfathered or replaced with your new IP platform?
587 MR. FLAHERTY: The types of switch -- like for example we are doing switch changes here as well. I think we have proposed -- I can't remember the exact number, but I think there were a number of switches that were also being changed with this. So those switches would be fully compatible with any future enhancement to IP.
588 So there are -- for example, even the two I mentioned earlier that we have done this year, they are REDCOM switches that have the ability to work in an IP configuration as well as a TDM configuration. So that investment wouldn't be stranded investment, it would be investment that could be built on in the future.
589 COMMISSIONER MOLNAR: But this SIP money, was I incorrect in assuming this was an investment in software?
590 MR. FLAHERTY: Some of it is, but there are also switches being changed as well. It's not uniquely software.
591 So basically I'm told it's line cards and then three new switches.
592 COMMISSIONER MOLNAR: So the majority.
593 Is it the majority or minority of that investment that would be stranded once you were to move to an IP platform?
594 MR. FLAHERTY: I'm not trying to be difficult.
595 The interesting thing is the biggest costs of course are with the switches. So half -- I think it's 50 percent of the cost of what we're asking for is the switches and the switches would not be stranded, as I just said to you.
596 COMMISSIONER MOLNAR: Okay. I want to move on to the issue of your local rate proposal.
597 So I understand your proposal as it regards the high-cost areas, effectively to offset some of the increases in subsidy.
598 I'm having a harder time understanding the rationale for your proposal to raise residential rates in non-high-cost areas And let me just explain myself.
599 You made a point more than once when you were talking to Chairman Katz about talking about the regulatory framework within which you operate and, you know, what is regulated and what is not, and so on. And the regulatory framework within which you operate is a price cap framework, as you know, and one of the bargains within the price cap framework is that you set the rates, you go into price cap and you undertake the risks of increases or decreases in profitability within that framework.
600 So I look at this residential rate increase and I'm not sure how that fits into the price cap framework.
601 MR. FLAHERTY: So, of course, at these periods of review this is an opportunity for us to look at either changes to the rules of the framework or one time, shall we say, adjustments to prices.
602 In terms of the non-high-cost areas, the cost -- the revenues today don't cover the cost-plus mark-up in the non-high-cost areas.
603 So that's the main reason why we're looking to do it there.
604 The other thing that today -- and we have agreed to this because we don't have an alternative suggestion, but today, of course, in the baskets were we even have inflation, we use GDPPI, but GDPPI, to be perfectly honest, is not a good reflection of the rate of inflation in northern Canada.
605 You know, I think the GDPPI, if I can remember correctly, something like let's say 10 percent increase over the five-year period. The price of fuel in the Yukon, to pick one territory, went up by 25 percent, not at all reflected in GDPPI.
606 So there's lots of regional elements that come in and they are driving up our costs, not just in the high-cost areas but also in the non-high-cost areas as well. So we are faced with this.
607 As a consumer when I go home at night, you know, the cost of milk hasn't gone down, it's gone up; the cost of gasoline, as I just talked about, has come up; the cost of fuel has gone up, those are all inputs that eventually affect NorthwesTel as well.
608 COMMISSIONER MOLNAR: Yes.
609 As you know, when the Commission froze the residential rates over the last price cap period their expectation was that you had some ability to achieve productivity to offset increases in inflation and there have been arguments that by increasing these rates it's effectively eliminating all of the incentives that were put in place through the first price cap.
610 So how do you respond to that?
611 MR. FLAHERTY: Again, the presumption, as you say, by fixing the rates is that we have been able to achieve productivity equal to inflation. We filed sort of unadjusted piece that if you looked at 2007 through 2010 we have negative productivity through that period of time.
612 If you look a little further back to 2006, it would appear that we have productivity, but that's all related to one very large system project, it's not something that's repeatable as we go on.
613 I talked earlier about fixed costs, fuel as an example. So we have 139 remote microwave sites, 90 of them generate their own power at those sites. So huge impact on the price of fuel there.
614 The other, what's that, 49, all have to have standby generators at them as well because there's -- you know, in order to make sure we can try and keep service up we need these backup generators. So we have 139 sites where we have to have fuel systems that are very expensive to manage and maintain as well.
615 So there's a whole number of reasons why, you know, we do things that are helping us to be more productive, but generally speaking we don't believe that -- we believe that the costs are increasing faster than the productivity and efforts that we can make and therefore we are falling behind actually. We are not keeping up.
616 "I" is an equal to "X", as much as we might like it to be.
617 COMMISSIONER MOLNAR: Okay. I would just point out that your argument had nothing to do with the non-high-cost areas that we were talking about the $2.00 rate increase. You were talking about high-cost areas; I was talking about the $2.00 in non-high-cost areas.
618 MR. FLAHERTY: Just to be clear, in Whitehorse there's three towers that are on mountains right around Whitehorse that have their own fuel systems, have their own helicopter pads to land on, that also impact Whitehorse. So Whitehorse is a non-high-cost area. So these things are relevant to the non-high-cost areas.
619 COMMISSIONER MOLNAR: So I can go back and check, you did file evidence you said that showed you had negative productivity?
620 MR. FLAHERTY: I believe in response to PIAC-4 we provided updated information there. That would show you both in an absolute way as well as in a normalized fashion as well.
621 COMMISSIONER MOLNAR: And you have not undertaken to come up with an inflation factor?
622 Because I'm not sure if I'm hearing about actual productivity. It's really hard to admit you have negative productivity, but perhaps you have an inflation factor greater than the national average and you have not filed anything or found anything that would more adequately reflect your region?
623 MR. FLAHERTY: That's exactly the issue that we are talking about is -- again, that's why we haven't proposed anything, we haven't been able to come up with anything that would be something that the Commission could have reliability on, but that is our issue, is that costs are going up faster than what that GDPPI figure would show.
624 COMMISSIONER MOLNAR: So is that your same rationale for the business rate increases?
625 MR. FLAHERTY: The business rate increases again don't cover costs plus mark-up -- sorry. The business rates don't cover costs plus mark-up as well today as we are in the world were are both in, non-high-cost as well as in high-cost -- sorry, in the high-cost. Overall they don't cover it; in the high-cost they don't cover it; in the non-high-cost they do cover it.
626 COMMISSIONER MOLNAR: So as we are talking about potentially opening for competition and as you're talking about different pressures on the internal cross subsidy mechanisms in place today, increasing business rates within the non-high-cost areas, is that trying to increase the amount of implicit cross subsidies?
627 MR. FLAHERTY: Arguably it is.
628 I guess the challenge being, you know, the alternative is we do a higher increase -- a much higher increase in the high-cost areas in the interim. So that would be the option, is don't apply the $2.00 rate increase to the businesses in the large urban centres of Whitehorse and Yellowknife and apply -- I would have to do the math, but apply a $4.00 or a $6.00 increase in the high-cost regions. It would probably be a little less.
629 There's more business NAS in the high-cost areas than there are in the large centres. But that would be an alternative, you're right.
630 COMMISSIONER MOLNAR: Yes. And perhaps one thing you may or may not look at when you're coming back tomorrow is what conditions would you look at under a scenario of local competition.
631 MR. FLAHERTY: That's right.
632 COMMISSIONER MOLNAR: Okay. I will wait for tomorrow, then.
633 A couple of other things.
634 First of all I want to talk about your proposal as it relates to the high-cost toll, the satellite links.
635 As you know, it is a significant policy change to add subsidy for toll from the national subsidy fund. It's not done today. You are not the only company that has asked for that to be done.
636 So the major policy change is one of the issues standing out there, but the other issue standing out there, from my perspective -- and I would just like your comments on this -- is that it's not clear to me, when you tell me the reasons that you want to reduce your -- I guess it's your AT rate, is it?
637 It's the AT rate, your CAT rate?
638 You want to reduce it because of IP and other opportunities to bypass, and the fact that you have significant cross-subsidy from your major centres, where there is, essentially, no cost on this toll connect.
639 So you have made this proposal, and yet, when I look at your proposed CAT in comparison to what CATs are within other territories, it is still significantly higher, and therefore must contain a significant amount of this cross-subsidy still.
640 MR. FLAHERTY: That's right.
641 Of course, our proposal is only the residential side, and the residential side is $2.8 million.
642 The business side, business toll, would be another $3.9 million.
643 So the two, in combination, are $6.7 million of subsidy that is going to support these small communities for toll.
644 COMMISSIONER MOLNAR: Right. I guess my question is, assuming we were to support your request here, do you actually think it solves your problem, or is this just a step and you are going to be coming back to us after saying: Look, we need to get the rest of our high cost toll covered, as well.
645 Is this the solution for you, or is this a little step, and you are still going to be coming forward and asking for more as it relates to this issue?
646 MR. FLAHERTY: I think you are quite right, this is an interim step. As we said -- I even said it in the opening statement -- we were trying to create some balance, trying not to put all the burden in one place, at one time.
647 But you are right, the other issue still has to be dealt with, and it wouldn't surprise me, as I go away and think tonight as to how do I address your other question on local competition, how that might enter into that picture, as well.
648 COMMISSIONER MOLNAR: Thanks.
649 I have just one other issue that I wanted to talk to you about, and that is quality of service.
650 Do people have this handout?
651 NorthwesTel has the handout?
652 MR. FLAHERTY: Yes, I have it.
653 THE SECRETARY: Candice, I would like to enter this into the record as Exhibit CRTC No. 1.
654 I will put some extra copies for people in the room at the back table.
EXHIBIT CRTC-1: Summary of NorthwesTel Quality of Service Results
655 COMMISSIONER MOLNAR: I know that you spoke about quality of service with Commissioner Duncan, and you spoke about some of your challenges, where you do and don't have technicians and so on.
656 I was struck when I looked at these quality of service results. In my view, there looks to be an alarming -- alarming, frankly -- reduction in the quality of service that has been provided to the remote regions.
657 If I look at 2010 and I look at "Out of Service", you missed 8 out of 12 months.
658 And when I look at this year, you have missed 4 out of 6 months as it regards out of service, which, of course, I am sure you would agree, is the most concerning element of service.
659 When you are out of service, all the things you have said -- it's an essential service and so on -- we agree, it's an essential service, and you have missed the indicator 4 out of 6 months this year within the remote regions, where it is most essential, and 8 out of 12 months in 2010.
660 I do want to give you an opportunity to speak to these results, but I would also like you to speak to how it was in 2007 and 2008 -- it appears that you were providing a better level of service, and that it has fallen over the years.
661 Through this price cap plan, it appears to have gotten worse and worse, year after year.
662 Having said that, it looks not so bad within your major centres, and declining in the remote regions.
663 First, I am going to give you an opportunity to explain these results, if you would like to, and then I will ask my questions.
664 MR. FLAHERTY: Again, if you look at your chart and you look at the "Business Out of Service" for the four year total, 2003 to 2006, you can see that we missed it a total of 21 times.
665 In this period, of course, we have missed it by 16. We have actually improved it from that previous four-year period.
666 In the other case, of course, it's different, it has gone the other way.
667 One thing that I would also point out is, if you were to look at 2010's average for all 12 months, taking all the trouble tickets, in respect of all the ones we missed -- I'm sorry -- if you took the whole number of misses for the year and the whole number of trouble tickets for the year, the average would be 88 percent.
668 If you do it for 2011, it's 91 percent.
669 So we are actually 3 points ahead, if you average it across months, versus just looking at a month.
670 Part of the issue, as I said, is volume. In all of these results, pretty consistently we are averaging about 2.2, 2.1 tickets per month, per community. So it's a very small volume.
671 So if you miss these -- and I will talk about reasons why we miss them -- if you miss them, it doesn't take very many to miss to drop you down. But if you bring it into the annual average, even the other one, "Repair Appointments Met", the average for 2010 was 89. The average for 2011 is 91.
672 So even when looking at the averages, yes, we have missed it, to your earlier point, but when you look at the averages, we are very, very close to the target.
673 Now, the reasons why.
674 One of the things that you read a lot about in the media and elsewhere is that the weather, of course, continues to change in northern Canada.
675 I took a vacation this summer, and I went to Nunavut. I was trying to land in a place called Qikiqtarjuaq on the north side of Baffin Island. Two days in a row I flew from Iqualuit, four hours, to Qikiqtarjuaq, only to be turned around and go all the way back. I did that, as I said, two days. So I used my whole day to go up and come back, and to go up and come back.
676 So I had a chat with my technicians. At Qikiqtarjuaq that happens often. You may only have one or two days out of six that the plane actually can land in Qikiqtarjuaq.
677 The alternative is that I just put a full-time technician in Qikiqtarjuaq. But now I have a full-time technician there, for a community that is probably in the neighbourhood of two or three trouble tickets a month.
678 So now I am back in my RES PES costing, and I am going to come in with something that is much, much higher in cost, and am I any more efficient? The fact that the person is only going to do two or three trouble tickets a month, they are not going to stay skilled at it. It's not a rewarding job for them, either.
679 So I am challenged there.
680 You might say: Well, have them fly elsewhere.
681 The problem I have getting in, I also have getting out. My technicians tell me that it may take them three tries to get into that community, and it may take them three tries to get out of that community.
682 So not only am I faced with the challenge of "I haven't fixed the problem", I just tied up my technician for two days on this plane, up and back, and up and back.
683 To be honest with you, it's a reality that we are facing in the north more and more.
684 In Tuktoyaktuk, in the month of -- I think it was May -- we missed three tickets in that month in Tuk, and it was because the techs couldn't land because of fog. If we had made those three, we would have made the indicator.
685 That's how sensitive, shall we say, it is.
686 So, again, I appreciate that if you look at it in the way that you have done so it looks alarming, but, again, if you look at it the way I have done it, where you look at all of the tickets, and you look at it over time, it's not nearly the situation that others are portraying.
687 We are very -- either we are on it or very close. In terms of the ones we have missed this year, the lowest score we have had is 87. The others have been 88, 89. So we have been very close, very much on the cusp.
688 And, believe me, we take this very seriously.
689 In 2010, we had an issue in Fort Nelson of turnover again.
690 Commissioner Duncan was asking about this earlier.
691 We immediately worked to backfill those technicians, to put them in there. But that's how sensitive this is.
692 Again, we could take the unusual step of saying, "We will just put a technician in every single community, I don't care how much the ticket volume is," but, again, I think we owe it to the people who are paying into our subsidy to support these communities to be more thoughtful about how we do it.
693 So weather, staffing challenges, in terms of turnover -- last year, as I mentioned, 25 percent of our community technicians left us, for a variety of reasons -- and then volume. Volume is huge, in terms of the impacts of all of this.
694 So we would argue that we are actually providing, we think, a reasonably good quality of service.
695 The other thing I would remind the Commission of is, in this "Out of Service - Remote", we are the only company in Canada that actually has this. Other telephone companies have remote territory, but they don't have this target.
696 In anecdotal conversations with them, most of them indicate that they would never meet this target if they were measured on it.
697 So I think we are doing -- I realize that people would like it to be better, but I think -- given the conditions and our balance that we are trying to apply to it, I think we are doing a reasonably good job.
698 COMMISSIONER MOLNAR: I want to make sure I understood what you said, because I am looking at this and I am looking at a trend, and you are saying that there have been changes in the weather patterns that have caused these troubles.
699 I understand that there are challenges in maintaining and repairing service within remote communities. I have certainly never worked within your area of remote communities, but I have had responsibility for maintaining and repairing troubles in remote communities. So I do have a sense of it, perhaps not yours.
700 But there is a trend here that I want to talk about; not the challenges particularly, but what has caused this trend. What has caused it to increase?
701 I think one thing you said is, when you look at your numbers, you get a different message.
702 If you want to file your numbers, I would like to look at your numbers, because this looks alarming. And if you are saying that your numbers don't look quite that alarming, I think it would be good for us to see that.
703 I just wanted to understand what it was that was causing this change.
704 MR. FLAHERTY: Definitely, we would be happy to file the averages. It's very straightforward. All we do is take all of the data and average it. Essentially, you take the full year's misses and divide them by the full year's trouble reports, and that gives you the average.
705 So it's not rocket science, but --
706 COMMISSIONER MOLNAR: It's not by month is what you are saying.
707 MR. FLAHERTY: No.
708 COMMISSIONER MOLNAR: You are not looking at it by month.
709 MR. FLAHERTY: No. I am just saying, if you look at it in the aggregate of the whole thing, the averages are working out at 90 percent, year to date, in July, versus 88 last year. But even the 88 -- you know, you have talked about 8, for example. But if you look at it on a trouble ticket basis across that period, it is 88 percent.
710 And, then, if you look at the other one, it's 89 and 91.
711 So I am saying that you are getting a different picture.
712 I can give you --
713 COMMISSIONER MOLNAR: And you will provide that same information from 2007 for all of these years so we can see whether it has been maintained or changed --
714 MR. FLAHERTY: Sure.
715 COMMISSIONER MOLNAR: -- the quality of service?
716 MR. FLAHERTY: We can show you that.
717 I think what you'll see -- I can't remember off the top but I think what you'll see is it probably came down a little bit from 2007, went to a low in 2010 and that it's coming back up in 2011, based on the results to date.
718 COMMISSIONER MOLNAR: Because you have done something, you have put in place something that's causing it to come back up?
719 MR. FLAHERTY: Well, I think the big thing is we recognize how important these community technicians are to us in trying to keep those positions fully staffed all the time.
720 So, you know, one of the things we have done more recently is -- they leave us for a variety of reasons. Some of them leave because they're not doing the job; many others will leave because they have other opportunities.
721 So one of the things we did start this year we have actually tried to enhance the training, help them be able to feel more connected to the company if you like. We brought them into Whitehorse and Yellowknife and provided them with a week's worth of training or two weeks' worth of training, so again, trying to make them feel more of a sense of purpose.
722 So is that the be all and the end all? I'm not sure. It's early days yet but we're trying to find ways to reduce the turnover. We'll see how that continues to go down the path.
723 I'll give you an example, though. Even having a community technician doesn't necessarily solve the problem.
724 So we had a community not this past Sunday, the Sunday before, that we lost service in the community. The community technician had left the community for the day so wasn't there. So we chartered a plane for $13,000 to go up. After it was all said and done we had to reset a breaker to make the service work.
725 So I'm just trying to give you an appreciation for, you know, we are taking it seriously. There was no question about us chartering that plane in there but the cost is very high.
726 You know I'm sure at one point we may get into the maintenance costs and why they are going up. That's a great example why. It's very expensive to operate in these Territories.
727 COMMISSIONER MOLNAR: I am pleased you say you are taking it seriously because, while I can't speak for everybody, certainly these results make me want to take this seriously.
728 As you know with other companies, when they went under price cap there was also a quality of service mechanism put in place. For other companies it was a rate rebate program. You know, that's been -- that has gone its way.
729 But there has been more than simply reporting to account for providing you with some incentives to take it seriously -- to take it as seriously. And if you do take it seriously as you say you are and you are raising the level of performance and improving the results, there is no potential penalties if you achieve your standards and there is potential penalties if you don't.
730 There are different mechanisms that we could look at as that kind of -- whether you call it a penalty mechanism or an incentive mechanism, but there are ways to tie within your price cap, some kind of incentive to achieving your quality of service standards.
731 First of all, I would perhaps let you comment on the potential that we would create a mechanism, call it incentive or penalty or otherwise, that would provide us, I guess, more assurance that you are taking it as seriously as you say.
732 MR. FLAHERTY: So, again, you know, I think we have a fundamental difference of view in that I feel that we are doing a good job up in this area. You know could we make sure we are 100 percent staffed? That's not always -- we're not always able to do that.
733 I guess if the Commission were going to do something like that I would ask that at least you consider things that are beyond our control.
734 So, for example, weather. If I can't get into a community, you know, I guess if your alternative is, no, I would like you to have someone posted there for 31 days or 30 days irrespective of the fact we have two troubles, you know we can look like that but it'll just go right to the Res PES costing at the end of the day.
735 Like I think we have to balance and that's what we try to do. I gave you the example. I'm quite prepared to spend $13,000 on a charter to go and fix that service. We are taking it quite seriously.
736 But if I'm fogged out of a community I can't force a pilot to try and land when he can't, you know. So I think we have to be a little bit careful.
737 I had another situation in Inuvik back in February. There was a blizzard that went for three days. I can't send someone out to climb a pole in a blizzard.
738 So these are realities of life in the North that we face. I guess if the Commission don't feel we should be putting that mechanism in place, if you were considering it, there would have to be some way to acknowledge these events, you know.
739 If there is a power outage in Toronto that's caused by something in the United States how can the people in Toronto react to that?
740 Well, I have the same issue. You know if there is fog that prevents me from getting in there I can't get in there. Another option is I can have someone stay there 24 hours a day, seven days a week but not very cost-effective for three troubles.
741 COMMISSIONER MOLNAR: Yes. Fair enough.
742 It's a big question to ask you. You are coming back tomorrow and I know you are going to be thinking of some things tonight from our discussion and I would maybe ask you to think of this as well.
743 And one of the potentials that to me seems relatively simple, is to tie quality of service to the subsidy in some manner, whether it -- you know rather than putting in place any additional mechanisms, we tie it some way.
744 So I want to just give you the opportunity to think about this a little more and maybe come back to us tomorrow when you're thinking about this, what would be necessary or your position on this if we were to tie the quality -- achieving your quality of service.
745 For me, particularly, it's out-of-service that are the most troubling, not the full indicator list. But certainly the out-of-service that somehow achieving quality of service and maintaining a high level of service within these communities is one of the conditions for achieving or for receiving the subsidy that you're provided in order to provide that service.
746 So that's the thought and I'll just leave it with you to maybe give it some thought tonight if you want to provide any additional comments.
747 Thank you. Those are my questions.
748 THE CHAIRPERSON: Thank you, Commissioner Molnar.
749 Head back to the right, Commissioner Menzies?
750 COMMISSIONER MENZIES: Thank you, a few questions.
751 A lot of ground has been covered but what I'm most curious about goes back to what the Chairman was talking about earlier.
752 We are fully aware of the challenges that are faced and you talk a good deal about these uneconomic areas and that sort of stuff. But I think, at least in terms of your public's perception and in terms of the interventions that have come before us here, there is an awful lot of people who, to put it in simple terms, think you're making too much money and not doing enough.
753 I want your reaction to that because if these are all -- to the average person on the street, I think outside the normal process here, but to the average person on the street they are sort of trusting us to manage this framework that you're within, ultimately to their benefit and hopefully in a way that allows you to make a reasonable amount of money as well.
754 What has happened in the last few years to change -- in your view what has happened in the last few years to change their perception of your company?
755 MR. FLAHERTY: I am not sure that I would agree that all customers have a very strong and different view of our company. There are clearly people who are --
756 COMMISSIONER MENZIES: I am not saying all customers. I am saying obviously -- I'm saying the feedback we have here, three governments, consumers' associations all calling for competition because they fundamentally don't think what's being done is good enough.
757 MR. FLAHERTY: It's interesting because, you know, again, back to the comment that the Commissioner or the Chairman was making earlier, in terms of things like call features, 5 percent as Muriel indicated, of our customers don't have it.
758 So that's not -- if you were to look at the broad customer base, that's not on what your customers are going to be asked. The questions you're going to be asked are around cellular service and internet service. Those are going to be the two areas that people are really looking for.
759 To be honest with you, I don't get a lot of feedback with respect to these regulated services that we are here discussing as part of the price cap's regime. So it's back to the Chair's comments, like is there a different regulatory model that should be looked at here? That's quite different than the South.
760 You know no one has proposed anything like that. They may comment about, well, we're not meeting customer needs, but they are in a non-regulated piece. So the regulation that we are here today discussing about generally is not those services.
761 Again, I'm struck by I know people want more in cellular and I know people want more in internet space. We are still faced with those economic challenges in providing those services. Over time there is a specific amount of capital being invested, as I talked about earlier, of a higher rate than pretty much most of the other telcos in the country.
762 So again, I guess it's a question of what is the framework then. Are we really talking about a price caps framework or are we really talking about something that is just going to put it all together? But then if it's going to be all together then how do we deal with competitors? How do we deal with others who are already providing services in these?
763 But it is an intriguing question that if you really got at where I believe most people are coming from, it's generally not these regulated services.
764 COMMISSIONER MENZIES: Okay. Just you mentioned capital costs there.
765 Briefly again, and I was wanting to ask about that when you said in your oral remarks about your capital costs are -- your capital intensity rate is -- the way you put it was at the higher end of the industry range. So it's not the highest but you talk a lot about maintaining the highest cost communities in all of Canada.
766 I'm surprised then that your capital intensity ratios aren't the highest. If you have the -- I mean, I know the cost of maintenance and capital costs is separate and that sort of stuff. But I am surprised that your capital costs would not be higher given the challenges that you face in these areas in terms of that. Could you comment on that please?
767 MR. FLAHERTY: One of the problems in that measure, you kind of have to look at it over long periods of time. If you look at TELUS and Bell, they would generally give guidance to the investment community that they are going to be in the 16 to 17 per cent capital intensity rage. That doesn't mean it doesn't bump up from certain years.
768 You know, they invested in huge cellular networks that I am sure all of a sudden drove their capital intensity higher. But if you kind of look and say, well, their guidance is on average they are going to be at that level. You know, if I were giving guidance to a street, and I don't because we are not publicly traded, but I would probably be talking more like the 18 to 19 per cent range.
769 So there is likely a 2-point swing right there between us, and that is in the aggregate. And all I can comment is on the aggregate, I don't have the breakdown of their numbers by regulated and non-regulated.
770 Our estimate on the regulated side is that we are probably in the neighbourhood of 21 per cent, something like that is what we are investing in terms of the revenues on the regulated side. So, you know, I can't say that there won't be a year that they may not go higher than I am, but ours is pretty steady. Whereas they might go up to 17, 18, they may come back down 16 at any given time.
771 So, you know, long-term steady, we are that sort of 18 to 19 per cent range.
772 COMMISSIONER MENZIES: So that is your position, that despite the challenges, your capital cost allocations needn't be any higher than most other southern companies?
773 MR. FLAHERTY: Well I think, and I am saying, they are higher than most other southern companies.
774 COMMISSIONER MENZIES: But within range, sorry, you may have misunderstood.
775 MR. FLAHERTY: At the upper end, at the top end of the range is what I would say, you know, on a consistent steady basis where they may blip up to it. But that is not their stated approach to the investment community. Their stated approach is that they will be, you know, 16, 17 per cent.
776 And, you know, I don't know what their capital intensity is on a regulated basis. I can only imagine, given their huge investments in wireless, that it is lower.
777 COMMISSIONER MENZIES: How would you address the criticism coming from some sectors that you are making an inappropriate level of profits?
778 MR. FLAHERTY: First off, again, the numbers that people were referring to earlier, they don't even include taxes. So we are not saying that is profit. Secondly, in the current framework that we have, again back to my earlier point, to my knowledge there is no expectation of cross-subsidizing regulated services from non or vice versa.
779 So again, I am not sure that I really -- so first off, you know, I think those numbers that you are seeing are a broad bulk number that don't even represent all of the costs that the company has. And secondly, it is relevance to this discussion, given the framework that we are in.
780 Like, we are not going back to all of a sudden say we are going to now look back on and regulate you on rate of return for the last three or four years. I guess if there is a decision that we need a different form of regulation, okay, let's talk about it and let's talk about how we go forward.
781 But in the past there has clearly been no expectation that I would get any of my competitive services subsidized, nor would I expect in reverse that the competitive service would subsidize the regulated services either.
782 COMMISSIONER MENZIES: Right. I think that would be a little difficult as a public relations strategy, because part of this is trying to explain to the normal public person who -- and I am not dismissing in any way your discussion there, because it is very technical regarding this process.
783 But public perception tends to dictate public actions in terms of that. And there seems to be a public perception that for the level of service people are provided, they feel that you should be spending more on improving their service and should be sending less money south in terms of profits.
784 Do you have a public relations strategy that you can fill us in on and tell us what your answer is to consumers and politicians and other public figures when they critique you? Because right now they are saying in, or at least the ones that acted in this hearing, these guys need some competition to clear their sinuses and get them focused on our communities.
785 MR. FLAHERTY: Again, I think you are talking about a whole variety of topics, as these people are talking about as well. And I think we would have to be specific. So if we are talking about call-display features in Gjoa Haven, I talked about it, totally uneconomic, there is no business case in the world that would support doing that on standalone basis.
786 If you are talking about cellular services, again, depending on where you are, you might have a desire to have cellular service up and down every highway in the Yukon, there is no economic business case to support it, to do it.
787 So at the end of the day, you know, we live within the rules that you put forward in front of us. If you are saying now that, okay, well we need to go and look at a rate of return form of regulation, I guess we do.
788 But I find it odd that, you know, people are looking at us and our profits when I gave the example earlier, like TELUS gets $30 million a year for their high-cost subsidy areas. So who wouldn't think TELUS is a profitable company? Their stocks are trading at $59 on the stock exchange, something like that. So we are not any different from those people, they have high cost areas as well. They are getting subsidies for their high cost areas.
789 So if there is a desire to create a very different regime for the north, then I guess let's talk about what that regime has to look like. It sounds like people are angling for some kind of rate of return kind of framework that would include all services. And that is very different than anything else the Commission has done in the rest of Canada.
790 But as the Chair pointed out earlier, maybe we do different things in the north, that is for sure.
791 COMMISSIONER MENZIES: Yes. Well, it is different. And it struck me listening to this earlier. And I would just kind of like your comment on this because this is not a whose fault this is or what has happened.
792 But it appeared to me as though your objective was to meet the basic service objective, as you said. And I am not critiquing that. And because that is the objectives and the standards that were set, those were the policies that were put forward. And there is the discussion about that there is no economic case for serving these communities. All true.
793 But not everything is about making a short-term economic case. So you have a monopoly and the usual -- a commonly understood reason for a monopoly is that you get granted a monopoly status, you have the right to make a reasonable profit in exchange for providing a set of services, which you have been, the basic service objective.
794 And I am thinking that people's expectations are changing because there is more available, because of -- I know it is outside, it is in the unregulated area, but because of internet technology people are much more conscious of and have higher expectations of being interconnected. They are comfortable living in remote communities, but they don't want to be disconnected.
795 And they feel like they -- more and more people feel like there is a right to be connected and have the same services levels whether you are living in Gjoa Haven or in Winnipeg. And that is a challenge to manage, right?
796 And when the company that has the monopoly loses the public faith in terms of that bargain, the public seeks change.
797 And I am just wondering if you -- while you have been meeting the objectives that have been, for the most part notwithstanding some questions that Commissioner Molnar raised, do you think it is time for a new set of objectives for the north in terms of these may be infrastructures that are uneconomic now, but if the country is going to grow and if the north is going to grow, a more robust infrastructure needs to be put into place?
798 MR. FLAHERTY: I would agree with your last statement there, that a more robust infrastructure, longer term. But I wouldn't want anyone to have the illusion that by just making it competitive it all of a sudden magically becomes profitable. It is not.
799 You know, in the Arctic Communications Assessment of Infrastructure report, you know, there is a highlight in there that SSi received through their partner companies $38 million to provide broadband into the communities in the north.
800 You know, in the current model we are provided something like $21 million.
801 So the notion that somehow -- so people in the north definitely want more services, to your point. The challenge becomes what is affordable, like what is economic to actually provide?
802 If I go into, I don't know, Gjoa Haven I guess, and asked them, you know, they would talk about call display. They would probably say, yes, and I want to have internet at 10 megs as well. That is doable, there is no question about that.
803 The challenge is the cost of the satellite capacity to do it. And there is no economic business case to provide that unless you're going to charge them, you know, $800, $900, $1,000 a month or something like that.
804 So there is definitely -- the consumers and the business people of the north would like to see more, there is no question about it. But the question is still going to be the economics of the whole situation. We have 120,000 people in 4 million square kilometres, that is the reality of our situation.
805 COMMISSIONER MENZIES: Yes, and it gets subsidized and it has always been subsidized, and it will probably be subsidized for a long time. So, I mean, whether it is subsidized or not, probably isn't really the issue. And whether one, two or three or more are subsidized, I mean, it is not a short-term economic discussion, right?
806 It is all agreed that it makes no sense short-term economics. It is all agreed that some of these communities don't in any way constitute what you would call an economic market in the market forces. But they are a social market, they are potentially a public policy ambition in terms of that.
807 And I would be curious to know what sort of level of subsidy and who would have to pay and that sort of stuff if we were -- and obviously government and governments have to make these sort of decisions -- what sort of recommendations you might make for what it would take for the south to provide more subsidy to the north so that the north could feel like it was a full partner in the communications framework of the country?
808 So that might be something you can get back to us on.
809 MR. FLAHERTY: That would be no small task, to be perfectly honest. There is a communications working group of federal government departments that have been talking about this now for more than a year. Again, you can almost -- and I keep suggesting to them, "I think you're going about it the wrong way".
810 I think you need to start from what services, not telecom services, what services do governments; do other businesses want to provide people in the North?
811 Start from the need first, the business requirement side, if you like, first. Once you understand that then you can go in and say, okay, so we need a communication structure that will do this, this and this.
812 But even the first part of that work has never been done. Really, that's critical, like you almost need to start there first.
813 COMMISSIONER MENZIES: Yes. It's difficult for us to put a regulatory framework into something without having that whole picture in terms of that.
814 In terms of -- can you fill us in a little on the history of the subsidy afforded your competitor in terms of how and why they were subsidized to set up these frameworks and you weren't or their share and that sort of stuff? How did that happen?
815 MR. FLAHERTY: Sure. I can give my perspective. I am sure they would have their perspective as well.
816 COMMISSIONER MENZIES: Yes.
817 MR. FLAHERTY: So Industry Canada back in probably 2004 through their BRAND program decided they were going to launch broadband services in parts of the country that currently didn't have it and they decided they were going to do it through non-profit organizations.
818 So in Nunavut there was an organization created called Nunavut Broadband Development Corporation and in the Northwest Territories there was one called Falcon Communications.
819 The Yukon didn't -- such a thing didn't happen in the Yukon for a different reason. The Yukon Government partnered with the NorthwesTel and we actually put the facilities in, in 2001, that brought broadband to every community in the Yukon in 2001 largely because of government, Yukon Government financing.
820 In this case it was the federal program that was done federally. So there was RFPs that were issued by the non-profit groups that were asked to bid and so NorthwesTel bid.
821 One of the criteria that Industry Canada put into their request for quotes is that whatever you bid had to be sustainable. So, in other words, you weren't going to be eligible for further subsidies.
822 So we took that quite seriously. I noticed in some material I saw from NBDC that they said, well, the initial network was only sized for 2,000 customers. That wasn't in the rules of the game. The rule was it was supposed to be sustainable.
823 Anyway, we approached it as it had to be long term and sustainable and any of the BRAND funding we received today we have never gone back and asked for anymore.
824 Nunavut NBDC -- and, again, they were the group that gets the money that is able to pass it on to SSi -- we bid and we bid a higher number because we took very seriously this notion of sustainability.
825 So I don't know the exact numbers. I'll give you an order of magnitude.
826 Our competitor may have bid somewhere in the neighbourhood $5-6 million. I don't know that. We probably bid in the neighbourhood of $8 million. So we weren't successful.
827 Since that time in that territory, they have been provided I believe it's $36 million. Now, they would argue that we have enhanced some services. Agreed. I don't disagree with that. But a big chunk of that is the bandwidth required to support more customers and that's what we bid from our perspective and that was sustainable.
828 So, you know, I'm to be honest with you, quite annoyed within Industry Canada. They put forward these rules and then they don't abide by them. So you know frustrated by that but that's how we come to where we are today.
829 Right now, as I say then, both networks are receiving subsidy. I think the NBDC subsidy goes through to 2013 or 2014, if I remember correctly from their website.
830 COMMISSIONER MENZIES: Thank you. That's all my questions for now.
831 THE CHAIRPERSON: Thank you.
832 Commissioner Simpson?
833 COMMISSIONER SIMPSON: One of the nice things about being last is all your questions get asked.
834 I would like to go back. I'm sorry to re-tread over some well-trampled territory, but I would like to ask a couple of questions on the SIP of a great proposal. It has to do with the type of switch that's being recommended for funding.
835 There has been some constructive criticism about the type of switch that you're looking at installing, that it's not as perhaps technically friendly to the long term evolution of the VOIP and basic IP architecture. I think Commissioner Molnar was alluding to this earlier.
836 Here is my question: Is there a reason for an intermediate step to this type of switch recommendation and not to go to the endgame, if you like, of a switch type that would better suit what seems to be the greatest need in the North which is toward, you know, the unregulated admittedly, but more to the broadband part of the network as it seems to be where the greatest pain in the North is?
837 I'm just curious what your answer is.
838 MR. FLAHERTY: So the switches, I'm not aware of anyone criticizing us for our switch selection going forward.
839 COMMISSIONER SIMPSON: The Government of Yukon was asking why you weren't going to a switch type, like a CCS7 architecture.
840 MR. FLAHERTY: Just to be careful, the CCS7 is not necessarily related to the switch architecture. That's a cost that is over and above --
841 COMMISSIONER SIMPSON: Yes.
842 MR. FLAHERTY: -- switch architecture.
843 So the switches that we are proposing to put in are fully capable of dealing with IP in the future. So there is no shortcoming and there is no intermediate step that's being taken there.
844 he prices that we are putting in, though, don't include putting in CCS7. That's another cost over and above that is not insignificant as well.
845 COMMISSIONER SIMPSON: That's excellent.
846 MR. FLAHERTY: The other switches, we have chosen where we could to upgrade the switch. Again, the idea is we are trying to minimize the capital investment. You could say to us, "I don't want you to spend the money on upgrading and I want you to replace the switch instead". The capital cost must be substantially more.
847 So we tried to choose a lowest-cost option. So where we had to replace the switch, pick one that's future orientated.
848 The other case is if we can do it a lower cost, let's do it at a lower cost to try and keep the overall costs down.
849 COMMISSIONER SIMPSON: No, that's excellent. Thank you very much. I think that clears up a misunderstanding that I was starting to form from some of the interventions.
850 With respect to a statement this morning you made in your oral statements, you on page 15, paragraph 4, had made an overarching general statement that if facilities-based competition was introduced into your service area it would -- the requisite would be significant implementation modifications and enhancements to your network.
851 What I'm gathering from that is that if facilities-based competition is created there is a significant cost to you to support the entry of that competition and to remain competitive yourself.
852 Have you ever done an economic analysis of what that cost would be versus a completion of your partial SIP span? Because right now, I think, you know, your SIP span has a component of X-number of dollars that you're asking for, which is an incremental amount as part of an overall span at some point in the future to modernize the system.
853 My question is would the introduction of competition, would that cost that you have indicated here, be equivalent to the modernization of the rest of your network if you were to go the whole distance instead of part of the distance on your current SIP proposal?
854 MR. FLAHERTY: I think my short answer is no, far from it, I would think.
855 Like, we are talking about the switches. If you are talking about the SIP II, the custom calling features, we are talking about the changes that would specifically be needed to made to allow those features in those communities.
856 If you're talking about, would it be equivalent to upgrading all of our networks to some future IP base, absolutely not. You know, there is a whole bunch of other switches that are not even part of this that aren't IP today that would have to be changed to do that. So I think there is a distinction.
857 I wasn't clear whether you were you were trying to get at, though, if we replace these switches -- I can't remember if there is three switches that we have talked about in the custom calling feature piece -- if we replace those switches under that SIP, it reduces the $31.7 million for local number portability. So that cost is common to both those scenarios.
858 The other thing that I would say is local number portability, the cost of competition depending on local number portability, as Commissioner Molnar asked earlier, if we provide local number portability in all locations, 31.7 million, she asked the question about if we didn't provide local number portability what would it be? And the cost was dramatically lower for doing that.
859 So again, the type of competition would significantly impact the investment required. But by no means would that upgrade cost be equal to what it would take to modernize the whole thing. Far from it; it would be a much, much larger number.
860 COMMISSIONER SIMPSON: You had referenced the ICIA report earlier. This is a report that has been also referenced by many of the government, Territorial Government intervenors.
861 I was curious. You know, you as a corporation had in a very fulsome way, inputted to this study as I can see.
862 I was just curious as to whether on the whole you agreed with their findings from the highest level. They have cited you know a very lofty but very adamant statement that, you know, the North needs reliable, affordable infrastructure and it needs it now.
863 I was curious as to whether you shared that belief. But I'm wondering aloud, how the North gets there under the kind of incrementalism that private industry requires in its investment plans.
864 MR. FLAHERTY: Again, I didn't write the report so I can't speak for the authors.
865 But my suspicion is that they are again calling about feed services such as internet and cellular. That's really where they are focusing -- and bandwidth. You know, the beginning of the report, to be perfectly honest, kind of annoys me significantly because the premise of doing it is that the military had a mission in Iqaluit that the communications were "woefully inadequate" I think, to use some of their terms, for that mission.
866 What bothers me about that is they came to us, told us they were going there, we said how many people are you going to have, they told us and then proceeded to double it. So we added all the capacity to meet what they asked for, they brought twice as many. If they had of given us the right request, they would have had the service to meet their needs.
867 So that sort of spurred this whole piece on, not to say there's isn't lots of other valuable information in there about what people would like to do, but there are lots of premises in there.
868 You know, there is a concern about a government agency in Whitehorse of all places that says they can't get a 30 meg service. I offer a 30 meg service today. So I'm not sure where they are even coming from.
869 But I think in general terms, there again talking about internet and cellular service, they are not talking about the telephone service being woefully inadequate in terms of business access or business toll or something like that, they are talking about more of these other services.
870 COMMISSIONER SIMPSON: Yes. Just two more questions or lines of questioning.
871 You were very candid, and I appreciate that, in your sincere statement that perhaps, you know, we all have to look at new frameworks because there are the regulated versus the unregulated challenges, there are the co-mingled expectations of residents of the north and there are frameworks that we have set up as a Commission that may also require re-examination because, the north is in play, it's evolving very quickly.
872 I guess this is a question about appetite and also tapping into your experience as an operator here the north.
873 The way the subsidies have been structured has been to try and put the application of money to the area of greatest need, the most challenged portions of the north, which are the high-cost service areas. To that extent I think we are trying to do our part in making sure that the money is spent in those areas.
874 The question is, in the business approach of looking at an entire corporation and the way it's perhaps most convenient to average costs, average rates, because it makes a much cleaner, efficient way to run a company, do the people and the needs of the high north suffer perhaps because in the averaging process the extraordinary is perhaps not dealt with by both of us in -- recognizing that extraordinary needs sometimes have to be dealt with in extraordinary measures.
875 Do we need, on both sides of the fence, to isolate costs, perhaps unaverage the costs to get a better reality of what needs and costs are in the high north and have a better understanding of the costs so that we can better assess the offsets that are required to meet the needs of the north?
876 MR. FLAHERTY: You know, I think I would let the government people speak for themselves, but in fact today the north is benefiting from those averages, not across regulated and non-regulated, but within regulated services.
877 So, for example, in the high-cost serving areas that we have been talking about, the residential access rate, if it was covering costs should be somewhere in the neighbourhood of -- depending on whether you include mark-up or not -- $70, higher or lower depending on whether you include mark-up, so they are paying $31.
878 So I would argue today many people in those high-cost areas are benefiting from the averaging.
879 The fear I have, to be perfectly honest, is that by opening up local competition we have to change that. Now, there's two ways of changing it. One is you drive the prices closer to cause; the other you dramatically increase subsidies.
880 So I think today while people may want more internet services and more cellular services, if we are specifically talking relative to these regulated services, that averaging is helping.
881 Long distance would be another example. If I charged what it cost for the high-cost areas it would be substantially more money.
882 So those communities, with respect again to those regulated services, are benefiting from the averaging today. My fear is we are going to de-average it. That's what's going to happen if we get into competition. It has to, it's economics, it drives closer to cost.
883 COMMISSIONER SIMPSON: But assuming that subsidy -- the subsidy started as top-ups to be able to try and offset losses and assuming that still remains the purpose of subsidies, so that if there was de-averaging the impact to the consumer would not be there because of the subsidy, it would more realistically apply money to the true cost of service. That's where I'm getting at.
884 I'm not trying to sneak a competitive question in on you, I'm really trying to get to grips with the true cost of what it will take to fulfill the ambitions of the needs of those who live in the high Arctic, because it's been quite -- you know, I am certainly not a numbers guy, but it has taken me weeks and weeks to try and sift through and better understand the operational side of the story to match my understanding of the subsidies out of the story.
885 It's simply because the subsidies again are, I choose to believe, focused on the bandage going on the wound, but the nature of the operation of the ER, if you want to call it that, is that we are trying to wade through the operational costs of running a hospital.
886 I'm just asking if there is an appetite for both of us to be a little more -- to perhaps look at a regime that is considerably more precise on the cost side, the true cost side as well as the subsidy side, maintaining a monopoly.
887 MR. FLAHERTY: I think definitely. We have talked for a long time about wanting to look at how we deal with these implicit subsidies and really making them explicit.
888 Again, I said earlier, we are wide open to the notion of local competition in Whitehorse and Yellowknife if we can get to the place that you are sort of hinting at, absolutely. You know, we have no reason to fear it then.
889 We are not afraid of competition, we are concerned about the sustainability of these high-cost areas. So if we can do what you're saying, the only caution I would throw out is some of these things are very small and you could go through some horrendous cost exercise. So to the degree we use sense in how we go about trying to determine the costs, absolutely.
890 But we have, I would suggest -- I don't know how precisely, but we have costing that can help in these areas that you are talking about. You know, we have our estimates of what we think the issues are and where these subsidies could be very lazerly pointed at, if you like.
891 COMMISSIONER SIMPSON: Last question and, I apologize, it's a bit of a zinger.
892 You had answered Commissioner Molnar with her quest for truth on the whole issue of quality of service standards and you were saying that by virtue of one or two failed calls it can completely weight the perception of performance.
893 But if that be the case I would like to gauge your appetite with respect to rate increases being tied to quality of service, if you feel that confident that you can meet them?
894 MR. FLAHERTY: The short answer would be, no, I don't.
895 There are so many factors at play.
896 Like if volume is so small, that's a concern.
897 Weather. Again, as I mentioned earlier to Commissioner Molnar, if we are going to look at something like that I think, different from being in downtown Toronto where I have the ability to get around, it's very unlikely I'm going to be stopped because of weather and other things -- our reality is very different in the north. So somehow we are going to have to acknowledge that, you know, that was just -- we worked herculean efforts and we couldn't get there and that was appropriate.
898 There was nothing else we could do, do you know what I mean, because I'm still back to the community that I can't fly in because of fog, which is becoming a big issue. I hope people don't think I'm just suggesting that and it doesn't really happen, it's a real issue that's happening in many of these communities.
899 I have communities in northern British Columbia, same thing, I couldn't get into because of fog three weeks ago. So this is a serious problem.
900 So of course my alternative is to have somebody stationed in that community 24 hours a day, seven days a week. Now, heaven forbid they need a piece of equipment because I still won't be able to get it in to them.
901 So I think there are those realities and I would find it inappropriate, to be honest, that we would be penalized for things that are beyond our control. That would be my biggest concern, is that, you know -- because I have a lot of people who take this stuff very, very seriously and, you know, through the example, $13,000 on a charter to reset a breaker, you know. That doesn't sound to me like a company that's not serious about trying to meet its objectives. We take this very seriously.
902 COMMISSIONER SIMPSON: But you are saying that the $2.00 increase in Yellowknife and Whitehorse is justifiable because there are some other service issues that would make it impossible for you to meet your targets?
903 MR. FLAHERTY: I didn't tie the issue of quality of service to service increases, I tied it to the costs of our business.
904 Whitehorse and Yellowknife for example on the residential side in the Band D basket is not covering -- the current rates are not covering cost plus mark-up. And of course we know in the high-cost areas they are not covering it at all. But that's the issue, is they are not covering the cost plus mark-up today.
905 COMMISSIONER SIMPSON: Thank you very much.
906 THE CHAIRPERSON: Thank you.
907 I just have a couple of cleanup questions.
908 Just to cover off on this issue, the Commission does deal with QofS actually for the purposes of forbearance in the south and we do recognize that in many cases there are what's called force majeure issues that cause you to miss and we do provide exemptions for that as well. So I don't see this as being any different. If we do get to that stage where there are issues beyond your control they can be removed for the purpose of the calculations, however that materializes if we go that way.
909 Just two things.
910 We touched upon, during our discussions this morning, the issue of consumers purchasing both PES and broadband services from you folks and I think you said that buying PES is a prerequisite to being a broadband customer.
911 Can you file with us -- I'm not looking for this on the public record, but can you file with us the number of customers that actually subscribe to multiple products. And when it comes to multiple products I'm looking at broadband service and basic telephone service from you folks. And if you can provide it both for the major markets distinct from the other markets -- Yellowknife, Whitehorse -- distinct from the other ones.
912 Also, the number of customers that subscribe to more than those two products, if you have customers that also have wireless and cable and everything else, as well.
913 What I am looking for is just to get a sense for how different the utilization of these services is up north relative to what they are down south.
914 That is one request I have of you. The other is something you said, Mr. Flaherty, earlier, I think in discussions with Commissioner Menzies. You said: I don't get my unregulated services subsidized.
915 I understand what you are saying. I guess I would ask the question: To what extent do you -- I don't want to use the word impute -- do you recognize the utilization of the regulated infrastructure in setting your costs or your rates for your unregulated services.
916 And I don't want to get into rate regulation of your unregulated services; I am looking at the other side of it.
917 Is there, or should there be consideration given to the regulated side of the business for provision of some of the infrastructure that is used by the unregulated side.
918 I don't want to get into the unregulated side, I want to focus on to what extent is there full value being given to the regulated side for the services that you are using outside of the regulated business.
919 MR. FLAHERTY: In our costing studies -- again, in the current framework, we use costing studies to try and identify the shortfalls, where they may exist in the regulated services. In there, very much, you go to great pains to separate out the regulated use and the non-regulated use of shared facilities.
920 So we do that in the way in which we go about those costing exercises.
921 THE CHAIRPERSON: But there is no financial recognition to the regulated side of the facilities that you are utilizing the other way.
922 You said that you invested $10 million for some redundancy, for some power, and capacity, and everything else, which benefits the regulated part of the business, which I understand.
923 But when the investment has been made on the regulated side of the business for the last 25 years, and now you are adding, overlaid to that, the broadband business, as well, you are relying on some regulated monopoly facilities and services. To what extent do the residents that have paid for those services over the last 25 years get any return for you using those services on the unregulated side, which one could argue are being used for non-regulated businesses?
924 MR. FLAHERTY: Part of the blurring in there, though, would be the shift of, for example, long distance minutes to VoIP. You are actually seeing a whole bunch of traffic that would have been called long distance, would have been paid for on long distance rates, that is now being offset through the internet service on a VoIP-type service.
925 I have had this debate with a few people; that in the very, very long term, if the model continues, both VoIP, over-the-top video -- if everything begins to ride on just the IP network, the cost of the IP service is going to have to go up substantially to be able to take on that burden.
926 So very much we look at that burden that goes across.
927 Our VoIP traffic has gone from, call it, more or less, zero in 2006 to 32 million minutes which are now being carried on the broadband side.
928 So you are actually seeing revenues declining on that side of the business, services being used on the IP side, and prices haven't really changed to reflect that reality, as well.
929 THE CHAIRPERSON: Okay. Let me ask my question a different way.
930 We currently have, as part of the subsidy regime, a $4 imputed revenue for optional services, because it is regulated and it comes out of the same business, basically. So we are sort of saying, let's recognize that there is some value there, as well, as a subsidy regime.
931 If this Commission chose to consider looking at that imputed contribution in a broader sense, and looking at what other services ride on the monopoly regulated backbone, should the utilization of the infrastructure be considered as part of that imputation?
932 So the 4 bucks would be $4 and something else to recognize the fact that you are benefiting by virtue of the services of the regulated business, and therefore the subsidy should reflect that, as well.
933 MR. FLAHERTY: I guess, if you were going to do something like that, then you would have to take all the costs of that infrastructure and load them in, as well.
934 As I said, we start by separating that infrastructure. So if you are going to impute --
935 Like, in features, for example, all of the costs of the switch are in there, so it makes sense that you would add some margin, potentially.
936 If you were going to somehow impute additional revenues, well, you had better take -- it's the margin, I guess, that you would have to look at.
937 THE CHAIRPERSON: Yes, that's right.
938 MR. FLAHERTY: Something along that line.
939 THE CHAIRPERSON: Which is what we did, I think, in optional services. We looked at the margin, if I remember correctly.
940 MR. FLAHERTY: I'm not sure, but...
941 THE CHAIRPERSON: Okay. Give it some consideration anyways.
942 MR. FLAHERTY: I'm sorry, could I just clarify your request, just so I make sure I understand?
943 THE CHAIRPERSON: Sure.
944 MR. FLAHERTY: You have asked for the number of subscribers that buy both basic telephone service and broadband over that same facility, like ADSL?
945 THE CHAIRPERSON: Yes.
946 MR. FLAHERTY: And you are looking for Whitehorse/Yellowknife discretely, and all of the other communities in aggregate?
947 THE CHAIRPERSON: That's right.
948 MR. FLAHERTY: Okay. So I understand that one.
949 On the second one I was a little less clear. You want the number of subscribers that purchase --
950 THE CHAIRPERSON: Any multiple of one service from you folks, from NorthwesTel.
951 So the number of customers in Yellowknife, Whitehorse and the rest of your territory that purchase three services or four services from you.
952 MR. FLAHERTY: A service -- are you defining that as an individual feature, are you defining it as LD? What are you defining a service as?
953 THE CHAIRPERSON: I will give you the five services that I was thinking of: LD, PES, broadband, wireless and cable.
954 MR. FLAHERTY: Independent of whether it rides on very different infrastructure.
955 THE CHAIRPERSON: Yes. I am just looking at the utilization of communication services in the north.
956 I am not looking at it from a cost perspective, I just want to know what the propensity is for people to buy multiple services from you.
957 MR. FLAHERTY: Yes. Of course, we aren't necessarily the only provider of these services, so that won't give you that.
958 For example, on TV, Star Choice and ExpressVu offer services in Whitehorse and Yellowknife.
959 THE CHAIRPERSON: But you wouldn't be billing for that, would you?
960 MR. FLAHERTY: No. I'm just saying, to the degree that you are looking for an idea of the penetration of the market, this won't give it to you.
961 THE CHAIRPERSON: It's a sample.
962 MR. FLAHERTY: But, again, it will be -- I will give it to you, but I would ask you to be very, very careful.
963 On the wireless side, for example, in Whitehorse and Yellowknife, most of the customers are Bell's, they are not NorthwesTel's. So I wouldn't have any numbers as to how many subscribers they have in Whitehorse.
964 THE CHAIRPERSON: When you say they are Bell's -- let me understand this. Do you have your own spectrum and Bell has their own spectrum, or do you share the same spectrum?
965 MR. FLAHERTY: We share the same spectrum, but in Whitehorse and Yellowknife, Bell has discrete plans and discrete services and they service the majority of all of the customers in Whitehorse.
966 NorthwesTel has no customers in Yellowknife. Only by virtue of our First Nation partnership do we have a small number in Whitehorse. Bell has almost all of the cellular customers there, and there are probably a number of other communities -- Iqualuit would be one, Inuvik, Hay River, Fort Nelson, Fort Smith -- those are all Bell cellular communities that NorthwesTel generally doesn't provide service in.
967 So I might show you a number in Fort Nelson that I might have, I don't know, 100 subscribers, but by no means does that come anywhere close to the number of cellular subscribers in Fort Nelson.
968 I just wanted you to understand that when I give you the information.
969 Do you want me to highlight if there are competitive alternatives?
970 THE CHAIRPERSON: I am sure we can find the competitive alternatives, but to the extent that you want to be clear as to which markets you are not in at all -- and, therefore, if you say there are three products that are bought by X number of customers, wireless can't be one of them if you are not providing a service there.
971 If you tell us that, that would be helpful, too.
972 MR. BILSKY: One other small caveat, Mr. Chair, is that we have different billing systems for all of those products that you speak about, so to create discrete customers and say that, yes, we know they have these multiples -- I just don't want to set expectations that we can't deliver.
973 THE CHAIRPERSON: Okay. I think those are all the questions we have for NorthwesTel during this phase.
974 I thank everybody very much for their patience.
975 It is 12:45. Let's break for lunch and resume at two o'clock.
976 MR. FLAHERTY: I'm sorry, I have one quick question. As Mr. Bilsky just pointed out, particularly that last one is not a straightforward piece of work. What timing were you thinking of?
977 THE CHAIRPERSON: I think there is a time for the final submissions to go in. I am not sure what date that is.
978 It is October 17th.
979 MR. FLAHERTY: Okay. We will do our best to strive for that date. Thanks.
980 THE CHAIRPERSON: Thank you.
--- Upon recessing at 1246
--- Upon resuming at 1402
981 THE CHAIRPERSON: Good afternoon. We are through NorthwesTel Phase 1 and I think we are moving on to the appearance of SSi Micro.
982 Do you have any opening comments, Madam Secretary?
983 THE SECRETARY: Yes, will the representation from SSi Micro please introduce your colleagues for the records, after which you have 20 minutes for your presentation.
984 MR. PROCTOR: Thank you, Madam Secretary.
985 I am Dean Proctor, Chief Development Officer with SSi Micro; to my left is Jeff Philipp the Founder and CEO of SSi Micro; and to my right is Robert Yates, the Co-President of Lemay-Yates Associates Inc.
986 And I do not want to begin the presentation, I just have an initial procedural matter. Mr. Chairman, the Secretary this morning when I was speaking with her asked that I address to you permission to include in your presentation today an attachment, it is a document concerning publicly available data, a document concerning the QINIQ ChatBox, which we will be referencing in our presentation today.
987 THE CHAIRPERSON: Why don't you, when you get to the reference to it, provide the material then?
988 MR. PROCTOR: We will certainly do that. Thank you, Mr. Chairman.
989 THE SECRETARY: You may now proceed with your presentation.
990 MR. PHILIPP: Thank you, Madam Secretary, Mr. Chairman, Commissioners.
991 My name is Jeff Philipp and I am the Founder and CEO of SSi Micro. I am very pleased to be here representing the SSi Group of Companies and, as Dean just mentioned, with me on the panel are Dean Proctor, our Chief Development Officer and Robert Yates, Co-President of Lemay-Yates Associates. And I believe some of you may already know Rob from his experience and expertise in the telecoms field.
992 I would also like to identify for the Commission's benefit a number of SSi employees in attendance today, including Stephanie Philipp, our CFO; Jeremy Childs our Chief Software Architect; Charlotte Walker, Director of Marketing; Tim Froehler, Manager of Network Operations; as well as Catherine Birchwood, our new Manager of Integration who started with us this week having moved from Toronto.
993 We recognize that the Commission is not often in Yellowknife and your arrival is certainly welcomed and we hope you have a chance to experience some of the great northern hospitality while you are here. I would like to start with a few opening remarks and then hand it over to Dean to review our interventions in more depth.
994 Your reason for holding the hearing, a review of telecommunications regulatory framework for NorthwesTel, is also welcome and timely. In fact, we believe it is long overdue.
995 We find it a bit ironic that SSi is here as part of other matters in the proceeding. In 2007 the Commission put in place a system of price cap regulation for NorthwesTel.
996 Normally, price cap regulation is put in place with markets are open to competition. So the irony is this, here we are, SSi, ready willing and able to compete with NorthwesTel as a local competitor across the north.
997 And NorthwesTel is regulated as if there is competition. But we cannot enter as a local competitor because the very same regulatory regime is stopping us.
998 To be candid, given that the north has price caps but local competition is still prohibited. The cart has been put before the horse.
999 Let me explain why local competition is so important to us. First, I will back-up and re-welcome you to the north and, in particular, the heart of the 867 area code. As you may know the 867 or TOP areas code at the top of the world has a number of unique features, not the least of which is the vast geography.
1000 For us here today, however, its most unique and distinguishing feature is that there is no local phone competition allowed.
1001 Even though SSi is a facilities-based provider of service in the 867 region, one thing we cannot do is provide customers with telephone numbers that begin with 867. This is not a technical issue, but simply a result of a regulatory prohibition on local competition.
1002 Again, please note SSi is already a facilities-based competitor in the north. We have invested to provide broadband service across our own network in 56 communities. In 55 of these communities we were the first company to offer broadband. In most of the communities, we are still the only provider of broadband.
1003 Being the first offer broadband, ours was not duplicate infrastructure, as has been inferred many times. In each community we deliver broadband to consumers, business and government customers using innovative wireless technology in the 2,500 MHz band.
1004 We also serve larger enterprise scale customers. Case in point, we are completing a new network build for the Government of Nunavut to meet their communications requirements throughout the territory.
1005 These new systems and technologies provide a notable increase in services and efficiencies while at the same time providing significant cost savings over the older legacy systems.
1006 SSi connects to most communities using satellite links to our teleport located in Ottawa. In one case here in Yellowknife our connection to the south rides on NorthwesTel's terrestrial network. We are, frankly, less than happy about NorthwesTel's rates which are extremely high and we filed a Part 1 application asking the Commission to step in to correct this situation.
1007 And as my colleagues know, I have lots to say about NorthwesTel's backbone pricing. But given that we have 20 minutes, I won't say more of it here unless asked about it.
1008 Despite restrictions, we continue to innovate. Last week at the annual trade show in Iqaluit, as Dean just mentioned, we launched a service called the QINIQ ChatBox, VoIP service, which is available in all 25 satellite-served communities of Nunavut.
1009 With this new service, our customers have an inexpensive alternative for long-distance calling, as well as placing calls to and from each other. We have included, along with our presentation, additional materials related to the ChatBox.
1010 MR. PROCTOR: Mr. Chairman, if it is appropriate, included in the presentation materials is some information on ChatBox.
1011 THE CHAIRPERSON: Okay, thank you.
1012 MR. PROCTOR: Thank you.
1013 MR. PHILIPP: Unfortunately, there is no local competition allowed in the north. This means that our customers have to choose numbers from southern area codes such as 613 because 867 numbers are not available to them.
1014 This also means we cannot offer local to local calling, that is calls that should normally be local end up being long-distance for both parties; NorthwesTel and SSi customers.
1015 So what SSi, our customers in the north, need from the local competition framework is really quite simple: first, the ability to access 867 numbers for our customers; and second, the ability to interconnect with NorthwesTel for exchange of local traffic.
1016 Note that there are many other aspects of local competition. We would like, for example, to have local number portability. But recognizing the practical difficulties NorthwesTel claims it has in implementing LNP across their network, we are willing to forego number portability, at least for an interim period.
1017 To reinforce the ease of introducing local competition in the north, SSi has built out wireless access technology and we do not require unbundled loops from NorthwesTel.
1018 We feel that following a few basic principles as well as considering the practical realities we all face in the north, the Commission can put in place quickly and easily a regime to permit local competition.
1019 With that, let me turn it over to Dean to describe the three basic principles we believe are essential for the introduction of local competition.
1020 MR. PROCTOR: Thank you. For the Commission's benefit, the three principles have previously been described in our interventions in evidence.
1021 Principle one, the benefits of competition in telecommunications should not be denied to Canada's northern territories. Principle two, the interconnection framework must focus on the services delivered, not the underlying technology. And principle three, the interconnection regime and pricing framework for interconnection services should be the same across Canada.
1022 Our goal today is to run through the principles using a W5 analysis. As stated, the what is opening up the telecom's market to competition and the where is in every community, every community across the north. We will also describe who can do this, why it needs to be done and finally when and how this can be accomplished.
1023 That actually makes 5 Ws and one H, the H being important as a how to, because we believe, as Jeff has noted, that a local competition regime can be put in place quickly and easily.
1024 Let me hand it back to Jeff for a minute so that he can start with the who. I believe the Commission will have a much better understanding of our interest in seeing full competition across the north if you know a little more about SSi's history and our operations.
1025 MR. PHILIPP: Thanks, Dean.
1026 I could go on for a lot longer than we have time for but I'll give you the Coles Notes' version.
1027 SSI's origins -- pardon me -- are in my hometown of Fort Providence, where I spent most of my life. It's a small community of 750 people, roughly, some 320 kilometres west of here, where the road meets the Mackenzie River. And it is still in the 867 area code.
1028 In 1965, my parents opened the Snowshoe Inn (which is where the "SSi" in our corporate name comes from.) Snowshoe, which started with an inn, has continued to grow and branch into various operations.
1029 Over the last 45 years, Snowshoe has been involved in construction, contracting, bulk fuel, marine operations, including the ferry that carries traffic across the Mackenzie River, connecting Yellowknife with the rest of the world.
1030 We have also been off grid for 30 years which means we understand a lot about the high costs of serving in these markets, 120,000 square feet off grid, in fact, generating our own diesel power, utilizing all the waste heat.
1031 My father, while working with NCPC, the Northern Canada Power Commission, back in the fifties and sixties, installed the first power plants in many communities across the North. Fifty years later, I am proud that SSi has delivered broadband for the first time to these same communities.
1032 SSi was founded in 1990, selling hardware and software in Fort Providence. Five years later, we became an internet service provider, and in the following decade deployed numerous voice, data and internet systems in Africa and South East Asia, including in Indonesia immediately after the 2004 tsunami. In fact, we were the first people on the ground offering voice and data for all of the eight organizations in Bandasha, Symalu(ph), Madang, Jacarta, just to name a few.
1033 In 2004, SSi also became a facilities-? based competitor to NorthwesTel when we launched high-?speed wireless service in Yellowknife.
1034 In 2005, we built the QINIQ network to provide affordable broadband services to all of Nunavut; that is to say, in all 25 communities in the Territory.
1035 The QINIQ network has improved the lives of residents by providing access to services that did not exist before, including online banking, education and health resources via broadband.
1036 Following the completion of the QINIQ network, we deployed the same broadband wireless technology under the "AirWare" brand in 30 communities of the Northwest Territories. As with Nunavut, while basic phone service was available, we were again the first to bring broadband to consumers, regardless of population density or remote location.
1037 SSi has deployed infrastructure in even the smallest of settlements, some of which have as few as 55 residents. Our goal is, and has always been, to give all Northerners equal access to quality communications services, regardless of where they live, and that includes Fort Providence.
1038 We wish to stress again that SSi is ready to compete in the local voice services market across the North, as demonstrated by last week's launch of the QINIQ ChatBox VoIP service in Iqaluit.
1039 Now, having run through the "who", I will hand it back to Dean to continue with the "why".
1040 MR. PROCTOR: Let's recall our First Principle: The benefits of competition in telecommunications should not be denied to Canada's Northern Territories.
1041 There is no local service competition in the North because it is prohibited. NorthwesTel is privileged with a monopoly in its local voice services market.
1042 The prohibition is an anomaly for Canada. We believe it works to the detriment of consumers, businesses and innovation, and it must be eliminated.
1043 NorthwesTel argues in its evidence and interrogatory responses that a prohibition on local competition should be maintained. Yet, its claims do not stand up to scrutiny.
1044 Let's run through NorthwesTel's six claims:
1045 First, they claim there is no interest in local competition;
1046 Second, despite the first claim, they argue that there is already appropriate and effective competition via resale, cellular service and VoIP;
1047 Third, the costs of implementing competition are too high, according to NorthwesTel;
1048 Fourth, NorthwesTel claims that competitors should be the ones to pay for upgrades to NorthwesTel's outdated network;
1049 Fifth, they say competition threatens the obligation to serve, and finally;
1050 They claim competition will only be in the larger centres and will drain cross-subsidies.
1051 Now that we have identified NorthwesTel's claims, let's deal with each of them:
1052 The first claim, "There is no interest in local competition in the North", it would seem that the number of interventions and the number of people in this room in support of competition would clearly indicate otherwise.
1053 Furthermore, SSi has long been interested to enter the local voice market, and NorthwesTel was aware of that fact when it submitted evidence. We have already built last mile facilities across the North, and we are ready to compete.
1054 Second, NorthwesTel suggests that "appropriate, effective and efficient" local competition is already being delivered through resale, cellular and VoIP service, but NorthwesTel itself admits that any local resale competition is small and aimed at sub-markets.
1055 And in terms of cellular, there are only three communities in the Territories where cellular service is provided by a company unrelated to NorthwesTel.
1056 As for VoIP, NorthwesTel admits it is unable to quantify competitive local VoIP traffic in the North. And again, the reality is that a VoIP provider cannot get access to 867 telephone numbers nor interconnect local-to-local.
1057 It is important to stress something here. There are no technical barriers to local competition in the North.
1058 For example, cellular providers operate in the North with 867 telephone numbers and with local interconnection. So again, there are no technical issues. Rather, it is a matter of regulatory "silos" that artificially prevent local competition.
1059 To move to the third claim, NorthwesTel says the costs of implementing local competition are too high, but it's not because of local competition that NorthwesTel needs to make investments in its infrastructure. Rather, it is because NorthwesTel has neglected for far too long to make investments that should have been made.
1060 And let's be clear. The Commission should not compare NorthwesTel to a small ILEC in southern Canada. The ILEC in the North is large and it is a wholly owned part of BCE, an even larger and well-financed organization. Compared to SSi, NorthwesTel is a very large ILEC, indeed.
1061 Fourth, NorthwesTel suggests that, "Competitors should pay for NorthwesTel's network upgrades". However, it is evident that local competitors like SSi cannot be stuck with a bill to upgrade equipment and software that should have been upgraded, and certainly would have been upgraded were the market competitive.
1062 Fifth, NorthwesTel claims that, "Local competition would have a negative impact on the obligation to serve". On this point, if NorthwesTel truly believes it, then the CRTC should consider how other carriers might be given the opportunity to meet the obligation to serve in any given community.
1063 It should also be noted that the infrastructure we deployed was not duplicate infrastructure, as there was no broadband available before SSi arrived.
1064 Finally; number six, NorthwesTel claims that local competition would come only to the largest centres and drain cross-subsidies. On this, SSi is ready and able to provide local competition in small markets across the North, provided the framework for local competition is supportive to new entrants. We are already a facilities-based competitor in all the small communities of the Northwest Territories and Nunavut.
1065 And this point really hits home with us. Jeff described SSI's origins in Fort Providence. One of the missions he set for SSi, and one I can genuinely say is taken to heart by each and every SSi employee, is to ensure that small communities are not left behind. Our actions have demonstrated that to be true.
1066 On the contrary, as their own list of outdated equipment vividly demonstrates, it is NorthwesTel that has neglected the smaller and outlying communities.
1067 So let's put to bed all of NorthwesTel's claims. They don't stand up to any scrutiny.
1068 We believe the Commission can and with confidence, move immediately to permit local services competition into the North. This is not a theoretical debate. SSi's network facilities are in place to allow local competition now.
1069 As part of this, the price cap regime and regulatory framework must ensure that NorthwesTel is not allowed to abuse its dominant position in the marketplace.
1070 For example, NorthwesTel cannot be allowed to use its monopoly control over transport facilities from Yellowknife to the South to thwart local competitors.
1071 Having addressed NorthwesTel's objections to local competition, there is no reason to continue denying the benefits of local competition to Canada's Northern Territories.
1072 And that has been a lengthy review of our first principle.
1073 Turning to our second and third principles much more quickly, these address "when" and "how" to introduce local competition into the North.
1074 For principle two, the framework for interconnection and the rules for competition must be flexible and adaptable. In this regard, SSi has proposed practical solutions for local interconnection in the North, which solutions can be implemented now.
1075 This leads to principle three, and more practical or "how to" aspects of implementation.
1076 In our interrogatory responses, we proposed to distinguish NorthwesTel's major markets, meaning those markets where they appear to have more advanced network infrastructure, from those communities where equipment has not been upgraded.
1077 For NorthwesTel's major markets, we see no reason why the local competition regime should not follow that in place in other parts of Canada, with all traffic type passing between competitors and NorthwesTel via local interconnect region points, or LIR points, likely one per Territory. We believe NorthwesTel can fit into the national framework, at least in its major markets.
1078 On the other hand, for smaller mostly satellite-served communities, a different approach may be needed. In particular in these areas, a more basic local-to-local interconnection is a necessity to avoid expensive and inefficient multiple-hop satellite routing, and to provide acceptable voice service quality for local calls.
1079 When the Commission introduced local competition in southern Canada via its Decision 97-8 it also put in place the CRTC Interconnection Steering Committee, or CISC, to oversee implementation of the interconnection regime.
1080 SSi would suggest that a similar but more modest approach could be put in place for the North, focused specifically on the North and the particularities of the 867 territory.
1081 This transitory framework could include forgoing local number portability on an interim basis in order to ensure that all communities in the North are opened to local competition in the earliest possible timeframe.
1082 The CRTC can determine how and when NorthwesTel is to upgrade its switching equipment and its software, and introduce local number portability. But again, none of NorthwesTel's costs to upgrade its network and implement local competition and number portability should be shifted to or imposed on competitors.
1083 So, to conclude our presentation, I would like to cite your colleague, Commissioner Suzanne Lamarre. Speaking last month to the Congrès annuel de l'Association des Compagnies de Téléphone du Québec in Malbaie, Quebec, Madame Lamarre stated, and I quote:
"Règle générale, nous convenons tous des avantages pour les consommateurs de l'industrie des télécommunications concurrentielle."
1084 To repeat what the Commissioner says: We can generally all agree on the advantages to consumers of a competitive telecommunications industry.
1085 SSi certainly agrees. We understand first-hand and in detail the challenges faced in providing effective and affordable communications services to remote and outlying areas.
1086 We are ready to compete in the local services market across the North, using facilities that are already deployed and in operation, and we have presented evidence to the Commission as to how this can be done in a timely and practical manner.
1087 We thank the Commission for having allowed us the opportunity to present before you today, and Rob, Jeff and I would be pleased to answer any questions you may have. Thank you.
1088 THE CHAIRPERSON: Thank you very much. I'm going to ask Commissioner Molnar to lead the questioning, but I am going to use the Chairman's prerogative and ask just one question.
1089 You refer to you're willing, able and ready to serve the North. You talk quite a bit about the Northwest Territories and Nunavut. You speak very little, if at all, about the Yukon. And you refer to 55 markets, and NorthwesTel this morning talked about 96 markets throughout the North, communities.
1090 Have I missed something? Are you leaving out the Yukon?
1091 MR. PHILIPP: We would very much like to be involved in the Yukon as well, Chairman Katz. The problem that we've always run into is finding a fair and competitive playing field in which to play.
1092 As you know, there is a terrestrial network in the Yukon, to which we cannot seem to find reasonable pricing or access, and if we had to deliver into all of the Yukon's communities via satellite, not only would the second network be prohibitive to build but it would also be non-competitive compared to the microwave and fibre network that exists today. That's the only reason we're not in the Yukon.
1093 THE CHAIRPERSON: Okay, thank you.
1094 Commissioner Molnar.
1095 COMMISSIONER MOLNAR: Good afternoon.
1096 I want to begin by making sure I do truly understand what you've proposed here. You suggest that you've proposed practical solutions for local interconnection in the North.
1097 I mean there are a couple of issues. There's the issue of cost recovery, and so let's put that aside for a minute and assume that we would allow local competition for purposes of our discussion and that NorthwesTel would be responsible for its own costs.
1098 But you have suggested these practical solutions for local interconnection and I do want to make sure I fully understand what you're proposing as a means of providing solutions for customers and minimizing the costs of introducing competition. Correct, that's your proposal?
1099 MR. PROCTOR: Yes, it is.
1100 COMMISSIONER MOLNAR: Okay. So you are suggesting that you would choose to interconnect directly in the major markets, and if I just understood your conversation with our Chair, two of the major markets?
1101 MR. PROCTOR: Major markets is actually a definition that we use. It's not major markets in the sense of Whitehorse and Yellowknife.
1102 COMMISSIONER MOLNAR: Okay.
1103 MR. PROCTOR: Major markets is in fact listed in our interrogatory response. We can give you the list of those communities.
1104 But it's based on our understanding from NorthwesTel's own evidence as to where their switching equipment has been upgraded to a level where interconnections such as you would find in a local interconnection regime in the South is readily introduced.
1105 The smaller markets or the secondary markets, where in fact we suggest that there should be direct interconnection, are for the most part satellite-served communities, but there may be other communities on the grid, on the microwave grid or on the fibre grid, where the switching equipment is not yet up to snuff, and we could accept a more modest form of interconnection, basically line-side interconnection, to allow for local interconnection to take place sooner rather than later.
1106 COMMISSIONER MOLNAR: Okay. So I'm going to deal with the two separately and I'll come back to line-side interconnection in a minute.
1107 So what you're proposing is in this term "major market," you're not proposing LNP in those markets?
1108 MR. PROCTOR: Not if in fact it's a cost that gets hoisted onto us and if it leads to delays in the introduction of local competition.
1109 COMMISSIONER MOLNAR: Okay. Okay.
1110 MR. PROCTOR: Our proposal is in fact for the Commission to determine the timeframes for local number portability, but again, without hoisting the cost onto competitors because that would in fact be the exact opposite of what number portability is supposed to accomplish.
1111 COMMISSIONER MOLNAR: Yes.
1112 So would LNP have costs for you?
1113 MR. PROCTOR: We're able to introduce number portability. Whatever costs there are, we'll certainly put them in, in terms of our own operations, to be able to port in and out from our system.
1114 COMMISSIONER MOLNAR: Yes.
1115 And on the --
1116 MR. PROCTOR: But -- sorry. But the costs are minimal.
1117 COMMISSIONER MOLNAR: Minimal for you, yes.
1118 And on the issue of LNP, because you have proposed that you could accept a regime where that comes later, it's an interesting statement because LNP has, of course, been considered a necessary component on the introduction of competition.
1119 I mean if you're able to acquire customers and have them take a new number, one questions what's the real driver for LNP later.
1120 MR. PROCTOR: We would agree with that and we think that that could be something that could come up with CISC. It could be the subject of a further proceeding as to whether or not the cost of LNP should in fact even be something contemplated in the North.
1121 At the same time, I think that with a bit of experience with competition we're going to see whether or not it really is a barrier for customers to come to us and to drop NorthwesTel or for just customers to come to us with a second line.
1122 But our biggest concern is timing, and if in fact number portability is being held out as some massive barrier or some massive cost and therefore there shouldn't be competition, our statement, our belief is fairly simple: It's better to have competition without local number portability than no competition.
1123 COMMISSIONER MOLNAR: Okay, understood.
1124 So in this area that you call major markets -- and you can go with LNP -- but you're looking for interconnection, one point of interconnection per territory; that's what you would suggest is reasonable?
1125 MR. PROCTOR: We're trying to follow the local interconnection region model from down in the South and --
1126 COMMISSIONER MOLNAR: I don't think there's ever one per province.
1127 MR. PROCTOR: No. And again, to be very clear because there seemed to be a lot of confusion this morning in some of the back and forth with Mr. Flaherty and yourself --
1128 COMMISSIONER MOLNAR: Yes.
1129 MR. PROCTOR: -- LIRs are meant to be put in place for efficient routing and cost-efficient means. If in fact one community on the grid would be more cost-efficient and more effective to have local interconnection rather than running through an LIR, then so be it.
1130 In our perspective, that's the sort of thing that that CISC working group or the mini-CISC could deal with, which communities should be run through the LIR, which communities are better off having direct local interconnect in that community.
1131 COMMISSIONER MOLNAR: So you would see if we were to set a policy determination that the market should be opened, you believe you could go to CISC -- and CISC is a consensus body, as you know.
1132 MR. PROCTOR: Yes.
1133 COMMISSIONER MOLNAR: You believe you can reach consensus --
1134 MR. PROCTOR: I certainly hope we can reach consensus.
1135 COMMISSIONER MOLNAR: -- or negotiate --
1136 MR. PROCTOR: Yes. Yes.
1137 COMMISSIONER MOLNAR: -- to meet the needs of both parties to minimize cost for both parties?
1138 MR. PROCTOR: Working on the assumption that the rules that the Commission sets out are clear enough, I would certainly hope that over the last 14 years of CISC a lot of the issues would have already been dealt with either as a precedent --
1139 COMMISSIONER MOLNAR: And points of interconnection can be determined via CISC?
1140 MR. PROCTOR: I would think so.
1141 COMMISSIONER MOLNAR: Okay.
1142 MR. PROCTOR: And in fact, what we could probably do is run some numbers fairly quickly. I mean which one is more efficient, is it more efficient and cost-effective to run through an LIR point of interconnection or is it more cost-efficient and practical to have a direct interconnection at a certain community.
1143 COMMISSIONER MOLNAR: Okay.
1144 These direct connections -- and when you say direct connection, is that where you're talking line-side connection?
1145 MR. PROCTOR: From our understanding of NorthwesTel's switching equipment, we believe it would probably have to be something like line-side interconnection, yes.
1146 COMMISSIONER MOLNAR: Line-side.
1147 So that would take me to one of the points made this morning, and I did want to go through some of the points that were made this morning.
1148 Is that the point here where I'm hearing from NorthwesTel that one of the customer impacts would be the proposed interconnection plan would undo the critical social benefits of calling line ID? Is that because of line-side interconnection or what do you understand that point to be?
1149 MR. PROCTOR: Let me start with that one and I'll see if Robert or Jeff wants to continue on.
1150 We haven't had the benefit of talking with NorthwesTel as to what they meant on that. I assume what they mean is that --
1151 COMMISSIONER MOLNAR: Does that surprise you?
1152 MR. PROCTOR: Does it surprise me?
1153 COMMISSIONER MOLNAR: No, to hear this, that --
1154 MR. PROCTOR: Yes, it does.
1155 COMMISSIONER MOLNAR: Okay.
1156 MR. PROCTOR: Within our own network, obviously we have line-side -- or, pardon me, calling line ID between all of our own callers.
1157 COMMISSIONER MOLNAR: Yes.
1158 MR. PROCTOR: But yes, it is a bit surprising.
1159 I don't know, Rob, maybe for the technical side, you can go a little further on this one.
1160 MR. YATES: That's more or less the answer, I think.
1161 But yes, we were kind of confused by that comment because, first of all, SSi's system would not have that type of problem and I guess it may depend -- if you back up a step too, we're talking about a lot of communities where they don't have calling line ID anyway.
1162 So it's not clear to me -- so we didn't think through the interconnection assuming there would be or not be calling line ID because it's not really a relevant point, because in most cases they wouldn't have it anyway.
1163 So I think the question then is if they do have caller line ID, then if it's a line-side interconnect, that caller line ID is coming across the line, so we don't quite get the point.
1164 COMMISSIONER MOLNAR: Okay, fair enough, and I think that we'll have an opportunity tomorrow to ensure we understand what this point is about.
1165 But it's not something you're aware of based on what you've proposed as interconnection arrangements?
1166 MR. PROCTOR: No.
1167 COMMISSIONER MOLNAR: Okay.
1168 And their point about the LIRs causing the long-haul traffic -- or they were talking about their microwave, their thin-route microwave and the need to have to -- I'm saying supplement because I've just lost the word here -- but to actually upgrade those, is that where you were talking about in CISC you could look at what's the most efficient and effective point of interconnection?
1169 MR. PROCTOR: That's point 1.
1170 I think Jeff would also like to address that point if that's okay with the Commissioner.
1171 COMMISSIONER MOLNAR: Okay.
1172 MR. PHILIPP: Yes. I was a little confused by that comment, quite frankly, by Mr. Flaherty.
1173 Our current VoIP platform, which is in every community in Nunavut and extended to every community in the Northwest Territories -- was launched in Nunavut last week -- has local switches in every community.
1174 So, first of all, we never take traffic out of the community that's destined to be local. If we could get local interconnect in every community if that was the most efficient, we would take that. If NorthwesTel determined that they couldn't do that and wanted to give us one interconnect in Yellowknife for a number of the terrestrial communities, we would take that too.
1175 But in no case would we be routing traffic out of the community that did not need to go there. I know there was a comment made about lifeline support and if the link were to go down, all of those customers would be lost, and that isn't the case.
1176 In every one of our cases, we have switches in every community which then make a determination as to whether or not they need -- that voice traffic needs to go out of the community or not.
1177 So I don't see how that traffic would have to go out of the community, but even if that traffic did -- because the point that Mr. Flaherty made was that the cost of upgrading that thin route would be exorbitant, and I did some quick math on the back of a napkin, and even in 750 people in the average community, if 60 percent of those people have phone lines, that works out to something like 435 people, and if 30 percent of those people switch to SSI overnight, that's 120-some people, and if even 50 percent of those people, 60 of them, were trying to make a phone call at once, at 30 kilobits per phone call it's 1.8 megabit worth of capacity on that thin route link.
1178 Now, I don't know how thin those links are, but I assure you in our network we don't have any problems like that. If you want to bring an extra thousand circuits out of the community, our network will dynamically allocate capacity for it.
1179 So I don't understand why the thin route would be an issue, but, secondly, we would never -- we would never attempt it that way. We would interconnect locally ideally, but if their switches do not allow it, we will accept a lesser form of interconnect.
1180 MR. PROCTOR: But again, our traffic stays local. Local traffic meant to stay local stays local.
1181 The proposal itself is one meant to allow for more efficient routing, in fact for the benefit of NorthwesTel in this case.
1182 COMMISSIONER MOLNAR: Okay. I just want to go back to make sure I understand this.
1183 You are suggesting a Territory-wide LIR, however you are also suggesting you would like to connect and exchange traffic local within each exchange, within each community?
1184 MR. PHILIPP: We were only sort of suggesting the Territory-wide LIR if in fact NorthwesTel switches don't have that capability of interconnecting locally in every community. If it is easier for them to bring traffic to one switch where they have upgraded the switch where it is capable of providing all of the features, then we would interconnect there as a first step, but ideally we would prefer to interconnect, quite frankly, in every satellite-served community directly to keep traffic local. And if it's on the terrestrial network and if their pipes can support it, we could take one connection, but we are not opposed to connecting every community. We do not see that as being a big expense for us or a technical complexity.
1185 COMMISSIONER MOLNAR: Thanks.
1186 I'm just trying to wade through these different documents and make sure I'm understanding what you are proposing.
1187 Maybe just give me in your words, which is better than mine, what you have proposed therefore.
1188 Is there any requirement to deviate from the local competition policy and arrangements that have been put in place in other parts of Canada, LNP aside?
1189 MR. PROCTOR: Probably the easiest way to answer that is actually with reference to the interrogatory response that we gave for the Commission where we broke out the various CLEC obligations -- CLEC obligations.
1190 In terms of --
1191 COMMISSIONER MOLNAR: I did see that, actually, but can't you just remind me easily? Is there anything big?
1192 MR. PROCTOR: It's a long list, probably --
1193 COMMISSIONER MOLNAR: Oh, it is a long list?
1194 MR. PROCTOR: Probably the biggest one, I think it's probably one of the biggest ones for most people in the Territories, is not imposing upon us an obligation to provide 9-1-1 and that a simple reciprocity obligation.
1195 NorthwesTel doesn't offer 9-1-1, so it seems to be a simple fact that we shouldn't be expected to offer 9-1-1 until there is actually a 9-1-1 system in place.
1196 Tied to that as well I guess is equal access. We have put in place a proposal whereby you could have -- it's it's almost dial around equal access, but obviously if NorthwesTel is switching equipment in a certain community it's not able to provide equal access, it's very difficult for us to justify putting in place the systems and equipment necessary for equal access as well.
1197 Those are probably the two most notable features of local phone service that one would normally find from an ILEC and a CLEC, but given that the ILEC is not offering them we are having trouble justifying how we could be putting them in place without the other half of the coin also offering them.
1198 COMMISSIONER MOLNAR: So on the issue of equal access it's you have the technical capability to do it, you just believe from a fairness point of view you wouldn't -- shouldn't be required to, is that what you're saying, in those communities where NorthwesTel does not provide it?
1199 MR. PROCTOR: That's right.
1200 COMMISSIONER MOLNAR: So from a fairness perspective?
1201 MR. PROCTOR: Mostly on a fairness perspective, that's right.
1202 Going a little further, there is a bit of debate going on which I'm not sure if the Commission will be on that proceeding, but in the 2011-206 proceeding, the interconnection framework proceeding, there is a bit of a debate as to whether or not equal access is in fact kind of going the way of the Dodo bird where it's more VoIP-type services that are in fact providing the source of alternative long-distance competition.
1203 So yes, there is one side which is a simple situation of equity and not putting in place useless resources if in fact there is nobody there to come calling for equal access, and then there's the other side which is I guess a larger debate as to what the interconnection framework should look like going forward.
1204 COMMISSIONER MOLNAR: Yes, I'm aware of that and that's for another day.
1205 MR. PROCTOR: Yes.
1206 COMMISSIONER MOLNAR: As are your issues on the backhaul. Broadband backhaul is for another day.
1207 But here today is the issue of local competition and the one issue you didn't bring up, and it's quite a large issue, and that's related to the subsidy.
1208 As you know, we made a decision not that long ago related to the obligation to serve and tied the subsidy to the obligation to serve.
1209 MR. PROCTOR: Yes.
1210 COMMISSIONER MOLNAR: I believe your position is that you believe you should have access to the subsidy within the high-cost areas?
1211 MR. PROCTOR: Let me try to answer that in various points.
1212 COMMISSIONER MOLNAR: Or just tell me I'm wrong and you don't want access to the subsidy.
1213 MR. PROCTOR: Our position is a little different than that. Our position is more that the subsidy is meant to assist consumers and it shouldn't be a situation of incumbency or shouldn't be a situation of some carrier meeting certain obligations that they have access to the subsidy, it should be a situation of consumer control.
1214 We have been -- and I personally have been -- a strong advocate of portable subsidies or transferable subsidies for well over a decade, in fact leading into the 97-8 Decision. In the 97-8 Decision -- the logic that still applies in the north I might add, because in fact the small ILEC decision is a carve out -- there was no determination yet made with respect to transferable subsidies in the north.
1215 Our position on this one is really it should be the consumer that controls where that subsidy goes.
1216 COMMISSIONER MOLNAR: Okay. Can I ask it another way then?
1217 MR. PROCTOR: Sure.
1218 COMMISSIONER MOLNAR: Because you are saying you are a long-term advocate of portable subsidies.
1219 MR. PROCTOR: Yes.
1220 COMMISSIONER MOLNAR: There was a decision made that said the subsidy rests with the person with the obligation to serve.
1221 So tell me, is there anything specifically different within the north that would cause us to have a different decision here? Not a philosophical perspective that subsidies are there for the consumer or that I think portable subsidies are correct or not, is there anything specific to the north that would cause there to be a different subsidy obligation?
1222 MR. PROCTOR: No.
1223 COMMISSIONER MOLNAR: No.
1224 MR. PROCTOR: No. In fact, the Canadian Portable Contribution Consortium -- I guess the CPCC -- the way that it works, effectively it is a consumer-controlled subsidy at that point. If in fact a consumer decides to take local phone service from company X, Y or Z who meets the CLEC or ILEC obligations in a high-cost serving area, then in fact that subsidy is attached to that service.
1225 That effectively is consumer choice. We would advocate that.
1226 If in fact the Commission comes to a different determination we will have to live with it, but we don't think that the logic that was put in place in 1997 has fallen to the wayside in the north. In fact, when you look at the rationale -- and again, I don't want to go into the Commission's mind because I can only work with the written word, but the decision that came out with respect to the small ILECs has to do with the situation where there is concern about small ILECs.
1227 So you could take Telephone Guevremont down in rural Québec, it's surrounded by Bell, it's surrounded by Videotron to Bemis in the wireline world, both of whom have the ability and probably desire to move into their territory; at the same time you have other competitive forces coming from Rogers, from TELUS. It's a very different world there in terms of the small ILEC reality versus what's happening up here.
1228 So although the logic of the south versus the north is the same in terms of the validity of portable subsidies for consumers, I think the reality of the marketplace for small ILECs versus NorthwesTel is quite a bit different.
1229 COMMISSIONER MOLNAR: Assuming you would not have access to the subsidies because they are tied to the carrier with the obligation to serve, would that change your plans to enter these markets?
1230 MR. PHILIPP: Would the Commission consider enabling us -- giving us the obligation to serve? Is that an opportunity that would be even feasible in the north, if it's not feasible for NorthwesTel to serve, or within a certain funding regime?
1231 COMMISSIONER MOLNAR: I think it's fair to say it's not part of this proceeding.
1232 MR. PHILIPP: Okay.
1233 COMMISSIONER MOLNAR: And our Chair can speak differently if he likes, but I think at this point --
1234 MR. PHILIPP: Well, I will answer that question.
1235 COMMISSIONER MOLNAR: I think at this point I mean we are looking to open potentially -- you know, one of the issues before us is whether or not the market should be open and under what terms and conditions.
1236 MR. PHILIPP: Yes. I will answer your question directly.
1237 COMMISSIONER MOLNAR: I'm asking you, under the term and condition that we open it up -- under the same terms and conditions as other where in Canada, which means the subsidy is available to the incumbent who maintains that obligation to serve.
1238 MR. PHILIPP: We would accept that instantly and we would lobby to try to convince you otherwise.
1239 But yes, we would accept that condition.
1240 COMMISSIONER MOLNAR: You would accept it. You would enter and over time you would fight to become the carrier of last resort?
1241 MR. PHILIPP: The carrier of choice I prefer to think and I hope that the end-users in voting that way and choosing us would make a statement large enough or loud enough that we might readdress this at a later date.
1242 COMMISSIONER MOLNAR: Okay.
1243 MR. PROCTOR: But, just to --
1244 COMMISSIONER MOLNAR: And if I could just ask one question about that?
1245 I mean, you know, there is some concern and you have heard it and you have seen the record, that you are in front of us as someone who has benefited from a lot of government money, you don't have a sustainable business plan and so perhaps in a few years you may or may not continue to have a sustainable and long-term business plan so here is another access to subsidies that won't be there for your business plan.
1246 MR. PHILIPP: Right.
1247 COMMISSIONER MOLNAR: Are you saying we will enter and over time it becomes sustainable only if we get access to these subsidies?
1248 MR. PHILIPP: No.
1249 COMMISSIONER MOLNAR: No, okay.
1250 MR. PROCTOR: Ms Molnar, you have assumed that our business case is not sustainable, in fact it was --
1251 COMMISSIONER MOLNAR: I'm just telling you what I heard this morning.
1252 MR. PROCTOR: Yes, thank you. Please don't make that assumption.
1253 COMMISSIONER MOLNAR: I don't want to presuppose your business plan, but it was talked about this morning.
1254 MR. PROCTOR: I'm sorry, but just to close on that point, too, we are in all of these markets. The 56 markets in the north, we are there. We are not exiting, and it's not a situation where we won't come into it, we are already there.
1255 So in terms of portable subsidies, as I say, I think it's a situation as to what -- the Commission has to do what is right, looking at all of the players.
1256 Actually, I should rather say stakeholders, because that obviously includes consumers.
1257 COMMISSIONER MOLNAR: Yes. Fair enough.
1258 I have a couple of other questions. Before I leave the issue of local competition, I just want to confirm, because we would open a market for any competitors to enter, and not simply -- you know, you happen to be before us with what sounds like quite an urgent desire to enter, but it would not be open just to you. If it's open, it is open to anyone.
1259 So the terms and conditions, as you have proposed, would, essentially, work for anybody entering?
1260 MR. PROCTOR: Yes. We don't understand that aspect of NorthwesTel's concerns either.
1261 We believe that our proposal is, in fact, readily acceptable for anybody who wants to enter the market.
1262 COMMISSIONER MOLNAR: Okay. Very good.
1263 As you likely know, while you have focused your attention on one issue within this proceeding, NorthwesTel has come forward with quite a number, including SIP and a requirement to provide -- or a request for investment to provide custom calling features, such as name display to some selected communities.
1264 I want to just confirm that that's something you would be able to make available to those communities.
1265 MR. PROCTOR: We are making it available now with our Q/NIQ ChatBox, yes.
1266 COMMISSIONER MOLNAR: Lastly, I have one question, if you would like to comment on it. I noted, as I said, that you focused your attention on just the issue of local competition. There were local rate increases proposed within the NorthwesTel proposal, within their full basket, and they would see rate increases in high cost and non-high cost areas in RES and BUS.
1267 What are your thoughts on that?
1268 Good for you? Gives a little more margin as you move in?
1269 MR. PHILIPP: Great, if they can get it.
1270 We launched a service in Iqualuit regardless of the CRTC Commission hearings, regardless of anything else. We launched a service, which I will call a crippled service, because there is no local interconnect, and we launched it at $5 a week, $15 a month, $120 a year for network access.
1271 So what they are asking an extra $2 a month for, in our scenario is $15 a month, and $120 a year, and it includes caller ID, it includes voicemail, it includes a number of the services that they don't include, and our long distance rate is 7 cents a minute, and we are getting no subsidy for that.
1272 So we don't think that those rates need to be increased, but they wouldn't in our model need to be increased.
1273 COMMISSIONER MOLNAR: Thank you.
1274 I said I was done, but I do want to follow up. You have long distance for 7 cents a minute. How do you address what we have been hearing is the high cost of toll backhaul out of the north?
1275 MR. PHILIPP: I think it's a great question.
1276 We got into this network, or into building the Q/NIQ Network, through a public RFP, as you heard earlier. NorthwesTel bid it as well. We happened to win it.
1277 The comment that they were a few million dollars higher because of their sustainability doesn't add up, quite frankly.
1278 We weren't in 25 communities of Nunavut, and we bid it and won it for millions less than their bid to upgrade their facilities.
1279 Our operating costs are significantly lower. Our infrastructure has been replaced three times in the last six years, because there have been better technologies come along; not because our business case suggested we had to, but because the technology was better and it delivered a better service to the end user, at a cheaper cost, more efficiently.
1280 So that network infrastructure that exists in every one of these communities in Nunavut is significantly more efficient than what NorthwesTel has deployed, and it is one of the major operating costs that caused their cost to be so high.
1281 Keeping in mind that we went into this, delivering broadband internet, where, at the time, broadband was determined by the Bram Program as 384 kilobytes download in about a 100 kilobyte upload. So call that 500 kilobyte. A voice call is 25 kilobyte.
1282 So we are talking 40 times -- 40 subscribers in the NorthwesTel NAS world, or 40 times the subsidy of whatever that number is -- $30 a month -- is what we are delivering to every Q/NIQ customer currently for broadband.
1283 Our subsidy, I believe -- and I have a note to actually do the math tonight, to be able to come back to you tomorrow with this, if the question comes up. I would like to be able to tell you what our cost per subsidy is, or per subscriber -- our subsidy per subscriber -- as well as what that amounts to on a cost per kilobyte per second, because I think if you were to look at the voice subsidy in that same light, you would find that there is a subsidy that is probably 20 or 30 times more than what we are getting for delivery of voice.
1284 And I might add that not a lot of people are happy with the voice delivery that is being done.
1285 So broadband internet -- it's a much tougher business case. We entered into that business case knowingly, and with the intent that we would be able to eventually convince the powers that be that local competition deserved to be in voice, as well, because we believe that voice is a great way for us to be able to, quite frankly, cross-subsidize our broadband internet services.
1286 I grew up in a little town of 725 people. I paid $1.10 a minute long distance to call Yellowknife for internet, at 14 kilobytes per second, until we bought a 56K line and shared eight modems on it in Fort Providence.
1287 This has not been about getting rich, this has been about putting communications into all of these little communities, because after Grade 7, unless you move, there is nothing for you there.
1288 So I this as a way -- I see voice as a way for us to sustain broadband, because voice, quite frankly, is much more lucrative than broadband, and broadband is a tough business case, and we are doing it, and we were the first to do it. Although NorthwesTel has been here forever, we were the first to do it in every community in the north, and it's not because we are getting billions of dollars in subsidies.
1289 Our annual contribution is less than one-tenth of what NorthwesTel's is toward broadband internet, which is 40 times more data per user.
1290 So I think that voice is a great opportunity for us, we are just not allowed to be in that game.
1291 COMMISSIONER MOLNAR: Thank you. I am going to ask my question again, because if you answered it, I missed it.
1292 MR. PHILIPP: That happens with me, I'm sorry.
1293 COMMISSIONER MOLNAR: You said that you were delivering toll at 7 cents a minute.
1294 MR. PHILIPP: Yes.
1295 COMMISSIONER MOLNAR: So you are delivering an IP-based toll.
1296 MR. PHILIPP: Correct.
1297 COMMISSIONER MOLNAR: So it is part of your entire IP backbone cost. Is that how -- what we normally consider a toll transport is part of your IP backbone cost?
1298 MR. PHILIPP: Absolutely. The cost for us to deliver one minute of voice, whether it be via IP or something else, is significantly cheaper, likely, it seems like, than NorthwesTel's, and perhaps that is because of the infrastructure investments we have made.
1299 COMMISSIONER MOLNAR: So you don't rely on satellite?
1300 MR. PHILIPP: Oh, we are satellite, absolutely.
1301 COMMISSIONER MOLNAR: You are satellite.
1302 MR. PHILIPP: We are satellite in every one of our 56 communities, in every one of them.
1303 The only one that we are not satellite in is here in Yellowknife, where we pay NorthwesTel for access to the backbone.
1304 COMMISSIONER MOLNAR: And you wish you had a Part I --
1305 MR. PHILIPP: And we have issued a Part I.
1306 COMMISSIONER MOLNAR: Okay. Those are my questions. Thank you.
1307 MR. PHILIPP: You're welcome.
1308 THE CHAIRPERSON: Thank you.
1309 Commissioner Simpson...
1310 COMMISSIONER SIMPSON: I have a couple of quick questions. Thank you very much.
1311 This morning's conversation with NorthwesTel was weaving back and forth between the regulated and unregulated sides of the business, and it brings about, I think, a palpable amount of frustration for us all, both NorthwesTel and the Commission, because I think there is a recognition that within the remote communities, it seems, at least to me, that the pressure point that is building is on the broadband side.
1312 And the complaints we are hearing are with respect to capacity and general infrastructure on the broadband side.
1313 So, hearing your story today, I have to ask you, if you are robust and fulsome in 56 markets, why are we still hearing as many complaints as we are concerning the availability of broadband, when we have essentially two broadband providers in the remote communities?
1314 MR. PHILIPP: I think that broadband -- we will always suffer with not being able to provide enough capacity for end users. That doesn't change, whether it is SSi or NorthwesTel. I don't think there is any mistake there.
1315 As NorthwesTel pointed out, satellite is extremely expensive. There is no question about that either. It's how efficiently you offer those services.
1316 Now, when we first built that network out, Q/NIQ, the Q/NIQ Network in Nunavut, we built that out with the understanding that broadband, the subsidized service we were going to deliver, with a federally set price of $60 a month to the end user, came with a subsidy of, I believe, at the time, about $50 per subscriber, in terms of subsidy. So call it a $110 a month service being sold for $60.
1317 And it was designed, and the business case was built for, and the network architecture at the time was built to deliver, roughly, 500 kilobytes per user as a burst speed.
1318 Now, YouTube has come along, high def has come along, video conferencing has come along, user demands have grown massively, distant education and health care have come along, and these technologies can solve these problems.
1319 But the reality is that you cannot deliver a $60 a month service in Grise Fiord, Qikiqtarjuaq, or any one of these communities, for all of the same reasons that NorthwesTel has pointed out. I agree with them. Power is $2 a kilowatt hour in Qikiqtarjuaq, versus 7 cents in Ottawa.
1320 It's more costly. We don't have the same roads. We don't have the same infrastructure. We have been arguing for years that where subsidies go into roads and bridges in Quebec, they should be going into satellite capacity, to be able to provide a subsidized service to those end users, because they will never be able to afford the real cost of that.
1321 Now, whether that is subsidized to NorthwesTel or to SSi, quite frankly, I agree with Dean, I think those subsidies should be portable. I think the consumer should be able to decide who their broadband subsidy goes to. It doesn't have to be us, and we don't need to be the operator in every community. I just need there to be somebody in every community, or we will be there.
1322 So, there was nobody, we built the network. We are there in every community. We are not going anywhere.
1323 And if you want to talk about cross-subsidies, the Snowshoe Inn, in Fort Providence, as an inn -- yes, I would say, at some point, between my wife and I, we subsidize internet in Qikiqtarjuaq with that. That's okay, I don't mind that, the implicit cross-subsidies.
1324 I think that what we need in the north is a model which recognizes that it is a very high cost, and there do need to be subsidies, but they should not be given to SSi or to NorthwesTel. The consumer should decide where that subsidy goes, because at that point competition is going to do what it needs to, and the consumer is going to pick the vendor of choice.
1325 That's what I believe.
1326 COMMISSIONER SIMPSON: Thank you.
1327 With respect to the relative size of the two companies, NorthwesTel is a large firm in and of itself but, you know, standing behind it is the Bell organization in Canada which is formidable and, the last time I looked, pretty good at being in the telecommunications business. They have been at it a long time.
1328 Given that -- I'm going to make an assumption here -- that you are smaller than Bell and that your financial resources might be more finite, given your scenario of portability of subsidy would you not be better to apply the resource, financial resources you do have, to continuing to build the broadband side and why do you want to back into the telephony per se?
1329 MR. PHILIPP: That's a great question.
1330 We built the network to carry packets, to carry IP packets specifically. And it wasn't always IP packets. We started originally by buying NorthwesTel services and reselling them. But we couldn't make that business case work.
1331 So we started building our own infrastructure because the business case was obvious to me, as the person that founded this company and does the math in it as far as our business cases, that we could have a return on investment building and owning and operating our own infrastructure.
1332 In fact, before we ever built the very first satellite uplink I approached NorthwesTel and said, "Look, we're going to do this if we can't get a better deal on our backhaul".
1333 Now, voice is a very simple thing. Once you have built a railcar to carry freight, carrying little wee packets of voice quite frankly is a very nominal thing. The challenge NorthwesTel faces is they built a voice network and they have to invest, upgrade that infrastructure to now carry big packets of data, video.
1334 We built it for that. For us to add voice is really quite nominal which is why I say we would do this without the subsidies because we already have the network. We're only not allowed because of the regulatory regime to be able to sell that service.
1335 We're offering it now to customers in Nunavut to great success and they like the service even though they have to interface a box between their internet modem and their phone line and their phone and they have to do other things and they can't get the local phone number and they can't make a local phone call. They still want it and it's still viable for us to do that but it's not the right solution.
1336 But our network will carry that with no difficulty.
1337 COMMISSIONER SIMPSON: Last question.
1338 You are making a very strong case for your ability to operate in remote communities as your prime directive only being in Yellowknife that's in one out of the 57 communities you serve.
1339 Could you tell me how you handle the logistic of having tech support in those communities as part of your business model?
1340 MR. PHILIPP: Yeah, absolutely.
1341 And to backup one little bit, I started in Fort Providence, remember. In grade 7 that was the end of schooling in Fort Providence. So to me connectivity was huge.
1342 So when I look at connectivity in these small communities in Grise Fiord and Clyde River and all the rest of these places, we suffer the same challenges in Fort Providence that we have seen in Africa, in Indonesia, in the South Pacific, in all of these markets we have operated in.
1343 And realizing that in the timeline we didn't have time in the presentation -- but the timeline of SSi's corporate history we started in a small community. We built up infrastructure.
1344 We moved around the world and did it and then we came back home and said, "Now, why can't we do this in the North?" -- which we can. It's all satellite/remote served, same as in Africa, Chad, Zambia, Kenya, we're in all of those markets or have been.
1345 So when I look at these markets in the North and specifically, to answer your question how did we handle the support, our model was quite different right in the very beginning.
1346 We approached the community and we said we're going to bring broadband internet here and we would like a community service provider. We would like to identify that one young person in the community or elder in the community, quite frankly. They don't need to have grade 10 English or Math. They don't need to have English as their first language.
1347 We can't afford, as NorthwesTel pointed out, to have a very expensive tech or two in every community. So we went slightly different. We agreed to take 20 percent of the revenue off the top and offer that to the agent in the community.
1348 So our community service provider program takes 20 percent of the revenue in that community and provides it to that agent to provide our on-the-ground support of our infrastructure. In addition, we charter a lot of aircraft to be able to fly it and do support where that local agent isn't able to and, in some markets, we have fulltime staff. But the reality is it will require a slightly different model in the North.
1349 I have been invested and involved in training since I was in grade 9. We were the first Microsoft and Novell-certified and Drake-authorized testing centre in the North, saving people flying to Edmonton to do Novell or Microsoft training.
1350 We have trained Aboriginal and Inuit students all across the North over the last two decades.
1351 And I believe in what I have said publicly to everybody that has asked, is that we need to be investing hundreds of millions of dollars in training not even so much just in the technology. It's training in mines. It's training in trucking. It's training in technology as well.
1352 And we need to -- to get there we need to change even the way the training dollars are being allocated because unless the kids have grade 10 English and Math they can't get certified. Unless the course is accredited it will not be funded, which does no good in these small communities.
1353 So training has to be a big part of it and it's something that I'm very passionate about as well in these communities.
1354 So we have taken a little different approach. In fact, that program is being extended out now and we don't have the time here. I would love to tell you about it.
1355 But we have a technical installation maintenance and support program which goes further than just saying 20 percent of our revenue goes to the local agent.
1356 Because we recognize portability and roaming, our voice service, our cellular services -- we have 35 megahertz of spectrum. We would like to be able to rollout services but without local phone numbers that becomes a much less attractive proposition.
1357 So I think that the training is going to be paramount and it doesn't matter if it's for NorthwesTel, for SSi or for another competitor and, really, is something that we all struggle with and needs more investment.
1358 COMMISSIONER SIMPSON: Thank you.
1359 Those are my questions.
1360 THE CHAIRPERSON: Thank you.
1361 Commissioner Menzies?
1362 COMMISSIONER MENZIES: I will just try to keep this to one question.
1363 I was curious in your oral presentation when you said:
"SSi cannot be stuck with the build to upgrade equipment and software that should have been upgraded and certainly would have been upgraded with the market competitive."
1364 Does that mean you don't think you should be stuck with any of the costs, or does that mean you should only be -- you would be willing to take on the costs in some areas and not in others?
1365 MR. PROCTOR: We should be responsible for our costs.
1366 COMMISSIONER MENZIES: Okay. And how would we prevent those costs from eventually finding their way to the consumer?
1367 And it's easy enough to say at the front end that NorthwesTel will pick up the costs but companies have an obligation to their shareholders and usually if their costs increase they recover it someplace else. That's usually from subscribers somewhere.
1368 MR. PROCTOR: I would like to think that the discipline of competitive market forces would in fact prevent NorthwesTel from gouging consumers inappropriately.
1369 In our particular case, if we were able to enter the market, we are going to have to enter it being more nimble possibly without subsidies and probably offering a better price value than the incumbent operator.
1370 So I would think that in terms of consumer protection probably the best consumer protection is their ability to vote with their feet and choose another provider.
1371 COMMISSIONER MENZIES: Okay. And are your -- I may have missed it earlier but -- and I apologize if I did.
1372 But your -- the subsidies you access, they are everlasting are they?
1373 MR. PHILIPP: Absolutely not. In fact, there is a number of confusing facts floating around regarding the subsidies that SSi receives. I can tell you that the subsidies run out in June of 2012 on broadband in the QINIQ network specifically. Those subsidies amount to less than $2 million a year.
1374 So in the context of serving the hardest part of the North, Nunavut's 25 communities, the subsidies there for delivering broadband are a fraction of the subsidies for delivering voice on an annual basis.
1375 And our subsidies are not in perpetuity. They end in 2012, June in fact.
1376 MR. PROCTOR: Sorry, Mr. Menzies. There may be other programs coming forward but ours are not --
1377 COMMISSIONER MENZIES: Your business plan doesn't anticipate that revenue?
1378 MR. PHILIPP: Correct.
1379 COMMISSIONER MENZIES: Now, does that mean the cost of those services from 100 and -- you said they were $50 a subscriber?
1380 MR. PHILIPP: $60 is the low-end plan and absolutely either the price will go up or the service bandwidth will change or we will have to become more efficient. Quite frankly, we expect to be able to offer an improved service because of some of the new efficiencies of our new satellite infrastructure.
1381 Again, this is the third infrastructure in the last 10 years, I think that we have built in the North or the third time we have replaced it.
1382 So some of that will come through an efficiency gain and some of it, we hope, will be through new services will be able to enable us to subsidize or cross-subsidize some of that bandwidth.
1383 If I may, just one more point, technical point; we don't see these as completely separate services. When we build our network architecture we provide a certain amount of capacity for internet, a certain amount for government, a certain amount for voice, a certain amount for videoconferencing.
1384 But all of that capacity is in one pool and because we are entirely satellite-served and because we have very advanced satellite architecture, we can dynamically shift that capacity amongst all of our communities. So any community has the ability to burst to a much higher level. We have no fixed size pipes and our services can burst into other services as capacity.
1385 So our voice traffic, if not being used for voice, improves the quality of service to every internet customer and reduces the amount of capacity required. The fact that we operate in three time zones reduces the amount of capacity required for any one given service because we can utilize that capacity when not being used in another area.
1386 So I think the efficiency of our network has a significant amount to do with it. And I believe that, going forward, we will have to increase prices if there are no subsidies.
1387 And if the federal government wishes to see the price remain the same at $60 a month there is a subsidy being applied to it right now. So either we have to get more efficient or the end user will have to pay more. There is no simple math to that.
1388 COMMISSIONER MENZIES: Yes. That will be a tough sell when you tell people that competition is being introduced and the next thing happens is that their bill goes up.
1389 MR. PHILIPP: Well, no, their bill wouldn't -- I would say if competition was introduced we might not have to increase their bill.
1390 But everything remaining the same, a growing number of users, a higher bandwidth requirement per user -- we see the number of gigs growing per family at an astronomical rate, you know, per month because of the services coming out.
1391 You know it's like suggesting that people paying for gas in the city shouldn't have to pay anymore next month although they are going to be using a lot more. They have to. There is just no two ways around it. Either they use the same amount, pay the same amount of money or if they want to use more it's going to cost more.
1392 COMMISSIONER MENZIES: How important is the portability of subsidy? The consumers -- the subsidy follows the consumer rather than the provider in that sense. How important is that to your business plan?
1393 MR. PHILIPP: You know it's important to me as a Northern resident. It's not -- it's important to the business plan for sure, but if we can't compete on a fair and level playing field we shouldn't be in that market.
1394 I firmly believe that. It doesn't matter which market we're in.
1395 And to be clear, my wife and I, our CFO, still do own the Snowshoe Inn. We still are in construction and contracting and we do those things competitively in a small community in Fort Providence.
1396 I see telecommunications no different here or in Africa. If we can't compete we shouldn't be in that business. And I believe we can compete very effectively.
1397 COMMISSIONER MENZIES: But it is important to your business plan then?
1398 MR. PROCTOR: As we have tried to answer to Commissioner Molnar, Mr. Menzies, we believe it is a situation where the consumer should in fact have the choice of where the subsidies go.
1399 COMMISSIONER MENZIES: No, I get that. I am trying to understand how critical that it is to your business plan.
1400 MR. PROCTOR: Our business plan, going forward, has put in absolutely zero revenues for portable subsidies with respect to local voice service.
1401 COMMISSIONER MENZIES: Okay. And in terms of your responsibilities to serve some of those communities that NorthwesTel carries, you are willing to share those or take those on as well?
1402 MR. PROCTOR: In terms of local voice obligations or..?
1403 COMMISSIONER MENZIES: Obligation to serve, yes.
1404 MR. PROCTOR: Yes.
1405 COMMISSIONER MENZIES: Okay, thank you.
1406 THE CHAIRPERSON: Thank you.
1407 Commissioner Duncan.
1408 COMMISSIONER DUNCAN: Good afternoon.
1409 First of all I wanted to pickup, Mr. Philipp, on one of the points you just made. And if I understood it correctly, that was actually when I think you were speaking to Steve, Commissioner Simpson.
1410 You said, I think, that without local phone numbers it is much less attractive. But yet, you are willing to go forward without local number portability. And as I understood from the conversation before, you are willing to go through a SYS process and, after you have some experience, to actually determine whether local number portability is in fact necessary. The expense of it being cost justified I am sure is what...
1411 MR. PHILIPP: We have a lot of customers, even in Yellowknife, that are unhappy about the fact there is no local number portability between NorthwesTel and Bell, because they have had a phone line for the last 15 years that they can't take through their new mobile service, so they are paying for both.
1412 We have customers in the north -- and the north is a very auditory, visual culture. Phone service is important, talking to people is important.
1413 Changing phone numbers, forcing customers to change phone numbers, to be able to secure a service at a rate they can afford is non-optimal. But we would accept it as a way to move this forward quicker. Ideally though, number portability is very important I think to our customers.
1414 COMMISSIONER DUNCAN: I guess I had thought that perhaps one of the reasons you were willing to accept, or deferring it for the time being, was that in the smaller communities where people would know one another, that it would be less important, less urgent?
1415 MR. PHILIPP: Local interconnect is more important than number portability. If a customer buys our service tomorrow, hooks it up, doesn't have NorthwesTel currently, and they call their grandmother across the street, for it to go all the way over one satellite top to Ottawa, then al the way around to Yellowknife, then over another Satellite top back to Iqaluit to deliver via NorthwesTel's network to the grandmother, it makes no sense to me. And all for the fact that we don't have a local interconnect.
1416 Now, sure, we could forgo local phone numbers because I agree with you, they are small communities, people will adapt, they will take a new phone number. I would rather they didn't have to, but certainly if that were the only way to do it, that would be better and local interconnect is more important there than local phone numbers certainly.
1417 COMMISSIONER DUNCAN: Okay, thanks. That helps.
1418 Just one quick question again following up another point with Commissioner Simpson. I gather then, because of the way you have structured the compensation for your community service providers, that turnover is not much of an issue?
1419 MR. PHILIPP: No, turnover when people move certainly -- turnover has not been a significant issue. The reality though is that in communities where you only have 700 people, even though we have a very high penetration of internet, in fact higher than the Canadian average again, because these are very remote communities.
1420 You know, when I grew up in Fort Providence, if you wanted to sell computers -- and we built a computer company to $2 million a year in a community of 750 people -- but if you wanted to sell computers, you needed to be able to communicate with your customers and your suppliers, and the internet was the only way to do it.
1421 So I believe that, you know, it is extremely important that these services exist in all of these communities and in a form that people can afford.
1422 COMMISSIONER DUNCAN: Twenty per cent of the revenue off the top, you know, is quite a significant amount --
1423 MR. PHILIPP: Yes. You know, it was our first kick at it. We probably could do that better, quite frankly. I really see that as being 10 per cent for support and 10 per cent for being our local eyes and ears on the ground.
1424 A lot of the communities, as we launch new and more complex services, are going to be harder for local individuals to support. But really, we are connected to every community and every customer.
1425 So really, our idea under this new TIMS is that any resident anywhere in Nunavut can be a support agent. They have to pass certain tests and certain qualifications, they don't have to live in the local community.
1426 So I think our model will grow and what you will find is that it will become, if we are allowed to deliver new services like voice, it will be different in that there will be a fund setup by us which is a percentage of our revenue which goes towards supporting the support agents as opposed to an individual community service provider, because we may have multiple in a small community.
1427 And to answer your last question, the amount of money in some of these cases is very small. Kakisa, the smallest community I think in the north, 55 people, which is 400 kilometres down the road, just on the other side of the Mackenzie River.
1428 I think from day one, before we built the antennae there, we knew there would be no more than six customers. And six customers at $60 a month is $360, less the 20 per cent is something like $290, take away power, you're at minus -$4,000. That is just a requirement, that we have to lose money there forever if we want to deliver service there.
1429 But our service is ubiquitous, you can take our modem to any community in the north and turn it on and it works with the same level of service everywhere, it is fully nomadic.
1430 So that is a big big thing. That isn't available in any other province or territory and we think it is a big factor as to why we have been so successful and why we are in 60 per cent of homes in the north. You know, that is a big number for penetration in terms of internet.
1431 COMMISSIONER DUNCAN: Thank you for that. I can understand where you are coming from. I guess I was just thinking 20 per cent out of 100 is a big jump, but I understand what you are saying.
1432 I am just wondering, this service that you gave us, the extra attachment here, the chat service. Can you just explain to me just quickly how that works?
1433 MR. PHILIPP: Sure, absolutely.
1434 We built a distributed voice network. So that means we have switches in every community. These are all IP-enabled switches. The software is distributed. And we are very much a software company.
1435 Eighty per cent of the services that we roll out are services that we have built from scratch, because there are no such commercial services in existence. And because you cannot buy from a big voice provider in the south hardware that will do what this system will, because ours is designed specifically for this network and for remote and rural networks around the world that we serve.
1436 So the voice network has a server in every community. Those communities are connected together by a full-mesh satellite network, which means any community can talk to any other community via single hop.
1437 When you buy the ChatBox it is an $80 piece of hardware that basically interfaces your handset in your house that you already have into the internet in the community, into the QINIQ internet service.
1438 Registers with the local switch, the local PBX, has a six-digit extension, and allows you to call any other six-digit extension, single hop, full-mesh, the most efficient satellite routing possible.
1439 If you call the south, it goes over a single satellite hop to Ottawa and then out in to the PSTN. That entire architecture was built in-house by SSi. We have deployed that across our entire network. It is software, it is very efficient to do. Our satellite network is already very efficient at moving packets.
1440 So really, all the rest of it is software, the ability to assign customers numbers anywhere in the south, anywhere in the rest of the world, quite frankly, currently we can assign them numbers, except in the 867 area code.
1441 So customers can buy 613 numbers, can buy 800 numbers, can buy UK 800 numbers and all of those numbers route to their ChatBox. They manage all of this via web interface, so if they want to buy a new number they can.
1442 If they are going on holidays, they take the ChatBox with them and all of their numbers ring there. If they have multiple ChatBoxes, one for the kids, one for them, they can call between ChatBoxes and it is free until April 1st.
1443 So between now and April 1st calls on net between ChatBoxes are free, no 7 cents a minute. After that, it will be 7 cents a minute, unless it is local of course.
1444 The system is very very efficient, it enables us to deliver services to customers that have internet already.
1445 The problem is there are lots and lots of customers that do not have broadband internet in Nunavut that have copper coming into their homes, but cannot afford the monthly fee to be able to buy a personal phone line and then pay long-distance on top of that.
1446 The average phone bill in Nunavut is more than the average internet bill is by the time you add up the services that customers are paying for on top of the basic $31.30.
1447 So I believe that by bundling their phone service with their internet we can give them a much better service. But by the same token, I would like to be able to offer that service and that efficiency to every member of that community whether or not they buy internet from us. NorthwesTel's own internet customers should have that flexibility of buying it and they can't currently.
1448 COMMISSIONER DUNCAN: So if I am calling my sister in that community and she is also a customer of yours, there is no extra charge for that?
1449 MR. PHILIPP: In fact, if you and your sister both have ChatBoxes, she could be anywhere in the world or anywhere in Nunavut and there would be no charge until April 1st, after which, yes, 7 cents.
1450 But on net, in same community, no cost. And, in fact, one of my goals is to have all of Nunavut be a local-calling area.
1451 COMMISSIONER DUNCAN: So then just a couple of things that sort of make me wonder. First of all, before this service was -- I read in your submission that people can use your service anywhere, they just take their equipment with them.
1452 MR. PHILIPP: M'hmm.
1453 COMMISSIONER DUNCAN: So is losing equipment a big issue? It is not -- privacy is --
1454 MR. PHILIPP: The customer owns the equipment.
1455 COMMISSIONER DUNCAN: Oh, they own it, okay.
1456 MR. PHILIPP: Yes.
1457 COMMISSIONER DUNCAN: Okay, all right.
1458 And I noticed on the Nunavut Government submission, which I am sure you have read that, you know, they speak about the problems they have with using the internet or these big file transfers, banking transactions, hanging up and libraries, how important it is for people and for the government itself to have the access, the high-speed access.
1459 Now, do they still have a problem with your system, that it can't handle the capacity? I know you just went through that explanation --
1460 MR. PHILIPP: No. To answer your question briefly, no, they don't have that problem and partly because of what I was mentioning earlier about us being able to layer capacity on top of each other and build rules within the network management system.
1461 Let's say the business case for voice has 10 megabit. When the next caller gets on that is taking it over megabit, we can do anything from play an automated message to give them a busy signal and wait for one more user to finish a call, if we needed to.
1462 But realistically, because all of our services are sharing the same capacity -- and really the differentiation is the colour of the packets, a green one is voice, a red one is internet and a blue one is business, we can share that capacity between all of those services much more efficiently.
1463 So in the case of the Government of Nunavut, their old network was very much one network per service. They have a network for voice, they have a network for health, they have a network for financial transactions, which is just not efficient but it is indicative of an older infrastructure.
1464 When we built our infrastructure 10 years ago we were the first in North America, the fifth in the world, to build a network like it. It was the first full mesh frame relay system out there. We are on our third network in the last decade and this network is much, much more efficient than any of them in the past. Consequently, the Government of Nunavut has the ability now to be able to do all of the things that they couldn't. Their biggest challenge right now is just simply being able to find enough trained resources to be able to implement some of the things that they can do and we are working hard with them on that.
1465 COMMISSIONER DUNCAN: So in their submission when they were talking about services hanging up or not being able to complete them, the banking transaction -- again I use it as an example -- that's in the past now because you are serving them.
1466 MR. PHILIPP: Correct.
1467 COMMISSIONER DUNCAN: It's not an issue now. Okay.
1468 I don't want to take up everybody else's time, I just have a couple of more questions.
1469 Just I'm wondering, your software company, am I understanding correctly, you are going to roll out local phone service in all 56 communities. I'm assuming that this is, you know, approved.
1470 Is there much or any additional equipment and software required to be installed in each of those communities and, if so, what kind of time line are you talking about?
1471 MR. PHILIPP: To answer your question, no.
1472 It's a complex issue, but let me see if I can summarize a couple of points that I think are important here.
1473 When we built this network we knew we would have to deploy services, e-mail, Web services, DNS, a number of the other services required to run Internet. We built an architecture that allowed us to deploy new software and new services remotely.
1474 So we have a rack of computers sitting in each community, redundant, so that we can, from Yellowknife or our Ottawa facility, push a new service out into a community without ever having gone there. And because we have a last mile wireless infrastructure that requires no truck roll, we can have customers that have our modem use that service in any community.
1475 So currently all 56 of our sites are equipped with servers that will host this. We have only launched it in the 25 communities in Nunavut, mainly as the first launch and to be able to see the impact on the network, see the metric, see where people are calling, see what gateways we wanted in the south, where were the bulk of the calls going, how much was local to local, where we are going all the way out and back in again so that we can determine how important and in which communities we need to do interconnects.
1476 So there will always be upgrades to the infrastructure, but our biggest upgrade over the coming 24 months will be simply adding wireless capacity. We have roughly 60 MHz I believe of 25 MHz spectrum. We were the first deployment of that MCS infrastructure that Inukshuk(ph) and the rest of Canada deployed, we deployed here in Yellowknife first.
1477 We have that same infrastructure deployed in every one of these 56 communities and what we really need now are more base stations to add capacity so that as we ramp up users we have got that last mile capacity.
1478 The satellite infrastructure we have been investing in continuously as we have launched new services.
1479 So really short of adding capacity, which is extending a contract with Telesat -- or, in our case, Northern Space Link in Ottawa is our provider who buys from Telesat --really it's not a challenge for us to be able to enhance this. And we do regular site visits anyway, so adding capacity to the wireless infrastructure just happens as part of the normal course of our site maintenance.
1480 COMMISSIONER DUNCAN: So what might delay this, then, is what you are looking to a CISC process to accomplish, or are you still able to get underway and the CISC is a follow-on?
1481 MR. PHILIPP: We have launched already. In fact, last week in Iqaluit we didn't just launch the ChatBox, although that's the literature we brought you because it pertains to the voice services in question here, we also launched a video service, videoconferencing by the minute, $2.00 a minute for desktop-to-desktop, boardroom-to-boardroom videoconferencing, pay-as-you-go.
1482 It's something that because our network architecture is there, because you can plug a device, an IP SIP device into our network in any community and we can recognize you, register you locally, but report you to the rest of the network so that anyone can find you with a single ha(ph), it's the most efficient architecture, it's completely dynamic, we don't have to do any pre-configuration for a user to take their videoconferencing phone or their voice phone ChatBox to another community, turn it on and use it.
1483 So there is absolutely nothing required. And the beauty of our business case is that as we add paying subscribers at $5.00 a week or $15 a month, whether it's a videoconferencing phone or a ChatBox, we can scale capacity.
1484 Go ahead.
1485 MR. PROCTOR: I'm sorry, Commissioner Duncan, the CISC process, too, should not be part of the delay, it should be part of the solution.
1486 COMMISSIONER DUNCAN: Okay.
1487 MR. PROCTOR: So in the event of, let's say Resolute, Resolute Bay, assuming that would be a simple situation of Lionside access and us receiving some 8-6-7 numbers, we can go to the numbering planners -- I'm sorry, I'm forgetting my acronyms, but the group that actually hands out the phone numbers, receive numbers for the area -- Lionside access is no big mystery, that's been going on for 25 years for cellular service -- CISC or the mini-CISC, if we want to call it that, should be dealing with issues that may arise. If there are no issues, there should be no delays in local interconnect.
1488 COMMISSIONER DUNCAN: So if the decision was issued that competition was given the go-ahead and I'm living in -- everybody keeps -- Gjoa Haven is it?
1489 MR. PROCTOR: Gjoa Haven. There are some good carvers and Gjoa Haven. That's a good place.
1490 COMMISSIONER DUNCAN: Okay, good.
1491 If I'm living there, then how long would I expect before I could get the local phone service?
1492 MR. PHILIPP: Tomorrow at 9:00.
1493 MR. PROCTOR: Without being glib, I think the issue probably depends on how quickly our interconnection facility with NorthwesTel can be put in place.
1494 COMMISSIONER DUNCAN: Okay.
1495 MR. PROCTOR: We are ready, willing and able to keep on using that tired and worn term, but we really are -- but it really takes two to tango in this case, so hopefully there are no delays on the other side.
1496 COMMISSIONER DUNCAN: Okay. Thank you very much.
1497 Thank you.
1498 THE CHAIRPERSON: Thank you very much.
1499 I just have one question.
1500 If this Commission is to move forward with local competition and you are the competitor, I need a better understanding of who you are.
1501 Are you a limited partnership? Are you a private corporation? Where do you get your funding from?
1502 I don't want you to divulge anything that's confidential, but I think it's important for this Commission to understand who we are dealing with if in fact we do decide to go forward.
1503 MR. PROCTOR: Yes. Can we maybe as an undertaking, I don't know, to file in confidence?
1504 You already have our financial statements from our annual reports so you have all that information. I'm not sure what additional level of detail we could provide beyond that, but --
1505 THE CHAIRPERSON: Is there a partnership or are there partnership agreements?
1506 MR. PROCTOR: SSI Micro is a Corporation, SSI Micro Limited. We can certainly provide all of the shareholding structure, basically everything that you would want to know on that, there's no problem. That would obviously be filed in confidence, if that's acceptable to the Commission.
1507 THE CHAIRPERSON: Yes.
1508 MR. PHILIPP: Let me just add to that.
1509 I completely agree with what Dean just said and if you don't already have it, I mean the corporate structure is really not all that complicated, there are a number of companies involved simply because my wife and I, who is our CFO, have been involved in running the family business since we took it over 25 years ago. So there is construction, contracting, motel, restaurant, bulk fuel, the Northern Space Link uplink in Ottawa, our own Internet services in the north, as well is what we do internationally. So there is a number of companies involved from a corporate structure perspective, but it's not really all that complicated and we really have no problem sharing any of that with you in confidence.
1510 THE CHAIRPERSON: But know that your accountants would have taken care of shielding certain exposure from other parties as well and your banks would have required it as well, so I just want to get a sense for the scope of your exposure in this undertaking, how much financing capability you have and that like.
1511 MR. PHILIPP: Well, when you figure that out, Mr. Chairman, I would like you to explain it. My wife has not filled me in on all of that.
1512 THE CHAIRPERSON: Okay. Maybe she can file it then for us.
1513 Those are all my questions and I think those are all the questions of the panel, so thank you very much. You will be around, no doubt, for the rest of this hearing.
1514 MR. PHILIPP: Thank you.
1515 THE CHAIRPERSON: Let's take a 5-minute break and get the next panel up -- or a 10-minute break. I sit corrected.
--- Upon recessing at 1533
--- Upon resuming at 1550
1516 THE SECRETARY: So, Mr. Chairman, you will now hear items 3, 4 and 5 on the agenda which are the Government of the Northwest Territories, the Government of Yukon, and the Government of Nunavut.
1517 So, we'll hear each presentation individually which would then be followed by questions from the panel.
1518 We will start with the presentation of the Government of the Northwest Territories.
1519 I would ask that you please introduce yourselves for the record after which you have 20 minutes for your presentation.
1520 MR. HEFFERNAN: Mr. Chairman, Commissioners, my name is Dave Heffernan. And I'm the Chief Information Officer for the Government of the Northwest Territories.
1521 Joining me on our panel this afternoon are Ms Laurie Gault, to my right, Director of our Technology Service Centre, and Ms Linda Maljan, to my left, our ICT Policy Analyst in our office of our Chief Information Officer.
1522 Today is a special day in the Northwest Territories and not only because we're honoured to have you here to listen to our concerns but because yesterday we elected a new government.
1523 As you may know our system of government differs somewhat from the system that prevails in the South.
1524 In our Government there are no political parties. All of our member MLAs are independents and operate by a consensus style of government.
1525 Members elect the Speaker, the Ministers and the Premier from within their ranks, and the business of government is conducted with the Executive Council and Regular Members engaging in lively debate on issues that affect NWT residents.
1526 However, our government is the same as southern provincial governments when it comes to its objective to serve the needs of our population. So today we are here in that capacity, to represent the interests of the people of the Northwest Territories, including residential, business and territorial government telecommunications users, and service providers -- including both NorthwesTel and existing and potential competitors.
1527 As you have heard from NorthwesTel and others, providing telecommunications services in the North involves some unique challenges. In the Northwest Territories, NorthwesTel provides service to 33 communities only 1 of which has a population greater than 5000, and only six of which have populations in excess of 1000 residents.
1528 Average community size is just 1300, and those communities are spread over a land mass greater than the province of Ontario.
1529 NorthwesTel's entire serving territory represents approximately 40% of Canada's land mass while representing only one third of one percent of Canada's population.
1530 The Northern climate is harsh and many communities either have no road access or have road access only during winter months.
1531 All of these factors make it costly to provide telecommunications services in the North. At the same time, however, as was so eloquently pointed out by the Yukon Territorial Government in its September submission, the same factors that make providing service in the North such a challenge also make our citizenry uniquely reliant on such services.
1532 For remote communities in particular, telecommunications can be essential for maintaining family and social links as well as for obtaining both commercial and government services.
1533 For example, current strategic initiatives by the GNWT Department of Education include the delivery of services to facilitate increased access to online resources by students and curriculum developers, distance learning opportunities for students in remote locations, as well as professional development for our Teachers.
1534 In the field of health, the GNWT is using the data network to bring patient care closer to the end user through speech pathology initiatives in schools and health centres in every community and, more generally, the demand for 24x7 high speed transmission of diagnostic images is growing at a tremendous rate.
1535 Many other examples can be found in the Artic Communications Infrastructure Assessment report that was referenced extensively in the Government of Nunavut submission.
1536 The GNWT has been actively participating in CRTC telecommunications proceedings for many years now. During the 1990's the focus of our interventions was to have basic telephone service extended to unserved communities and to seek some improvement in the quality of service provided by NorthwesTel.
1537 During the first decade of this century, our focus was to have NorthwesTel provide a wider range of services and to allow for competitors to enter the market to stimulate innovation and provide new and improved services.
1538 Throughout these proceedings, we have also been concerned that rates charged to Northerners should be affordable and align with the rates charged in Southern Canada.
1539 As we meet today I can say that many of the changes the CRTC has made to date have yielded important improvements.
1540 I think particularly of the Service Improvement Program undertaken between 2000 and 2005, and the introduction of a national subsidy program for this service improvement program and for residential rates.
1541 Another important milestone was the introduction of long distance competition in 2007.
1542 At the same time I cannot say that we find ourselves entirely satisfied with the situation we find ourselves in today.
1543 NorthwesTel's technology is antiquated and outdated and leaves it unable to provide many services which are taken for granted elsewhere in Canada.
1544 Even with the investments being proposed by NorthwesTel in this proceeding there will remain many communities that will not have access to certain optional features, and some services (such as call display) will only function on an intra-exchange basis, within a community and not between communities.
1545 As another example, NorthwesTel cites limitations in its network as a justification to deny local competition in its territory or to provide it without critical features such as Local Number Portability.
1546 Yet it must be remembered that the network NorthwesTel has in place today is a network it selected and maintained and not something that was simply imposed upon it.
1547 In the GNWT's view, a fundamental review needs to be undertaken of NorthwesTel's network, with the Company then being directed to undertake all necessary investments to modernise its network to ensure it can provide a full range of services to both customers and competitors.
1548 At the same time, to provide the company with an ongoing incentive to operate efficiently, and for many other reasons as well, we believe that local competition should be introduced in the North without further delay.
1549 In our September submission we spoke to the fact that while competition is permitted throughout Southern Canada, it remains that such entry is prohibited in the North.
1550 We see no reason why this should be the case. We have at least one party, SSI, who has expressed a strong interest in entering this market and interestingly, SSI is talking not just about offering service in our largest centers but in extending service to smaller communities where it can leverage its existing network investments.
1551 As noted earlier, NorthwesTel opposes such entry, in part because of the costs of adapting its own network to permit such competition.
1552 We question, however, why the fact that, in a monopoly environment it has not invested sufficiently in its network, why that should be used as a justification to allow it to continue to maintain its monopoly.
1553 In our submission we also noted that the costs of modifying NorthwesTel's network to allow competition in major centers was comparatively small, and suggest that, as it has done in the South, the Commission could explore a variety of options concerning the terms and conditions upon which entry could be allowed in smaller communities.
1554 Specific proposals have also been put forward by SSI in this regard and include such elements as forgoing local number portability on a transitional basis.
1555 The GNWT believes that it is imperative that the prohibition on local competition be removed and be removed now. To the extent there are specific technical and financial issues that need to be resolved, we are confident that the CRTC can resolve them just as it has done in the South for both the major telephone companies operating there and for the smaller independents operating mostly in remote and rural areas with smaller populations.
1556 With regard to the other matters at issue in this proceeding I would now like to walk briefly through the principal recommendations we have made.
1557 First, I'd like to talk about rates. With regard to residential local rates, NorthwesTel has proposed that despite the fact that its rates are currently among the very highest in Canada, a $2 monthly rate increase should take effect on January 1, 2012.
1558 As we note in our submission, the CRTC has recently found that residential rates in all other areas of Canada should be capped at $30, or in the few places where existing rates are above thirty, be capped at their existing level. This policy applies, without exception, and is applicable in both areas that receive subsidies and in areas that do not.
1559 NorthwesTel's residential local rates are currently $31.33. And as we stated in our written submission, we can see no reason why northerners should be subject to a more punitive rate increase policy than applies to all other residential local service users in Canada.
1560 If affordability and other factors cited by the Commission in the Basic Service Objective Decision 2011-291 require that rates be capped in every single location in the south, then there is no reason why they should be permitted to increase above this cap in the north.
1561 With regard to business local rates, NorthwesTel is further proposing that a $2 local rate increase be allowed effective January 1, 2012.
1562 The GNWT's position with respect to this increase is that NorthwesTel has not provided any convincing justification for the increase and that it, too, should be denied. If, however, the Commission does allow the increase, rather than allowing NorthwesTel to simply pocket increased earnings, or use them to offset reduced earnings from foregone or unregulated services, they should be applied to either, (a) fund the expansion of enhanced calling features if the CRTC provides no subsidy for this purpose; or, fund the reduction in carrier access tariff rates greater than that proposed by NorthwesTel.
1563 The third rates proposal made by NorthwesTel is to reduce the carrier access tariff charged to long distance providers. To finance this rate reduction, NorthwesTel proposes to exclude it's residential satellite toll connect costs by moving such costs to the local service category and including them in the residential local costs used for subsidy calculation purposes.
1564 The GNWT fully supports this proposal and notes that it is entirely consistent with the Commission's determination in Decision 9916, that, because of the unique circumstances of NorthwesTel such facilities should be considered as an extension to the local network and that the associated costs are to be assigned to the monopoly access category as opposed to the competitive toll category, as is the case with other telephone companies.
1565 Making this adjustment will allow the CAT rate charged by NorthwesTel to itself and its competitors to fall from just above four and a half cents a minute to just below three cents per minute.
1566 While this rate is still well above the rate charged in the south, which varies from company to company, but is generally less and one-tenth of this amount, this will allow some reductions in northern long distance rates and, as we argued in our written submission, help reduce the unsustainable burden on Yellowknife and Whitehorse to collect such costs even when they are not incurred when long distance calls are made from these locations.
1567 Moving to another issue, the GNWT has also made a number of recommendations concerning the subsidy provided to NorthwesTel from the National Contribution Fund.
1568 First, as noted above, we have recommended that residential satellite toll connect costs be included in the cost used in the residential local subsidy calculation.
1569 Second, we have recommended that the existing subsidy in place to finance the service improvement program undertaken between 2000 and 2005 be continued. This program was instituted pursuant to Decision 9916 in which the CRTC acknowledged that NorthwesTel might require supplemental funding to undertake this program. The need for such funding was confirmed in Decision 2007-46 and NorthwesTel's Service Improvement Program was approved on the basis that such funding would be provided.
1570 The ongoing appropriateness of such funding was again confirmed in Decision 2007-5 which stated at paragraph 234 that,
"The Commission finds that the total SIP expenditures of $8.4 million are reasonable with respect to NorthwesTel's request for explicit funding from the National Contribution Fund, for the non-access portion of the SIP. The Commission has previously approved this program and finds that continued funding from the NCF is appropriate." (As read)
1571 Today, it remains that NorthwesTel must finance the ongoing maintenance, depreciation and other expenses resulting from this program.
1572 In the future, as capital equipment installed under the program requires replacement the costs associated with this will replace any reduction and depreciation that occurs as some existing equipment becomes fully depreciated. Accordingly, the subsidy should be continued both now and in the future.
1573 As well, as mentioned earlier, in the GNWT's view, a fundamental review needs to be undertaken of NorthwesTel's network with the company then being directed to undertake all necessary investments to modernize it's network to ensure it can provide a full range of services to both customers and competitors.
1574 NorthwesTel is also proposing that subsidy funding be provided for a second, much smaller SIP in this proceeding. The proposed new SIP whose total annual cost is less than $1 million has two parts. The first part would provide for enhanced calling features such as call display which the CRTC has previously indicated are included in the basic service objective to be extended to the twenty-nine northern communities that currently lack them.
1575 Because of the importance of these services, both as tools of convenience and to provide privacy and security, the GNWT strongly urges that NorthwesTel should now be directed to offer these services throughout its territory as per its proposal. And while we believe it would appropriate to provide a subsidy for this purpose, should the CRTC disagree, we urge that NorthwesTel nonetheless be directed to undertake the proposed investments to furnish these services.
1576 The second part of the proposed SIP program seeks to replace an obsolete wireless access network used to offer basic service in parts of British Columbia. While the GNWT has no direct interest in this proposal we consider that as a matter of principle subsidy funding should be provided where it is required to allow NorthwesTel to meet the basic service objective, and where NorthwesTel would be unable to do so absent subsidy funding.
1577 Last, to summarize our position, let me say that in the Northwest Territories what we need is more competition and more and better services. What we don't need is higher rates.
1578 Because of the unique circumstances of the North as the CRTC has recognized on many occasions, to attain this will require ongoing CRTC intervention to insure an adequate level of financial support is provided and to regulate the activities of NorthwesTel where market forces are not sufficiently strong to do so.
1579 Mr. Chairman, Commissioners, I thank you for giving us your attention and I'd now welcome any questions you might have regarding our presentation.
1580 THE SECRETARY: Thank you very much. Before we do that, we'll hear the presentation of Government of Yukon.
1581 Please introduce yourselves for the record after which you have twenty minutes for your presentation.
1582 MS BADENHORST: So, good afternoon. The Government of Yukon appreciates the opportunity to participate in this proceeding and specifically to address the Commission today because of the profound effect of telecommunications policy on Yukon's economy today and the implications of social and economic development in the future.
1583 My name is Lisa Badenhorst, and I am a senior policy advisor in the Department of Economic Development for the Government of Yukon.
1584 With me is Jim Pratt, our telecommunications consultant.
1585 The Government of Yukon has been consistently involved in telecommunications regulatory and policy matters affecting NorthwesTel, and specifically Yukon, for more than a decade. Over that period we have reiterated the importance of telecommunications to our region and the need for policy solutions that address the unique needs of the North. Our objectives for participating in this proceeding are to address key telecommunication policy priorities affecting the present and future well-being of Yukoners with particular focus on the availability of telecommunication and IT services, the reliability and continuity of service and the affordability of telecommunications.
1586 In the report on Arctic Communications Infrastructure In the 21st Century: A Matter Of Survival, published in April of this year, the significance of communications to the people of Canada's North and the importance for the nation are described in the following way: Arctic residences must have reliable, affordable communication infrastructure to engage in 21st Century opportunities. Many communities' long-term survival will depend on it. Canada needs a healthy, educated, prosperous population of Canadians living in the Arctic to properly manage the vast land that contains so much of Canada's natural resources that benefits the entire country.
1587 The hundred thousand residents living in seventy-five communities spread over one-third of Canada's land mass need affordable communications to improve the distribution of health care, engage in education, participate in the economic opportunities in their region, and continue to ensure the Canadian Arctic is part of a sovereign Canada.
1588 Communications for maintain sovereignty in emergency response is a fundamental requirement. So, too, is the requirement for modern communication services to Arctic communities. It's a matter of survival.
1589 The goals contained in Section 7 of the Telecommunications Act establish a level of expectation for all Canadians setting what we believe are important policy standards. We are appreciative of the efforts made by the CRTC to ensure that decisions affecting customers of NorthwesTel meet these standards. Yukoners and other Northen Canadians must continue to have access to telecommunication services comparable in quality, affordability and choice to those available to all Canadians.
1590 Paradoxically, the same factors of remoteness, distance and widely dispersed population which make the provision of telecommunication services costly and difficult to maintain are those which make access to telecommunication more important for Northerners than for other Canadians.
1591 The reality of the telecommunications environment in Canada's North is that basic service cannot be provided without subsidy support for the high cost areas, and market forces have not yet provided incentives for innovation and investment. Yukon's telecommunications environment is dominated by NorthwesTel. Yukon users of telecommunication services are effectively limited to a single supplier NorthwesTel, which serves not only as the ILEC, but also as the provider of cable communications.
1592 NorthwesTel also controls our wireless market by itself or through affiliated companies. This eliminates any possibility of price competition and offers no incentive for investment or innovation.
1593 At the same time, the needs of Yukoners for advanced telecommunication services and increasing demands for bandwidth are not being met.
1594 The ICIA Report observed:
"In Yukon, public health workers regularly need to connect to networks from the field. They need to use publicly accessible Internet points of access to interface with secure databases on the backbone. Libraries in Yukon are struggling to meet consumer demand, as visitors quickly reach the caps that have been set to keep bandwidth costs under control. Library users are not allowed to stream video or audio of any kind, even in a community with a fiber link, as costs are simply too high. The demand for more and more services will only continue, with users' expectations and needs evolving, and networks struggling to keep up."
1595 MR. PRATT: Turning to the specifics of the matters before you, this framework was established by the Commission in Decision 2007-5 following a Public Notice that was issued early in January of the previous year and a full public hearing, after which the Commission reached a decision following consideration of the option of splitting NorthwesTel's rate base, which would have separated the utility portion of the company's operation.
1596 The advantage of this approach would have been to isolate the uneconomic segment, making costs more visible and subsidies explicit.
1597 The Commission did not choose this approach because local service would be subsidized from the National Contribution Fund rather than from long distance services, which was the case for the large ILECs, and that splitting the rate base would result in a continuation of the current form of regulation with additional complexity to ensure allocation of costs between utility and competitive segments were appropriate.
1598 In this review proceeding, NorthwesTel proposes several changes to the existing basket structure, including relaxing some pricing constraints and eliminating the productivity offset, but does not propose to change the modified price cap methodology that was established in 2007.
1599 It is important to note that the Commission's decision establishing the service basket structure and the accompanying price constraints was "to promote incentives for operational efficiencies and provide adequate protection for consumers." The Government of Yukon submits that both of these purposes must be considered in evaluating NorthwesTel's current proposals.
1600 While staying with the price cap framework, NorthwesTel seeks to introduce additional factors in justifying the proposed price cap structure, namely that outcomes are reasonable and that the impact on the NCF is ameliorated. The company commends its balanced approach as an optimal solution.
1601 While the Commission has a statutory responsibility for just and reasonable rates, it is not clear where in section 7 there is any requirement to apportion subsidy burdens between internal and external sources. NorthwesTel's approach seems to reflect more of a revenue requirement philosophy than the incentive-based approach which is characteristic of price caps.
1602 Let's look now at how their proposals stack up in comparison to the standards of operational efficiency and adequate protection.
1603 NorthwesTel proposes other relaxation of pricing constraints established in the previous decision by changing the frozen prices on Other Capped Services to allow prices in that basket to increase annually by the rate of inflation and opening the residential access basket to automatic price increases equivalent to the rate of inflation.
1604 It is difficult to see how a change from frozen rates to automatic annual rate increases provides any protection for consumers. It cannot be argued that compared to the present framework the incentive for NorthwesTel to improve its productivity would be diminished.
1605 It seems that NorthwesTel has not provided adequate justification for their proposed automatic rate increases, especially in the context of the continuing resistance to the introduction of local competition, which would otherwise provide some measure of pricing discipline and thereby protect customers.
1606 We are very concerned that without a productivity offset the proposed framework is missing an important element of the price cap regulatory regime and there is no measure of assurance for consumers that prices will not automatically ratchet upwards, as was the case with rate base rate of return. Without a productivity offset, there is just simply not adequate protection for consumers.
1607 While the Government of Yukon fully supports NorthwesTel's right to earn profits, adopting a framework that makes pricing constraints more generous for the company, at a cost to consumers, seems neither to provide the adequate protection required by the Commission nor the balance that NorthwesTel suggests will be achieved by its proposals.
1608 If the company has been unable to generate a consumer dividend over the initial price cap term, should it be rewarded by eliminating that obligation now?
1609 We have looked carefully at NorthwesTel's proposed rate increases from the perspective of what might be in the best interests of Yukon's telecom environment and do not find that NorthwesTel has made a convincing case, whether measured by the standard set by the Commission in setting the price cap framework or what might be seen as just and reasonable taking into account the needs of the company and the needs of Yukoners or by what might be best for the growth and development of the Yukon economy.
1610 In the first price cap decision for NorthwesTel, the Commission froze residential PES rates and the subsidy to reduce the regulatory burden, provide the company with a degree of certainty and provide an incentive for the company to become more cost-effective.
1611 NorthwesTel proposes to increase local access rates by $2 per month for both res and bus customers in both Band H and Band D. The rationale for this proposal is that the rates have not increased for five years while costs have increased. If the increase is approved, rates will be among the highest in Canada.
1612 The rate increase proposal is further explained as resulting in a reasonable balance between moving rates closer to costs, lessening or perhaps reducing the subsidy requirement and minimizing rate shock. It is important to recall that Decision 2007-5 stated that the last rate increase approved for Band D would bring those residential access rates above costs, which suggests that the current proposal would move Band D rates further away from cost and would actually increase the subsidy burden that's being borne by those customers.
1613 An additional justification for the company's proposal is that rates have been frozen for five years, during which time inflation has operated to the extent of 2.1 percent. In effect, this proposal seeks to do retroactively exactly what the Commission's initial decision did not allow the company to do, and that's to apply an inflation adjustment to local prices over the initial price cap period.
1614 NorthwesTel states in the proposal that its proposal "reflects the need for customers to share in recovery of these increased costs" and the company "believes it is appropriate for customers to contribute to increased costs of providing services just as they would for any other good or service purchased in the North."
1615 The need for customers to share the burden of NorthwesTel's cost increases ended with the extinction of rate base/rate of return regulation. While it is undoubtedly true that prices for goods and services in the North do fluctuate with market conditions, NorthwesTel is claiming a regulated price increase, and unlike other goods and services, there are no competitive alternatives for Yukon customers.
1616 The Government of Yukon has a significant concern about the impact of these price increases on the competitiveness of our businesses, especially with limited prospects for offsetting benefits. It seems self-evident that a greater number of business customers will see a higher total bill than those that will see lower ones.
1617 NorthwesTel's rationale for these rate changes is clearly stated as conserving internal cross-subsidies in order to balance the impacts on the complex of internal and external subsidizers. Not only is it opaque to customers just how much of a tax on their competitiveness is being imposed by NorthwesTel's internal balancing of their interests but they also have no ability to do anything about it in the absence of a competitive alternative.
1618 There can be no doubt that access to affordable and reliable telecommunications throughout the North cannot be achieved and certainly will not be sustained without the support of external subsidies. This is, in our view, an appropriate use of public investment and it should be recognized that different regulatory calculations must be applied than is the case where market forces may come into play.
1619 NorthwesTel identifies the significant challenges involved in operating in regions where distances are vast, communities extremely small and the extent of disproportionate market size between urban and rural communities is dramatically greater than anywhere else in the country. Combined with the high costs of establishing and maintaining service across vast distances in difficult conditions, it cannot be overstated that the northern telecom environment requires a unique set of regulatory circumstances.
1620 Since infrastructure investment in the North typically requires subsidy support, there should be a comprehensive, or at least coordinated, approach to planning, implementing and funding, as was observed in the ACIA Report. This would ensure that investment is aligned with priorities in order to optimize benefits for all stakeholders.
1621 NorthwesTel proposes to allocate the costs of satellite connection to local access for the purpose of more accurately reflecting the costs to serve satellite communities. The Government of Yukon supports this proposal. It accurately reflects the CRTC's rationale in deciding on price caps rather than split rate base because local service in high-cost areas would then be subsidized from the NCF.
1622 This rationale should, in our view, be equally applicable to business access rates in Band H. The underlying economics and the importance of communications to business users are the same and likewise consistent with section 7 of the Act.
1623 Burdening Band H customers with an internal cross-subsidy obligation to residential service in the same high-cost areas would not only yield a meaningless contribution due to the small scale but would also impose an unnecessary burden on fragile local economies, impeding the prospects for growth.
1624 We commend NorthwesTel for the proposed reduction in the CAT rate charged to prospective competitors but we are concerned that the rate continues to include an implicit subsidy component and thereby remains a deterrent to effective competition.
1625 The evidence of NorthwesTel regarding the paucity of competitive entrants bears this out. It's unrealistic to expect that prospective competitors will invest in infrastructure knowing that the rates they will be charged to access their competitor's network will subsidize their competitor's current customers.
1626 The Yukon Government strongly supports the use of Service Improvement Plans to ensure that the investment necessary for all northern communities will achieve the level of basic service that the Commission has established for all Canadians. The SIP mechanism and the related subsidy represent an important regulatory solution for addressing the need for critical investment in infrastructure and telecom services in the North.
1627 While it's an appropriate use of the SIP mechanism, and would result in progress towards the basic service objective in the designated communities, the Government of Yukon is concerned that the proposal for the calling feature SIP still falls short of providing customers in these communities access to comparable services.
1628 The SIP mechanism should be utilized to achieve parity of service in these communities and recommends that NorthwesTel be directed to propose a plan which fully achieves the BSO throughout the North.
1629 With respect to the SR 500 SIP proposal, while we continue to support the need for investment in telecom infrastructure throughout the North, we wonder why provisions were not made, through prudent network planning, to replace these facilities at the end of their scheduled service life.
1630 In fact, there seems to be a patchwork appearance to NorthwesTel's network investment. The company's observations about switch types and vintages say network technologies and platforms are more complex than any network in Canada.
1631 Once again, it would seem that in the absence of competitive pressure, the incentive to invest is also absent.
1632 What seems to be missing in NorthwesTel's SIP proposals is a coherent strategy for investment that will satisfy the current basic service obligations on a comparable basis throughout the North, but also enable the adoption of new services and features as technology evolves and customer expectations increase. From the perspective of customers, it is not transparent how these projects are prioritized.
1633 Furthermore, it would be useful for all NorthwesTel customers to understand how a project like this one fits into the company's priorities for network modernization, particularly given the continuing resistance to investment in capabilities that would enable competitive entry.
1634 The Government of Yukon would be concerned if these subsidies were to be counted against the subsidy requirement needed to provide basic service on a widespread basis throughout the North.
1635 The benefits of competition are well understood, well documented and certainly well-talked about. But Yukon users have only been able to sit and watch as the rest of the country and indeed the rest of the world have benefited from opening the markets to provide many innovative services and options.
1636 The presence of competition is inherent in the price cap framework, and price caps are often considered as a transition to competition. Competition is also now integral to the Commission's approach to regulation, which has adopted the course of utilizing market forces wherever possible. In fact, from the policy perspective, we would suggest that competition may be even more important to incentive-based regulatory framework than price caps themselves.
1637 As the Commission noted in 97-9:
"The Commission agrees that competition is likely to have a strong effect on incentives to improve productivity beyond those that price cap regulation provides."
1638 Competition is desirable from the policy perspective and is desired by all of the parties to these proceedings except NorthwesTel.
1639 NorthwesTel continues to oppose the introduction of facilities-based local competition, citing in several places how the costs of upgrading its legacy network are an insurmountable hurdle.
1640 NorthwesTel expresses concern that the costs of LNP are prohibitive and therefore no further consideration should be given to competition. In the five years since this matter was last considered, the company has come up with no new proposal and seems indeed seems content to rest behind this argument.
1641 The Government of Yukon insists that alternatives must be considered, and strongly recommends that the CRTC require a workable plan for competition to be developed without further delay. There may well be more cost-effective solutions than the legacy of investment approach suggested by NorthwesTel.
1642 Perhaps local number portability investment is no longer necessary. Certainly, the ubiquity of cell phones over that last intervening period has conditioned users to having at least a second number if not being more comfortable with changing their phone number.
1643 The Government of Yukon also notes that NorthwesTel has taken steps to operate as a CLEC in at least one community outside its operating territory.
1644 Since 2009 NorthwesTel has utilized its cable plant in High Level, Alberta to offer "a competitive choice for reliable home phone service". This service provides the same functions as traditional landline telephone service, but also offers premium voice quality and a number of cost-savings. It is incongruous at best for the company to compete in local service markets outside its territory while continuing to deny Yukon customers the option of choice.
1645 MS BADENHORST: So, in conclusion, NorthwesTel's proposed modifications to the current regulatory framework move further and further away from the price cap methodology. With relaxation of pricing constraints, abandonment of a productivity offset, and the rejection of local competition (perhaps permanently) the proposed framework is more consistent with a cost-recovery approach to regulation than it is to an incentive-based approach that acknowledges a transition to competition.
1646 There is no clear, compelling justification for the proposed rate increases:
1647 Current Band H residential access rates are below cost, which would indicate that increases are appropriate, but this proposal would exceed the $30 per month standard and there is no evidence that affordability has been addressed;
1648 Band D residential access prices are above cost. So this proposed rate increase serves only to increase the subsidy burden on these customers;
1649 Band H business rates should be treated similarly to residential;
1650 And there is no rationale for the proposed increase in Band D business and multiline rates other than maximizing contribution. Absent a rating strategy with specific goals for rate rebalancing and lacking a plan for introducing competition, the case for rate increases is weak.
1651 The need for subsidy support for the high cost areas of NorthwesTel's serving territory is profound, and while the adjustments proposed by NorthwesTel go some way towards making the subsidy requirement transparent and explicit they do not remove continuing distortions in pricing and access to services.
1652 The proposed SIPs identify appropriate investments in service improvement that meet public interest and Telecommunications Act policy objectives and are justified uses of subsidy funds. However, what is missing is a comprehensive improvement strategy, which would provide a context for these projects and clearly demonstrate the priorities for investment in telecommunications infrastructure.
1653 There is no convincing justification against the implementation of a plan and specific timetable for the introduction of local competition. Maintaining the explicit and implicit barriers to entry serves only to impede the implementation of choice and innovation for Yukon customers, and to impair the social and economic development of the region.
1654 THE SECRETARY: Thank you very much for your presentation.
1655 I will now invite Ms Margaret Hollis from the Government of Nunavut to make her presentation. You may now proceed with your 20-minute presentation.
--- Native language spoken
1656 MS HOLLIS: Good afternoon, ladies and gentlemen.
1657 I'm very happy to be here and to have this opportunity to speak on issues related to Nunavut. You'll be pleased to know the remainder of my remarks will be in English.
1658 MS HOLLIS: But I thought you would like to hear the language.
1659 This is the Government of Nunavut's first involvement with the CRTC and I have probably made a million mistakes and there is a lot I don't understand but I'll give it my best shot.
1660 One of the things I didn't understand, I thought I would be able to make a PowerPoint presentation and prepared my submissions that way. It turns out there is no place in the room to conveniently put a screen so I'm going to work off the hard copy.
1661 I would like to start by telling you a little bit about Nunavut. Everybody else has been talking large distance, small population.
1662 Nunavut is the pure case, as it were. There are almost two million square kilometres of land and another 64,000 square kilometres of water within its jurisdiction.
1663 There are 25 communities with 33,000 people, about the size of a large apartment complex in Toronto.
1664 Iqaluit has 7,500 people so you can do the math. Most communities are under 1,000 people. Those communities are too small to have banks or doctors.
1665 We have the lowest average income in Canada. My filed submissions have the Stat Can records on that.
1666 There are no roads in or out and we have the highest cost of living in Canada. I don't have any statistical link for that except to show you some photographs that were taken in Arctic Bay earlier this year; a one-serving cup of noodles at $4, 750-grams of Cheez Whiz costs $9, almost $10. A jug of cranberry juice costs $38, a half a dozen breaded frozen chicken breasts costs $77, and so on.
1667 It is possible to purchase non-perishables in the South and have them shipped up in a process we call the "Sealift" but to do that means that you have to have communication software or extraordinary patience on a telephone to place an order for one's entire annual supply of dry goods would run up -- would easily exceed the 400 minutes that is covered in the Long Distance Calling Plan that NorthwesTel offers.
1668 It's much easier to do by internet but, of course, point of sale websites timeout if you don't complete them fast enough and on dial-up that's usually what happens.
1669 We're also extremely short of almost every kind of professional; most acutely healthcare professionals. I appreciate this isn't unique to Nunavut but the intensity of that need is unique to Nunavut. We have about five times the population per doctor ratios in the rest of Canada.
1670 As has been already mentioned, all telecommunications go through one satellite. One Iqaluit has ADSL internet, the capital. But high demand means low transmission speed.
1671 In preparation for this hearing I was monitoring my transmission -- my download speed at home. It was running between 15 to 20 kilobytes per second. I'm downloading everything I can on the hotel's wireless because it's so much faster and of course I don't have to pay $10 a gigabyte for it.
1672 Only eight of our communities have cell phone service. That might be a little premature. Cell phone is being installed in Pangnirtung this week or next week.
1673 Only Iqaluit has EVDO cell phone technology which I understand first came on the market in 1998. Other communities have older cell phone technology. I think it's disingenuous of NorthwesTel to say that they have nothing to do with that and it's Bell. They are basically the same thing for the North.
1674 These are not reasonably comparable services. Just to pickup on a phrase that NorthwesTel used earlier today.
1675 An ongoing feature of ongoing life in Nunavut, is the level of frustration that we have with communications. I wish this had been held in Iqaluit, then I would not have to explain this to you, because you would already have been frustrated beyond bearing. You would have heard your own voice in echo drowning out the voices of your children at home or your head office.
1676 Streaming video or even audio is out of the question, both because of our low -- now, I am speaking now about residents, businesses, not the government. We have solved some of those problems by having SSi build us a wide-area network.
1677 But a typical problem is for somebody who is a regulated professional, who has to take certain courses to maintain their eligibility. And the southern providers believe, not without justification, that webinars and web-based courses will take care of that for remote access. But we can't stream those webinars, we just can't, it takes way too much bandwidth. To download even a two-minute video takes about 10 minutes. So to down load a whole webinar, it just isn't going to happen.
1678 This is part of the cost of living. A full-priced ticket from Iqaluit to Ottawa is $2,500 return.
1679 We have frequent internal outages that are NorthwesTel-caused in the GN. These are verbatim notices that I have listed here, various outages. I just went back and pulled them out of my old emails, these relate both to voice and data.
1680 We have the rogue satellite issue, I don't know if you are familiar with that; Galaxy 15 went out of its orbit and its signal is on the same frequency as Anik F2. And when it is in certain positions, it interferes with the signal.
1681 We also have this really cute thing called transition; twice a year the satellite goes between a community and the sun, and that also interferes with voice, and that does affect basic telephone.
1682 So we have all kinds of state of the art practices, many of which have been urged on us by regulators and the Office of the Auditor General and so forth, but we can't use them because they require the transmission of large amounts of data. Again, the wide-area network is going to deal with a lot of that.
1683 Most of us have also had the experience of people sending us emails and saying what is wrong, I can't reach you by telephone, is something wrong? The calls just don't go through.
1684 And if we call the NorthwesTel service centre in Whitehorse we are told simply, "Oh, our system isn't showing that you have a problem." That is it. NorthwesTel does not acknowledge that we have a great deal of service difficulties with the voice lines alone.
1685 When people come to Nunavut, the first thing they notice is that their SmartPhone doesn't work anymore. And these aren't just tourists and family visitors, these are also people who are there to explore economic development for Nunavut, which we desperately need because Nunavut has no economy base of its own, resource-based economy of its own. The Inuit originally were nomadic for the best of reasons, and that is that a single place doesn't support any economic activity.
1686 So people can't download data. And generally speaking, they leave saying this is a lovely place except for the interconnectivity problems.
1687 But it isn't just about those of us who live there or who are trying to do business there. The Arctic has become of increasing interest to the whole world, and communication from outside Nunavut into Nunavut is becoming increasingly necessary.
1688 There is of course a lot of climate change research going on, geological research, mapping and developing the Northwest Passage in anticipation of increased navigation. For the second year, we have now delivered fuel to the western part of Nunavut through the Northwest Passage, which I think really ought to be a news item somewhere, but hasn't been so far. And that requires tracking so that they don't run afoul of ice.
1689 There is also adventure tourism as well as the mining and petroleum development. And I notice that the map of Canada that you have up there actually chops off the top part of Nunavut and doesn't display the areas in which most of this development is going on, Ellesmere and the Basin around the North Pole.
1690 Sovereignty, military readiness and manoeuvres and emergency response are also increasing, particularly with the adventure tourism. But all of those people who are not northerners need to communicate southward or southward into Nunavut.
1691 Those last three items, sovereignty, military readiness and manoeuvres and emergency response, resulted in the creation of the Northern Communication Infrastructure Working Group and that was, as has been mentioned, the communication failure in Operation Nanook 2009.
1692 My understanding was that the military actually brought the number of people they said they would, but they didn't count in their estimates that the Prime Minister would be there for his annual photo op and all the vast numbers of media that follow him around on those things.
1693 So basically, what I hear NorthwesTel saying is if you are going to have a party, you had better get permission from them first.
1694 So I imagine you are all familiar with that report. If not, I recommend it most highly, it sets out most of what I have been saying in a technical and an evidenced way, where I have been presenting it pretty much anecdotally.
1695 But its conclusion is the same as mine and everybody's, that Arctic access to communication services is not keeping pace with southern access. And it is not just a matter of having to wait a little bit longer, it means sometimes you just can't do something at all, and banking is the best example of that.
1696 But that is the current need. But Nunavut is growing. And I direct your attention the graph on the bottom of page 12. This shows, on the right-hand side of the graph, the population of Canada. And you can see the familiar double bump of the baby boom and the baby boom's children.
1697 But if you look on the left-hand side you will see that there is no equivalent bump moving through the system, but rather is starting right there at the bottom, the youngest cohort is also the largest. Nunavut has a birth rate that is only slightly below that of southern Canada in the 1950s, and children have children essentially. It's not unusual to have 30-year-old grandmothers. Childbearing starts at a very young age and that is part of the culture.
1698 This data, by the way, is found in the Nunavut 2010/2013 Business Plan, which is cited in the filed submissions. It is the under-30s of course who are the most technically savvy and tech-hungry, and they all want cell phones and they all want the internet.
1699 And it isn't just people, there is also businesses. Mineral exploration expenditures for 2011 are projected to reach $400 million. And they are proposing to add 2,000 new direct jobs, which probably means 2,000 new customers.
1700 NorthwesTel's plan for dealing with the current unmet need and with the expected explosive growth -- I was under the impression they were only going to provide call waiting in one more community. I am delighted to hear that they are planning to do it in all communities.
1701 I am a little surprised, in 2011, call display is treated as something extra that they should get paid for. And they propose to raise the rates and maintain their monopoly and really not do anything about the current service levels.
1702 Complaining about NorthwesTel is pretty much good sport in Nunavut, but it isn't NorthwesTel's fault. The Arctic Communication Infrastructure Assessment Report said no matter how you slice it, delivering affordable bandwidth to Arctic communities is an expensive business that cannot be borne by the purchasers of service alone, nor by private sector providers that require return on their investment to stay in business.
1703 The user-pay model really works where there is physical infrastructure, land lines, and where this a high density of population somewhere really to subsidize the remote areas. And Nunavut doesn't have either of those things. Most particularly, it doesn't have a Yellowknife or a Whitehorse, so a population centre that can subsidize the remote areas.
1704 We really need a different business model in the north. Nunavut is 2 million kilometres of last mile essentially. So it doesn't make sense to treat it the same way as other jurisdictions.
1705 Because all of our telecommunication is by satellite, it is my submission that it really makes no sense in Nunavut in 2011 to distinguish between voice and data, either physically or in the regulatory structure. I appreciate that the regulatory structure has grown up and applies and makes good sense elsewhere.
1706 But really, to allow NorthwesTel a monopoly on voice is -- well, SSi has really set out what the problems are around that.
1707 We need to plan holistically and not just in these little band-aids of this subsidy here and this Infrastructure Canada grant and that Industry Canada grant and this CRTC grant. We need a coherent plan for the whole thing.
1708 The thing is there is a lot of bandwidth available on the other pole of Anik F2, all we need are earth stations that can receive it.
1709 And I should mention land lines really don't make sense in Nunavut. Inuit spend quite a lot of their time out on the land, even in weather that those of us who are Qallunaat, outsiders, would never even consider venturing out in. And I have a little picture there of a picnic out on the ice in the middle of nowhere.
1710 Cellular is the technology of choice. And there is an incredible market opportunity there because land lines are one per household, but cell is one per person. And in Nunavut, we have between eight and 10 people average in a house. We have a real housing shortage.
1711 In other countries that have this sort of problem, like Australia, the state owns the backbone and private enterprise delivers the last mile. And that is an approach that we are looking at, we have already started talking with Telesat. Their funding is there. Government is already the single largest purchaser of communications in the north. And they see a report lists the $140 million to existing infrastructure in recent years.
1712 And the other thing is that modern communication will save the Government of Nunavut an extraordinary amount of money because we won't have to do everything manually, we won't have to have meetings in person, we won't have to fly thumb drives with data to other communities. We will simply be able to do the job and we won't have to keep two systems running.
1713 The other interesting thing is that mining companies have been very quick to step up and put money into infrastructure to support their projects. They are already building roads, fuel depots, or tank farms as we call them, and they are planning port and rail facilities. So the cost of putting in them earth station isn't that much to them.
1714 So there are sources of funding for communications infrastructure, but as long as NorthwesTel has that monopoly no new business model can really be implemented because they have a lock on the voice lines, the basic voice lines.
1715 I'm delighted to hear about SSI's ChatBox and I'm going to be looking into that.
1716 If NorthwesTel's monopoly is continued, in four or five years we are going to be back here making exactly these same arguments and the north will be for five years further behind the rest of the world and even more isolated than it is now.
1717 So Nunavut is not asking the CRTC to solve this problem, all we are asking is that it remove one of the barriers, which is NorthwesTel's monopoly.
1718 In the future we may ask that some subsidy be directed to government-owned infrastructure, but that is not today. We don't have a plan. It's really more at this point of a half-baked dream, but we would like to be free to pursue it without having to deal with NorthwesTel's monopoly.
1719 Thank you very much for listening to me. I think I'm a little over time.
--- Native language spoken
1720 THE CHAIRPERSON: Thank you very much, and thank you all very much. Very interesting presentations with a string of commonality to them.
1721 I'm going to ask Commissioner Simpson to lead the questioning.
1722 COMMISSIONER SIMPSON: Thank you very much.
1723 In the spirit of your opening presentation, I believe I have this right --
--- Native language spoken
1724 MS HOLLIS: You're welcome.
1725 COMMISSIONER SIMPSON: This is going to drive the court reporters crazy because when we have multiple presenters it becomes difficult to identify who is who with respect to questions and a lot of the questions I have are universal so we will have to muddle through it in some way. If we start seeing some hands flying over on the left, we will know that we are getting off pace here.
1726 But I would like to ask all of you -- and it may be I think appropriate to identify yourself in these universal questions and it will make it a lot easier for the record.
1727 Ms Hollis had brought up my first question, which is: Is it safe to assume that territorial governments are the largest, if not among the largest, purchasers or customers of communications in the north?
1728 MS HOLLIS: That's certainly true in Nunavut.
1729 COMMISSIONER SIMPSON: Thank you, Ms. Hollis.
1730 MR. PRATT: And yes for Yukon.
1731 COMMISSIONER SIMPSON: Thank you.
1732 MR. HEFFERNAN: And yes for the Northwest Territories.
1733 COMMISSIONER SIMPSON: Okay.
1734 Again as I said with our presenters from SSI, all of you are very articulate and I commend you, extremely articulate about the issues and the underpinnings of regulatory policy and I presume it's indicative of the importance of communications in the north to have individuals such as yourself representing your governments who, frankly, from what I hear, could be sitting on this side of the microphone with respect to your individual expertise and it makes our job a lot easier.
1735 My question starts off with the issue of separating the regulated from non-regulated.
1736 We have heard earlier -- and I would just like to dispatch this question, even though it's outside of the scope of the hearing.
1737 On the broadband side of things we have been hearing what seemed a disproportionate number of complaints or issues, negative issues addressed with respect to both quality and quantity of broadband, so would you say that from the constituents that you hear from in your day-to-day lives, broadband is more of an issue, equal to or less than an issue than all the rest of the regulated services?
1738 MR. PRATT: Jim Pratt, for the Yukon. I will start, and my friends may jump in to add in or correct.
1739 I would say, Commissioner Simpson, that from the customer's perspective that broadband is certainly most important. I highlight customer perspective because what we often think about in the regulatory argot as broadband may not be as pure a definition for them. They want to be able to use their point-of-sale equipment, they want to be able to access other markets and conduct business and get educated, take courses, all those sorts of things, and they are kind of agnostic about what service or what regulatory configuration is being utilized.
1740 It's really for them are they satisfied with the services and applications that they are able to access.
1741 I think the experience that we have is that there is a high level of concern about bandwidth and from everything we can see that concern is more likely to increase than decrease as the needs increase.
1742 COMMISSIONER SIMPSON: Yes.
1743 MS MALJAN: Linda Maljan, from the Northwest Territories.
1744 We do hear a little bit about broadband, certainly in the unregulated side. Also cell phone service is a big concern in many of our communities, with only three communities in the Territories having any kind of cell phone service. I would say we get just as many complaints about cell phone service or lack of as we do about broadband from residents' perspective.
1745 From our own perspective, we do have concerns around the regulated side of things and we can speak to that at another time or now, whatever you prefer, but those would be two of the big ones.
1746 And of course in the past we have had issues around 9-1-1 as well, although that has settled a little bit lately. It's broadband and cell phone that come up a bit more.
1747 COMMISSIONER SIMPSON: So from your perspective it's more a 50:50 between regulated and unregulated services or did I misinterpret that?
1748 MS MALJAN: More broadband and cell phone I think than regulated.
1749 COMMISSIONER SIMPSON: Okay. Okay.
1750 Ms Hollis...?
1751 MS HOLLIS: I would agree.
1752 I think for me that was kind of shocking given that the sound quality and the dropped calls on regular landline telephone is so bad.
1753 I think it's just because it hasn't changed. It just has never got better from the '50s or whenever it first started, but with the youth market seeing commercials on television that say to see the end of this story go to such and such a URL, that the expectation of broadband and cellular availability now is just through the roof and it's that gap we hear about. People don't talk about how good telephone is in the south.
1754 COMMISSIONER SIMPSON: Going over to the regulated side, particularly focusing on the obligation to serve, I'm somewhat surprised to be also hearing some concerns, if not negative comments.
1755 Would you just give me -- and again, I think where I'm going with this line of questioning is that this hearing is extremely fact laden, both from our friends at NorthwesTel, potential competitors and from intervenors, and I am trying to extract anecdotal experiential information from qualified subjects. So that's the nature of this line of questioning.
1756 So from the obligation to serve standpoint, the core business if you like, I was somewhat surprised to be hearing as many comments as I did that are concerning.
1757 Would you say that the core business of NorthwesTel is also deficient to the extent of -- I'm not trying to put words in your mouth, is deficient to the extent that competition is warranted?
1758 MR. PRATT: Yes, in a word.
1759 The frustration stems from not having choice. You heard, as you mentioned, lots of facts about comparable or comparative rate levels, how much more expensive some services are. I think they are -- speaking for Yukon anyway, there are also issues about on a broad scale about reliability.
1760 You heard some evidence about the service outages and the massive effect that has on all kinds of service. So that's why we have been concerned about network planning, making sure that there is redundancy.
1761 That may not be answering your question directly in terms of on a service-by-service basis, but I think on a broad-gauge basis what we would report for our customers interests would be that level of concern, that choice. They see having a choice as a means of achieving some of those goals.
1762 COMMISSIONER SIMPSON: Thank you. Mr. Pratt, I would just like to say thank you for bringing up two issues, because quality of service is on my mind when I ask that question, but also that you are bringing -- all of you are bringing forward -- perhaps not so much from the Government of Nunavut, but bringing forward a position that there is a lot to be desired on the investment on that side for infrastructure.
1763 MS MALJAN: From the Northwest Territories just a comment.
1764 When you asked about regulated versus non-regulated, to your previous question, we don't often hear many of the complaints that there are on the regulated side, those would go to the telephone company.
1765 We can comment on the kinds of things that we would hear internally as a customer and I could ask Laurie Gault to speak to some of those kinds of things that we think could be improved if there was competition.
1766 Laurie, I will just maybe have you comment on some of those.
1767 MS GAULT: Sure.
1768 There is no question bandwidth and network performance are our key priorities in the Northwest Territories. We experience on our data networking side where technology, access to online services, be it healthcare, education, social services, professional and personal development, e-commerce, all of these have created environment where as Canadians we need this in the north as much as everywhere else across the country.
1769 We have experienced regular network outages in our remote communities, specifically -- well, with our microwave infrastructure. We've had each year in the winter several outages that can last days. And this simply isn't acceptable.
1770 It has a direct impact as technology is more critical to us. It directly impacts education and patient care.
1771 One of the areas we'd like to see improvement is when there could be investment in converting satellite facilities to microwave facilities. This gives us better bandwidth, the robustness in the network that we're looking for.
1772 NorthwesTel has made efforts, has made investments in redundancy but to their own point that is for South or southern north heading south. It's north of Hay River where we really need that redundancy built in and that investment would be critical.
1773 And as well as in terms of visibility into the network, the performance of the network, outage reporting so that as a government we can plan our future and what technology we're able to reliably provide as government services by having that information from Norwestel's network that gives us the confidence that we can make our own projections.
1774 Thank you.
1775 COMMISSIONER SIMPSON: Thank you.
1776 There have been many comments made by yourself and others today that seem to not be anecdotal but more factually based. And I would like to probe this a bit with respect to that investment.
1777 I'm believing I heard you say collectively or individually that investment hasn't been sufficient in the market.
1778 I believe that you were also inferring that that was the case with both the, well the backbone and the respective investments for both telephony and broadband.
1779 But with respect to the core business, how is it that you are coming to that very definitive point of view?
1780 I mean I know you're big customers and there's a certain familiarity that comes with being in a market this size and having -- and being a big dog with respect to being a customer, a large customer of NorthwesTel. But how is it that you're so definitive on the investment perspective that you bring it forward in your submission?
1781 MR. HEFFERNAN: Dave Heffernan, GNWT.
1782 One of the big things that we have, we don't have any insight into what NorthwesTel is planning for their infrastructure. All we can base this on is what we know and what impacts us on a day-to-day basis.
1783 It's evident to us just based on the amount of downtime that we have that they're not putting any investment in providing adequate redundancy on the infrastructure in providing enough equipment to have in sort of a bench stock of parts available.
1784 Often when these outages happen it takes a long time to get parts in because the infrastructure is a bit outdated. They don't have a going supply, I guess, on hand that can just be there.
1785 So these are the types of things that impact us that we can really comment on.
1786 I'm not sure if that's the question that you were asking though. Maybe if you can...
1787 COMMISSIONER SIMPSON: We see public and private financial submissions. And we have a pretty good idea of where things are at.
1788 MR. HEFFERNAN: M'hmm.
1789 COMMISSIONER SIMPSON: I was most curious as to how -- I believe the presentations from the Yukon and of you too were fairly definitive about the investment deficiency. You know, you were commenting on that with a certain amount of certainty. And I was curious as to where that was coming from. Whether it was just a supposition because of quality of service issues or there was something that you knew that perhaps you could share.
1790 MR. HEFFERNAN: Okay.
1791 MS BADENHORST: It's Lisa Bandenhorst with the Government of Yukon.
1792 You asked that you were looking for anecdotal. I think I can give you one about investment.
1793 Recently in the last ten years the Yukon Government upgraded its mobile radio system, its VHF system.
1794 When it -- this new system we were going to use was an IP-based system. And when it came time to have the discussions with NorthwesTel about how to have that system up and running we had long discussions about how much it was going to cost for the government to upgrade NorthwesTel's system in order to handle the new mobile radio system. Basically because it couldn't handle the IP services.
1795 COMMISSIONER SIMPSON: Thank you.
1796 The concept of a $2 rate increase is from what I can gather a volatile issue at the street level.
1797 And regardless of the merits of the need, assuming for a second that there is sufficient merit but it's not necessarily a pill that anyone would like to swallow, would in your judgement, considering you are advocating on behalf of your constituents, would you if it was economically necessary be somewhat satisfied if there was a performance measure such as a quality of service or other metric that would help justify the need for an increase to the extent that there might be something coming back to the consumer in return for that?
1798 MR. PRATT: Jim Pratt for the Yukon.
1799 We certainly would. In fact had proposed that in the 2007-5 proceeding. We advocated that.
1800 MS BADENHORST: Just on the -- sorry, Lisa Badenhorst for the Yukon Government.
1801 Just on the $2 increase, I've been getting e-mails from back home about the news releases. And they're really picking up on the $2 increase.
1802 Over all of the other very important things we're talking about here that $2 increase seems to really resonate with the media.
1803 MS HOLLIS: Margaret Hollis for Nunavut. Oh, sorry.
1804 The one thing that would concern me if there are controls in place about how much investing NorthwesTel does, is that I have the strong suspicion that NorthwesTel buys its obsolete equipment from Bell Canada when Bell Canada can't bother -- can't find a market for it anymore. And Bell can set whatever price it wants for that.
1805 So, although I think that having some sort of control on making sure that NorthwesTel puts in enough money, it would also have to be not just at a price fixed between Bell and NorthwesTel.
1806 MR. HEFFERNAN: Dave Heffernan, NWT.
1807 NorthwesTel's rate today is $31.33 per month, already among the highest in Canada. In the South rates below $30 are capped at $30 and rates above $30 have been capped at their current levels.
1808 So we believe that any increase in the rate would threaten affordability in the north due to the low cost -- the low incomes in our remote communities.
1809 COMMISSIONER SIMPSON: Thank you.
1810 This is a clean up question while we're on the subject of rates and inflation factors.
1811 I'm looking at one sheet that was prepared by staff. And it may be incorrect simply because it was cobbling together information from your written submissions earlier.
1812 But may I just for the record have an understanding from all three governments with your view to the use of the cost of living or the, you know, the gross national product PI as a metric for calculating increases that are required from time to time, just as a methodology?
1813 MR. PRATT: As a methodology we wouldn't have a problem with it. It's commonly, has been commonly used, commonly understood.
1814 It's a, you know, maybe not a universal standard but a certainly well understood one.
1815 COMMISSIONER SIMPSON: Yeah.
1816 MS MALJAN: Is that the inflation factor?
1817 COMMISSIONER SIMPSON: Yes, GDPPI.
1818 MS MALJAN: Yes.
1819 We think that's probably as Jim says a well-recognized way to do it and a fair way to do it.
1820 COMMISSIONER SIMPSON: Okay.
1821 MS HOLLIS: I agree.
1822 COMMISSIONER SIMPSON: Okay.
1823 While I have you Ms Hollis, in your both written and oral submissions you had spoken about two concepts with respect to going forward.
1824 One was the position that the Government of Nunavut felt there was need for competition. But in the same presentation you were inferring that we should also consider state-owned models such as I believe Sweden and Australia where a state-owned model would take everything up to the golden mile and then it would be privatized in the last mile.
1825 Which is it that you're coming down on?
1826 MS HOLLIS: When government does something it always puts it out to tender.
1827 We really want to have more than one provider of that last mile service. If we go to a model where a backbone is state-owned we would definitely want to have competition for that last mile to control that.
1828 And also to -- government, particularly the Government of Nunavut doesn't do anything by itself. It always hires specialists to do it. We're the size of a tiny little town. We just don't have that expertise.
1829 So competition is necessary at every stage before we -- because it's going to take two, three years at a minimum to get into a state-owned system. It involves actually switching data over from one pool to another and so on.
1830 So, in the interim we think competition is necessary. But also should we get to that point, competition will be necessary too for the delivery of the services, both the state-owned part but also the last mile.
1831 Does that answer the question?
1832 COMMISSIONER SIMPSON: It does. Thank you.
1833 Just a couple of more questions and then I'm done.
1834 I believe two out of the three, perhaps all three of you have referred to the ICIA study that was done, the Arctic Communications Infrastructure study. And I had asked earlier as a contributor to the study how NorthwesTel felt about it.
1835 And it seems that on balance with the exception of a few areas where perhaps it went over the top to make a point, it's a document that this Commission could at least focus on to get a better understanding of needs.
1836 My question is this that given that their -- this Commission can only deal with that with which it regulates which is the non-internet broadband component. What is the appetite of your governments to move forward on trying to bring a national strategy or a strategy that is participated in by the federal government to a more meaningful form.
1837 Is it part of Canada's digital strategy, or do you need your own?
1838 MR. PRATT: I will take a crack at it. It's a big -- potentially a big issue.
1839 Yukon has, for a number of years, advocated a cooperative model for looking at issues of priority for investment back to the National Telecom Policy Review Panel; we did some extensive work for that.
1840 So, two parts: Yes, I think the Government of Yukon is certainly interested in that. And the last observation or your last point, whether it's a national strategy or something that is more -- more carved up, for myself I have a sense that there may need to be some subdivision of it that's simply -- a national strategy tends to swamp all of us because we represent such a -- such a small fraction. And that's the -- you know, the fallacy of averages because on average we probably don't really count in the grand scheme of Canadian Telecom Policy. So, having a multi-party participative process where we have an opportunity to lay out our ideas, discuss them and see if we can come up with some solutions, I think would be certainly something we would support.
1841 MS MALJAN: Linda, from the Northwest Territories.
1842 This isn't something we've talked about in a lot of depth but there are a lot of models that allow for a national approach such as CRTC with unique consideration being given to the North. The Federation of Canadian Municipalities also has national approaches with Northern subcommittees. And the three Territories often talk about what are the areas that affect all of us and how do we more effectively work together. So, I think we are always open to approaches that would pay attention to some of the issues that concern us, particularly in this area. But, we certainly would be getting together to talk about how we might bring forward the unique Northern issues, if there are any.
1843 COMMISSIONER SIMPSON: Just a closing comment, rather than a question. What I -- it's interesting that what draws you together are issues of common need, but as an individual who spent some time up in the North over the last twenty years, I'm finding it also very interesting that the three Territories are uniquely different and becoming ever more so. Not just the particularly unique issues that I think this entire Commission is understanding with respect to Nunavut, but its population and its expanse and just the nature of the terrain, but also the different types of economic issues that are in play with both Northwest Territories and the Yukon which seem to be causing, in my mind, a recognition that there will be a need to look at our differences as well as any kind of a cohesive plan goes forward.
1844 So, thank you very much. Those are my questions.
1845 THE CHAIRPERSON: Thank you. Any questions from any of the other Commissioners?
1847 Well, thank you very much. I took one thing that I wrote down here, it came from Ms Hollis' presentation and it was a quote on one of her pages saying,
"We need to plan holistically rather than incrementally."
1848 THE CHAIRPERSON: And obviously five years ago it maybe something the Commission did not do, to the extent it needed to do. Hopefully, we'll be doing a better job this time around.
1849 Thank you very much.
1850 Let's take a ten minute break and then reconvene with both the Utilities Consumers' Group and PIAC and the CAC together.
--- Upon recessing at 1716
--- Upon resuming at 1729
1851 THE SECRETARY: Mr. Chairman, we will now hear items 6 and 7 of the agenda, which are the Utilities Consumers' Group and Public Interest Advocacy Centre (PIAC) and the Consumers Association of Canada, CAC.
1852 We will start with the presentation of Utilities Consumers' Group and Mr. Roger Rondeau is appearing for them.
1853 Mr. Rondeau, you may now proceed with your 20-minute presentation.
1854 MR. RONDEAU: Yes. Good afternoon, ladies and gentlemen. My name is Roger Rondeau. I'm a representative of the Utilities Consumers' Group, which is Yukon-based only.
1855 First of all, I want to apologize to the people of Nunavut. In one of my presentations I misspelled Nunavut and I promptly received an email from one of my ex-students who is now in Nunavut and he told me that slight nuances like that could mean a different thing. So if it did mean anything different to the people of Nunavut, I apologize and I take full responsibility.
1856 Who is UCG?
1857 In 1993 our organization was formed when a large mine in the Yukon, in Faro, shut down and the electrical company decided to raise our rates 50 percent because they had to recoup the loss from this mine for their mortgage on the infrastructure.
1858 So we promptly formed an organization and we were successful, along with some other interveners, in bringing this down to 20 percent. We then lobbied the government to put in a rate relief program which took it down to another half of that.
1859 Shortly after this happened, NorthwesTel and the Commission started rate rebalancing. We intervened in all of these types of things where they were taking the long distance charges and subsidizing the local rates.
1860 What happened with this was that our local rates went up over four times as much as they originally were, which affected many of the low-income, set-income people of our Territory. It did help many others. It cut the costs down for some people 50 percent.
1861 Not too long after this, the high-cost serving area proceeding started, in which the Utilities Consumers' Group went to Ottawa and we basically supported NorthwesTel on this issue, which started the SIP and which led into the new rate regime of price cap.
1862 And here we stand today, ladies and gentlemen, very little competition in the Yukon for all our telecommunications.
1863 In my opening presentation, I'll start with stating that there was a lot of information and evidence provided by NorthwesTel that was in confidence. So it was very difficult for us to evaluate the application. It was also difficult to track as much of the evidence was revised or amended, some more than once.
1864 Nevertheless, as NorthwesTel serving area now has some of the highest local rates in the country, there is no legitimate reason for them to further punish the consumers, the customers with higher rates.
1865 Again, as I stated in my prior statement, this will hurt low- and set-income people, single families, single-parent families, the elderly, other people who are on disability, et cetera. They will receive a rate shock from this. Most of them can only afford local.
1866 UCG -- pardon me, I have points here.
1867 NorthwesTel has provided no evidence to demonstrate that all Northerners will not experience a rate shock from this proposal. They simply state that it's a balanced approach, with no demographics or residential income studies to support this.
1868 I received a letter last night from the Anti-Poverty Coalition of the Yukon, which I would like to present to the Board with my final argument. I cannot -- where I'm staying, I do not have access to a printer, so I couldn't print this off and I just received it last night. So with your permission, I'll file that.
1869 THE CHAIRPERSON: Counsel.
1870 MR. McINTYRE: Just for the record, could you clarify what this document is again?
1871 MR. RONDEAU: It's a letter from the Anti-Poverty Coalition of the Yukon supporting our intervention and stating specifically they do not want to have a $2 increase in the residential rates.
1872 MR. MCINTYRE: And you said that you would file it with your argument. Is this tomorrow?
1873 MR. RONDEAU: The final argument. I'm in the same situation tomorrow.
1874 MR. MCINTYRE: So you mean on the 17th?
1875 MR. RONDEAU: Yes.
1876 MR. MCINTYRE: Okay.
1877 THE CHAIRPERSON: If you have it I'm sure our support staff here could probably transfer it over to one of their links and get it printed out for tomorrow.
1878 MR. RONDEAU: I will try and do that, Mr. Chair.
1879 THE CHAIRPERSON: Thank you.
1880 MR. RONDEAU: The UCG would like to remind the Commission that NorthwesTel has had a very healthy financial result since the price cap regime was initiated. This was shown in the September 23, 2011 letter to the Commission staff.
1881 NorthwesTel claims looking at this yearly comparison of operating revenues, expenses and income is not useful. UCG begs these questions from NorthwesTel:
1882 Which operations have nothing to do with telecommunications?
1883 Is not all of the NorthwesTel infrastructure intertwined? That includes local phone, long distance, Internet, cable and even the cellular services? UCG would like to see all of these aspects under some type of regulation -- if we have to take a step back, then so be it -- in order for competition to roll into the north.
1884 We also believe that the Commission cannot continue to reward one company with subsistence funding if the incumbent is not willing to allow fair competition in all areas of telecommunications.
1885 All possible competitors should be treated equally, but I will emphasize that the Commission must be careful here not to substitute one monopoly for another one. NorthwesTel continues to operate with many legacy assets all the way back from when they purchased the CMT transfer in 1978 to direct government investments, federal funds, things like Connect Yukon, to the National Contribution Fund for the service improvement plans we have now.
1886 UCG contends that all possible competitors should be given reasonable cost access to this infrastructure, including bandwidth. UCG wants to be certain that the Commission knows and understands that although in 2000 they recognized -- and this was part of a news release, the Commission stated they consider access to the Internet as an important priority and note that there are a number of Internet service providers in the north with plans to extend Internet access to numerous communities over the next few years.
1887 This has failed in the Yukon. We are blessed with some of the slowest and most expensive Internet service in the world. This Commission needs to pressure our government to implement bandwidth Internet regulation.
1888 This next statement I have never been able to find documents to prove it, but being a consumer group we receive lots of information and I just wanted to roll it through, perhaps NorthwesTel can clarify it tomorrow.
1889 We have been told that NorthwesTel has sold a vast amount of bandwidth to the United States of America. Has this severely restricted our future access?
1890 UCG wants to point out that the performance indicators have increasingly not been met. Please review the quality of service results NorthwesTel-PIAC-03 revised which the Commission has already asked questions on.
1891 UCG also does not understand why, if the true cost of Band H, average in service residential NAS costs is $77.99, why a 15 percent mark up is needed as well as the NCF subsidy.
1892 We also do not understand how NorthwesTel will have the incentive to cut cost margins, especially in certain areas of management and various operating costs if no product factor is included.
1893 Another question that I would like NorthwesTel to possibly clarify tomorrow is the overhaul of switches, the only way that call display services can be rolled out to the communities that are now lacking the service, or are there less costly alternatives? Some examples are VoIP as well as some other features.
1894 My last statement is that in the Yukon community microwave and TV spectrum is now a monopoly. No one can start a 2.5 GHz system in the Yukon like SSI has done in the other two areas.
1895 I would like to ask the Commission, if you have questions now could you please ask them to me as I have to leave right away.
1896 THE CHAIRPERSON: Are there any questions for Mr. Rondeau?
1897 COMMISSIONER MENZIES: A couple.
1898 THE CHAIRPERSON: Go ahead, Commissioner Menzies.
1899 COMMISSIONER MENZIES: When you talk about rate shock for consumers, what sort of rate shock do you consider -- what sort of rate increase to you consider would be sustainable?
1900 MR. RONDEAU: If the $2.00 increase is implemented, it will bump the cost of local charges almost five times to what was originally. These people who have low set incomes cannot afford any type of increase or they have to take it from food or some --
1901 COMMISSIONER MENZIES: I understand that, but I'm just trying to get a little bit of a reality check, that usually at a certain point costs of services go up with anything, right, things are expensive here, it's expensive to supply and that sort of stuff.
1902 Do you have a suggested rate increase or is your position zero rate increase?
1903 MR. RONDEAU: Our position is zero, as well as what you are getting from the three Territorial interventions as well.
1904 COMMISSIONER MENZIES: Okay.
1905 The only other question I had was when you refer in your written submission -- which I think you refer to it as an unhealthy level of profitability for NorthwesTel, what would you consider to be a healthy level of profit?
1906 MR. RONDEAU: That was a Freudian slip, it should have been a very healthy level of profit that they have.
1907 COMMISSIONER MENZIES: Okay. You considered it -- I took it from your presentation and your general positioning that you thought that was overly healthy.
1908 MR. RONDEAU: Yes, and it comes basically from bandwidth sales from the Internet.
1909 COMMISSIONER MENZIES: Right. Right. We don't regulate that at the moment.
1910 Is your point that they are making too much money or that they are making enough money that they don't need to push the rates on the PES side?
1911 MR. RONDEAU: That is definitely the case, I believe they don't need to increase the rates.
1912 COMMISSIONER MENZIES: Okay. I just wanted to make sure I understood that correctly.
1913 Thank you very much.
1914 THE CHAIRPERSON: Thank you very much, Mr. Rondeau.
1915 MR. RONDEAU: Thank you.
1916 THE CHAIRPERSON: Madam Secretary...?
1917 THE SECRETARY: Thank you, Mr. Chairman.
1918 I will now invite the joint intervenors, The Public Interest Advocacy Centre, PIAC, and the Consumers Association of Canada, CAC, to make its presentation.
1919 Mr. Michael Janigan is appearing for both parties.
1920 Could you please proceed with your presentation, Mr. Janigan. You have 20 min.
1921 MR. JANIGAN: All right. Thank you very much, Madam Secretary, thank you, Mr. Chair and Panel Members.
1922 As part of my oral presentation today I have provided the Commission with a package of attachments that I will be referencing.
1923 I am here to speak to you as an advocate for residential consumers in both the north as well as the rest of Canada. This proceeding was initiated to review the price cap regulatory framework for NorthwesTel that will go into effect in 2012, as well as related matters, including local competition and funding from the National Contribution Fund.
1924 I'm going to focus my oral remarks today on a number of key issues.
1925 One, the implementation of facilities-based local competition;
1926 Two, the price cap plan for NorthwesTel going forward;
1927 Three, NorthwesTel's proposed residential rate increase; and
1928 Four, NorthwesTel's proposed Funding from the National Contribution Fund.
1929 With respect to local competition, we support the opening up of all telecommunications markets to competition as the best way now to protect and promote consumer interests and provide consumer choice.
1930 To this end, we are fully supportive of the establishment of a framework for facilities-based local competition in NorthwesTel's operating territory. This framework should also include the implementation of local number portability and wireless number portability to the greatest extent possible.
1931 NorthwesTel is the last operating territory in the country where such a framework is yet to be implemented. We are disappointed that NorthwesTel has proposed to forestall the expansion of local competition and the benefits it brings to consumers in its territory.
1932 We believe that consumers in the North have waited long enough and that if competitors are prepared to enter the market, there should no longer be a prohibition on this entry.
1933 In opposing the opening of the market to competition, NorthwesTel claims that the market size in the North is too small and the demand for local competition is too small to justify the high costs of implementing facilities-based competition.
1934 A closer examination of these claims reveals that these concerns are based on implementing facilities-based local competition and local number portability in every community in its operating territory and includes the necessary investments for CCS7 in nearly every community in its territory and the replacement of numerous local switches to accommodate local competition.
1935 We support a more measured approach to implementing facilities-based local competition and local number portability in communities and exchanges where it is more economically feasible, such as Whitehorse and Yellowknife initially.
1936 NorthwesTel estimates the upfront cost to implement local competition with local number portability for these two cities at $2.7 million, with ongoing annual costs of under $400,000, which is far lower than NorthwesTel's estimate of 31.7 million to implement local competition across every community in NorthwesTel's territory.
1937 These two cities contain approximately 46,000 residents and roughly 30,000 residential and business NAS representing over 40 percent of the total NAS in NorthwesTel's territory.
1938 In objecting to implementing facilities-based local competition, NorthwesTel has raised concerns that the introduction of such competition may impact its ability to maintain its obligation to serve small remote communities.
1939 NorthwesTel also claims that it relies on substantial internal cross-subsidies from its two major centres, Whitehorse and Yellowknife to support other areas of its territory.
1940 We submit that the current subsidy mechanism to support local residential services in high-cost servicing areas, such as Band H1 in NorthwesTel's territory, along with the modifications recently made by the Commission in TRP 2011-291 provide sufficient funding to maintain services in these communities and meet the company's obligations.
1941 Furthermore, NorthwesTel has not provided sufficient supporting information to demonstrate that local residential services in Whitehorse and Yellowknife in Band D subsidize residential services in other areas. I note today they excluded local service from their definition of subsidy.
1942 We submit that the existing frameworks for local competition can be used to implement facilities-based local competition in NorthwesTel's territory and that existing mechanisms, such as the residential local service subsidy mechanism provides NorthwesTel with adequate financial compensation to continue to provide service in high-cost serving areas.
1943 Next, I would like to deal with price cap regulation.
1944 In order to assess what changes, if any, may be required or appropriate to the first price cap plan, it is important to assess NorthwesTel's performance, including its financial performance and Quality of Service performance, under the first plan.
1945 Unfortunately, very little financial information regarding NorthwesTel's financial performance has been placed on the public record, limiting our ability to conduct such an assessment. However, based on the limited information available, we submit that NorthwesTel has benefited from the first price cap plan.
1946 The company has placed consolidated aggregated financial results for the period of 2006 to 2010 in the public record. We have summarized this information in Attachment No. 1 of our hand-out. I don't propose to go through this at this point in time.
1947 We recognize that this information includes both regulated and non-regulated lines of business but, as we indicated, no other information on NorthwesTel's financial performance is available.
1948 We further note that total basket revenues still represent a significant portion of NorthwesTel's business, representing over 40 percent of aggregated company revenues in 2010.
1949 The information in Attachment 1 also shows that NorthwesTel's consolidated revenues grew by an average of 7 percent per year from 2006 to 2010, while operating expenses only grew by 3 percent per year. As a result, NorthwesTel's operating income and operating margin expanded substantially, with operating income growing by 18 percent per year and the company's operating margin growing from 21 percent of revenues in 2006 to 31 percent in 2010.
1950 Another measure of NorthwesTel's financial performance can be gleaned from looking at the average revenue and operating income per fulltime equivalent employee.
1951 Revenue per employee has grown by an average of 6 percent per year from 2006 to 2010, while operating income per employee has risen by 16 percent per year, indicating that the company has been quite productive and very successful in generating more profits from each employee.
1952 We submit that this information indicates that NorthwesTel has benefitted from its first price cap plan.
1953 NorthwesTel has proposed the following elements for its next price cap plan for the residential services basket:
1954 First, no productivity offset;
1955 Second, residential access rates to increase by $2 a month on January 1st, 2012 to $33.33;
1956 And starting June 2014, residential access rates to increase by inflation and a 5 percent constraint on individual service elements.
1957 In support of its position that it is no longer appropriate to include a productivity offset factor, NorthwesTel provided an analysis of the annual change in the monthly cost of providing residential primary exchange service in Band H1. Based on this analysis, it claimed that the company's derived productivity was negative.
1958 We disagree with NorthwesTel's proposal that no productivity off?set be applied.
1959 Firstly, NorthwesTel has derived a productivity measure by only including the cost of NAS from Band H1, its high-cost serving area NAS which in other parts of its evidence is recognized has particular characteristics that make it difficult to achieve productivity.
1960 However, since the exercise is to determine the appropriate productivity factor to be applied to the residential services basket, which includes all residential NAS, those in Band D as well as those in Band H1, NorthwesTel should have used the change in average monthly cost for all residential services NAS, not just for Band H1.
1961 In answer to Interrogatory No. 4 from PIAC it's noted that they just didn't do cost studies for Band D so they couldn't include it.
1962 Secondly, while NorthwesTel claims that the company's derived productivity is negative, this is simply no longer correct. Attachment 2 provides the derivation of NorthwesTel's productivity based on the cost information it originally filed with its evidence.
1963 However, NorthwesTel recently revised its 2010 cost per residential NAS for Band H1 after uncovering two cost model errors that impacted Band H1's residential access operating costs. As a result of the correction of these errors, the 2010 cost per residential NAS (excluding satellite toll connect costs) declines from $72.26 per month to $68.30, a drop of nearly $4 per NAS per month.
1964 The impact of these cost model errors is very significant. Not only does the error result in a decrease in the residential subsidy requirement by $1.1 million for 2012, but as shown in Attachment 2, the derived productivity factor over the first price cap period is not negative, as claimed by NorthwesTel. It is in fact a positive 0.89 percent. We submit that 0.89 percent understates the productivity for Band H1.
1965 A review of the methodologies and assumptions used by NorthwesTel to generate the 2010 cost results indicates that there has been a significant change in methodology for calculating maintenance expenses.
1966 According to NorthwesTel, the 2006 study excluded some cost centres that contribute to PES preventive maintenance activity, while the 2010 included these cost centres.
1967 Using cost results with differing methodologies and assumptions without making the necessary adjustments to account for these differences will produce erroneous results in calculating the derived productivity. In this instance, since the change in methodology results in more costs being included in 2010 versus 2006, the impact will be to understate the productivity over this period.
1968 PIAC/CAC has identified two other issues regarding the cost studies used to calculate the derived productivity that lead to a further understatement of productivity. This includes a concern over the assignment of customer care systems costs which have been wholly assigned to residential PES service when there are other non-PES lines of business that appear to make use of and benefit from these systems, including the internet and video services.
1969 It is important to remember the reason that performance-based rate-making (PBR) was adopted by the Commission in the form of price caps in the first place. Price caps were chosen in order to prepare monopoly ILECs for competition by encouraging them to become more efficient by reducing incentives and opportunities for companies to over-invest or misallocate costs.
1970 When regulated companies implemented productivity measures to become more efficient, the ability to retain the financial rewards from that exercise provided an incentive to do so. In turn, subscribers were guaranteed a productivity dividend during the period of the price caps.
1971 In our view, NorthwesTel has not approached the design of price caps with a view to the objective of setting rates with the required discipline associated with a price cap that necessitates efficiency. There is little point in adopting an approach that is not preparation for competition and which, at the same time, is not fully based on either the derivation of cost-based rates or accepted elements of PBR.
1972 In addition, we take issue with NorthwesTel's use of an ROE of 11 percent in the cost studies.
1973 Firstly, the Commission established an ROE of 10.5 percent for calculating NorthwesTel's going-in revenue requirement in Decision 2007-5. NorthwesTel has provided no support for increasing the ROE to 11 percent.
1974 And we submit that rather than increasing the ROE to 11 per cent, NorthwesTel's ROE should be declining and should decline from 10.5 per cent to 10 per cent as the risk-free rate has decreased from 2006 to today by roughly 70 basis points.
1975 And actually it has declined more than that, I see by today's figures that the 30-year bond rate is about 2.86. I don't know if I could find an expert that could get that from a 30-year bond rate of 2.86 up to 11 per cent, but I would sure like to meet him. If we were calculating to today, suggest that the ROE would be substantially different.
1976 In conclusion, we submit that NorthwesTel has experienced positive productivity over the first price cap period and that, at a minimum, it would be appropriate to continue to apply the same treatment to residential access services basket, rates frozen for the price cap period.
1977 Rigorous monitoring and follow-up of a regulated company's quality of service results is critical under a price cap regulatory plan to ensure that the regulated company does not reduce the quality of services delivered to consumers as a means to control its operating and capital expenditures.
1978 We have reviewed NorthwesTel's quality of service results over the first price cap period. And, as detailed in our comments, are concerned with the results for two indicators: 2.1C out of service reports, rural, cleared in five working days; and 2.2B repair appointments met.
1979 And we have reproduced NorthwesTel's results for those two indicators on Attachments 3 and 4 of our handout. Over the past 24 months NorthwesTel has missed the minimum standard in 15 months or 63 per cent of the time for indicator 2.1C. While it has missed the standard for indicator 2.2B 10 times over that period or 42 per cent of the time.
1980 While we appreciate the unique challenges posed by operating in the north, NorthwesTel has significant experience and resources to ensure that it continually meets the minimum standard levels for service to consumers as established by the Commission.
1981 We submit that the current system of reporting and explaining quality of service result misses has not resulted in improved performance and that the Commission should move to implement other measures to incent NorthwesTel to meet its minimum standards of the service quality.
1982 The previous experience with maintenance of service quality standards by incumbent monopoly providers of local service is instructive.
1983 During the first price cap period commencing in 1998 the Commission was reluctant to implement financial penalties for failure to meet service quality standards, as it thought that the regulated company's desire to protect the integrity of the ILEC brand from the onset of competition would be sufficient to deter quality of service failures.
1984 By 2002 the Commission was forced to concede that financial incentives were necessary. And I have included at the bottom the words of the Commission in that respect.
1985 In PIAC/CAC's view, there is little to commend a conclusion that NorthwesTel does not require the same regime to ensure satisfactory performance.
1986 Residential local rate proposal, we do not support NorthwesTel's residential rate increase proposal. NorthwesTel already has among the highest rates in the country. We have reproduced Table 4 from our comments in Attachment 5 of our handout.
1987 And Attachment 5 graphically illustrates that NorthwesTel's proposed residential rates of $33.33 per month, which would be applicable to all residential NAS across its territory, would be higher than most of the comparative rates. Indeed, only Telebec's highest rate would exceed NorthwesTel's proposed rate.
1988 Furthermore, the Commission has established a target rate of $30 per month for the high-cost serving area subsidy calculation in Decision 2007-27. In TRP 2011-291 the Commission also determined that residential rates that are already $30 or more will not be permitted to increase further during the three-year transition period.
1989 As residential rates already exceed $30, we submit that it would not be appropriate to increase rates further. Any further rate increase at this time would not be reasonable in terms of balancing the interests of the company with that of consumers in Nortwestel's territory. Residential rates should remain frozen at $31.33 per month for the next price cap period.
1990 NorthwesTel currently receives $20.8 million in funding from the National Contribution Fund to: a) subsidize the provision of residential local service in Band H1; and b) to fund the ongoing requirements of the non-access portion of the first service improvement plan. The amounts associated with each of these are provided in Attachment 6 of the handout in the 2011 column.
1991 Based on the proposals and information filed in the current proceeding, NorthwesTel's estimated annual subsidy requirement from the National Contribution Fund would rise to $24.3 million or $24.8 million without the proposed $2 residential rate increase. The details of this amount are provided in Attachment 6 of the handout.
1992 In assessing NorthwesTel's proposals, it is necessary to balance the interest of NorthwesTel, the consumers in its territory, and the consumers in the rest of Canada that fund the National Contribution Fund.
1993 As previously indicated, we do not support the proposed rate increase to residential rates. We also support a thorough examination of NorthwesTel's proposed costs for Band H1, as the revisions already made to these cost estimates during the proceeding due to model errors demonstrate the significant impact that any errors may have on NorthwesTel's subsidy requirement.
1994 We also do not support NorthwesTel's proposal to fund the portion of satellite toll connect costs related to residential service from the subsidy requirement. We do not view toll connect costs as access-related costs and don't believe that they should be funded through the residential PES subsidy requirement. These costs should be continued to be recovered through the CAT charge.
1995 Regarding the two parts of NorthwesTel's proposed Service Improvement Plan II, we submit that any cost estimates provided should be carefully assessed to ensure that there are no costs included that should be more appropriately funded through NorthwesTel's normal capital expenditure plan for replacing and upgrading existing equipment.
1996 In conclusion, we submit that the price cap regulatory framework for the next period, including any requests for additional funds from the National Contribution Fund, should balance the interests of the consumers in the north with the rest of Canada. Residential rates should remain frozen at $31.33 a month.
1997 Consumers in the NorthwesTel territory should no longer be denied the benefits of competition. Facilities-based local competition should be implemented as soon as possible.
1998 Where problems exist on the delivery of important services in an economic fashion, in PIAC/CAC's view the correct approach is not to dumb down or relax the rigour of the methodological process for arriving at just and reasonable rates for their delivery. It is preferable to get the components of the revenue requirement correct, set a price cap formula in accordance with the values that capture the appropriate cost environment while not rewarding inertia.
1999 It is then that any shortfall can be met by way of a subsidy from the NCF. It is access to telecommunications that Canadians are prepared to subsidize, not the insulation of ILEC ownership and management from the demands in the marketplace.
2000 Thank you, and I would be pleased to take any questions.
2001 THE CHAIRPERSON: Thank you very much.
2002 I just note that your I think Appendix 1 and 2 are interchanged in the references, just for the purpose of consistency.
2003 I would ask Commissioner Menzies if he could lead questions?
2004 COMMISSIONER MENZIES: Thank you very much, Mr. Janigan.
2005 Just a few questions. First, how realistic is it to expect NorthwesTel to solely absorb the costs of competition?
2006 And its profitability levels indicate it has room, but company operators always need to meet shareholder expectations. And if their costs go up in one place, they are generally going to search very hard to recover it in another place. And that puts pressure on services typically and that sort of stuff.
2007 So I would just like your comments on that. Won't the cost, if it is solely assigned to whoever it is assigned, won't it inevitably be felt by the consumer. And given that NorthwesTel is the largest provider, wouldn't it be NorthwesTel consumers who might eventually feel that pinch the most?
2008 MR. JANIGAN: Well, I guess, in fairness to NorthwesTel, they can point to the examples of what occurred in the southern ILECs, the local number portability and other preparation for competition were largely absorbed by the rates from residential consumers. And you are correct from that standpoint.
2009 I think we have suggested that it may be possible to implement local competition in a phased fashion that would de-emphasize the impact of the expenditures associated with local number portability and other preparations for competition such that it may be able to be accommodated within the revenue requirement of NorthwesTel.
2010 COMMISSIONER MENZIES: That actually segues to my next question. In terms of the phase-in, I wasn't completely clear on what you were -- I mean, it is clear that what you are proposing, it starts in the urban areas or rural as opposed to remote areas, to use the terminology.
2011 But in the cities of Whitehorse and Yellowknife, I want to be clear, are you talking about just LNP starting there or are you talking about competition, just competition starting there or both?
2012 MR. JANIGAN: Well, I mean, obviously it would be preferable if competition was able to flourish everywhere. But from looking at it in a realistic standpoint and, I must say, I was interested today in the submission of SSi in relation to their take on wireless number portability.
2013 But my assumption was that those kind of preparations for competition were necessary. And looking at it from a financial standpoint, believe that competition and preparations for competition should commence in the urban areas of Whitehorse and Yellowknife first.
2014 COMMISSIONER MENZIES: Okay, if that is where it commenced, how big a timeframe are you talking about between commencing and ending? Like, if it starts in Yellowknife and Whitehorse on October the 1st how long does it go in Whitehorse and Yellowknife before it moves beyond Whitehorse and Yellowknife?
2015 MR. JANIGAN: Well, you're faced in the other areas I would assume on the same rather substantial requirements for contribution towards local number portability.
2016 And as you note from our materials that quite a bit of that figure, I believe the 33 million dollar figure that's associated with that is associated with areas outside of Yellowknife and Whitehorse.
2017 So I'm hard pressed to state a timeframe where competition would be developing outside of those urban areas if its required, those expenditures associated with local number portability will be required in those areas.
2018 COMMISSIONER MENZIES: Right.
2019 But just to be clear competition in your view would start in Whitehorse and Yellowknife.
2020 MR. JANIGAN: Yes.
2021 COMMISSIONER MENZIES: And then at a point to be -- a date to be determined it would start outside those cities.
2022 MR. JANIGAN: Well, I mean presumably the start date is dependent on market forces not simply on the basis of a regulatory fiat.
2023 All of the areas would be opened up for competition. But you know effectively what you would see is that local number portability expenditures or another preparation would only be required from NorthwesTel in relation to the urban areas.
2024 COMMISSIONER MENZIES: Okay. Good. I understand that better now.
2025 In your chart on the financials I just wanted to know, to confirm your record under -- when you've got income from operations, the 69,255 in 2010 is that before interest taxes depreciation accruals number or is that an EBITDA number or is that a net profitability number?
2026 MR. JANIGAN: I don't think it's a net profitability number but I could stand to be corrected.
2027 COMMISSIONER MENZIES: Okay.
2028 Maybe somebody can help us with that tomorrow or follow up because that's somewhat helpful just in terms of clarity.
2029 I just, I wanted to get a confirmation from you too on your view on the assignation of the obligation to serve in a competitive market, where that should stay or not stay in terms of that.
2030 What would be the future of the obligation to serve in competitive market, as we have it now or do you have any...?
2031 MR. JANIGAN: Well, I believe the latest pronouncement of the CRTC is that effectively the obligation to serve and the ability to obtain subsidy are intertwined and that one cannot expect to be -- receive subsidy for high cost serving areas unless the obligation to serve follows the same.
2032 And I think it would be somewhat speculative to, you know, to go off on the idea of portable subsidies and whatever. I think that the CRTC has effectively set the course of action in relation to that at this point in time.
2033 And I think that's effectively where it sits for the purpose of this hearing.
2034 COMMISSIONER MENZIES: Okay.
2035 So you don't have any -- you're not making any suggestions in regard to SSI's view on the portability of subsidies?
2036 MR. JANIGAN: Well, portability of subsidies was actually our baby when it first came forward in the high cost serving areas back in the 90's.
2037 So, I don't want to pooh-pooh it in any way. But I think for the purpose of this hearing I think we have to accept what the Commission has determined recently in relation to this.
2038 COMMISSIONER MENZIES: That's exciting to hear.
2039 COMMISSIONER MENZIES: What do you think -- in your summary you're looking at balance of rates. It's your position that the rates here shouldn't, the PES rates here shouldn't go up, the increase should be denied and that.
2040 But in a general sense what do you think should be the appropriate balance between southern and northern rates?
2041 MR. JANIGAN: Well to some extent the same test is applicable.
2042 If we look back at reasonableness of rates, I mean effectively the company, we should have access to enough income from rates or in this case from the fund in order so that it can raise capital and meet the service obligations. I mean that's the same test, southern and northern.
2043 What's compelling in terms of looking at rate increases in the northern area is that the customers of NorthwesTel are faced with the kind of cost of living regime which would make most southern customers blanche so that effectively rate increases in the -- for northern customers may have a greater effect just based on the requirements for maintaining a household than they would in the southern region.
2044 So it's something important to keep in mind.
2045 But I don't think that it's primarily a circumstance where, you know, we're looking at a specific target. It's more a combination of factors.
2046 And one other compelling piece of evidence is of course the comparison across the board to rates that exist across Canada. And in our view it's, the $2 increase is too much.
2047 COMMISSIONER MENZIES: I think it's pretty established, at least anecdotally, that it's more expensive to live here.
2048 But do you have any data on disposable income levels, after tax income levels, after tax income followed by the sort of fundamental basket of costs in terms of that, that we could use to compare or that you have used to compare the cost of northern living versus the cost of, you know, average living in south of 60 or something like that?
2049 Because it's, just if you have it, it would be helpful. Because I think we -- it's generally accepted that having firm numbers to look at would be useful.
2050 MR. JANIGAN: I'm sure it exists. And it's probably in the Stats Can household expenditures reports.
2051 I will -- I'm probably not in a position to generate that in the next couple of days but I'll look and see if that material can be generated prior to October 17th.
2052 COMMISSIONER MENZIES: Thank you.
2053 It would be helpful to confirm the commonly held view or dispossess us of it one way or the other.
2054 One of the things that can happen, competition much as it appears to be desirable for at least all but one person who-- all but one group that's appeared so far is sometimes in hard scrabble areas it fails.
2055 And when that happens either the competitor just fails and dies or more frequently we see wounded competitors just purchased, just taken over by other competitors.
2056 Do you have any concerns about that? Do you have any suggestions regarding safeguards that might be considered?
2057 It'd be one thing to introduce, for instance it would be a heck of a thing to introduce competition and a year later have one side by the other.
2058 MR. JANIGAN: Yes, I do. I mean --
2059 COMMISSIONER MENZIES: Sometimes it's cheaper to buy the other guy than compete with him.
2060 MR. JANIGAN: Exactly.
2061 And there is such a thing, I think, as destructive competition where you effectively have the circumstances where the competition is not producing anything productive or efficient. It's effectively just running down the resources of the competitors.
2062 I think there is a concern here because I, you know, I have some difficulty in notwithstanding the pace of technological development, I have some difficulty in predicting competition outside of the urban areas of Whitehorse and Yellowknife.
2063 And if that's the case then the Commission has to be vigilant to make sure that these, the areas where competition doesn't exist are not simply orphans in relation to the ability of the company to service and maintain telecommunications in that area.
2064 So I guess it re-emphasizes the point that we made in our submission that things like service quality standards have to come with probably sticks and carrots.
2065 And we have to be -- to ensure that the resources of the company are not being shifted to those areas which are under competitive pressure and away from those areas that may need it where no competition exists.
2066 COMMISSIONER MENZIES: Okay.
2067 Thank you very much.
2068 Those were all my questions.
2069 THE CHAIRPERSON: Commissioner Molnar?
2070 COMMISSIONER MOLNAR: Thank you.
2071 I'll just follow up on your last statement about sticks and carrots.
2072 What would you propose?
2073 MR. JANIGAN: Well, I have some difficulty in remembering the regime that was in place under the second price cap. But I would think that it would be modeled to some extent under that with those provisions in mind that failure to meet over a period of time or some particular episode of service failure should meet with potential sanction either by way of diminishment of the subsidy or other mechanisms that would be financially -- would financially impact the company.
2074 I think as well Chairman Katz's observation that even under the service quality standard regime there was proviso for the company seeking to prevent the application of the incentive-based regime on the grounds of inability to predict or prepare for the kind of event that took place that started the service failures. So, I would think that it would be modeled under the second price cap regime.
2075 COMMISSIONER MOLNAR: Okay, thank you. Just one last question. You have proposed basically all rates remain frozen, or residential at least. But there have been identified and the amount of local competition costs varies depending on this scenario, but under a scenario where the local competition would be open, there is a requirement to recover startup and ongoing costs. So you would -- what are your thoughts on how that should occur, or how that would relate to any of the local rate increases proposed?
2076 MR. JANIGAN: Well, it seems to me on the last go-round of these costs in the last part of the '90s and early 2000s, effectively most of these costs were picked up in the rates for residential customers.
2077 In our view, that would be inappropriate. That, in fact, the costs of competition should be largely picked up by the competitors themselves and, to some extent, by the ILEC insofar as one must look to the benefits of competition and where competition may benefit. And, in our view, it would not be appropriate to visit all of these costs upon residential customers in the same way as they were in the Southern ILEC's.
2078 COMMISSIONER MOLNAR: Okay, thank you. Those are my questions.
2079 THE CHAIRPERSON: Commissioner Simpson, do you have any questions?
2080 COMMISSIONER SIMPSON: Thank you very much, I've got one question and it's apropos the last topic on the term you used of destructive competition as it relates to rural and remote areas.
2081 I take it your position is that in the rural areas of Whitehorse and Yellowknife that the local number portability and competition should prevail. But when you get the remoter areas the costs need to be very carefully analyzed because there may not, if you look into your crystal ball, actually be competition somewhere downstream given the size of the markets we're looking at.
2082 Do you believe -- you started with those two markets, first of all. My understanding is, on the record, that there are three other markets: Fort Nelson, Inuvik and Iqaluit that also have got capability of local number portability at the same time, well.
2083 Were you limiting your remarks to Yellowknife and Whitehorse solely because they were the big markets, or do you see those other three markets where there is no incremental or minimal incremental costs of providing LNP to be included in your sort of sphere of non-destructive competition?
2084 MR. JANIGAN: Well, I guess it's more of a circumstance that I think the competition has to walk before it can run. And there has to be some successful implant of competition in the NorthwesTel area to begin with, before I can predict with any degree of certainty that it's going flourish throughout.
2085 You know, the caveat of that, of course, is that, you know, I was very impressed with the SSi presentation today that -- in fact in relation to technological developments and their confidence in relation to being able to provide service throughout the region. But, you know, we've -- in terms of necessarily saddling the company competitors or residential customers with the costs of gearing up for competition I'm well aware of, you know, what occurred in the last fifteen years or so where, you know, fairly substantial amounts of money were spent to try to engender competition, and it flourished in an entirely different way than it was imagined. So, I think the counsel of caution is probably to look first to the two areas where it's most likely to be successful.
2086 THE CHAIRPERSON: Okay, thank you.
2087 I think that concludes our discussions with yourself, Mr. Janigan. Thank you very much.
2088 MR. JANIGAN: Thank you.
2089 THE CHAIRPERSON: Based on the time, it is now six-twenty-nine -- six-thirty. We're running, obviously, quite a bit behind. The last group in this first phase is TELUS. I will leave it to them to decide if they want to go on now, or if they would like to be the first ones on in the morning, because I've got a copy of their handout. I'm not sure whether it has been distributed or not, and so from a fairness perspective I leave it to you, Mr. Schmidt and Mr. --
2090 MR. REIRSON: Reirson.
2091 THE CHAIRPERSON: -- Reirson, to decide whether you want to go on now and complete Phase I or not.
2092 MR. SCHMIDT: Yes, Mr. Chairman, we are happy to do it if it's not too much of an imposition on your energy levels and your patience.
2093 THE CHAIRPERSON: Let's go on.
2094 MR. SCHMIDT: Okay.
2095 THE SECRETARY: You may now proceed with your twenty minute presentation.
2096 MR. SCHMIDT: Thank you very much, Madam Secretaire.
2097 Good evening. I guess when I wrote this last week I started thinking I was going to say Good Morning and then at some point today I thought I would say Good Afternoon. And I'm finally saying Good Evening.
2098 So, Good Evening, Mr. Chairman, and Good Evening, Commissioners. Good Evening, Commission Staff. My name is Steven Schmidt, I'm Chief Regulatory Legal Counsel with TELUS Communications. Appearing with me today is my colleague Hal Reirson, Senior Regulatory Policy Advisor, also with TELUS Communications.
2099 We thank you for the opportunity to appear before you today at this hearing in order to add our voice and our perspective to the important matters under consideration here, and we thank you for your patience and stamina on the home stretch here. And I hope to come in under twenty minutes, in fact.
2100 At the outset I think it's helpful to explain the nature of TELUS' interests in this proceeding. This will provide some context and rationale for the four submissions we want to make in the course of these comments.
2101 Our first interest flows from the fact that TELUS exchanges a very high volume of voice and data traffic with NorthwesTel. We are the largest non-affiliated interconnector with NorthwesTel.
2102 The practical effect of this fact is that the interconnection rates charged by NorthwesTel disproportionately impact TELUS customers living in Alberta and British Columbia in making calls to the community of interest here in Yukon, Northwest Territories and Nunavut to a lesser extent.
2103 The interest of TELUS customers in being served as reasonably as possible, of course, aligns entirely with the Commission's similar interest in ensuring that customers across the country and not simply in this Territory are served as reliably and as affordably as possible.
2104 In the course of these comments we will be asking you to revisit and reduce the CAT rate for NorthwesTel to bring it into line with the rating norms that apply in other parts of Canada.
2105 Our second interest in this proceeding flows from the fact that TELUS is the largest contributor to the National Contribution Fund that is not affiliated with NorthwesTel. We, therefore, have a very acute interest in ensuring that proposed draw-downs from the National Contribution Fund are (a) justified, and (b) sort of reasonable as to quantum.
2106 As a result, any strategies by NorthwesTel to fund its ILEC operations, other than via approved rates will, if approved by the commission, result in an increase in NorthwesTel's subsidy requirement, and funding drawn from the NCF is at bottom very significantly drawn from TELUS customers in Alberta and BC. So we ask you to keep that fact foremost in your minds.
2107 We will be asking you in the course of these comments to reject NorthwesTel's proposed SIP II. The SIP that aims at implementing certain network upgrades and enhanced calling features, and we're asking you to reject this on the basis that such costs ought rightly to be recovered from the proceeds of previously approved rates.
2108 The underpinning principle of TELUS' submissions in this proceeding is quite simple, and it is that NorthwesTel should be subject to the same regulatory framework as all the other incumbents, big and small, across the country. For example, there is no principle basis exempting the Northern operations of a $17 billion per year communications conglomerate, BCE, from local competition when even the smallest incumbents in the marketplace, these ILEC's are subject to the possibility of local competition.
2109 There was likewise no principle basis for allowing BCE to avoid the obligation to provide cost-based interconnection in the Yukon and the Northwest Territories when all other incumbents across the country are subject to an obligation to provide cost-based traffic determinations -- cost-based traffic terminations. This includes the tiny SILECs, this includes BCE's operations in the very Far North of Quebec (served by Télébec), and of course this includes TELUS serving in some of the very same remote and challenging environments in northern B.C., in northern Alberta, that Télébec serves in.
2110 MR. REIRSON: NorthwesTel's Carrier Access Tariff, or CAT, should reflect cost-based interconnection costs, and nothing more. The CAT is a charge levied on carriers like TELUS for the termination of voice and data traffic in NorthwesTel's territory.
2111 NorthwesTel's CAT rate is notable and notorious in several respects.
2112 It represents the highest traffic termination rate in the country, standing at approximately 4 cents per minute. This is 14 times the traffic termination rate charged by TELUS in the same northern B.C. setting in which NorthwesTel operates.
2113 NorthwesTel's CAT rate is also notable for the fact that it is not strictly a cost-based rate for traffic termination but instead contains a variety of other costs extraneous to interconnection, such as helping pay for residential telephone costs.
2114 For example, the costs for satellite toll connect links for residential service are recovered from interconnectors like TELUS, notwithstanding that the Commission previously determined that these satellite links are an extension of the local access network.
2115 We urge the Commission to put in place a cost-based rate for traffic termination that is exclusively confined to traffic termination. We say this for four reasons.
2116 First, this will bring rating practices for NorthwesTel into alignment with the practices for all of the rest of the country, including the SILEC territories. Every other incumbent in the country, save for BCE's Far Northern operations, is subject to an obligation to provide cost-based interconnection.
2117 Second, by discontinuing the funding of universal service obligations via surcharges applied to interconnection, the Commission will be bringing NorthwesTel into alignment with the universal service funding paradigm that applies in the rest of Canada, where, since 2000, the Commission has funded universal service cost shortfalls via a national contribution fund. The current arrangement calls on TELUS' customers to disproportionately fund universal service cost shortfalls in Yukon, the Northwest Territories and Nunavut, contrary to the Commission's more even-handed policy for the rest of Canada.
2118 Third, transitioning to an exclusively cost-based interconnection rate, without extraneous subsidy elements, will respond to Canada's commitments under the Reference Paper -- part of the Canadian government's participation in the General Agreement on Trade in Services -- in which Canada agreed, inter alia, that interconnection be provided at cost-based rates. The Reference Paper also provides that universal service obligations will be implemented in a competitively neutral manner.
2119 The current CAT offends both of these principles. It is not cost-based given that it contains costs for services extraneous to interconnection, such as residential service, and it does not implement universal service in a competitively neutral manner because one class of carrier, an interconnecting IXC like TELUS, disproportionately bears the cost of funding universal service in NorthwesTel's territory.
2120 We therefore urge the Commission to put in place a cost-based CAT. We estimate this rate to be approximately 0.8 cents per minute.
2121 MR. SCHMIDT: We're halfway there now. The second submission of four submissions we'd like to make to you this evening concerns transport rates.
2122 The termination of traffic in NorthwesTel's territory involves the acquisition of and the payment for two distinct services, the CAT or Carrier Access Tariff rate on the one hand and transport charges on the other hand. So terminating traffic in their territory involves the payment of significant transport charges to carry the traffic in question from points of interconnection in British Columbia, Alberta and Quebec into NorthwesTel's territory.
2123 NorthwesTel has adopted the practice in recent years of bypassing both the tariff provisions in the Act and the agreement approval provisions in the Act by entering into transport agreements with carriers and terming these agreements "negotiated" or "commercial" agreements.
2124 This is evidenced, for example, on August 1st of this year when NorthwesTel filed four agreements with you that had never been previously filed for approval under section 29 and contained rates that ought properly to have been filed for approval under section 25 of the Act as well, and these involved agreements with their affiliate Bell Canada, with Rogers, SaskTel and Primus.
2125 So we say that the Act recognizes no category or exemption, you know, for the term "negotiated" or "commercial," they don't sound in the Act. If you don't have a forbearance order, you have to tariff the service.
2126 NorthwesTel has frankly acknowledged in response to an interrogatory we put to them that they have no -- they don't benefit from any forbearance order for the transport services in question. These transport services therefore properly form part of the cap, properly form part of this proceeding, and they must be tariffed.
2127 So given the above, our second request is that the Commission direct NorthwesTel to file tariffs for the transport services at issue for approval, that fully, faithfully and publicly reflect the rates, terms and conditions in those "commercial" or "negotiated" transport agreements that they've entered into with those carriers and only recently filed with you on August 1.
2128 Such a direction from the Commission will ensure that NorthwesTel is responsive to its obligations under the Act and will ensure that all carriers in Canada have non-discriminatory and public access to the arrangements that NorthwesTel has entered into with other carriers, particularly with its affiliate Bell Canada.
2129 MR. REIRSON: In this proceeding, NorthwesTel has proposed a new service improvement plan, or SIP, to provide enhanced calling features in 29 communities and to replace an obsolete radio system in northern B.C.
2130 TELUS notes that these proposed initiatives are strikingly similar to initiatives proposed by NorthwesTel in 2006 when it proposed a SIP that included the replacement of microwave radio systems and obsolete switching systems.
2131 The SIP proposed in 2006 was denied by the Commission in Decision 2007 5 where it found that:
"NorthwesTel's proposed new SIP is a modernization/replacement plan, which should be part of the capital plan."
2132 In other words, the Commission found that NorthwesTel should be recovering the costs in question from its approved rates, not over and above its approved rates via a supplemental funding request.
2133 As it did in 2006, the Commission should deny NorthwesTel's new proposed SIP.
2134 MR. SCHMIDT: The fourth area we'd like to make submissions on this evening concerns the introduction of local competition.
2135 Now, NorthwesTel is in its third decade of appearing before you in proceedings and saying that you absolutely shouldn't introduce local competition in the North. However, in TELUS' view, there is no compelling rationale to exempt BCE's northern operations from the requirement to implement facilities-based competition and local number portability when such frameworks have been introduced, in some cases with variations, for all incumbents across the country, no matter how big or no matter how small.
2136 So in our view, NorthwesTel should be required to file an implementation plan with the Commission within 30 days of receiving a formal signed expression of interest from a LEC or carrier requesting to use NorthwesTel's competitor services.
2137 NorthwesTel holds up the high cost of serving in the region or the territory as a reason for you to obstruct local competition. We say, on the contrary, these high costs place you under a practical or policy compulsion to introduce competition. It is the singular way of disciplining incumbents and it's going to work for you far better than all the aggregation of X factors and tariffs and everything else under the world.
2138 So it's expensive here, absolutely, and one sound response to that would be the introduction of local competition.
2139 I have a couple of wrap-up comments to conclude and I will be referring briefly, in a footnote sort of way, to Attachment 2 that PIAC gave you just before us, the Consolidated Financials of NorthwesTel. We would like to make one quick comment on that.
2140 So in conclusion, our basic principled position is that the framework for NorthwesTel should be brought into alignment with the framework that applies to all other incumbents, big and small, throughout the country.
2141 There is no principled reason to allow BCE's northern operations to enjoy the benefits of a modern regulatory framework, like increased pricing flexibility, without the burdens that also attend such a framework: the obligation to provide interconnection at cost-based rates, local competition, et cetera.
2142 We urge you, in short, to do four principal things here:
2143 1. To establish a cost-based rate for traffic termination, a CAT, that is exclusively confined to traffic termination. We estimate that this rate will be in the neighbourhood of approximately 0.8 of a cent;
2144 2. To direct NorthwesTel to file tariffs for approval that fully, faithfully and publicly reflect the rates, terms and conditions of those "commercial" or "negotiated" transport arrangements it has entered into with various carriers;
2145 3. We ask you to deny NorthwesTel's so-called SIP 2, radio upgrade and enhanced feature SIP; and
2146 4. We ask that you introduce local competition in the North, permit the possibility of local competition coming to the North.
2147 Now, as a final matter, I would like to refer to the -- and then I'm done -- Attachment 2 that PIAC gave you, the Selected Financial Consolidated Highlights of NorthwesTel's financials.
2148 This morning, for whatever reason, NorthwesTel serially put into issue TELUS' capital intensity and made statements about what our capital intensity was and portrayed us, it would seem as, you know, relative laggards in this manner. So I assume for some strategic benefit of suggesting that they are doing okay.
2149 So I think it's worth quickly correcting the record in that regard, since there has been views put on the record by NorthwesTel about what our capital intensity is you might want to hear it from TELUS, too.
2150 So if you look at Row 10 of Attachment 2 where it shows 2010 back through 2006, NorthwesTel's CAPEX intensity, I'm going to allow you pencil in what our was for the relevant year.
2151 So 2010 it was 26 percent for our wireline segment, higher than NorthwesTel's; 2009 also 26 percent, higher than NorthwesTel's; 2008, 25 percent, again higher; 2007, 25 percent again; 2006, 24 percent cutbacks intensity.
2152 During the 10 year window running from 2001 our wireline capital intensity is sitting at 23.7 percent for a 10-year period. That's basically the highest capital intensity you will see for any telco, any of our peers in North America, full stop.
2153 And what I think is relevant to say, and to wrap up on, we weren't investigating under regulatory compulsion here, we were, frankly, investing under market compulsion to catch up to Shaw, to overtake Shaw; to catch up to Rogers, to overtake Rogers. That's a good dream. So I mean it's relevant. It's not just regulation that's going to get you there, you really need to look at the role of increase -- you know, unleashing additional competition in the north and how that will sort of colour and condition the level of CAPEX intensity in NorthwesTel as well.
2154 Thank you very much.
2155 THE CHAIRPERSON: Thank you very much, gentlemen.
2156 I will ask Commissioner Duncan to lead the questioning.
2157 COMMISSIONER DUNCAN: Thank you.
2158 I know you have covered a lot here in your comments and I know in your submissions you covered a lot of areas, so I'm just going to go through it. Not all of them you mentioned today.
2159 But you are going further than what TELUS proposed to do with respect to the rate increase on the residential rates in Band H, if I understand correctly; you are proposing a further $2.00 increase January 1, 2013 and another one January 1, 2014 and I'm just wondering -- I accept your point that you are the largest non-NorthwesTel affiliated contributor to the National Contribution Fund so I can understand why you want to see that reduced, if it can be.
2160 But I'm wondering if you can describe the extent to which affordability was taken into consideration when you made that recommendation?
2161 MR. REIRSON: We were primarily concerned with moving rates closer to cost and we recognize that over the past price cap period rates have also been frozen, so it was certainly reasonable to expect a rate increase or a series of rate increases for those customers.
2162 COMMISSIONER DUNCAN: So it would actually result in another $6.00, a rate of $37.33 after three years.
2163 MR. SCHMIDT: Yes. I mean, in recognition of the far higher costs in the north we though there was some room for tracking costs while remaining close perhaps to some of the highest approved rates for other parts of the country.
2164 COMMISSIONER DUNCAN: So because you didn't mention it today in your remarks, does that mean you feel a little less strongly about it?
2165 MR. SCHMIDT: No, we just decided to focus our efforts and conversations with you and we didn't realize we would be speaking in the middle of the night, but now it looks quite visionary.
2166 So we haven't abandoned any of our proposal, but we thought we would have a more focussed conversation with you.
2167 COMMISSIONER DUNCAN: Okay. The other thing that I wanted to next talk about was you are supporting, as you indicate here today, the NorthwesTel proposal to include the cost of the satellite toll connect links related to residential service in remote communities as a cost of the local service and eligible for funding from the National Contribution Fund.
2168 So I'm wondering, first of all, does TELUS have any Band H communities?
2169 MR. REIRSON: Our banding arrangement is a bit different. Our stops at Band G and Band G in TELUS' territory are communities that do not have year-round road access or they have marine access, like if they are on an island, somewhat similar, probably not quite as remote as Band H is for NorthwesTel. I think that's probably how Band H came into being.
2170 COMMISSIONER DUNCAN: What about size would you say of yours as compared to the communities they have that are --
2171 MR. REIRSON: We have some very small communities, especially some of the small island communities and First Nation communities. I would hazard a guess that some of them are even smaller than NorthwesTel's communities. So size-wise I think they are in that same range.
2172 COMMISSIONER DUNCAN: So do you use a similar satellite delivery method to service those communities?
2173 MR. REIRSON: No. As far as I know we do not use satellite to serve any communities, but some are served by radio and microwave. So they are still high-cost links, but not as high-cost as a satellite connecting link.
2174 COMMISSIONER DUNCAN: So when you talk about those costs, then, because I know that one of your suggestions is that the terrestrial toll connect link should also be passed on or included as part of the PES costs.
2175 Is that what you do? Do you include that and receive National Contribution Funding for those communities?
2176 MR. REIRSON: I think the closest analogy for us would be the host remote links that connect remote switches back to host switches and those links are included in the cost of local service.
2177 We don't have a -- because we don't have a satellite toll connect link in the same technology, that would be the closest comparison. So those costs would flow through for residential customers to be recovered as part of the National Contribution Fund.
2178 COMMISSIONER DUNCAN: Appreciate, then, that you don't have the satellite similarity, but you also did recommend that the cost of their terrestrial toll connect links be considered part of the residential PES. Is that the same type of delivery?
2179 MR. REIRSON: No, it's not the same.
2180 COMMISSIONER DUNCAN: It's different again?
2181 MR. REIRSON: We didn't say that it should be included in the res satellite toll connect links. We said that should be recovered through an adjustment to either the business services basket or the other cap services basket.
2182 So there's two components. There's two additional components that we recommended taking out of the cap, one is the business portion of the satellite toll connect links, which I believe is about $3.9 million per year, and then the terrestrial connect link should also be taken out.
2183 So that really pears down the CAT, going from 4.15 cents per minute all the way down to about .8 cents per minute and the reason we couldn't calculate that precisely was being of the amount of information filed in confidence surrounding those costs.
2184 COMMISSIONER DUNCAN: I'm sorry, that's my mistake, I did realize that you were making that distinction.
2185 And I guess one of my biggest concerns is with the impact on the consumer.
2186 So those last two items, the impact on business and the impact on the reduction of or the removal of the terrestrial toll connect links would not directly impact consumers.
2187 MR. REIRSON: Would not -- well, not residential consumers.
2188 COMMISSIONER DUNCAN: Residential consumers.
2189 MR. REIRSON: It would affect business services and we recognized that and we said if it was deemed to be too large for a one-time transfer of those costs that it could be phased in in order to spread that transfer over a couple of years.
2190 COMMISSIONER DUNCAN: In a similar way, I guess, as you are proposing the two dollars phased in over three years -- not phased in over three years, but $2.00 each year for three years.
2191 MR. REIRSON: Correct.
2192 COMMISSIONER DUNCAN: Yes, okay.
2193 So I'm wondering if the situation in NorthwesTel to your knowledge is unique. Like is there any other ILEC or SILEC in the very same situation as NorthwesTel with regards to the delivery of these services?
2194 MR. REIRSON: It's possible that Telebec uses satellite, I'm not sure, but they have some communities that are up at the northern tip of Quebec that could also be reached by satellite.
2195 COMMISSIONER DUNCAN: I guess this leads me to my last question on this aspect of it then.
2196 I'm wondering if NorthwesTel is sufficiently unique that we can pick this up, that we can address this in this hearing or whether this would better dealt with in a policy proceeding, because I understand that there are applications from Bell Aliant and one other, I can't remember, ILEC that has made similar requests.
2197 So is it your view that we could make this decision here or is it a policy matter?
2198 MR. REIRSON: I think this could be made here.
2199 Are you referring to examination of residential Phase 2 costs?
2200 COMMISSIONER DUNCAN: I'm referring to what your real objective is is to reduce the CAT rate to what you consider to be cost.
2201 MR. REIRSON: Correct. And that's going to flow right through to consumers. They will see long distance rates drop dramatically. So it's certainly going to be off.
2202 The increase to their residential phone rate will certainly be offset by reductions in long distance rates as a result of this change.
2203 COMMISSIONER DUNCAN: Of course, and I guess the concern that we have there is that the long distance rates are not regulated so we would have no assurance of that.
2204 MR. REIRSON: Well, if a large portion of the costs that go into the make-up of a long distance rate are being taken away, I would think that over time those rates would pick up that reduction.
2205 COMMISSIONER DUNCAN: So would you then, because you are looking for a reduction in the CAT rate that you pay, would you be proposing to pass that rate onto your consumers?
2206 MR. REIRSON: A lot of those savings we are already passing onto our consumers because our rates are provided, regardless of where the traffic terminates. So this is just an extra cost for us that we would like to --
2207 COMMISSIONER DUNCAN: Absorb.
2208 MR. REIRSON: -- absorb.
2209 COMMISSIONER DUNCAN: Yes.
2210 Just look at this other -- the other thing that if you don't mind helping me with is, in your submission on September the 2nd, if you could look at that?
2211 I just thought you were -- the statement that you made in paragraph 11 seemed to be contradictory and I just thought perhaps I wasn't understanding what you were saying there, if you could explain it.
2212 So I'll read it, if you like:
"The recognition that toll connect links are an extension of the local network results in NorthwesTel's blended CAT rate being out of step with the Commission's general framework for the recovery of the cost of providing access to basic service in high-cost serving areas.
Recovering the cost of its obligation to serve from interconnecting IECs, inter-exchange carriers, by the blended CAT is the very approach that Decision 2007-45 was meant to overcome. NorthwesTel should be recovering a portion of its costs not currently recoverable through rates from its obligation to serve from the National Contribution Fund." (As read)
2213 So I'm just -- if you can just simplify that a bit for me?
2214 MR. SCHMIDT: It's written with the clarity that only a lawyer could have provided in drafting it.
2215 MR. SCHMIDT: What we were trying to say, and clearly not succeeding, was prior to 2000 to the establishment of your modern contribution regime, which is basically a small revenue tax that you apply in all telecommunications revenues in the economy to support universal service obligations -- prior to that you really kept local services cheap by placing surcharges uniquely on inter-exchange carriers.
2216 You know, so you got "contributions" from IXCs and it eventually became ruinous for them and unsustainable, et cetera, so you transform to a more balanced regime where you're recovering the money from all PSPs in the economy, period.
2217 So what we're really saying when we say, like the blended CAT is out of step with the Commission's general framework for recovering universal service costs, we're saying it's this old school 1990s approach of recovering universal service costs from IXCs, inter-exchange carriers instead of recovering it more generally across the entire economy more generally across all classes of carriers.
2218 So we're saying recovering it from the Universal Service Fund -- from the NCF is just more -- comports more with your modern approach from after 2000.
2219 I don't know if I made it worse or more clear.
2220 COMMISSIONER DUNCAN: No. I think that helps. Yeah, thank you.
2221 I think those are all my questions, Mr. Chairman. Thank you.
2222 THE CHAIRPERSON: Thank you.
2223 Any other questions...?
2224 I have got one and only because somehow I have got a quantitative aspect to my logic.
2225 The argument that you make on the carrier access tariff reflecting costs, how much money are we talking about here? Like, what are you paying today? Maybe this is confidential and you want to talk confidentially.
2226 What are you paying today and if the rates that you would like to see come into force, what will you be paying, because I have no idea of the quantum of this.
2227 MR. SCHMIDT: Okay. Yeah, I understand.
2228 So we can file something in confidence by, I would suggest, in time for Reply as opposed to tomorrow morning because I may not be able to get that information for tomorrow morning. But we would be happy to do it.
2229 We don't have a view in terms of the total market size in terms of what is being charged but we can talk about our piece and what it means.
2230 THE CHAIRPERSON: Yeah.
2231 MR. SCHMIDT: Okay.
2232 THE CHAIRPERSON: I just want to know if it's bigger than a breadbox.
2233 MR. SCHMIDT: It's a large -- there is a lot of bread there.
2234 THE CHAIRPERSON: Thank you.
2235 MR. SCHMIDT: Thank you.
2236 THE CHAIRPERSON: That concludes our questioning of TELUS, and it concludes Phase I.
2237 So I want to thank all the parties for their patience and diligence and hanging around this late which hasn't been our norm.
2238 And we're done, Madam Secretary?
2239 THE SECRETARY: We are done. It concludes Phase I. We'll start tomorrow with Phase II.
2240 Would you like me to read into the record the Order of Appearances for tomorrow?
2241 THE CHAIRPERSON: Do they not already have it?
2242 THE SECRETARY: Yes, they do.
2243 THE CHAIRPERSON: That's fine.
2244 THE SECRETARY: There is copies in the back of the room. Thank you.
2245 THE CHAIRPERSON: Perfect, thank you.
2246 We're adjourned.
--- Whereupon the hearing adjourned at 1905, to resume on Wednesday, October 5, 2011 at 0900
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