ARCHIVED - Transcript, Hearing 24 November 2014
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Volume 1, 24 November 2014
TRANSCRIPTION OF PROCEEDINGS BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION
Review of wholesale service and associated policies
140 Promenade du Portage
24 November 2014
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 wholesale service and associated policies
Eric BowlesLegal Counsel
Lyne RenaudHearing Manager
140 Promenade du Portage
24 November 2014
- iv -
TABLE OF CONTENTS
PAGE / PARA
1. The Competition Bureau9 / 54
2. Dr. Reza Rajabiun, Research Fellow, and Dr. Catherine Middleton, Canada Research Chair, Ted Rogers School of Information Technology Management, Ryerson University113 / 669
3. Vaxination Informatique154 / 856
4. Cybera227 / 1302
- v -
PAGE / PARA
Undertaking42 / 212
Undertaking59 / 327
--- Upon commencing on Monday, November 24, 2014 at 0902
1 LE PRÉSIDENT : À l'ordre, s'il vous plaît.
2 Alors, bonjour et bienvenue à cette audience publique qui portera sur les services de télécommunications filaires de gros au Canada.
3 Ceci est la dernière de trois audiences publiques d'envergure tenues cet automne par le Conseil. La première, tenue au début septembre, portait sur l'avenir de la télévision au Canada. L'autre, tenue peu de temps après, s'est penchée sur le marché canadien des services sans fil de gros. Le fil conducteur de ces trois instances est le suivant : le choix et la concurrence durable.
4 The Commission is reviewing its frameworks with an eye firmly fixed on the future. We are seeking to ensure that Canadians are able to benefit from a world-class communication system for years to come, one in which they have access to compelling content as well as the choice of innovative wireless services and Internet services wherever they live in Canada.
5 So, what are wholesale telecommunications services? In Canada, large cable companies and incumbent telephone companies must provide certain telecommunications services on a wholesale basis to their competitors. These services are offered under rates, terms and conditions that are approved by the CRTC.
6 We require that the companies make certain parts of their networks available to competitors to encourage greater competition in both the residential and business marketplaces. This benefits Canadians through a greater choice of telecommunications services, more product features and affordable prices.
7 Certain wholesale services also provide important social benefits to Canadians, such as 9-1-1 emergency services and message relay services.
8 Over the years, the CRTC has either mandated or deregulated a number of wholesale telecommunications services. At this hearing, we will review the services that ought to be regulated or not, as well as whether currently unregulated services ought to be regulated, as some parties have asked. In addition, we will examine newer services where there is currently no obligation for companies to provide access to them.
9 Nous tenons la présente audience afin de cerner les mesures appropriées à prendre dans le marché du gros afin de favoriser un plus grand choix, des investissements et une concurrence durable.
10 Certaines entreprises, par exemple, investissent dans leurs réseaux de fibre optique afin que ceux-ci soient de plus en plus près des domiciles canadiens. Elles peuvent ainsi proposer un accès Internet plus rapide et des services de télévision de pointe.
11 We will consider the current state of deployment of fibre-optic facilities, the economic and social impacts of this technology and the required network investments. This will help us decide, for instance, whether independent Internet service providers should have mandated access to these facilities.
12 We will also look at whether our current policies strike an appropriate balance between sustainable competition and sufficient incentives to invest in networks by both the incumbents and competitors.
13 Ce seront là des discussions importantes, car les Canadiens utilisent de plus en plus Internet pour participer à l'économie numérique. Plus de 65 pour cent des Canadiens sont abonnés à des services Internet d'au moins 5 mégabits par seconde, et entre 2011 et 2013, la quantité de données téléchargées a augmenté de 150 pour cent.
14 Donc, lors de cette audience, le panel vise à axer ses questions sur trois grands thèmes :
15 - premièrement, si des modifications devraient être apportées au cadre réglementaire du CRTC pour les services de télécommunications de gros;
16 - secondly, what considerations the Commission should take into account when making its decision whether or not to:
17 (a) require the provision of wholesale telecommunications services, including fibre-to-the-premises;
18 (b) step back from regulating services; or
19 (c) re-assert its jurisdiction to regulate services that have been deregulated; and
20 - thirdly and lastly, whether changes should be made to the CRTC's approach for setting wholesale rates, the underlying principles or the associated processes in order to improve the timeliness, accuracy or consistency of its rate-setting exercise.
21 Before we begin, I would like to thank everyone who has participated in this process so far, either by submitting comments or by appearing before us. We would not be able to fulfill our legislative responsibilities without your views and participation.
22 All comments will be taken into consideration as we make our decisions.
23 Finalement, je voudrais faire quelques présentations.
24 Le panel se compose des personnes suivantes :
25 - M. Peter Menzies, vice-président des Télécommunications;
26 - M. Tom Pentefountas, vice-président de la Radiodiffusion;
27 - Mme Candice Molnar, conseillère régionale du Manitoba et de la Saskatchewan;
28 - M. Raj Shoan, conseiller pour la région de l'Ontario; et
29 - moi-même, Jean-Pierre Blais, président du CRTC, et je présiderai d'ailleurs cette audience.
30 L'équipe du Conseil qui nous assiste comprend :
31 - Lyne Renaud et Philippe Kent, cogestionnaires de l'audience;
32 - Eric Bowles et Valérie Dionne, conseiller et conseillère juridiques; et
33 - Lynda Roy, secrétaire de l'audience.
34 J'invite maintenant la secrétaire de l'audience à expliquer la procédure que nous suivrons.
35 Madame la Secrétaire.
36 LA SECRÉTAIRE : Merci, Monsieur le Président, et bonjour à tous.
37 Before we start I would like to go over a few housekeeping matters to ensure the proper conduct of the hearing.
38 When you are in the hearing room, we would ask that you please turn off your smartphones as they cause interference on the internal communication systems used by our translators.
39 You can obtain an interpretation receiver with the commissionaire at the front desk. French interpretation is on channel 2 and English on channel 1.
40 To facilitate the work of our interpreters, we would like to remind participants that during their oral presentation they should provide for a reasonable delay for interpretation while respecting their allocated presentation time.
41 Afin de faciliter le travail des interprètes, nous désirons rappeler aux participants d'allouer un délai raisonnable lors de leur présentation à vive voix, tout en respectant le temps alloué à cette fin.
42 Veuillez noter que les documents seront disponibles sur Twitter sur le compte du Conseil à CRTCaudiences (audiences au pluriel), en utilisant le mot-clic #CRTCServicesFilaires (services et filaires au pluriel)
43 Please note that the Commission will also be tweeting the documents during the hearing at CRTChearings using the hashtag #CRTCWireline.
44 Also note that CPAC will be webcasting the entire hearing. A link to CPAC's website is available from the CRTC home page website.
45 Veuillez noter que CPAC diffusera également sur le Web la totalité de l'audience. Un hyperlien vous permettant d'accéder à la webdiffusion est disponible sur la page d'accueil du site Web du Conseil.
46 Just a reminder that pursuant to section 41 of the Rules of Practice and Procedure, only previously submitted evidence may be referred to at the hearing. If you wish to introduce new evidence as an exception to this rule, you must ask permission of the Panel before you do so.
47 As noted in the Organization and Conduct letter dated 14 October, there will be a Phase II for replies in reverse order of appearances. In this phase, parties will have 10 minutes to make their oral reply to interventions heard in Phase I.
48 As in Phase I, Panel members and legal counsel of the Commission may ask further questions of clarification.
49 Parties are reminded that their participation in Phase II is not mandatory. Please advise the Hearing Secretary by the end of Phase I of your intention to appear or not appear in the Reply Phase.
50 Also set out in the Commission's Organization and Conduct letter, if parties undertake to file information with the Commission in response to questioning by the panel, these undertakings must be filed by 12 December unless otherwise determined by the Panel at the time the undertaking is made.
51 Please note that the content of undertakings will not be confirmed on the record through the transcript of the hearing. If necessary, parties may speak with Commission legal counsel at a break following their presentation to confirm such content.
52 And now, Mr. Chairman, we will begin with the presentation by The Competition Bureau.
53 Please introduce yourselves for the record. You have 20 minutes for your presentation.
54 MR. HUGHES: Good morning and thank you, Mr. Chairman and all of the Commissioners, for inviting the Competition Bureau to appear during this oral hearing.
55 My name is Patrick Hughes and I am a Senior Economist at the Bureau.
56 Accompanying me here today is Mr. Derek Leschinsky, our counsel from Competition Bureau Legal Services.
57 We are pleased to participate in this hearing as part of the Bureau's competition advocacy mandate. Sections 125 and 126 of the Competition Act grant the Commissioner of Competition the authority to appear before federal and provincial boards that supervise regulated industries in order to advocate for greater competition. The purpose of the Competition Act is to maintain and encourage competition in Canada in order to, among other things, promote the efficiency and adaptability of the Canadian economy and provide consumers with competitive prices and product choices.
58 In light of its mandate and the purpose of the Competition Act, the Bureau advocates that regulators and policymakers regulate only where necessary and that they rely on competition and market forces as much as possible to achieve desired policy outcomes.
59 Where regulators consider market forces insufficient to achieve these objectives, the Bureau provides advice to regulators to assist them in implementing policies that achieve their objectives in a minimally intrusive way.
60 We appear before you today to make two recommendations:
61 First, that the Commission not regulate wholesale access services such as fibre-to-the-premise facilities (FTTP) until these services have been deployed long enough for the Commission to have sufficient information to determine whether FTTP constitutes a separate relevant product market from fibre-based access and transport services such as Ethernet; and
62 Second, the Commission not mandate access to unbundled local loops given a lack of evidence of vertical foreclosure in this proceeding.
63 The Commissioner of Competition does not at this time have recommendations in respect of fibre-based access and transport services such as Ethernet but will make certain comments to assist the Commission's analysis.
64 The Commissioner of Competition supports the Commission's decision to migrate to a market power standard in its definition of an essential service. Generally speaking, the information on the public record indicates that the Commission's wholesale services framework has been successful in facilitating the emergence of vigorous competition between two facilities-based competitors in most areas of Canada.
65 Let me turn to the matter before the Commission.
66 In its letter for the organization and conduct of this hearing the Commission notes that it intends to focus questioning on the wholesale services framework, specific wholesale services and approaches to wholesale rate setting. In this presentation the Bureau will focus on specific wholesale services, namely wholesale high-speed access services including FTTP, unbundled local loops and fibre-based access and transport services such as Ethernet.
67 The Chairman of the Commission noted the importance that internet services will have in shaping the future of business, health, education and other areas of the Canadian economy in his November 6th speech. The Commissioner of Competition agrees. A new wholesale service such as FTTP has the potential to affect both the availability of faster internet services and internet protocol television services and the future of e-business in the digital economy.
68 The Commissioner of Competition recommends against the regulation of FTTP at this time. The Commissioner of Competition makes this recommendation for two related reasons:
69 First, the Commission should not regulate without ascertaining whether FTTP constitutes a separate relevant product market. If FTTP is in the same relevant product market as existing high-speed services, such existing high-speed services will provide a competitive constraint on FTTP.
70 In order to define the relevant product market, evidence on consumer switching behaviour such as the amount of switching, information on functional interchangeability and/or documentary evidence relating to business or marketing plans produced by FTTP providers in the ordinary course of business is required. Consumers are switching to FTTP. If such evidence also indicates that a sufficient number of consumers would be willing to switch from FTTP to existing high-speed services in response to an attempt by FTTP providers to increase the price by a small but significant amount, then the Commission should conclude that existing high-speed services are in the same relevant market as FTTP.
71 Evidence relating to the willingness of consumers of existing services to switch to FTTP in response to a small but significant price increase does not inform as to whether existing high-speed services are an effective constraint on the exercise of market power by FTTP providers. Rather, it is informative as to whether FTTP is an effective constraint on the exercise of market power by providers of existing services.
72 In the Commissioner of Competition's view, there is currently not enough information available about consumer switching in this proceeding to accurately determine whether FTTP constitutes a separate relevant product market. By implication, the Commissioner of Competition does not believe that there is enough information in this proceeding to assess the significance of the availability of existing high speed services as a competitive constraint.
73 When a new product such as FTTP is being rolled out to consumers, evidence related to the willingness of consumers of FTTP to switch to existing high-speed services may be incomplete. It may take time for a sufficient number of consumers to migrate to FTTP. If the Commission defines the relevant market based on evidence available in this proceeding, this may result in an incorrect market definition. In other words, there is a risk that the Commission may adopt unnecessary regulation.
74 Second, in the Commissioner of Competition's view, unnecessary regulation would impose risks to the incentives to invest in these new facilities and introduce them into new areas of Canada. The consensus view among expert reports filed in this proceeding, that the rollout of FTTP is challenging and faces considerable uncertainty, is consistent with the Commissioner's view.
75 As a consequence of unnecessary regulation, there could be a significant loss of economic efficiency since access to a new service is effectively being denied to consumers in those regions. Even an unnecessary slowing of the rate at which FTTP services are introduced could have a meaningful adverse impact on the Canadian economy overall. Thus, deferring the decision whether to regulate FTTP is consistent with the objectives of the Telecommunications Act and the Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives.
76 The Commissioner of Competition instead recommends that the Commission begin collecting data on switching patterns on a regular basis, ideally monthly. The Commission could then use information about switching from FTTP to fibre-based services to assess whether to commence a separate proceeding in the future concerning FTTP.
77 If evidence of consumers' willingness to switch suggests that FTTP is a distinct relevant product market; that is, if it indicates that fibre-based access and transport services do not provide a sufficient competitive constraint on the pricing of FTTP services, the Commission should commence a separate proceeding for the purpose of confirming the need for further regulatory measures.
78 Alternatively, if switching data indicate that fibre-based and access service and transport services -- excuse me -- are in the same relevant product market as FTTP, it will likely be appropriate for the Commission to continue forbearing from wholesale regulation of FTTP.
79 The Commissioner of Competition also recommends that the Commission not mandate access to unbundled local loops. The Commissioner of Competition makes this recommendation because of an absence of evidence of vertical foreclosure in this proceeding.
80 Vertical foreclosure can deny Canadian consumers the full benefits of competition in relevant markets for services that rely on access to local loops, such as low-speed internet access and local voice telephony. If vertically integrated incumbents strategically raise unintegrated rivals' costs, consumers may be deprived of product choices that would otherwise be available.
81 To assess whether to mandate local loops, the Commission should consider whether vertically integrated incumbents have an incentive to engage in vertical foreclosure strategies. To assess this incentive, the Commission should consider the factors the Commissioner of Competition set out in his interventions in the CRTC's Wireless Wholesale proceeding, CRTC Telecom Notice of Consultation 2014-76. These factors are:
82 (i) whether the incumbents' wholesale customers are likely to switch to a competing wholesaler;
83 (ii) whether the incumbents' wholesale customers are likely to pass on a wholesale price increase to customers;
84 (iii) whether consumers are likely to leave the market altogether or switch to other suppliers, including the incumbents' retail offerings and;
85 (iv) the margins the incumbents earn from their retail offerings.
86 In the Commissioner of Competition's view, the evidence on the public record does not support the affirmative finding on any of these factors. Rather, the evidence in this proceeding indicates that, at the same time as competition in local exchange services was increasing, incumbents' market share losses were predominantly to cable companies. This evidence does not suggest incumbent providers have the incentive and ability to protect their retail market power by raising the wholesale rates that they charge for unbundled local loops.
87 The Commissioner of Competition does not recommend particular regulatory outcomes for the existing high-speed services in this proceeding. Instead, he provides general recommendations about the approach the Commission should take and offers comments on the evidence that may assist the Commission when assessing competition issues in relation to fibre-based access and transport services.
88 Specifically, to assess whether to mandate fibre-based access and transport services such as Ethernet, the Commission should consider whether vertically integrated incumbents have an incentive to engage in vertical foreclosure strategies. To assess this incentive, the Commission should consider the factors the Commissioner of Competition set out in his interventions in the CRTC's Wireless Wholesale proceeding.
89 Empirical evidence on this point is available to the Commission. The Commissioner of Competition generally agrees with Ms Sanderson's methodology, which examined a natural experiment and assessed whether the Commission's 2008 forbearance decision resulted in a substantial lessening of competition in forborne markets. However, Ms Sanderson aggregates data across the company's overall territory, such that the report's conclusions may not hold true for particular geographic markets. The Commission may be able to inquire further into the reliability of these findings across Bell Canada's territory in the course of the public hearing and through a review of the confidential record.
90 With respect to product market, the Commissioner of Competition is skeptical that wireless services should be considered as being in the same product market as existing high-speed services. Several interveners have argued that wireless services constrain the incumbents' ability and incentive to raise the price of wireline fibre-based services above competitive levels. However, the Commissioner of Competition has found in his investigations that wireless services are generally too expensive to be an effective alternative for wireline consumers that face a price increase.
91 We have found significant price differences that cause wireless services to be an unattractive and uneconomical alternative for consumers given the heavy and increasing data usage of many households and businesses. For example, the Commissioner of Competition noted these issues in his recent public statements concerning the merger between Bruce Telecom and Bragg Telecommunications.
92 We would be more than pleased to answer any questions you may have. We expect we may be best placed to address questions regarding considerations the Commission should take into account when making its decision whether to mandate the provision of or forbear from regulating specific wholesale services. We would be pleased to answer other questions having regard to the information within the Bureau's area of expertise and the information on the public record.
93 Thank you very much for your time and consideration.
94 THE CHAIRPERSON: Thank you very much, gentleman.
95 So I will start off the questioning. And the first question is more a broad issue about the nature of your participation in this particular proceeding.
96 I was struck as I was preparing about two things, first of all the limited nature of your participation in the various phases. That's just one -- you know, it's an issue you can decide on yourself, obviously. But I was struck by it, but mostly by the fact that your focus, at least in your written positioning seemed to focus a lot more on unbundled local loops and rather less on future-looking issues, which I think may have more importance in the Canadian marketplace over the next five to 10 years.
97 I found that, you know, other than today's presentation I think you have spoken more about high-speed access, fibre to the premises and high-speed broadband in your oral presentation today than in any of your written submissions. I was wondering whether you were actually going to help us in trying to figure out what the framework ought to be over the next five to 10 years.
98 MR. HUGHES: With regard to -- I will answer the first question and I'm not sure about the -- how to deal with the second question.
99 In terms of the direction we have been taking and what you have been reading, frankly, we have been struggling with these new services in terms of the information that is available on the public record or, indeed, we think perhaps even could be to some extent. So we didn't want to -- we were careful not to speculate.
100 We want to be -- we want to have evidence behind our positions. We want to have reasons -- be able to articulate reasons for our positions and early in the game as we waited for the public record to develop we didn't have those reasons.
101 In some ways we are still in a position where we feel that the evidence necessary to deal with these difficult issues which you are faced with is still thin. That's why we have ultimately come to the recommendation to try to be helpful in terms of not only saying what I suppose we could have said probably from the beginning, which is it's a new service and it's a very difficult -- it is going to be a very difficult issue to deal with -- we have tried to look at that problem and apply our principles and ask ourselves what would we do, how would we deal with this kind of a problem and we would look for this kind of evidence.
102 And we are mindful of the kinds of evidence you usually look for and the kinds of evidence you ask for and we see in proceedings. This is our recommendation that if you take some time and monitor and you get a good record on switching that you may be able to make a decision that I think is based on the evidence, based on the kind of reasoning we tend to do.
103 So I hope that answers your question.
104 THE CHAIRPERSON: Yes, except we are all dealing with issues that are rather on the cutting edge of technology and there is no guidebook here anywhere. I was struck by your presentation this morning to say, well, wait until we have the evidence.
105 I have always thought that the role of the Commission is more to be a doctor that analyzes an issue and prescribes a course of conduct if there is an illness rather than a coroner when it's too late.
106 MR. HUGHES: When we deal with these issues we are guided by the principles of competition analysis. Other agencies around the world do this. What we really focus on is what we are talking about here, which is trying to get the relevant markets right and trying to get the direction you are looking correct. We think that if you get that answer right in the beginning as soon as you can, then you are guided towards the right answer.
107 That's really where we are coming from here. And the data and having knowledge of these facts, however forward-looking, is a necessary part of the analysis we think.
108 THE CHAIRPERSON: I was struck, for instance, in your comments this morning on FTTP, you said, "Well, we don't have enough evidence. Let's wait". I was struck how different that is in your approaches for instance as a Bureau looking at mergers. You actually have to look prospectively as to what might happen down the road. Why can't we do that here? Why do we have to wait to have evidence that may actually be quite not timely down the road?
109 MR. HUGHES: Well, in some ways it's a question of what evidence you are going to -- it's going to put in your data set.
110 We were pretty careful. We thought a lot about -- there is a line here that says in our submission -- and I apologize. It will take a second --- we try to summarize the kind of evidence one can be getting here; switching behaviour, information on functional interchangeability.
111 Switching behaviour is something we are probably going to have to wait for at least to some degree for the reasons we have talked about here.
112 Information on functional interchangeability, I mean, we could get that from technology people. That runs into a real problem because you have differences in speeds, differences in what is being delivered, but you have differences in prices and you have to know how consumers are going to behave there. So it's a part answer, but it doesn't tell you the whole story.
113 The last one, documentary evidence relating to business or marketing plans produced by FTTP providers, is something that we often rely on. When we are trying to do a forward-looking analysis we are going to have fairly extensive requirements of companies to provide this kind of data.
114 So we are getting -- maybe we can't get the underlying data. Maybe we are going to have to wait a year to get the switching data, but these companies are sophisticated entities. They have made presentations to their board, probably to financial people, to shareholders.
115 They have got some internal workings in terms of trying to make the judgment on things like how much are consumers going to switch back, how much of a competitive constraint are existing services going to be? And if it were a competition case we would have that. That's one of the things we'd look for. If you can get that, that would help a lot.
116 THE CHAIRPERSON: Okay, let's move on.
117 You suggest that you can help us better decide sort of the framework through which we have to put this analysis going forward, and that is your area of expertise in your submission. And you know, I looked at your June 27th submission. Particularly in paragraphs 6 to 11, you discuss there the test the Commission should apply and you have repeated it here today.
118 Essentially it boils down to reasserting the methodology in CRTC Decision 2008-17. It comes essentially down to essentiality, I think that would be fair to say. But not just essentiality. I think the test in 2008-17 goes a little further than pure essentiality.
119 Wouldn't you agree that the Commission may also have to look beyond essentiality per se for such matters as public good considerations such as, I don't know, 9-1-1 services or message relay services or support structures? Because if we don't get it right, support structures for instance may create a great deal of inconvenience to the public.
120 MR. HUGHES: Certainly. We are talking about a subset of those services.
121 THE CHAIRPERSON: Okay. So you would agree that the Commission's perspective has to go well beyond essentiality in pure economic terms when looking at forbearance or de-forbearance, I guess.
122 MR. HUGHES: On those elements of the regulations certainly, yes.
123 THE CHAIRPERSON: Now, at paragraph 9 of that same submission you say "requiring that" -- and here you are commenting on TELUS' perspective and you say:
"Requiring that a facility be considered essential only if competition downstream is prevented..."
124 And you underscored that word:
"... without access to it, as TELUS submits, would be too strict a threshold."
125 Could you elaborate on why you think that the TELUS proposal goes too far?
126 MR. HUGHES: Because it is not looking at effects in the market. So they are really saying in essence, if another -- if there is an opportunity for another provider to duplicate this service, then that's enough.
127 Whereas we are worried that the alternative may be constraint, it may not be as effective as necessary to get a result that consumers are going to benefit from. It may be that it is enough of a participant to get a foothold in the market, but it may have no effect on -- consumers may not see the effect of this competition.
128 THE CHAIRPERSON: Which is speculative, because we won't know until we know.
129 MR. HUGHES: Which we would have to predict, yes, right.
130 THE CHAIRPERSON: So I get back to the comment we were making earlier about FTTP and your reluctance to take a position because you don't know how behaviour would occur. Here you have just suggested that we could.
131 MR. HUGHES: Except that we have this difficulty in FTTP which is unusual that we don't know what the consumer switching patterns and consumers willingness to switch -- but the willingness to pay or not pay these premiums for these additional services, we can look at the relevant downstream market. There is information on whatever services are out there.
132 We can see whether that competitor is -- evaluate whether that competitor is going to have a meaningful impact on that. That doesn't run into the same kind of difficulty we run into here that we have to take -- we can't ask consumers, "You have FTTP. How good a deal would it have to be for you to switch back to existing services?"
133 We are stuck with a situation where we have to look at -- we have to be basically doing surveys based on very difficult questions to put to people. I think other -- we are not the only ones who have run into this. There are a couple of things or pieces on the record that I think are relevant here.
134 First of all, the -- where is my printout? In the United States there is a report "Connecting America: The National Broadband Plan" which is referred to in one of the other party's submissions in this hearing, and they have a recommendation exactly of this, of the nature -- not exactly, but in the spirit of the recommendation we're making here, they're faced with this problem, the recommendation in this report is that we need to get this switching data to make a good decision.
135 I don't think we're -- so in some ways they're faced -- if someone could ask the same question you're asking of me, they could ask of them and I think the answer would be that more switching data is better and that the stakes are really high in terms of getting the decision wrong, getting the relevant product market wrong. So taking some time to get a good fact basis to make the right decision is well warranted.
136 In some ways the importance of these services speaks to both the importance of trying to get as much information and work as hard as possible to get the right -- make a decision that's correct, but also have enough data to make sure we have a basis for it.
137 Another one that I thought was illustrative is something that was referred to in one of the Bell expert reports and the Bell expert report is suggesting that FTTP and the existing services are in the same relevant market, they're looking at this piece of evidence and saying, okay, we know about consumer willingness to pay for these services, so this is going to inform us on our relevant product market definition.
138 Well, when you read, download this report, this report by ComCom in New Zealand says the issues paper caveated these survey results, noting that:
"... the results from market research may be somewhat limited when respondents are asked to evaluate a product that has not been introduced (ie, a concept or an abstraction)."
139 Accordingly, the results from this survey are likely to be only indicative at best.
140 I think this is a real problem we face with this evidence here and our recommendation is to take the time to get some harder data and some harder facts to get the right answer.
141 THE CHAIRPERSON: And is that explaining, in part, why the Bureau itself didn't maybe provide that sort of analysis because you could never do survey evidence that would be reliable, or was there another issue there?
142 Because you could have participated in the evidence-gathering process on this proceeding; could you not?
143 MR. HUGHES: Please.
144 MR. LESCHINSKY: Well, to some extent, the Bureau's position is shaped by an early decision of the Commission with respect to information sharing. As Mr. Hughes has indicated, certain information we thus thought would have gone to issues with respect to switching, and so the nature of our participation is informed by the access decision that the Commission made in this proceeding.
145 I turn it back to Mr. Hughes to address more substantive matters.
146 THE CHAIRPERSON: But you could have done surveys yourself. I understand your point that you didn't have access but, I mean, you could have created your own evidence. The Bureau's well-funded, it acts in the public interest, it could have occupied the field, or are you saying it would have been impossible to come up with that sort of perspective survey evidence?
147 MR. HUGHES: Well, part of the reason I'm suggesting -- I'm bringing this to your attention is the inherent weakness that I think if I was asked by the Commissioner whether we should do this, I would probably say exactly this, that doing a survey on a concept or abstraction, normally we ask people who are already in the market who have made decisions to -- how would you react to a small but significant price increase?
148 And we do do that as a matter of course, but in cases where people have already chosen to participate on a product, instead of so hard for a consumer to understand, somebody tried and the Commission in New Zealand is identifying this exact weakness.
149 Could we have done it? I suppose, but our recommendation is if -- I think here, if we were going to do it, we would want to wait until some consumers had at least got into this market, they can talk to their neighbours and sort of get a view of it, they can get some idea of what the services are, what you can do with it before we try to overplay what we're getting from a survey which is really not based on any hard facts.
150 THE CHAIRPERSON: Okay. So your position is survey evidence, you can only do it by real information after the fact?
151 MR. HUGHES: Best done. I'm not a survey expert, but I'd say it's certainly best done.
152 THE CHAIRPERSON: Your position is that we should wait and see what occurs. Would you not be concerned that that creates a climate of uncertainty as well, that the Commission saying: well, we don't know, let's wait and see, will itself affect the climate of investment?
153 MR. HUGHES: Well, I would say that as long as it's clear and it's articulated what a survey -- what information like this is seeking to identify, parties can see where it's going, it's going to be -- if it comes to a point where in some amount of time people are buying the service, people are out there in the market, at first there will be the data, of course, but there will be other evidence as well that one could look at and consider this and it may be apparent to the parties where this outcome is going, potential investors, and by doing this you're articulating a clear standard of when you're going to intervene here.
154 You're going to look to this market, here is your criteria. You want to decide whether this is in or not in the relevant market, that's going to be your criteria, and I think that's more informative and less uncertain than many other alternatives.
155 There's some degree of uncertainty that's, of course, inherent here. I mean, a more certain decision would be we decide not to do it.
156 I guess our recommendation is doing that without the evidence is risky.
157 THE CHAIRPERSON: But I'm putting to you that not deciding because you might fear not having the full set of information will be equally detrimental potentially to the climate of investment because the test applied down the road -- and we're talking about FTTP here -- the situation down the road as to whether it's the same or not product market involves a degree of subjective evaluation by the Commission and somebody trying to make an investment decision today may not know how the Commission will land, even if we set out as clear a criteria as we can.
158 MR. HUGHES: There's some uncertainty, but this is a well-accepted principle. Many of the parties in this room have their own experts and have their own experience in dealing with trying to prove that something is or is not in a relevant market.
159 I think that that's a clear standard.
160 THE CHAIRPERSON: But there's always uncertainty.
161 MR. HUGHES: There's always uncertainty. If you want to get the evidence to make the decision right and avoid the possibility of having regulation where it was unnecessary, you're going to have to -- there's going to be some uncertainty.
162 THE CHAIRPERSON: Okay. Let me turn to another subject then. You'll recall back at the September hearing on the wireless proceeding I asked you some questions about your position in this proceeding and the apparent contradiction.
163 I must admit I'm still struggling to reconcile your position in both proceedings and maybe you can help me.
164 Now, the record of the wireless proceeding is closed, so I'm not suggesting that we should be adding to the wireless proceeding --
165 MR. HUGHES: Fair enough.
166 THE CHAIRPERSON: -- record, so it's really with respect to the wireline context.
167 So here, unlike in the wireless proceeding, you're basically saying that there is no market power issue in the retail wireline market because there are two competitive alternatives; namely, ILECs and Cablecos and you say that's -- I notice there's some words in your submission today, maybe I'll just deal with that first.
168 You say that, "In most areas of Canada..." Did you have a specific -- this is in your first page of your proceeding. So are you suggesting that there are places that there isn't?
169 MR. HUGHES: We don't know.
170 THE CHAIRPERSON: You don't know.
171 MR. HUGHES: We're just being careful.
172 THE CHAIRPERSON: And that's the comment you were making also. But you admit that -- so you're saying, for the most part?
173 MR. HUGHES: For the most part, as far as we are aware, that is the rule, we just don't want to overstep our bounds.
174 THE CHAIRPERSON: So you're saying in the wireline proceeding two competitive alternatives are sufficient, but in the wireless proceeding you were of the view that three active national competitors was insufficient.
175 So can you help me understand what specific facts and considerations you're using in this case to come to the conclusion that the duopoly does provide the sort of safeguards for sufficient competition that we should be satisfied with?
176 MR. HUGHES: Okay. So again because, you know, wireless, there's a lot going on there. So I guess I would -- allow me to try to --
177 THE CHAIRPERSON: Maybe I can chew it out for you --
178 MR. HUGHES: Please do.
179 THE CHAIRPERSON: -- in steps. So what is the fundamental structural difference between those two, the wireless and the wireline business that comes to such a dramatically different position on the part of the Bureau?
180 MR. HUGHES: There are two reasons: one conceptual, one factual and they both go in the same direction.
181 There's a number of other factors, but we're just talking about -- I'm not going to -- I'm going to try to cut to the chase here.
182 On the conceptual level, these are sunk networks that are largely ubiquitous. So in wireline both incumbents could, without too much change in their costs, without too much disruption, supply for a lot of these services, particularly when we're talking unbundled local loops and that end of the spectrum, FTTP is a different matter, they could supply the whole country.
183 So in wireless it's not clear that any one competitor could take -- turning on a dime, supply the whole country. So that is going to affect the incentives to compete. If you have a high fixed cost, a high sunk cost, and a low variable cost, economic theory is going to indicate that in those kind of circumstances competition is going to be very vigorous.
184 And even two is quite vigorous and as also we talked about, also through our undertakings as well, I mean part of that is it is not a numbers game and there are some other factors here.
185 So that is part 1 of this. Also when they are facilities-based competitors we think the risks in our coordinator conduct are lower. We don't see those kinds of issues where -- these players really are much more true facilities-based competitors.
186 Finally, on the factual side, we believe we have evidence of market power being already exercised in wireless. You know the record, unless you want me to talk to it, I am happy to. We were able to do some empirical work and some theory work --
187 THE CHAIRPERSON: Yes. Well, that record is closed. So I mean, conceptually, I am more concerned about understanding why you find that, based on the evidence in that case versus this case, it is completely different.
188 MR. HUGHES: I couldn't do that, I don't have that evidence.
189 THE CHAIRPERSON: Right.
190 MR. HUGHES: I guess what I am saying here, what I am trying to say is the evidence that we would normally look for in a case like this would be if I -- in this kind of a circumstance, we would look for evidence of market power.
191 THE CHAIRPERSON: Right.
192 MR. HUGHES: And in other cases, whatever, we may be able to get that, here we can't and don't have it.
193 So then that confirms our view of the theory side. We also see that on broader-based indicia terms of the ability of new entrants to be able to take away market share from incumbents, in some markets below 50 per cent, is at a very high level. An indicia that there is a lot of competition here.
194 THE CHAIRPERSON: And it is between those two duopolies.
195 MR. HUGHES: Between those two. But our position is that that competition between those two players is, well, likely vigorous here.
196 THE CHAIRPERSON: You mentioned that there was less chance of coordinated conduct. You based yourself on empirical analysis for that?
197 MR. HUGHES: Structure of the industry, what we may or may not have seen. We don't see really any evidence on this record that leads us to think that there is coordinated conduct.
198 THE CHAIRPERSON: And in the other activities of the Bureau looking at mergers or other complaints you have seen no evidence of that?
199 MR. HUGHES: I apologize, but I --
200 MR. LESCHINSKY: Well, our investigations are conducted in private by virtue of our act, so I don't think we are in a position to state anything here in terms of --
201 THE CHAIRPERSON: Even if you had evidence you wouldn't share it?
202 MR. LESCHINSKY: We might share it, but in an aggregated way.
203 THE CHAIRPERSON: Well, my question was an aggregated question.
204 MR. HUGHES: And I apologize, could you repeat the question, sir?
205 THE CHAIRPERSON: Well, you said there is a conceptual and a factual element.
206 MR. HUGHES: Yes, I did.
207 THE CHAIRPERSON: And on the factual element you said you are less concerned that there is -- less persuaded there would be coordinated conduct. And I asked you whether there was, based on all your work, not on any specific file, any evidence in your view that there was no coordinated conduct.
208 MR. HUGHES: And I can answer that. To my knowledge, the answer is no.
209 THE CHAIRPERSON: But you didn't specifically inquire into this, is that correct?
210 MR. HUGHES: I certainly -- excuse me for a second.
211 I am starting to get into areas where I would preferably want to have just my -- to be able to get the feedback of some of my colleagues. So I will let Derek speak to it.
212 MR. LESCHINSKY: To state simply, we will undertake to do this. We are on a line here and we don't want to walk the wrong side of it here in this proceeding. I think it is the sort of answer that would be best addressed by way of undertaking, if you want.
213 THE CHAIRPERSON: Okay. And then potentially asking for confidential treatment for that, is that what I am hearing?
214 MR. LESCHINSKY: We can put our position forward in our submissions to you on this.
215 THE CHAIRPERSON: Okay. So that is the 12 of December on that aspect.
216 MR. LESCHINSKY: Okay.
217 THE CHAIRPERSON: Your position on this, making the line of distinction, at least on the conceptual level, between the wireless and wireline is, as I understand it, two things. There is no capacity constraint --
218 MR. HUGHES: Yes.
219 THE CHAIRPERSON: -- between the two. And as well, I can't remember the exact word you used in your answer to Primus interrogatory, but it was almost as if you felt that it was the amount of expenditure that the two duopolies would have to spend was almost trivial.
220 MR. HUGHES: I think we would have been more like very low or low incremental costs of expanding. Do you have it handy?
221 But that is the spirit of it. We are not --
222 THE CHAIRPERSON: The spirit. You are not --
223 MR. HUGHES: No, I am not disputing with the spirit of what you are -- I wouldn't use trivial, but that is...
224 THE CHAIRPERSON: You know, when I look around I am seeing network operators spending a great deal of capital, because there is a growing consumer demand for higher and higher speed. How do you factor that in?
225 MR. HUGHES: As we get higher speeds and when we get into what you are calling fibre-based access and transport services, which I think are where that is much more applicable, we are mindful of that and not making a recommendation here.
226 THE CHAIRPERSON: So when you talk about the duopoly position being an acceptable one and focusing on unbundled local loops, are you assuming that you are dealing strictly with voice and low-speed internet?
227 MR. HUGHES: It is certainly where our theory is going to give us the most guidance is in those areas. We don't have a position on exactly where that line is, but it is that lower end.
228 And part of our position on unbundled local loops reflects what we understand the evidence to be on at least the public record in which, and you have the confidential record, that these loops are not being used very much, are declining in usage exactly when we see people going more and more to the higher speed services.
229 So with regard to the services that local loops provide in the economy for the most part, I think that is right.
230 THE CHAIRPERSON: So the large amount of investments we see, you are saying, is completely irrelevant to your analysis?
231 MR. HUGHES: I think that the large amount of investment we see is probably related to the FTTP and the fibre-based access and transport services where the further we get up the more cautious we are about applying the same principle.
232 I think it is still something to be mindful of. But we are more cautious in saying look at the evidence that you have on what has happened when forbearance has occurred and rely...
233 Anytime you are looking at a conceptual construct you are also mindful of the information and the facts to back it up. And there, we are being cautious because we think: a) you may have that evidence available to you; and b) maybe as we get further up there are other factors that are playing a role and look at the data.
234 THE CHAIRPERSON: See, the reason I am struggling is with your duopolous-type analysis is that it seems frozen in time.
235 That I get voice but, frankly, I would have expected you to take the position that the availability of higher and higher speeds is also important when you are analyzing the future health of the marketplace. Because that is what, at least on the residential side, seems clearly the demand of the Canadian population.
236 MR. HUGHES: And I think that that is going to be more important. We do think that is where people are going and that is an important thing. And we are suggesting that the evidence that you have probably will give you some better guidance here. It is more complicated.
237 So more evidence, less theories, probably the better prescription here. And we tried to provide you some comments on our view of the public version of this evidence, but we can't go any further than that.
238 THE CHAIRPERSON: So with respect to what services is the non-significant investments you are referring to? Because you are saying there is no significant investment required to compete. But with respect to what types of services?
239 MR. HUGHES: I think that is largely with the -- we know, or know is probably overstating, that we believe and our position is, that these costs are likely of that small nature is probably voice and low-speed internet.
240 THE CHAIRPERSON: Okay. So I would like to understand further your assumptions when you come into this analysis that, you know, a duopolous situation is good enough.
241 So one of the assumptions, I take it, is there is no product differentiation between the two services?
242 MR. HUGHES: Yes, no significant -- enough that they are in the same relevant market.
243 THE CHAIRPERSON: Right. And that consumers are extremely price sensitive. Is that another assumption you would make?
244 MR. HUGHES: Price in a broad sense, in terms of the level of the offerings being...
245 THE CHAIRPERSON: Oh, because of the nature of the service content --
246 MR. HUGHES: Could be a little different -- a little different speed, little more bells and whistles. But in the broad sense of the word price, including quality and choice and things like that, yes.
247 THE CHAIRPERSON: And the third assumption is that the two networks or groups of networks don't coordinate pricing behaviour?
248 MR. HUGHES: Correct.
249 THE CHAIRPERSON: Are there any other assumptions?
250 MR. HUGHES: There is the technology analysis we are talking about. And as a consequence of what we characterize the technology and cost assumptions to be and what we have already suggested on the demand side, that firms are, to use an economist's language, competing in quantities.
251 THE CHAIRPERSON: And you haven't now, beyond what is on the public record, you haven't tested any of those four assumptions? I guess the fourth one is the technology that --
252 MR. HUGHES: Beyond what is on the public record, correct.
253 THE CHAIRPERSON: Just on those. Would you agree though that if any one of those assumptions are wrong, the entire conclusion is on shaky grounds?
254 MR. HUGHES: To a degree. I think if we move from -- well, certainly coordinated conduct and certainly if we thought that -- which is kind of related, that the operating is competing in -- as not competing in quantities as an economist would put it, yes.
255 THE CHAIRPERSON: Okay. But the Bureau hasn't gone into the field or done any research --
256 MR. HUGHES: Correct.
257 THE CHAIRPERSON: -- or hired any experts beyond what has already been provided by other parties on price sensitivity?
258 MR. HUGHES: To my recollection, that is correct. I am just trying to think about what we might have done in the earlier proceeding, but I think that is right.
259 THE CHAIRPERSON: Or product differentiation, you haven't gone and done any analysis on that?
260 MR. HUGHES: That is correct.
261 THE CHAIRPERSON: And with respect to the coordinated pricing behaviour, I guess your undertaking will tell us to what extent you may or may not have dealt into that issue, is that correct?
262 MR. HUGHES: Correct.
263 THE CHAIRPERSON: What would you answer to consumer groups that have intervened in this proceeding who state that a de facto duopoly would not be sufficient to protect the interests of consumers?
264 MR. HUGHES: I guess I would say that we are using the best principles we have to try to develop a recommendation to you that will promote their interests as much as possible. And if two facilities-based competitors is, by all these principles, going to get you there, then I think that is what we should be doing.
265 THE CHAIRPERSON: It may not be seen as quite comforting to individual Canadian consumers, however.
266 MR. HUGHES: Well, if the principles are correct, what we are saying is that it should be of comfort to consumers because that is the most likely to promote their interests.
267 And if one over-mistakenly intervenes, then it might result in losses that would affect them equally as much. They may not even have the services.
268 THE CHAIRPERSON: I am just putting to you that sometimes perception is also part of the things that we as entities responsible for the public interest have to be concerned about. And I put it to you that the starting off point by most individuals would be worried about a duopoly situation.
269 MR. HUGHES: Well, perhaps the record of the past is something that they can look at and see that I think we are correct in saying that Canada has enjoyed quite vigorous competition between facilities-based competitors in the past few years.
270 And I don't think we see -- it is not clear to me that consumers are -- I think a lot of consumers would think that they are not being -- I am not sure a lot of consumers -- I am speculating here, I am trying to address your point, it is not something I have any expertise or really am prepared to do. But I am not sure that there is an outcry of gouging in local -- on these services.
271 THE CHAIRPERSON: I was also struck, again on the fact that you think a duopoly is sufficient. I was struck that, you know, the record that lead to 2008-17 occurred in a quite different market environment with respect to the availability of wireless services.
272 And I was wondering if the fact that wireless telephony since 2008 is far more ubiquitous and it is not just voice and data, it is pretty much high-capacity broadband is now available.
273 I am surprised that I didn't hear you speak more about the fact that wireless telephony and internet can be a substitute in the wireline sense. You have mentioned it a bit here, because your view is that the price makes it not a substitute.
274 MR. HUGHES: We are just sceptical. We think you may have more evidence and come to a call. We are not taking a hard position on that.
275 I think that if you do ultimately look at the record and concluded that these are part of the relevant product market I think that is another reason to go in the same direction we are suggesting here.
276 So we are trying to give you our view based on -- with some scepticism about wireless services. We don't want to be in a position where we are dependant on that, that our submissions are of no value to you if that conclusion doesn't hold up.
277 But we think that what is here would be -- if you decide, looking at the public -- excuse me, the confidential record, that wireless is part of the relevant market, I think that is consistent with the direction we are suggesting you go.
278 THE CHAIRPERSON: Right. So assuming you are correct that a duopoly situation is appropriate on the wholesale wireline side of things, if I could just get you to focus a little bit more on high-speed access for a moment where arguably you have two providers, two incumbent providers, cable and ILECs --
279 MR. HUGHES: M'hmm.
280 THE CHAIRPERSON: -- who arguably have two interchangeable competitive offerings, and the same arguments could be made. Should we draw the same conclusion for that market?
281 Do you have a position on that?
282 I am not -- you know, obviously CNOC and Primus would disagree. But I was wondering if you had a view on that, that whether a duopoly in the wholesale high-speed access would be sufficient based on the same analysis you have just made I guess for unbundled local loops?
283 MR. HUGHES: So the theory side of my two points would be we would be much less confident in. I don't think we can say that adding a new -- as a matter of stepping back as our prior before looking at the evidence or looking at the data, I don't think we can say that that part of our framework necessarily holds up, in fact, perhaps it doesn't.
284 And I think that the burden is really on the data at that point. If we have a situation where we are much less confident in what are the assumptions of that model. So let's see how the behaviour and the facts on how the competition has worked out.
285 And if it gets us there on that side of the ledger, then that is really the framework that we are suggesting here; focus on the other side of the ledger. Because I wouldn't say that it is necessarily inappropriate, I would say that I wouldn't be confident saying it is.
286 THE CHAIRPERSON: Are you thinking of anything specific, factually different between those two situations?
287 MR. HUGHES: I would say both the costs of adding a new customer and the capacity constraints would be things that I would have pause and want to know a lot more facts before I would have a very strong prior based on the theory.
288 THE CHAIRPERSON: Okay. And you are suggesting that that is the area of inquiry that we should continue on with respect to high-speed access services?
289 MR. HUGHES: Existing high-speed access, like... Well, I guess what we are suggesting is that and we are suggesting at continuing an inquiry and look at the data to see if you can get comfort from that.
290 THE CHAIRPERSON: But you are less comforted that a duopoly in that situation would be a good thing?
291 MR. HUGHES: As a matter of theory. And then it could turn out that even though the assumption is not necessarily holding exactly how -- that would give us the confidence. If the data bears it out, then it is getting there anyway.
292 THE CHAIRPERSON: Okay. Now your submissions, including your oral presentation, focuses a lot on facilities-based competition.
293 I was wondering if you considered, you know, quite apart and unparallel to facilities-based competition between ILECs and cablecos, whether there is any need as well for a healthy service-based competition between incumbents; on the one hand cablecos and ILECs, and independent ISPs on the other hand?
294 MR. HUGHES: I guess the answer to that question is that if that does develop, and in other markets we do have this kind of service competition, I think it could be a good thing. It could benefit having more choices to tailor things more to specific customers.
295 Just a question of if the analysis is such that there is no vertical foreclosure incentives, then an incumbent who has an opportunity to supply this service-based competitor will want to do it.
296 They'll want -- they'll have as much interest in that as the consumer if you can get -- if you could supply one of these players and provide them with the access to your network to add this value, consumers will pay for that value, and have every interest in facilitating that. It's just a question of whether we need to go further to try to promote it.
297 THE CHAIRPERSON: Right. But the ISP -- independent ISPs might argue that, without a mandated access, they can't even begin to offer that service.
298 MR. HUGHES: Well --
299 THE CHAIRPERSON: That competitive quality, innovative services which some of the parties, like CNOC and Primus, has -- have said that they're offering in the marketplace.
300 MR. HUGHES: Our position is that if incumbents do have an incentive to make it difficult for those players because these players -- we could -- we have a theory by which adding that value to consumers is going to erode the incumbent's market share -- market power, excuse me, then that would be an area where mandating access would be appropriate.
301 THE CHAIRPERSON: Right.
302 MR. HUGHES: Alternative, if it's not --
303 THE CHAIRPERSON: It's similar to what you've proposed in the wireless --
304 MR. HUGHES: Exactly.
305 THE CHAIRPERSON: -- but you're saying we should apply it to the high speed access proceeding.
306 MR. HUGHES: That's our submission.
307 THE CHAIRPERSON: Right. But in the FTTP context, your position is we should just wait and see.
308 MR. HUGHES: Our position is that you should get -- you should be sure your relevant product market is correct, and to do that, I think we're going to need more data and more information.
309 THE CHAIRPERSON: I'd like to delve more into the whole issue of coordinated behaviour that you mentioned earlier was an important assumption. And so if I'm not mistaken, your view is that ILECs and cable cos. have relatively low costs excess capacity in order to compete vigorously. Is that correct?
310 MR. HUGHES: I guess what we're saying is -- I apologize if I'm -- I -- just let me read that back to you and see if I understand.
311 I think that if they have a large capacity -- excess capacity, if you will, and low costs of adding a new consumer that they will have very strong incentives to compete vigorously.
312 THE CHAIRPERSON: And -- okay. So that basically is the -- your view is that they appear to have that low cost --
313 MR. HUGHES: Correct.
314 THE CHAIRPERSON: -- excess capacity. And that you're unaware, subject to the undertaking, of coordinated behaviour at this point.
315 MR. HUGHES: Correct.
316 THE CHAIRPERSON: Now, the merger and enforcement guidelines of the Bureau states that the Bureau will look at excess capacity because there's sometimes a risk that suppliers use that excess capacity to discipline departures from coordinated behaviour.
317 Would you agree with that?
318 MR. HUGHES: That's part of the equation, yes.
319 THE CHAIRPERSON: So why -- do you see a risk or don't -- why don't you see a risk in the residential wire line market that excess capacity could be used to enforce coordinated behaviour?
320 MR. HUGHES: Part of the answer is that there's another side to that, which is when they -- when the other player has a lot of capacity. There's -- it's a bit of a double-edged sword of where this capacity goes to.
321 But I think what we'll say is that's really going to -- I think we're going to back on that and get back to you.
322 THE CHAIRPERSON: Which suggests that you think there may be a risk, but you're not quite sure how big of a risk it is.
323 MR. HUGHES: I'm saying that I don't -- I need to get back to my colleagues and make sure that we're using the full benefit of the Bureau's knowledge rather than me stating it.
324 THE CHAIRPERSON: Okay. Fair enough.
325 So you'll do that as an undertaking, answering that question I just asked?
326 MR. HUGHES: That --
327 MR. LESCHINSKY: Yes.
328 THE CHAIRPERSON: Let me delve in another aspect of the Bureau's approach to some of these issues on -- and this -- on mergers. And this is the use of concentration ratios to value whether a proposed merger is anti-competitive or not.
329 So it's my understanding, and I think it's quite obvious, that the Bureau does use concentration ratios when doing merger analysis. Is that not correct?
330 MR. HUGHES: Yes. In a way -- in the manner that the guidelines state, yes.
331 THE CHAIRPERSON: Right. So for instance, the merger enforcement guidelines say that, normally -- you would not normally do a detailed analysis in a merger situation if a firm's post-merger market share is less than 35 percent; right? That's one example of a -- of concentration ratio. Is that correct?
332 MR. HUGHES: I don't have the guidelines here, but I'm sure it's correct.
333 THE CHAIRPERSON: And similarly, if the four largest firms have less than 65 percent of the market, the Bureau would not generally challenge a merger in that context.
334 MR. HUGHES: Provided that's what the guidelines say, and I'm sure you're right.
335 THE CHAIRPERSON: Right. So now here, in the residential wire line telephony marketplace, according to the Duopoly perspective you're advancing, we would be well above the thresholds.
336 MR. HUGHES: Sure.
337 THE CHAIRPERSON: You'd agree?
338 MR. HUGHES: Just by the math, yes. I mean --
339 THE CHAIRPERSON: So help me understand why you wouldn't be concerned that a Duopoly situation would lead to anti-competitive behaviour?
340 MR. HUGHES: Well, lead to --
341 THE CHAIRPERSON: And in fact, you're taking a more aggressive position than some telecos on the unbundled local loop based on the theory that a Duopoly will protect -- would not lead to anti-competitive behaviour.
342 MR. HUGHES: So getting back to the guidelines and the technicalities of the concentration ratios, the guidelines are a document that has a lot of explanation of our analysis and the thresholds themselves are just one part of that picture, and you have to read the whole guidelines.
343 In terms of our position, I think -- I don't know what else I can add to what we've already talked about.
344 THE CHAIRPERSON: So you're saying, going back to your original point, that a Duopoly in the facts -- based on the conceptual and factual analysis --
345 MR. HUGHES: Correct.
346 THE CHAIRPERSON: -- you think a Duopoly on the wire line side with respect to specifically, I think, more so on unbundled local loops --
347 MR. HUGHES: Correct.
348 THE CHAIRPERSON: -- is the point. Okay.
349 Again I'm going to refer to the wireless proceeding not so much to build the record on the wireless proceeding because it's closed, but to understand your analysis here.
350 So now, in that proceeding, you had advanced evidence by the Brattle Group that looked at certain indicia of market based on high industry concentration ratios and the presence of normal profits over a long-term period. And there was some debate in that hearing as to whether that was the appropriate way to go and whether the evidence actually suggested that these things were occurring.
351 And I don't want to go back over there, so -- but I'm more struggling why didn't you apply a similar analysis in the context of this proceeding?
352 MR. HUGHES: So the key difference here, and there's a number of probably smaller reasons as well, but a really important difference sort of talking at a high level is we had public data on -- that would facilitate the kind of market power and IRR analysis that was -- that we asked Brattle Group to do and they did, we think, quite successfully because we had in the public domain information on costs and profits and revenues starting at the beginning of the wireless company's operation so we could go from day one and we could look at the full length of the investment.
353 And as you know, there was -- the debate -- a lot of the debate centred on what those existing investments should do in the future as well. But the point here is that we have a good chance with only two of the three players, by the way. The public data is going to permit us to do a robust analysis.
354 We don't have that here. The data doesn't exist.
355 THE CHAIRPERSON: But your view would be that it would be equally probative to do it in this case.
356 MR. HUGHES: If the data -- if we had --
357 THE CHAIRPERSON: Assuming the data is available.
358 MR. HUGHES: If we -- yeah. And it's not -- this is not -- this is just the way that the companies report things and --
359 THE CHAIRPERSON: Right.
360 MR. HUGHES: -- carry things.
361 Yes, if we had -- if we had data on this from the beginning of these operations, yes, that would be equally probative.
362 THE CHAIRPERSON: And that explains why you may not have hired an expert like the Brattle Group to make that analysis in --
363 MR. HUGHES: Yes.
364 THE CHAIRPERSON: -- this case. It's not because you don't think that the analysis is -- wouldn't have been pertinent. It's just you didn't have the --
365 MR. HUGHES: Correct.
366 THE CHAIRPERSON: -- inputs to --
367 MR. HUGHES: Correct.
368 THE CHAIRPERSON: -- apply to it.
369 Just to clarify something -- and I've got the transcripts from the wireless hearing. And in that case, when we were going at this issue but from the other side --
370 MR. HUGHES: Okay.
371 THE CHAIRPERSON: -- the wireless -- no, sorry, the wire line situation is different, and this is at paragraph 210-211, and you're basically saying that there's basically a regime in place in the wire line situation and that that's why it was a bit different.
"There is no regime in place in the wireless so we can see that there is this difference in the evidence [and I'm quoting you here] available to us. We see this as an important fact that leads us to our conclusions here."
372 So it's the same point you're making, that the evidence is not available, or is there a different framework that would apply?
373 MR. HUGHES: If I'm recalling the context of that correctly, it is kind of an evidence point insofar as when there's -- when there's not a -- in any case, irrespective of -- I don't exactly remember the context. If -- in wireless, there was no regime in place and, therefore, though we hadn't seen the full confidential record, we had information from the Commission that these prices were quite high. It's not just high. I think there was an issue here.
374 So in that kind of case, we -- instead of trying to just look at the incentives to engage in vertical foreclosure, we -- because companies were free to operate as they wanted to, we could see the outcome, whereas here, there is a regime in place so I don't think there's -- to my knowledge, there's no evidence of people raising these access prices to the levels we saw in wireless simply because it's regulated.
375 THE CHAIRPERSON: Right. But you make the point of evidence a little earlier in this testimony in the wire line -- wireless proceeding, and here you use the word "regime" in your evidence. So I'm wondering whether you aren't actually meaning the fact that we have a wholesale access mandated regime in the wire line proceeding isn't a very important factual distinction between the two markets.
376 MR. HUGHES: Well, I'd have to -- I don't have it before me, so it's a little hard for me to state, but I guess my submission here is to -- that the important part to -- from a substantive point of view is whether or not we have evidence that firms have engaged in misconduct or not.
377 THE CHAIRPERSON: Right.
378 MR. HUGHES: And why they -- what are the backgrounds behind that. And whether I used the word "regime", I don't remember.
379 THE CHAIRPERSON: You can take this away as an undertaking, if that's okay, because you may not have the actual text of the transcript in front of you.
380 But the question I'm going to be asking which you could, after looking at the transcript, is your reference to "regime", does it not -- are you not implicitly saying that the wireless regime -- sorry, the wire line regime, that is, the mandated access, is required to prevent abuse of market power?
381 Because you're juxtaposing the two of them and saying there's a regime in place in the wire line, therefore, it's -- that's good. And now you seem to be arguing that a Duopoly is an appropriate -- an unmandated Duopoly situation would be good going forward unless you meant something completely different by the word "regime" in your testimony.
382 MR. HUGHES: I can't really answer that.
383 THE CHAIRPERSON: Sure. Then we can take that away.
384 MR. HUGHES: So what -- excuse us for a moment. We were trying to -- the essence of where we were going is whether we could -- whether it might be more effective us to try to answer the question here than to take it away.
385 So could we take a run at it?
386 THE CHAIRPERSON: Fair enough. Yeah.
387 MR. HUGHES: Could you give me the question?
388 THE CHAIRPERSON: I'm suggesting to you that when you were giving testimony in the wireless proceeding, that you're saying that the wire line market is completely different because there is a regime in place, namely, the CRTC's wholesale market regime, and that's why it's a better regime, whereas in this proceeding, you're now saying, especially for unbundled local loops, get rid of that regime.
389 MR. HUGHES: Okay. So notwithstanding what I might have said 'cause I don't really -- I'm not prepared to really comment on that part of it --
390 THE CHAIRPERSON: Fair enough.
391 MR. HUGHES: So let me try and answer here and see whether it -- whether it answers your question.
392 So conceptually speaking, in a market like wireless where there is no regime in place, there may or may not be an incentive to engage in vertical foreclosure. The Bureau submitted that there was, but other people submitted there wasn't.
393 And we can -- one of the things we can look at is whether it actually happened.
394 In wire line where there is a regime in place, in a sense, what we're probably -- we're not going to have that data point. We're going to have a data point in wireless because we can see what happened without them being -- they're not -- there's no control on what they're doing, so we do the true-ups without any constraints.
395 In wireless, we see -- excuse me. Wire line, and there's a regime in place. Then what we see is firms are -- may or may not have an incentive to engage in vertical foreclosure, but the regime is holding it back and mandating the price anyway.
396 So whether or not they have the incentive to engage in vertical foreclosure, they don't the ability.
397 So in that kind of a situation, the substantive problem facing an economic analysis is, okay, I can't see -- I can -- I've got a model to predict whether the disincentive is there and the right indicators and the right way of looking at this, but I don't have the benefit of being able to actually see what they would do in the absence of the regulation.
398 So it's really a question of probably, early in the game, it may well have been that, over time, that this -- that the regulation was necessary, constraining the ability of the players to engage in this conduct was necessary because the incentive exists. Over time, market forces may have been, and we suggest have, reduced that incentive to the point where the -- restraining the ability to engage in this conduct may not be necessary.
399 And we're saying -- does that answer your question?
400 THE CHAIRPERSON: Yeah. You're arguing, basically -- I'll rephrase it and make sure that I understand it.
401 MR. HUGHES: Yes.
402 THE CHAIRPERSON: That in the wireless context, there's a purity to it because there's no overarching insertion of regulatory rules that otherwise skews things, so -- and whereas on the wire line side, unfortunately, we do not have a control group in scientific terms --
403 MR. HUGHES: Right.
404 THE CHAIRPERSON: -- which is entirely pure, and so you can't --
405 MR. HUGHES: Which may be good for consumers, but as an economist, we don't have an actual --
406 THE CHAIRPERSON: Right. I understand. Okay.
407 So you avoided having to do an undertaking, so thank you for that.
408 Let me bring to your position with respect to unbundled local loops. So correct me if I'm wrong, but it seems that you are -- are you arguing -- I don't think that's in dispute -- that there's -- that unbundled local loops are not essential and, therefore, should not be mandated.
409 MR. HUGHES: Yes.
410 THE CHAIRPERSON: But I get the sense that you're mostly arguing based on your evaluation of the residential service segment.
411 MR. HUGHES: I think that's fair.
412 THE CHAIRPERSON: And in fact, you seem to suggest that you have insufficient information with respect to the business segment of this market.
413 MR. HUGHES: That's -- so the information we -- the informations that we have to analyze this problem, including the information that the parties have provided in terms of what services are being provided with -- by these local loops, we don't know the answer to that.
414 THE CHAIRPERSON: Right. But would you -- is your position that unbundled local loops should -- and I'm not really going to develop this during the hearing as a matter of issue as to whether we can distinguish those two. Is your view that unbundled local loops should also no longer be mandated for business purposes?
415 MR. HUGHES: I think the answer would -- that's a very difficult question to ask -- answer in the abstract. We don't have the information to look at and really understand the problem we're looking at.
416 THE CHAIRPERSON: Right.
417 MR. HUGHES: So you're --
418 THE CHAIRPERSON: So here; I'll tell you what the problem is and what we're struggling with, is that the unbundled local loops are currently provided to competitors on a monthly basis, but there doesn't seem to be a distinction between whether they're being used for residential or business purposes.
419 And so here's the conundrum for us, is, based on your recommendation, does residence follow business in terms of not mandating, or is it the other way around? And I was wondering if you had a -- you know, which trumps which?
420 MR. HUGHES: So this is only going to be a partial answer.
421 The test -- what's really going to affect our -- if we could hypothetically think of a world where we had all that data and had all the information that we needed, what we would be looking for is whether -- we'd be using the same framework. We'd be trying to apply the same theory and using -- using what we understand of the facts on the market to have our prior views and to try to assess whether vertical foreclosure incentives would otherwise exist.
422 So I think that there are probably some -- there are probably some business services that would fall into this category. I wouldn't be sure if they all did.
423 THE CHAIRPERSON: Right.
424 MR. HUGHES: I don't see any -- excuse me.
425 THE CHAIRPERSON: Yeah.
426 MR. HUGHES: I think it is complete. I'm doing this on my head here.
427 I don't think the fact that the label business versus residential is really -- matters to us. It's just the -- it's just there's the unknown of this other area where we would apply our principles.
428 THE CHAIRPERSON: Right. Here's -- maybe I'll restate it a little bit so you understand the conundrum here, is that unbundled local loops are being used in the business sector, mostly to serve customers by operators outside of the original footprints. And I understand you may not have the evidence as to what extent that that is occurring, but --
429 MR. HUGHES: Yes.
430 THE CHAIRPERSON: -- that is, hypothetically, let's say that we come to the conclusion that we need to continue to get involved on the business side of unbundled local loops.
431 If there is no way of seeing the distinction between residential and business unbundled local loops, even though your argument may be valid for residential, we still may need to mandate those loops unless we can somehow divide it, and that's not clear to us at this point because there is a concern with respect to the business segment for those loops.
432 MR. HUGHES: I think I understand to some degree your conundrum but without the facts, without having something harder to deal with, it's hard for me to answer that in the hypothetical. I understand -- I'm not -- I think I understand your conundrum. When faced -- so maybe this is more helpful.
433 THE CHAIRPERSON: The problem is a loop is a loop is a loop whether it's used for residence or business.
434 MR. HUGHES: Pardon me?
435 THE CHAIRPERSON: The problem is a loop is a loop is a loop whether it's used for business or residential.
436 MR. HUGHES: Oh, so you're suggesting you may not even have the information?
437 THE CHAIRPERSON: Well, it's not a question of information, it's the way the architecture of the network is.
438 MR. HUGHES: You may not have the information on the things that we would need to apply our principles?
439 THE CHAIRPERSON: The use of the loop by the competitor, particularly out of their footprint, the original footprint, may be for both or either business or residential.
440 MR. HUGHES: But the question for us --
441 THE CHAIRPERSON: So the theory of splitting them up may not work.
442 MR. HUGHES: Well, we're not -- it's possible that the business services have the same characteristics as residential. From an economic point of view, it might be that a business line in a pizza place --
443 THE CHAIRPERSON: Absolutely. I'll grant you that. But the consequence of not being able to make the distinction in a practical way is that even though we may be persuaded by your argument on the residential side of things, the same loops are being used for the business side of things and it's the same access and I'm assuming that there's a problem on the business side.
444 MR. HUGHES: Right. And there may or there may not be and I don't have enough information to help you on that.
445 THE CHAIRPERSON: Granted. Granted. So assuming there is a problem on the business side that we can't divide the two up, do you have a view on which trumps which?
446 MR. HUGHES: Well, again, it's hard -- I'm sorry, I can't really. Without the information, I'd be speculating and that's not the right thing to do.
447 THE CHAIRPERSON: Just a few more questions for you.
448 You noted the need, that the market is evolving -- market in the wider sense of the word -- to more broadband and one could foresee in a few decades that it may be all broadband. I was wondering if you could help us understand whether in your view low-speed services and faster-speed services are in the same product market.
449 MR. HUGHES: I think my answer right off the top -- and maybe we'll drill down on this a bit. I don't know if this answer is going to be that helpful, in the beginning at least.
450 We have to apply relevant market considerations and really wrestle with that issue in terms of what consumers are willing to pay for these better services and whether that's a sufficiently large differentiation that it takes them out of the market or in some cases services that are lower and higher quality, if you like, are in the relevant market.
451 In other industries, we do not apply -- in our experience, we haven't had to apply every service has to look alike in terms of functional interchangeability. In other markets, sometimes less high quality or less brand name or less perceived value do have a very important constraint.
452 I don't know if you want to drill down on that.
453 THE CHAIRPERSON: So I take it you don't have a specific view as to whether it is or not in the same product market, but the way you would decide would be based on some of the factors you've mentioned?
454 MR. HUGHES: Correct. Yes.
455 THE CHAIRPERSON: Any other factors that -- or standard --
456 MR. HUGHES: Standard stuff.
457 THE CHAIRPERSON: -- analysis --
458 MR. HUGHES: I could go into detail about the tools used --
459 THE CHAIRPERSON: Right. Right.
460 MR. HUGHES: -- but you can probably read that somewhere else.
461 THE CHAIRPERSON: But it's the same framework. We don't necessarily have to go back.
462 Well, in the same light, as you are no doubt aware, particularly in the residential -- if not exclusively in the residential -- market there's a growing amount of bundling of communication services: voice, data, Internet, broadband Internet and TV.
463 So I'd like to see if you've thought about these triple and quad plays and whether in your view all the -- because all the major players, for instance, are now offering an IPTV play -- is whether in your view -- well, what in your view is the relevant product market when you're looking at bundling? Is it bundled service to bundled service or elements in each one of the bundles?
464 MR. HUGHES: The key issue here is going to be how much of a discount, how much of a benefit there is to a consumer, money or otherwise, in taking the bundle as opposed to getting the components themselves.
465 So a couple of things that bundling is going to have an impact on is it may be that as more and more consumers -- and not all of them have to do it -- because it's the consumers that are driving the firm's incentives that is really the issue here, the bundle may well be a relevant product market.
466 THE CHAIRPERSON: Bundle to bundle?
467 MR. HUGHES: Pardon me?
468 THE CHAIRPERSON: A bundle to bundle?
469 MR. HUGHES: Yes. If there's a sufficiently -- if a consumer are getting a sufficiently good deal from one incumbent with buying a bundle and now is thinking that there's been a small but significant increase in that price, am I going to switch, they're going to have to take that bundling into account if they try to -- it may not be economic to say I'm going to switch away from one element because I lose more on breaking up the bundle than I gain by avoiding the price increase here, and really, it may turn out to be that the only alternative is to switch to the other bundle. That's a factual issue.
470 THE CHAIRPERSON: See, that's the challenge we have because I think there is a strong tendency in the marketplace towards bundles because from a price perspective --
471 MR. HUGHES: Yes.
472 THE CHAIRPERSON: -- they're very attractive, but it makes the sort of analysis of service by service less relevant because, in fact, people aren't buying based on the individual elements in the bundle, they're buying bundles --
473 MR. HUGHES: Except --
474 THE CHAIRPERSON: -- which have a mix of voice, wireless/wireline and broadband at higher and higher speeds.
475 MR. HUGHES: Except that the one difference here, which is one of the things we're talking about today, is bundling or not bundling, one way or the other, a key issue going forward is going to be to find out how much FTTP is a distinct service or it has substitutes out there and it's got effective discipline.
476 And bundle or not bundle, if it turns out that there are no substitutes to FTTP and consumers really want this, then that would allow the players to increase the price by a small significant amount.
477 If there are substitutes for it -- and what we see normally I think are triple plays or quad plays where each competitor provides all of the services and we're looking at one bundle versus another -- we're now looking at a situation where one of the pieces of the bundle is in the consumer's view a trump card. So we still face that problem.
478 THE CHAIRPERSON: Yes. For instance, that may be the case for high broadband speeds, right?
479 MR. HUGHES: Yes.
480 THE CHAIRPERSON: It becomes more important than, let's say, the availability of voice, especially since we've seen people get out of the wireline voice market in significant numbers.
481 MR. HUGHES: Sure.
482 THE CHAIRPERSON: Yes.
483 My last question before I turn to my colleagues to see if they have questions relates to your oral presentation this morning about FTTP and basically you're saying don't do anything yet but monitor and you've outlined some of the evidence that we should monitor. Is this all the evidence you think we should be looking at? Is this a complete list?
484 MR. HUGHES: The more you can get, the more informed you'll be and the sooner you'll get it.
485 In terms of the switching data, which is that kind of information which is hard data, I mean you may indeed want, if you could -- if you can get some of the other documentary evidence that we sometimes get, that would probably be helpful too, but let's talk about the data for a minute.
486 In competition applications, one of the problems is finding out what switching data is due to price increases and how much is due to other things. So frequency of data is useful because we can use kind of metric techniques to try to tease out what's due to a price increase and what's not. Sometimes we see companies collecting data on why consumers switch. So they'll find out a way of -- are you switching to another player, are you leaving town. That can help ascertain how much of the switching is switching that is relevant to considering whether it's effective constraint or not or other reasons.
487 A key thing is whether they're going -- if it's clear that they're going to a competitor's existing wholesale access -- excuse me, the high-speed service, then if we had that data buy where the consumer is actually going to and to the extent we could have why, that would help the data move much more quickly and much more ambiguously to give you guidance on what the right answer is.
488 THE CHAIRPERSON: Right. And presumably, one would have to do it by a geographic area?
489 MR. HUGHES: Yes. Again, it's to tease out, so we don't want to have to -- excuse me, but if you permit me for a second.
490 There might be other factors going on in a particular region that when you put the two regions together you're going to pool in a way that's going to just hide things.
491 THE CHAIRPERSON: Since the heart of your position on FTTP is a monitoring element, and maybe this is all you want to say about it but if you wanted to embellish or add to the sort of things we would need to monitor, you're more than welcome to do so through an undertaking.
492 MR. LESCHINSKY: If there's anything else we think we can add productively, we will do so by undertaking.
493 THE CHAIRPERSON: Okay. And confirm whether or not -- that there's nothing to add other than what --
494 MR. LESCHINSKY: Yes, of course.
495 THE CHAIRPERSON: Okay. Good.
496 Do my colleagues have questions? One? I'm conscious of whether we're going to do a break or not. Yes. Okay.
497 So rather than try to not do a break, why don't we take -- please stay and we'll come back after the break at 11:00 and there will be further questions at that point.
498 MR. HUGHES: Thank you.
--- Upon recessing at 1049
--- Upon resuming at 1103
499 THE CHAIRPERSON: Order, please.
500 So I'll pass it to the Vice-Chair Telecom.
501 COMMISSIONER MENZIES: Thank you.
502 My question -- I guess I'll express it as a concern and you can address it -- is I understand in terms of your fibre-to-the-home position that there's insufficient data, in your view. In terms of that, my concern is largely that -- and from an academic or theoretic point of view, that's completely understood and respected.
503 My concern is that when we're dealing with a market that is active and vibrant and that sort of thing and sort of going back to the idea that -- I mean we can do one thing or we can do another thing and in the sense that doing nothing or declaring nothing on it possibly creates a scenario in which investment is disincented because of uncertainty, because of what we might do, and at the other end, innovation is disincented because there's uncertainty about what we might do. If people, for instance, know that access to fibre-to-the-home isn't going to be mandated, then they can work an alternative, right, or they can invest, but if they're sitting there thinking that it might be, then they might hesitate with their investment.
504 So how long do you think it would be before sufficient data would be collected and do you agree that hesitating as opposed to acting one way or the other could be the bigger problem?
505 MR. HUGHES: I do think that in some ways the stakes here and the investment issues, which we've already talked a little bit about, there is a degree to which collecting more information does inherently create more uncertainty than an answer very quickly yes or no, but all of that also speaks to getting the answer right.
506 If we can get the necessary information in a timely way and in a way that facilitates analysis and if there's information -- if it can be articulated what one is looking for, waiting and seeing and then getting the right answer may be much preferable than making a decision now one way or the other, for example, mandating, discovering that the facts haven't borne this out in fairly short order, people have made the investments, people have started down that road and then you have to switch course.
507 I think that it's always a question of the implementation but, in our submission, taking that time to at least be able to make an informed decision is better than making the mistake and having to reverse it.
508 COMMISSIONER MENZIES: How long would you see that timeframe? I mean this process that we're in today is already a year old and it has the potential, as they always do in terms of follow-up procedures, to go on for quite some time. So how long would you see it taking to get the decision right, to have the data collected to get the decision right?
509 MR. HUGHES: That's a hard question in the abstract and I'll get to it but if you will just permit me for a moment. As a practical matter, it's harder to answer the question till one sees the data. It's a bit of a chicken or egg kind of problem.
510 Perhaps more useful is I would say the degree to which it's very focused and addresses the issues that have been seen in competition areas, where we've tried to apply this kind of thinking in terms of trying to ascertain whether it's switching because of price changes and switching for other reasons.
511 So if it's not just monitoring on the switching per se, reporting every month how many switchers happened, but the way it's monitored is much more focused and much more direct and it's agreed upon how we're going to look at that, I think that does speed it up significantly.
512 I think that we typically and without -- excuse me, I have to caveat this, that without seeing the data and being asked this question before the data exists is a little bit of a stretch here.
513 But we often -- if we have good data, we're looking at periods of a couple of years. We need to have -- and really how long is also a function of seasonality and the reason we need longer is to tease out some of the other variation that may not be representative of a period.
514 I'd have to think about -- actually, the Bureau would have to think about exactly a more focused answer, but judging from other circumstances, I think that's kind of the timeframe that is often the case used for us.
515 COMMISSIONER MENZIES: Okay. Understood. I mean the concern there is that, you know, a period of years that we'd be talking about in terms of that, that money is less patient than that and that when you're looking at billions of dollars worth of investment and that if there's uncertainty money goes where it can reproduce the most efficiently and it's not an uncertain environment, and also that, I mean, this market at this time is extremely quickly moving, right?
516 So I'll just use that to sort of segue to the next question, is that, to sort of be a devil's advocate for those who might look at this and sort of say, well, separate product market, it's self-evident -- some would say that it's self-evident that fibre-to-the-home is merely a technological extension of that which exists and has existed in the past and that the product, it's not a separate product, it's simply an extension of the technology that's used to deliver the current product. So why would they be wrong to say that?
517 MR. HUGHES: Well, I guess what I would say is that practically speaking, and maybe this is moving towards -- this is one way we're suggesting the public record could be enhanced. There are other ways. You may have more information than is accessible to us.
518 You may decide that our recommendation is -- at its heart you need enough evidence to make the right decision that you're confident in because the costs of making the wrong decision are large. Even in light of our recommendation here, which is based on our knowledge of the public record, you may decide they are right. If you have the facts and you have the evidence, then that is fully consistent with where we are going.
519 Our core answer, our core recommendation is that you do that fact-based analysis and avoid not getting it wrong. And if you have evidence that you think the Commission decides that they are right, then that is equally a fact-based analysis that addresses our issue.
520 COMMISSIONER MENZIES: Just so you can confirm my understanding is that your main view is that the goal of facilities-based competition at this point, given the data that you have, is best served by not mandating fibre-to-the-home?
521 MR. HUGHES: I think or I would say that -- I would rephrase it slightly, but I think it is probably the same point, that the risks of mandating access where it's not necessary are high and that there are significant benefits. If there is -- and furthermore to that point, which perhaps addresses where you are going a little bit, if there is facilities-based competition then that is a -- could deliver significant benefits to consumers in the economy.
522 COMMISSIONER MENZIES: Thank you. Those are my questions.
523 THE CHAIRPERSON: Thank you.
524 Commissioner Molnar...?
525 COMMISSIONER MOLNAR: Thank you.
526 I may be repeating some of what you have discussed, but I just want to make sure I understand.
527 MR. HUGHES: Fair enough.
528 COMMISSIONER MOLNAR: You say that we need to determine whether fibre-to-the-prem is a distinct retail product market; is that correct? From a retail perspective it might be a distinct product market?
529 MR. HUGHES: So we would take the position that both wholesale and retail considerations are relevant.
530 We would also say that retail has a very -- the retail relevant market has a very large impact on wholesale market competition and that the test we are proposing here is where we are talking about switching. Where we are talking about the discussion about other indicators that one may look at, we are focused on retail competition.
531 COMMISSIONER MOLNAR: All right. So one of the concerns that just comes to me, first off, if we say that it may be a distinct retail product market is we don't really have an ability to wait.
532 You may be aware that the Telecom Act requires services to be regulated unless it's ascertained they are part of a product market where there is sufficient competition. So I'm trying to square that notion of waiting, looking at the retail market, with our requirement that we regulate all products and services unless it's determined there is or will be competition sufficient to discipline the market.
533 MR. HUGHES: So maybe, in economics code, I was cognizant of that in the beginning of the answer that we are focusing on the evidence in the retail markets. We are focused on what consumers who have adopted FTTP, are they willing or not willing to substitute to the alternative in light of a small but significant price increase? That impacts the degree to which there is wholesale market power.
534 If indeed the retail market is quite vigorously competitive, then this will discipline the ability of the wholesaler to engage in vertical foreclosure or raise the price because the only -- the value of that wholesale service is to provide retail.
535 So if you can't increase -- if you can't -- if you don't have market power downstream it's going to be very difficult to -- there is going to be an -- there is going to be an effective constraint on your ability to act that way in the wholesale market.
536 COMMISSIONER MOLNAR: But would you agree based on our Act we have to make a determination as to whether or not there is sufficient competition in the retail market?
537 MR. LESCHINSKY: Sure. I think our answer on this is that you should look at the evidence before even the proceeding. We have brought our comments here today based on the evidence that we have seen and you have additional information available to you on the record.
538 What we are, I think, recommending is a position based on the information that is available. We recognize there is a difference between what we have and what you have and our recommendation is based on what we believe the evidence in the proceeding is. So I think that should give you some sort of direction.
539 COMMISSIONER MOLNAR: But I'm just trying to square it with your recommendation that we gather information and wait and see.
540 MR. LESCHINSKY: So I think that it's a two-part point.
541 Number one, we are saying if the information that you have on your confidential record gives you the ability to make a finding different than ours, perhaps you can make a finding today.
542 But I think what we are saying is that based on the evidence here today that we have seen our position is a wait and see approach which would mean not a decision.
543 COMMISSIONER MOLNAR: Wait and see on the wholesale, on mandating wholesale?
544 MR. LESCHINSKY: Yes.
545 COMMISSIONER MOLNAR: Because we don't have an ability to wait and see on retail.
546 MR. HUGHES: That if -- given the information on the public record, our recommendation is that in order to make a decision in the wholesale market that is going to be consistent with delivering benefits to consumers and businesses promoting economic efficiency, that that decision on the wholesale market needs that vital piece of information to make that link. And even though -- and the link is necessary and just a function of the problem you are faced with. So given your objective there is no alternative but to get this piece of information to make the right decision at wholesale.
547 I'm not speaking to whether this analysis is technically what you are looking for when you are charged with the decision, but we are just -- really, what we are saying is given the purpose of your decision is to do this --
548 COMMISSIONER MOLNAR: Theoretically if we didn't have an Act that required us to --
549 MR. HUGHES: Sorry?
550 COMMISSIONER MOLNAR: I said I think what you're saying, and tell me if I'm wrong, is theoretically if we didn't have an Act that required us to regulate all services, unless there is a determination that those services are part of the product market that has sufficient competition to discipline their activities, if we didn't have that we should sit back and wait and see what happens in the market and decide it later.
551 MR. HUGHES: I think I agree with everything except if you didn't have the Act. I'm speaking as an economist, but I am speaking for the Bureau.
552 I believe that you are charged with trying to discharge those duties which you have under that Act in order to get those benefits to consumers and businesses in the economy. I think -- however the technicalities work out, I think it is important for you to think about the impact on consumers and on the economy when you make that decision.
553 So I don't see how you can ignore this important piece of information. If you believe our submission that it matters to that link of understanding what your decision is going to impact the economy, I think it's hard to ignore that, the existence of the Act.
554 COMMISSIONER MOLNAR: Okay. Well, I'm going to move on although I'm not quite sure. Again, I struggle in trying to understand how the Act allows us to wait and see.
555 MR. LESCHINSKY: By making a determination now on the evidence that exists before you now, given the weight that should be ascribed to it, and then monitoring the evidence on a go forward basis with the need to revisit.
556 COMMISSIONER MOLNAR: I'm sorry. Can you say that again?
557 MR. LESCHINSKY: So I think, if I can state the position, it's to look at the evidence now and to make a decision based on the evidence now. I think what we are saying is that there is a key piece of information, and Mr. Hughes has given the link between the wholesale and the retail market on that to say we need this evidence.
558 What we are talking about is the sufficiency of the evidence today as we have seen on the public record to make a finding. We recognize that you may have more information than we do, but that based on the information that we see now we would make a recommendation now and then, in addition to that, consider the monitoring in the future.
559 COMMISSIONER MOLNAR: So you begin with the premise that it may be a distinct product market?
560 MR. HUGHES: It may or may not be, yes.
561 COMMISSIONER MOLNAR: May or may not be.
562 MR. HUGHES: Depending on the facts.
563 COMMISSIONER MOLNAR: Yeah, and then you laid out the facts. You said one of the facts is consumers would be willing to switch from fibre-to-the- prem to existing high-speed services.
564 MR. HUGHES: Yes.
565 COMMISSIONER MOLNAR: That's all existing high-speed services including those provided -- all services provided in the market today?
566 MR. HUGHES: All would be relevant, yes, certainly.
567 COMMISSIONER MOLNAR: Okay. So if we were looking at a service delivered over fibre-to-the- prem in comparison to a service provided by a cableco of the equivalent speed --
568 MR. HUGHES: Yes.
569 COMMISSIONER MOLNAR: -- that would be relevant, whether you switched from one to the other?
570 MR. HUGHES: Yes. Or different speeds. Whatever the consumer -- the consumer's behaviour is what's key here.
571 COMMISSIONER MOLNAR: Okay. Why did you begin by assuming it may be a separate product market?
572 MR. HUGHES: So I guess --
573 COMMISSIONER MOLNAR: Do you have any indications like your front-end information that made you believe it may be a distinct product market? What would that be?
574 MR. HUGHES: I think what we're saying here is that -- I mean what we are saying here is that we always are going to address these questions. It may or may not be and we are going to be guided by the facts.
575 To the extent there is some functionality relationship between these products -- I mean it's not a tomato -- so I mean your priors, you are going to come in with certain priors that it's a more relevant and more important consideration. So you are going to have some -- you are going to be saying that there is weight on that. But at the end of the day we are guided by the evidence and the consumer behaviour.
576 COMMISSIONER MOLNAR: Okay. Well, I guess I understand what you're saying. I mean, I'm just trying to understand this relative to technology evolutions that have occurred in the past, right.
577 I mean if you talk about the high-speed market, and this case is talking about the incumbent telephone companies networks that we are speaking of in large part here -- and I mean they have gone through a continued evolution to increase speeds within high speed. You know, they went from the loop to ADSL, ADSL2, VDSL. None of those were considered distinct product markets and now we are to next gen, which is another, you know, another speed increase, if you will.
578 MR. HUGHES: Yes. Yes.
579 COMMISSIONER MOLNAR: I'm not clear besides the speed increase what we would say would cause us to believe it is a distinct product market.
580 MR. HUGHES: I think the difference here is that you are considering a new discrete step and with the possible implications we were just discussing and that heightens --
581 COMMISSIONER MOLNAR: As we, you know, heard argued a few years ago when they went fibre-to-the-node; right? They went fibre-to-the-node. Then they went closer to the prem and closer to the prem and then they bonded pairs and went closer to the prem. So how is it --
582 MR. HUGHES: Well, and so I guess --
583 COMMISSIONER MOLNAR: -- and that was an overlay. This is an overlay. What causes this to be distinct?
584 MR. HUGHES: In any case the same principles apply and the same evidence would apply and you could conceivably -- if this were different circumstances you might have -- you might be looking at different relevant product markets. But here this is the question we are looking at and we see the importance of getting this decision right. Therefore, that makes us -- heightens the priority in our mind of highlighting this consideration, this factual determination which is always there today.
585 COMMISSIONER MOLNAR: So it's no different. You just think it's more important?
586 MR. HUGHES: I have no reason to say whether -- I'm saying that this is quite important. The other kinds of relevant product market definitions could be very important. It's just they are not the issues that we are looking at the moment. The same facts apply. The same principles apply.
587 COMMISSIONER MOLNAR: Okay. I want to ask you about the Commission's reliance on the essential services test. You believe that is appropriate?
588 MR. HUGHES: I don't see any difficulty.
589 COMMISSIONER MOLNAR: And the definition that we use today for essential services you --
590 MR. HUGHES: Yes.
591 COMMISSIONER MOLNAR: -- believe that is appropriate?
592 MR. HUGHES: Yes.
593 COMMISSIONER MOLNAR: Did you apply an analysis of that on your determination that unbundled local loops, they were determined to be conditionally essential in the past? In your analysis did you take into consideration --
594 MR. HUGHES: Okay. So when I said yes to that I'm talking about the conceptual framework and the definition. We don't really have the detailed industry knowledge or the role to --
595 COMMISSIONER MOLNAR: To apply it.
596 MR. HUGHES: -- to get into the way it has been applied over time and the various definitions. Our role as the Competition Bureau is more at a higher level directional focus. So I thought we were going to go down the road of the definition. If you are going to get into the details, my apologies, I can't really comment.
597 COMMISSIONER MOLNAR: Well, I think you said you agree with the definition --
598 MR. HUGHES: I agree with the definition.
599 COMMISSIONER MOLNAR: -- and I think the definition has been aligned with the definition you would use as well, if I understand correctly.
600 MR. HUGHES: We support the definition.
601 COMMISSIONER MOLNAR: Right. So in applying the definition you would apply the definition by distinct product or geographic and product markets. Correct?
602 MR. HUGHES: Yes.
603 COMMISSIONER MOLNAR: Did you take that into consideration when you determined that unbundled local loops are no longer -- should no longer be mandated?
604 MR. HUGHES: That was certainly part of the equation. To the extent we didn't have all the information necessary to bring that all -- wrestle that all the way down to ground, then a judgment which we have already discussed in the limitations of that --
605 COMMISSIONER MOLNAR: Right.
606 MR. HUGHES: -- and the conundrum that we were chatting about are all possibilities. These reflect information we just simply don't have.
607 COMMISSIONER MOLNAR: Right. So with the information it should be applied, would you say, at what kind of geographic level?
608 MR. HUGHES: So the way we have approached this historically and would continue to support is that theoretically this could be at a very, very small local level.
609 And the Bureau's approach and economic principles suggest that rather than doing a market definition for 20 million lots that we are -- or business locations -- that we are going to aggregate locations and geographic areas where we do no violence to the competitive effects. So two houses next to each other who both have two competitors, the same competitors, there is no -- it's not clear that there is any basis for -- any way to price discriminate. We would simply as a matter of convenience aggregate those together.
610 Depending on the question, the purest way to do this is to look at the two footprints of the networks that are at issue and use those networks as the furthest you could possibly aggregate and not do violence to the competitive analysis. So I mean, to state the obvious but just to help spin it out, if we had -- if one aggregated beyond the footprint of the networks under consideration and included a location that only had one wire where everyone else had two and they only had one alternative where everybody else had two, then you would be pooling the consumers who are different and you would lose -- you would do violence to the analysis. So we have been faced historically with this question.
611 A lot of times it has been proposed to us that could we use it in exchange as a geographic market? Depending on the circumstances that is usually fine. We haven't found any particular reasons to go more narrow than that. Could you go broader than that? Probably, and it really depends on the circumstances.
612 But that's really the guts of our analysis.
613 COMMISSIONER MOLNAR: Okay. Thanks. Those are my questions.
614 THE CHAIRPERSON: Mr. Vice-Chair of Broadcasting...?
615 COMMISSIONER PENTEFOUNTAS: Thank you, Mr. Chairman.
616 I just want to touch on a couple of points, Mr. Hughes; one, as it regards your position on FTTP and perhaps bring bundles into the picture as well. We are obviously not chartering any new ground here. The Chair has thoroughly gone through most of these issues.
617 I understand your position on FTTP would be that if the Commission is to err potentially, it best err on the side of caution in that you don't want to disincent investment in the network. Would that be an appropriate sort of starting point?
618 MR. HUGHES: I think that's consistent. I hate to be -- I hate to split hairs here, but really we get the right market definitions so that we get the right answer. But I think we are in the same -- we are moving in the same direction.
619 COMMISSIONER PENTEFOUNTAS: Yeah. I understand the market definition and I don't want to get back into it. I think my colleague covered that.
620 MR. HUGHES: Me either. I'm just -- but I'm just trying to find some common ground.
621 COMMISSIONER PENTEFOUNTAS: But I think we are on the same track.
622 MR. HUGHES: I agree.
623 COMMISSIONER PENTEFOUNTAS: Isn't there a risk -- and again I get back to the Chair's analogy about doctors and coroners, and we can get at the Hippocratic oaths if we wish but we best not. Are we better off sacrificing sort of independent ISPs as opposed to the potential for a disincentive to invest in the networks?
624 If you are going to pick one, and it goes back to a sort of Sophie's Choice-type scenario, which would it be?
625 MR. HUGHES: I can't responsibly --
626 COMMISSIONER PENTEFOUNTAS: Could one not conclude following your presentation, given your desire that we not make the bigger of the two mistakes that the independent ISPs could potentially be sacrificed --
627 MR. HUGHES: Well, that's a factual --
628 COMMISSIONER PENTEFOUNTAS: -- if we are wrong?
629 MR. HUGHES: -- that's a factual question and we have certainly given you some considerations that we think may be helpful.
630 But it's possible that the benefits -- there are benefits on both sides of this equation that if FTTP is a -- and I'm speaking hypothetically. I don't have the facts to do this, but just to sort of spin it out a little bit to give you an idea of our thinking here, if FTTP is indeed a distinct relevant product market --
631 COMMISSIONER PENTEFOUNTAS: Yes.
632 MR. HUGHES: -- that is to say, and I apologize for repeating myself in a sense, that is that other speeds and other technologies aren't an effective constraint on that incumbent provider. That incumbent provider may indeed have an incentive to do two things.
633 One is to exercise market power and raise prices and higher prices and less output will deny consumers the benefits of -- the full benefits of this technology.
634 And more to your point perhaps, if they do have that market power it really brings into play the real possibility that they will have an incentive to engage in vertical foreclosure. That an ISP that has something very valuable to consumers goes knocking on the door and the incumbents of this hypothetical situation, which I do not have the facts to say is true, knocks on the door of this incumbent in a relevant product market they are alone in and says, "Well, yeah, that's going to benefit consumers and I'm going to make some money off of that, but what is really going to hurt me as you are going to restrict my ability to exercise market power with respect to all the other consumers and for that reason and that reason alone I'm slamming the door in your face."
635 So there are risks on both sides of this equation. If it's competitive and -- excuse me -- if it's not a distinct relevant product market and there is competition with two facilities-based competitors and there is a risk that the regulation may be unnecessary and that consumers will be denied benefits that way, investments may be curtailed in that way.
636 But there is an equally possible outcome -- I don't know about equally. There is a hypothetical -- in this hypothetical world we are making up here, it is completely possible that it is a distinct relevant market and in such a new and innovative area that a remedy may be very appropriate and may have consumer benefits.
637 COMMISSIONER PENTEFOUNTAS: Would you not also be able to continue to incentive and induce investment? Isn't there a rate at which mandating access would supply the appropriate ROI to the incumbent whereby investment would not be disincented, short of retail obviously?
638 MR. HUGHES: Well, so now we get into -- now we are moving further down our hypothetical line. If it was a hypothetical market --
639 COMMISSIONER PENTEFOUNTAS: If the risk is -- and I'm raising the question because if the risk is that we are disincenting investment, are there not ways of minimizing that risk and still offering second-party access, if you will, to the network?
640 MR. HUGHES: And the answer to that question is we do think there is a way and that way is to do what we suggested you do in wireless, which is to address vertical foreclosure incentives if need be. When you see that's a problem -- if you look at this distinct relevant product market and you find there is market power -- you find that there is -- in addition to market power these players are -- these incumbents are using their control of the facilities to protect that market power by raising rivals' costs, you ought to stop that, have a remedy to deal with that.
641 And in our submission, that kind of addressing vertical foreclosure is a way to get the benefits of competition from these other players where it's a distinct, relevant product market without distorting innovation in investment.
642 COMMISSIONER PENTEFOUNTAS: So would that help you sort of revise your position? Because you raised quite a red flag here in terms of investment. There are ways of ensuring that investment will not be disincented.
643 MR. HUGHES: Well, our submission is that the best way to make this -- to find this desirable outcome, is to do a market power analysis the way we did in wireless. Identify whether there is a problem, look at the evidence and go in that direction. And we can't make that market power assessment without the relevant product market definition. We don't have the evidence to get there.
644 So it's not a red flag as much as basically us saying we don't have enough evidence responsibly to give you a recommendation on this new problem. Here is a way we can talk about making it better. And maybe there is some other document, maybe there is some stuff on the private record, but that's the way to get there.
645 COMMISSIONER PENTEFOUNTAS: And you are not concerned that once we have all that relevant information it may be too late?
646 MR. HUGHES: Well, there's risks on both sides of the coin if you don't get -- my retort is a little bit of a devil's advocate. If you don't get the information you may make the wrong decision and that has consequences, too.
647 COMMISSIONER PENTEFOUNTAS: Okay.
648 On the bundling front, briefly, you follow markets, be they relevant product markets or not. Bundling is a phenomenon that's here to stay; you would agree with that?
649 MR. HUGHES: Yes, I think.
650 COMMISSIONER PENTEFOUNTAS: You think, yes.
651 Is there some inherent unfairness for certain players -- we could talk about independent ISPs -- to not be able to offer a triple or quad play and is that disadvantage something worth noting if you want to create a competitive market?
652 MR. HUGHES: I will answer that indirectly and hopefully answer your question.
653 My first reaction to that is that when we are looking at whether any particular player, including some hypothetically that had FTTP or otherwise, and we are saying is that player going to be disciplined, the ability to raise prices by incumbent "X" or, excuse me, player "X" --
654 COMMISSIONER PENTEFOUNTAS: Player.
655 MR. HUGHES: -- one of the first questions that comes to mind is can they offer the full bundle?
656 COMMISSIONER PENTEFOUNTAS: And if they can't?
657 MR. HUGHES: We would be much more skeptical of their ability. Assuming again we are in a little bit of a hypothetical world where we were convinced -- we already said bundling is important and here to stay, but bundling is so important that it meets the market test of a relevant product market that, yes, they are a less effective competitor, because people are not going to be able to turn there.
658 COMMISSIONER PENTEFOUNTAS: Ergo less capable of disciplining the incumbent's power in the market.
659 MR. HUGHES: Right.
660 COMMISSIONER PENTEFOUNTAS: Right, okay.
661 Thank you, Mr. Hughes.
662 THE CHAIRPERSON: Thank you.
663 Gentlemen, those are our questions. That will be all, thanks.
664 Madame la Secrétaire...?
665 LA SECRÉTAIRE : Merci, Monsieur le Président.
666 I would now invite our next presenter, Item 2 on the agenda, Dr. Reza Rajabuin. For the record, he is a Research fellow from Ted Rogers School of information Technology Management at Ryerson University.
667 Take your time. When you are ready you may start your presentation.
668 THE CHAIRPERSON: Welcome. Please go ahead.
669 DR. RAJABIUN: Good morning. Thank you very much for inviting us to this hearing.
670 Unfortunately my colleague, Professor Middleton, couldn't be here today. She is in Australia working on broadband policy issues there and she sends her regrets. I would like to apologize in advance also since I won't be able to be here next week for the response phase of this proceeding since I have commitments abroad also.
671 Our submission draws on a number of research projects we have completed over the past few years that evaluate the relationship between the design of public policy and the development of broadband network infrastructure both in Canada and internationally. Studies that inform our comments have been published in peer-reviewed journals and are cited in our written submission.
672 We are particularly pleased to hear the Chair has recently reiterated the Commission's commitment to ensuring "Canadians have access to a world-class communication system". This approach to defining CRTC's policy objectives provides a basis for empirically-based debate and decision making regarding particular policy instruments, including wholesale access obligations.
673 Our reading of interventions by other parties suggests that in the next two weeks you are going to be confronted with a great deal of contradictory evidence about the state of the Canadian communications system, some of it bordering on hyperbole. Certain parties have submitted very long and detailed interventions arguing there is already substantial retail market competition, Canadians have access to the best/fastest networks, and that attempts by the Commission to extend wholesale obligations to fibre-to-the-premises or fibre-to-the-node transport facilities will force them to reduce their capital expenditures on the broadband networks Canadians demand.
674 The parties tend to argue that the "public interest" will be served best either by continuing the regulatory framework formalized in Telecom Decision 2008-17 or going even further by reducing the scope of the regulations, i.e. replicating the U.S. policy model of forbearance. Given that these parties tend to dominate the fixed and mobile markets, we submit considering and accounting for threats of reduced investment by large incumbents should be an integral element of any attempt to reconfigure the wholesale regime.
675 Others will offer a more critical reading of the evidence about the competitive landscape, pointing to international data documenting that retail and wholesale access prices in Canada tend to be relatively high and average service quality levels are low.
676 This more diverse group includes consumer and business advocacy organizations, content and application providers. Lower levels of government and public entities such as educational institutions are urging the CRTC to do something about the state of the retail markets by reforming the wholesale regulatory framework. They also offer a wide range of proposals for the Commission to consider, including functional or structural separation, equivalence of inputs as in the EU, access to transport/backhaul facilities, reducing regulated rates to essential facilities, and so on.
677 Our research suggests that reality lies somewhere in the middle of these contradictory perspectives. In case the Commission determines that adjustments to the Telecom Decision 2008-17 framework are required to ensure Canadians have access to a "world-class" infrastructure, we offer an approach to reforming the wholesale regime that aims to enhance the pace of progress in network improvements in a technologically and competitively neutral mandate (sic) while minimizing interference with market forces as mandated under the 2006 Policy Direction.
678 Consider the policy dilemma you are facing in this matter as an empirical puzzle. On the one hand the CRTC has long emphasized investment incentives of DSL and cable broadband operators in its decision making, a strategy that appears to have been relatively successful in promoting overall capital expenditures in telecoms. According to ITU data, at least since the collapse of the telecom bubble in the early 2000s, telecom capital expenditure levels in Canada have been higher than the average for high-income countries. More recent CRTC data and disclosures from operators in the course of this proceeding indicate capital expenditures growth in fixed networks has remained strong.
679 Despite relatively high investment levels, at least since the Telecommunications Policy Review Panel's final report in 2006, federal policymakers have recognized that Canada is beginning to lag behind other advanced economies. The Review Panel noticed Canada's comparative decline in broadband penetration rankings.
680 Industry Canada's 2010 Digital Strategy Consultation paper identified the problem in terms of broadband service quality in Canada, highlighting that, and I quote:
"Canada ranks in the middle of the pack in average or median real-world download speeds according to sources such as Akamai and Speedtest."
681 More recent data from these and other network performance test beds document the situation has not changed very much since Industry Canada's characterization back in 2010. Broadband network performance in terms of download speeds in Canada remains about average, relative to other advanced economies. If average or mediocre is considered good enough and the Commission determines that, to paraphrase the Chair, the "sky is not falling", then retaining the status quo regulatory arrangements might appear to be a viable option.
682 However, comparative international rankings commonly cited in these debates hide a number of important facts about the state of Canada's broadband infrastructure. In terms of the magnitude of the performance gap, service quality levels end users in Canada can achieve are about two to three times lower than leading countries in terms of download speeds in a number of leading countries in Europe and Asia. Furthermore, the magnitude of the gap with the leading cluster is substantially larger in terms of upload speeds, around five to seven times slower.
683 The particularly asymmetric nature of the Canadian broadband services represents an important impediment to the adoption of various personal, business and public service applications requiring reliable symmetric connectivity speeds; for instance, cloud services, e-learning, e-health and emergency services.
684 From a long term perspective, it is worrying that the diffusion of FTTP networks in Canada remains negligible, around 2 to 3 percent depending on which data we use, which is around five to seven times lower than the OECD average and around two and a half to three times the U.S. The lack of access to high-capacity fibre connections is not only a problem for individuals and businesses that demand content and application services that require this kind of connectivity, symmetric connectivity at very high speeds, but also forces high demand end users to remain on legacy DSL and cable networks, exacerbating congestion on local links and routers that degrade quality of experience for others in the vicinity.
685 Despite the fact that the CRTC has clearly signalled its commitment to forebear from regulating wholesale access to fibre access networks under 2008-17 Telecom Decision, disincentives to allocate capital from legacy platforms to the deployment of advanced FTTP networks apparently remain strong. Today, six years later, high-speed and symmetric fibre connections remain largely unavailable to Canadian households and businesses, even in the relatively densely populated urban areas where the costs of deploying fixed network assets are relatively low.
686 The Canadian experience contradicts the theoretical arguments that you have heard and you will be hearing about that forbearance from imposing essential facilities obligations will foster investment and diffusion of next generation networks.
687 To identify which policy strategies and business models are more or less conducive to promoting private sector incentives to supply internet access services, we have studied the evolution of internet connectivity using broadband speed measurements within Canada and internationally.
688 The Canadian experience offers a number of important insights worth considering.
689 Due to the differences in the relative costs of upgrading network capacity and deploying new technologies, the Commission's decisions about the design of wholesale access to old and new platforms have different implications for the supply of internet access services in rural and urban areas. In relatively densely populated urban settings, it might be feasible and economically justifiable for multiple platforms to coexist. As the costs of deploying networks increase with lower population densities and challenging geographical obstacles, policies that promote platform competition become less efficient and those that promote cooperation become even more imperative.
690 Lack of effective essential facilities obligations to interconnect third parties to local access, switching and backhaul facilities at the federal level represents an expensive impediment to the ability of lower levels of government to address market failures. For example, to induce essential facilities operators to maintain open access points and transport facilities, Alberta and British Columbia have had to resort to compensating backbone providers with expensive procurement guarantees, invest directly in an open access backbone, and other have had to directly subsidize the incumbents to open up their local switching and transport facilities. An example of that is the Eastern Ontario Regional Network which is nearby.
691 While costly for lower levels of government, our research documents that provinces with policies that encourage open access to transport facilities have developed higher quality networks.
692 We submit that federal wholesale access regulations that promote cooperation and risk sharing can reduce the costs facing sub-national governments trying to address market failures and promote adoption of advanced platforms.
693 Lessons from the provincial and rural broadband experience are particularly important because under Canada's federalist Constitution it is the provinces -- I mean, the municipalities that are ultimately responsible for delivering social and business infrastructure that tracks people, capital and sustainable economic development.
694 Inspired by the puzzling dissonance between investment inputs and broadband network outcomes in Canada, we have also looked at the relationship between regulation, investment and network development in the European Union. Our research confirms the results of some of the studies you will be hearing about in the next week, documenting a negative correlation between the intensity or density of regulatory obligations and aggregate capital expenditure levels. However, we do not find a statistically significant link between capital input levels and differences in broadband network quality.
695 Moreover, we find that countries with regulatory regimes that were more effective in promoting service-based competition have developed relatively higher quality networks and are further along the path in the transition from first generation broadband to next generation fibre networks. In other words, relatively clear and predictable access obligations appear to increase the pace of creative destruction from sunset to sunrise platforms.
696 We do not contend that a technologically and competitively neutral essential facilities regime will by itself reverse noted empirical trends about broadband quality and technological change in Canada. In the very long term operators of legacy platforms will extend fibre links closer to end users as old technologies are decommissioned. Nevertheless, without a substantive shift in the incentive structure of the industry, we do not believe Canada is going to catch up with the leading cluster of advanced economies in terms of average connection quality and fibre diffusion anytime soon.
697 In case the Commission determines that the pace of progress is not sufficient, then we offer a number of proposals for reforming wholesale market rules that might help achieve these objectives.
698 (a) To promote cooperation and risk sharing, reduce inefficient duplication, and to comply with the technological and competitive neutrality mandate of the 2006 Policy Direction, the Commission has the option to extend the scope of wholesale access obligations to fibre transport and hypothetical FTTP access networks of the future.
699 (b) To limit the threat of under-investment and promote incentives to channel capital expenditures into next generation networks, the Commission could then adopt a relatively high mark-up level for regulated access to advanced platforms relative to those on legacy platforms. This might induce some operators to increase the pace of their transition to fibre and if they don't, allows for other entities to start filling up the gaps, as they are already doing in many municipalities for example. In the very long term as FTTP platforms are deployed and their fixed costs are amortized, the Commission can gradually reduce the mark-up level to reflect incremental toll costs.
700 (c) By continuing to allow market transactions at prices that vary from the regulated price, as it already does, the Commission will eliminate the likelihood that the new obligations will interfere with the operation of market forces pursuant to the 2006 Policy Direction.
701 Finally, to reduce the costs of compliance for incumbents with wholesale obligations and regulatory uncertainties about the scope of access to particular classes of facilities, we suggest simplifying and consolidating service category classifications.
702 Thank you very much, and I would be pleased to answer your questions.
703 THE CHAIRPERSON: Thank you very much.
704 Vice-Chair Telecom will start the questions. Thanks.
705 COMMISSIONER MENZIES: Thank you. How would you be more specific about how your proposals -- how you propose we structure a system in terms of cooperation?
706 DR. RAJABIUN: In terms of cooperation?
707 COMMISSIONER MENZIES: You want a more cooperative investment model so how would that be structured --
708 DR. RAJABIUN: Well, our point --
709 COMMISSIONER MENZIES: -- and how would you ensure that it didn't make people nervous about being anticompetitive in a sense?
710 DR. RAJABIUN: -- it is in a sense anticompetitive because one objective that we have here is to reduce the duplication that is going into the networks.
711 One reason why we have very high investments, well but very relatively poor outcomes, network outcomes in Canada is because we have a very special structure already where cable companies have the -- we have the largest degree of platform competition between cable and DSL in OECD countries.
712 So that is creating -- and that worked very well for expanding access in the early to mid-2000s, into the late 2000s, but what is happening is that you are getting basically two relatively poor networks instead of having one really good fibre network that can handle the capacity.
713 So by having a notional price, which is our argument for having a high mark-up on the next generation platforms that don't exist yet, is to reduce market uncertainty for investors and that means both public and private investors in fibre access networks, and by reducing that uncertainty you're creating an option price by which people know that they can buy the capacity once it's installed.
714 If that cooperation can come from people -- it can come from many different angles. For example, in some areas that the costs are very high, the incumbents might choose to cooperate together. I don't think that's very likely, but in theory they could, to build a fibre network.
715 COMMISSIONER MENZIES: What I'm trying to get at is what specifics that would incent that behaviour. I mean, where would publicly-traded companies be able to argue that shareholder value was enhanced by cooperating and then competing on that network as opposed to competing strictly on a facilities basis in terms of building a better network or competing, or being able to offer higher speeds and that sort of stuff?
716 Because, I mean, the companies will operate to enhance your holder value, it is a big part of their operations. I'm just trying to get at what sort of specific regulatory or structural systemic tool you could use so that they would be more incented, they would get a better return by cooperating, the companies themselves, than duplicating?
717 DR. RAJABIUN: But they're not building any right now, so it's very limited build and I understand that cooperation comes over time as companies begin to specialize, they determine where to allocate their resources more so you can develop specialized network companies that already are coming about in cities, from some of the interveners, in Calgary and Coquitlam that are publicly owned but they are specialized network operators and they deliver service through a number of different service providers on top of it.
718 That is the type of cooperation we are talking about.
719 COMMISSIONER MENZIES: Okay. Do you have any advice on how it would be structured so that it -- two issues: one, that it wouldn't be anti-competitive --
720 DR. RAJABIUN: M'hmm.
721 COMMISSIONER MENZIES: -- in terms of its structure, and how would you prevent it from evolving into a sort of monopoly cartel-type model where sort of once you're in the cartel it's a cooperation but it becomes a barrier for those who would not be -- have party invitations?
722 DR. RAJABIUN: M'hmm. And that's -- to prevent that, one approach that we said is as fibre becomes more diffuse, you can start reducing the mark-up rate; and the second is simplifying regulatory uncertainties.
723 And that's one thing that CRTC could do quite a bit, is to make the rules of access much more credible and easier to understand by domestic and international investors that want to come into this market.
724 And basically, besides simplifying the rules, the only instruments that the CRTC has is the relative prices, the price-settings approach that it will adopt if it chooses to extend the scope of the regulations to fibre.
725 So the question that we have not answered in our submission, and some of the other interveners asked us about it and we didn't want to get into it because I think the first decision is whether you want to extend the scope of the framework in a technologically neutral manner.
726 Once that decision has been made, then there is quite a bit of room about debating how to adjust the relative prices between legacy and next generation platforms, so you create the right incentives that you require and there's trade-offs between those kinds of pricing strategies.
727 So, for example, if you want, you can adopt the same mark-up level that we have right now in FTTP on future FTTP, but since there is so many concerns about the costing methodologies that are used and they're relatively high prices of wholesale access in Canada relative to other countries, is to basically reduce the margins on the legacy platforms.
728 So that would increase the incentives to invest in the next generation platforms basically and reduces it on the older platforms. So you are reducing the duplication on the old platforms and you're channelling investment to the new platforms and that mitigates the risk that we just heard about of the underinvestment, creating underinvestment in certain types of...
729 COMMISSIONER MENZIES: Just so I get it right. So you're disincenting usage of legacy platforms in order to incent the build?
730 DR. RAJABIUN: You're not discentivizing the usage, you're discentivizing investments in them.
731 The usage is different because you get product differentiation, so a person like me that just uses e-mail that is a luddite can stay on the legacy platforms, but for the business, for the gamers, they can move to the next generation platforms and that actually can reduce the quality of service on the legacy platforms if there is that option for the high-demand users to bypass the legacy platforms, which there isn't right now.
732 COMMISSIONER MENZIES: I'm still kind of stuck on how it would be structured so that people wouldn't still duplicate. I mean, I think there are examples -- I can't give you a specific one off the top of my head, but in Alberta where there was a big public investment in the Super Net, for instance, that still didn't stop other companies from building their own network, building of their own network, so it's been duplicated in terms of that.
733 So how would you address it; would your model sort of forbid duplication, or --
734 DR. RAJABIUN: No, no.
735 COMMISSIONER MENZIES: -- you want to incent that cooperation?
736 DR. RAJABIUN: Incent that cooperation if they're --
737 COMMISSIONER MENZIES: I'm still trying to get at what sort of specific regulatory tool you might use to do that.
738 DR. RAJABIUN: The pricing model you will use.
739 COMMISSIONER MENZIES: It's all about...?
740 DR. RAJABIUN: It's all about the pricing --
741 COMMISSIONER MENZIES: Well, it is all about the pricing today.
742 DR. RAJABIUN: -- but the other tools that CRTC have, pricing model is the key tool at the wholesale level and the credibility of the rules.
743 So those are the two instruments that you basically have and you can adjust, and the scope of the obligations which is central here, but beside the scope of the obligations is those two instruments that are available.
744 COMMISSIONER MENZIES: Right. Well, you've suggested that we mandate access to fibre but set a very high price for the third-party access; right, and that's why I'm trying to get at, why wouldn't those third parties simply overlay fibre networks on their current networks to avoid the cost of access to another network?
745 DR. RAJABIUN: Well, they could. You can't control what they decide to do and it will depend probably on geography and cost structure and what kind of market it is.
746 So in a rural area there is going to be no duplication happening because the cooperation will be essential for getting the network out there. So there will be one company operating the network and hopefully reselling it.
747 But in an urban environment you could have -- duplication can continue and duplication can be useful in terms of redundancy of the network if the costs are justified; right?
748 COMMISSIONER MENZIES: So paragraph 34 of your submission you make the argument that if incumbent DSL and cable operators both build fibre platforms for their end customers that there will be inefficient duplication and overinvestment in fibre, right.
749 So do you have some -- what data or what evidence could you provide us to support that claim of inefficient duplication and overinvestment because some might look at it and say, well, that's facilities-based competition and that's a good thing.
750 DR. RAJABIUN: Yes, but the reason we have that facilities-based competition is because of the legacy that we had of having a cable -- nationwide cable networks in the past.
751 And that argument that -- sorry, it was paragraph 34, I just want to see there, that's all?
752 COMMISSIONER MENZIES: Yeah, it was paragraph 34.
753 DR. RAJABIUN: Okay, on the duplication. Well, I think the story of Canadian broadband system over the past few years is exactly the evidence that you need for recognizing that duplication.
754 Why do we have higher investment rates and lower quality networks, in relative terms? And part of it might be duplication and we would love to explore this issue further, but unfortunately, the disaggregated data on capital expenditures are not available and decisions have been made not to make them publicly available, but I think there are some things the CRTC could do, informing the data so it doesn't identify individual companies, and we can move forward with that.
755 But there is duplication, there is also inefficiency that can come from a lack of competitive discipline because there is very limited service-based competition just on the margin, right.
756 So you have two forms of inefficiencies in the system that we are trying to address with our proposal: one is the duplication and -- well, I guess three.
757 The first one, most important one, is the lack of financial incentives as we have seen over the past few years to deploy fibre, even in --
758 COMMISSIONER MENZIES: Essentially, that we'd be better off having one very high quality network, your argument is that that gets a better outcome than competition?
759 DR. RAJABIUN: In terms of transition to fibre, yes.
760 COMMISSIONER MENZIES: Okay. So in paragraph 7, you kind of make the point that the statutory framework of the Telecommunications Act and the Policy Direction contains the legal basis for justifying wholesale regulations that facilitate or promote competition.
761 Could you unpack that a little bit for us and explain how that might be because we could argue that the statutory objective of regulating with regard to the efficiency and competitiveness of telecommunications, section 7.(c) of the Act, provide all the legal elbow room that the CRTC requires.
762 DR. RAJABIUN: Yes. I'm saying that it does not -- the legal basis does not provide for promoting competition explicitly and formally. The Telecom Act does not have explicit reference to competition, there's competitive neutrality, there's investment, there's efficiency and this is -- I'm not a lawyer, but this is a legal point in the sense that, for example, the Competition Act you have promotion of competition versus maintenance of competition. So these are different standards of legal mandates that different regulatory agencies have.
763 And the reason -- and again, I'm not a legal historian behind what went into the thinking of writing the Telecommunications Act, but I think emphasis on efficiency and rurality and the access of Canadians to advanced networks are central to the objectives as they are set out under section 7 of the Telecom Act.
764 It's not an anti-trust law that says you have to promote competition. True, competition helps a lot and, as I mentioned, countries with higher levels of service-based competition have higher diffusion of fibre of next generation networks and this runs counter to the framework that is usually used in these debates of the trade-off between investment and competition. That trade-off is basically a first order condition.
765 So in the undergraduate economics textbooks you get that trade-off would occur, but as you get more sophisticated, second order conditions, you see the feedback effects between the incentives.
766 So you could actually be increasing investment incentives by enabling, by having a regulatory approach in place that allows, first, network operators to specialize in what they do best and service providers to look for customers and differentiate the service quality they provide.
767 COMMISSIONER MENZIES: I'm going to move on to the next question and I'll let the regulatory lawyers whose interest was probably aroused by your response follow up, if they wish.
768 Paragraph 9, you make the point that the U.S. strategy of forbearance is not appropriate in Canada due to specific institutional conditions that influence market outcomes in Canada.
769 Can you be a bit more specific about what those institutional conditions are that you're referring to?
770 DR. RAJABIUN: Well, one institutional condition and structure is the size, that's the most important one. So with a larger market that the U.S. has, smaller companies can achieve scale economies and they can enter in particular markets that seem like there is market failure and satisfy that demand. That's one aspect of it.
771 The second -- and that's why you have -- despite the fact that U.S. has clearly signals this forbearance strategy, you have much higher fibre diffusion in aggregate terms. True, it's localized in particular cities, but still about 80 per cent of the Canadian population lives in urban areas where it's pretty cheap to deploy fibre, especially right now.
772 And U.S. has a different geography, so I don't think you can have -- and also another important institutional consideration here is the continued protection from external control from international -- international protections that large incumbents continue to get. So there is pretty much no way for a hedge fund from the U.S. that thinks that this company is inefficient because -- this Canadian company is inefficient because it's not facing too much competitive discipline, to come in, take out the management and try to get those efficiencies out of that company.
773 And that pressure, that capital market corporate control pressure is a very important part of maintaining efficiency in very large companies where there is not that much of a competitive discipline at the retail level.
774 So the market for corporate control is very important.
775 COMMISSIONER MENZIES: Okay, I understand that. Yes, the next thing that caught our eye here is in paragraph 13, I quote:
"The adoption of a more robust essential facilities interconnection regime at the federal level would reduce the need for inducements by lower levels of government to operators of essential facilities to interconnect with third parties." (As read)
776 I'm just trying to get a sense in there of what aspects or elements, whatever word you want to use, of the current regime fall into the less robust category when you're talking about it?
777 DR. RAJABIUN: You can think about how, for example, the B.C. government has tried to make -- add to the federal regulatory regime, or the eastern Ontario regional network, they've had to add to the regulatory regime by basically making side payments to their incumbents that already have facilities to open them up to third parties in order to be able to deploy networks in particular places.
778 And I think the best evidence that you have from the Canadian experience, forget about the international stuff for now, is the Alberta and British Columbia experience, that despite -- and I'm not advocating giving procurement guarantees to one company in a market that the costs are falling so fast, that's very costly to the taxpayer to have such arguments, and actually one of our fellow interveners -- I wanted to mention this because I don't think they're showing up, or maybe they are -- is a school district in British Columbia, that they have to pay per student fees to the operator. So they cannot buy wholesale, there is the node there, it would be very cheap and easy for the school board to just connect to that node, but they can't do it, instead of paying...
779 So the experience from -- it is expensive, but the effect has been positive in terms of network improvements.
780 So Alberta and British Columbia have had the highest rate of growth in network improvements and this might be partly because they have a different competitive structure and different corporate governance structures, certain companies might be more efficient and more consumer friendly than the others.
781 So there is all these different variables that are in this. And one difference with here and the U.S. is also the regional fragmentation also that they don't have in the U.S., so the larger incumbents can achieve even stronger scale economies than they can in Canada because they are generally smaller. So that adds to the inefficiency of the system.
782 COMMISSIONER MENZIES: Okay, thanks. Paragraph 21, you make the point that despite relatively high capital spending in Canada on broadband infrastructure --
783 DR. RAJABIUN: M'hmm.
784 COMMISSIONER MENZIES: -- that this hasn't translated into the sort of capacity enhancement and technological change that you believe it should have and you attribute that to:
"...dynamic efficiency loss in the absence of competitive discipline and/or inefficient duplication of facilities as a result of too much platform competition." (As read)
785 DR. RAJABIUN: M'hmm.
786 COMMISSIONER MENZIES: Now, that kind of caught the eyes because it kind of suggests that you're saying that broadband markets in Canada might be too competitive.
787 DR. RAJABIUN: Depends. We are trying to differentiate between different kinds of competition. We want competition to adopt the new technologies, but we want consolidation to get rid of the sunset technologies.
788 So what our proposal is, is trying to bifurcate those two and enable the CRTC to create an incentive structure that promotes the adoption of the new one and getting rid of the old one. That's going to happen by itself anyway.
789 So in terms of the timeframes you were talking about when it will be -- you will have enough data to move forward, so at this rate that we are going we might have, say, 20 per cent fibre diffusion -- like what OECD averages right now is 16, 17 per cent; we would have something like that unless -- as long as we're not stuck in a low diffusion equilibrium permanently and some companies keep on deploying the fibre down to the end user, we'll get to the OECD average around 2025, 2030.
790 So the key question is whether you want -- if that pace of progress is fast enough or we want to have a regulatory infrastructure that tries to promote this. And I don't pretend that this is going to succeed, in the sense that there might be a lot of -- financial disincentives right now for fibre diffusion are very strong, especially for the incumbents.
791 So even if you decide to adopt this higher pricing strategy, there might be -- there's going to be a lot of informal barriers for other entities to come into the particular local markets.
792 COMMISSIONER MENZIES: That was one of the points I was just confused by, because I didn't think that anybody would need a regulator to tell them to spend less money on old stuff and more money on new stuff.
793 DR. RAJABIUN: But the money on the old stuff has been already spent, so it frees cashflows. That's the difference.
794 COMMISSIONER MENZIES: I see what you're saying.
795 DR. RAJABIUN: And so as long as you extend those free cashflows, you are -- basically you are able to pay the higher rates of return to the financial markets.
796 And this is another point, going back to the efficiency, another evidence of why -- another signal of this growing inefficiency of the Canadian telecom market is that Canadian operators have to pay very high yields to investors and we have some of the highest returns in the developed world, and that's not because of charity, that's because international investors and domestic investors, they recognize the problem in a sense and they require higher returns to lend money to these companies and that's why they have to pay a higher return to continue gaining that capital that they need to refurbish their networks or extend fibre in the future.
797 So financial market signals are very important in this case I think.
798 COMMISSIONER MENZIES: Thank you.
799 Paragraph 23, you recommend that we reduce the number of service categories from six to four: essential; non-essential; interconnection; and, public good.
800 You base that by saying that reduction would reduce uncertainties and reduce costs of incumbent compliance with the regulations.
801 So could you just elaborate a little bit what those benefits might be? You know, what is the origin of the benefit and its nature or something or estimates on how large those benefits might be if we did that?
802 DR. RAJABIUN: I can't really estimate that. That has to do with...
803 On the benefit side the cost reductions for the incumbents may not matter that much. But the uncertainties on the investors' side that want -- potential investors' side, about which particular access points they can have, they can access, is very important.
804 For example, I will give you a very micro-level example of a say an apartment building, a property developer, that has built a new housing complex and has fibre in there.
805 The question upon certainty about whether they can connect that complex to the fibre to denote backhaul infrastructure is very important. If they know they can certainly have that access, then they can basically buy wholesale, resell to whatever complex they have, and move forward.
806 When there is so much uncertainty about whether they have access and how hard they have to work to get that access, then they will just specialize in building and managing properties and they won't go into that side market, which might be beneficial not just for them, also for the people that are living there.
807 COMMISSIONER MENZIES: I have a couple questions on your oral presentation today stemming from that. In paragraph 11, and I don't need to read it all back to you, it is all on the record there. You are more or less making the argument that Canada's lagging behind in terms of the quality of its networks and expansion and that sort of stuff.
808 I just need you to clarify for me a little bit. Is that a cry for regulation or a cry for deregulation?
809 DR. RAJABIUN: The reason that is our approach, and I have other work in other fields on this basically the same issue, is that seems contradictory to the standard efficiency competition trade off is because there is two general economic schools of thought.
810 Some, as you have heard today, believe that competition and regulation are substitutable institutions. And that is more of a Chicago school approach to anti-trust analysis and regulation.
811 But there is also the Toulouse school with Jean-Jacques Laffont and Jean Tirole who won the Nobel prize this year, is that it is a different approach that they are complimenting.
812 So regulations can compliment the capacity of market systems to provide better services. And that is the fundamental argument that we have. And it just depends -- it is not regulation is bad markets are good. It is that well-designed regulations can compliment the capacity of market systems to deliver what is expected of them or to -- those efficient regulations can help companies translate capital inputs into market outcomes.
813 So there is a different between whether you are conceiving regulation as a substitute to competition or as a compliment to competition or market processes. And that is the argument.
814 COMMISSIONER MENZIES: When you talk about Canada's comparative standing sort of being in the middle of the pack, I guess some people will argue that it sort of isn't fair that where Canada ranks depends on the context of the geography, the density of some of those other countries.
815 So I wanted to be able to know to what extent you look at that. I mean, you can look at, in some studies, the top 10 performing countries. And you could probably fit all 10 of those countries inside British Columbia, right? I mean, you are talking Singapore, which is geographically the size of Calgary, right?
816 DR. RAJABIUN: M'hmm.
817 COMMISSIONER MENZIES: And Hong Kong, right, or Lithuania or I mean, countries that you can drive across, you can fit between Ottawa and Montreal and enjoy the scenery all the way.
818 DR. RAJABIUN: M'hmm.
819 COMMISSIONER MENZIES: And is that fair to look at the Canadian context when you have, you know, those being examples of your top 10 countries? And that maybe it would be more fair or more relevant to compare Canada with countries to which it is more comparable?
820 DR. RAJABIUN: In our research we do account for density, population density as a proxy for cost differences across countries. But I think it is a fair argument, because 80 per cent of the Canadian population lives in very low-cost areas for delivering telecom.
821 True, there is that 20 per cent that are in very remote areas, and it is precisely for them that I think our proposal is going to be more beneficial for people that are in higher cost areas than in lower cost areas. But it is going to be beneficial for lower cost areas also.
822 But in terms of comparative analysis, I would like to be clear about a couple of points. I said the rankings, because those are used in the debates and the digital strategy, the consultation paper used it as that.
823 But right after that, we do say that however those rankings are hiding a very important reality of the magnitude of the gap in Canada and countries that are pretty much or even more rural and difficult, say Scandinavian countries. Norway, drawing fibres into the fjords, that is very expensive work, but they have done it.
824 And in terms of rate of urbanization, Canada is pretty high up there. Okay, true, the distance between Tokyo and Kyoto might be shorter than the distance between Toronto and Vancouver, but percentages of population that live in rural areas in Japan is still higher than in Canada I believe. I don't have the statistics for it.
825 COMMISSIONER MENZIES: Right, just there is a lot of infrastructure between the points, the two points.
826 DR. RAJABIUN: Yes. And that is the key for it. And that, I think, very important for the specialization argument that we have. Is that companies that are able to build that infrastructure between the points need to be concentrating on that and everybody else needs to be trying to sell services that allow you to use the internet between 5:00 and 8:00 at night.
827 And in many places, it is pretty much you cannot use the internet, even though you might be paying for 20 megabits in the high-traffic periods in Canada right now. Basically, you can do email, that is it.
828 COMMISSIONER MENZIES: Okay. Just sort of then in summary. You are really recommending to us that we structure our wholesale regime and with the main purpose of incenting parties to deploy fibre on a shared or cooperative basis, right, to avoid duplication and over-investment --
829 DR. RAJABIUN: M'hmm.
830 COMMISSIONER MENZIES: -- as you put it?
831 Why don't those incentives already exist for companies? Why would it have to happen through a regulatory framework? As you have described, right, I mean why wouldn't you cooperate on a...? I mean, public investment in some areas has the Alberta SuperNet, you know, probably whatever structure is being contemplated for the Mackenzie Valley fibre, those sorts of things. Sort of structure things that way because people, you know, see that as the most efficient way to do it.
832 So you were going to say free cash flow?
833 DR. RAJABIUN: There is a couple of reasons. From the perspective of the incumbents is the free cash flow, from the legacy platform. So it is basically we are paying for our previous success in a sense right now. We would be succeeded by having these double platforms to develop very good quality network up to the mid-2000s, but then we are paying for that now in a sense.
834 The second reason that we may not be seeing this going back to the protection, the regulatory protection for the incumbents in terms of the management side, and also international investors are very afraid of coming to the Canadian market now after the past few years.
835 And that is why we have the argument about simplifying and consolidating the categories, simplifying the rules and making them readily understandable by market participants, not just people that are very specialized in how the telecom law works in this circle.
836 We all know what is going on. But people that are looking around for investment opportunities around the world are not -- that information has a lot of cost for them.
837 COMMISSIONER MENZIES: Okay, just so I don't make assumptions or none of us make assumptions about what you are saying. What is it specifically that is frightening away international investors?
838 DR. RAJABIUN: Well, there has been a few experiences the past few years that people have tried to come in to particular aspects of the market. And then they can't get access to essential facilities that they thought they would be able to get access to. And then they see they can't move forward.
839 And this is not just international, this is also domestic investors. Over-the-top services providers, they know that they cannot get service quality guarantees at the wholesale level. So that creates a lot of risk for them to invest say in video or even telephone call trunking services for business clientele. That creates a very large risk for them.
840 And that is another aspect of this that I don't think other interveners have really discussed very much, is the quality of service determination; who has the right to make deals on the second side of the market with content delivery companies and others to be able to differentiate the quality of service they are offering to their particular customers.
841 So, for example, for business services you need a lot of services -- you need the quality of service guarantees.
842 The way the 2008-17 structure is set up, it is basically the infrastructure operator that has the discretion to make that deal with the second side of the market, with the content side.
843 Whereas, the resellers are pretty much in -- they have no control over it, which creates a lot of uncertainty for them in investing into the market and then finding customers, marketing it, and then finding out six months later that the service quality their customers are getting is getting degraded relative to the incumbent's customers in the same geographic location.
844 So that is a very important issue and I think that the Commission should pay careful attention to it.
845 COMMISSIONER MENZIES: Thank you for bringing it to our attention.
846 Those are my questions. My colleagues may have some more.
847 THE CHAIRPERSON: Those are our questions. Thank you very much.
848 DR. RAJABIUN: Thank you very much.
849 THE CHAIRPERSON: We will adjourn until 2:00.
850 Thank you.
--- Upon recessing at 1237
--- Upon resuming at 1400
851 LA SECRÉTAIRE : À l'ordre, s'il vous plaît.
852 LE PRÉSIDENT : Alors, Madame la Secrétaire, s'il vous plaît.
853 LA SECRÉTAIRE : Oui. Merci.
854 Alors, première présentation de l'après-midi avec Vaxination Informatique.
855 Présentez-vous, s'il vous plaît, aux fins du dossier. Vous avez 20 minutes.
856 M. MEZEI : Bonjour. Mon nom est Jean-François Mezei de Vaxination Informatique. Je présente à titre individuel. J'aurai des portions en anglais et en français.
857 During the dial-up days there was plenty of competition in the ISP industry and there were no calls for ISPs to duplicate the telephone system. Telcos were more than happy to get the increased business and subscriptions for telephone service. Since then, the Internet has become an integral part of the economy.
858 Why did the incumbents begin to lobby for ISPs to become facilities-based? To be blunt, it was the easiest way for them to get rid of the competitors: convince the policymakers that limiting the players to the two facilities-based incumbents would increase competition, investment and innovation. I call this spin.
859 The 2009-261 consultation, despite having a goal of moving ISPs to facilities-based, concluded with TRP 2010-632 that GAS and TPIA were needed to prevent a duopoly and maintain sufficient competition in the retail market. No evidence has been presented in this file to invalidate the conclusions of TRP 2010-632.
860 In terms of competition, the current evaluation of retail market power is based on the presence of thriving independent ISPs and that is made possible by regulated wholesale. It cannot be used to predict whether the competition levels would be sufficient with a duopoly of incumbents because right now we have independent ISPs.
861 The other aspect to consider is that with the telcos now in broadcasting and cablecos now in telecom, they each have similar business models and retail offerings do not differ significantly. Vertical integration amplifies this problem because of the instinct by incumbents to protect their media interests from Internet competitors either by limiting the Internet offering or giving their media business preferential treatment. Only the presence of independent ISPs helps keep the incumbents in check and give consumer options that meet evolving market demands.
862 The last mile is an essential utility. Duplication beyond what the Canadian market can sustain is inefficient and leads to higher prices. Seventy percent of OECD countries have regulated wholesale access prices. Canada is not the odd one out with our GAS and TPIA systems.
863 Municipal fibre deployments such as Olds, Alberta, or fixed wireless such as CSUR in St-Rédempteur, Quebec, do not duplicate. They fill a void left by absent incumbents. They do not exist to increase competition, they exist to provide what the municipality considers an essential service that incumbents are not interested in providing.
864 Now, the other aspect to consider is ISPs are traditionally aggregators of facilities-based telecom services such as last mile, carrier hotel facilities, transit providers and the ISPs also provide their own services such as email, billing, IP address assignment, et cetera. So to consider them to be facilities-based or to require them to be facilities-based is not necessarily the right definition of what the ISPs should be.
865 Interestingly enough, the facilities-based ideology has the perverse effect of killing competition before it has time to emerge by restricting players to incumbents.
866 Forbearance is not a tool to stimulate competition. It is the end result of successful wholesale regulation that has created the competition. As such, it must be an ex post process where the onus is on the regulated incumbent to show that competitors have reached a certain target market share and no longer require regulated rates or mandated access.
867 The Commission must recognize that there are services such as the last mile where duplication is not possible or desirable and never expect forbearance. I know this is hard but this is the hard truth.
868 The ability to offer off-tariff deals that we have seen in the last couple of years means that regulated incumbents are not prevented from competing where there is emerging competition.
869 Also, because upgrades to technology (such as fibre replacing copper) are often long-term projects, forbearance of older services needs to be considered geographically as each geography gets an upgrade because it takes a long time to do all of Canada. You can't, you know, forbear all of Canada at the same time. So it's not just geography where competition exists, it's also the time to actually deploy that technology.
870 CNOC has raised the issue of aggregation but there's also another side to it in part of the interrogatories. With the deployment of FTTPs, there's been different protocols used, that the incumbents have used, which means they don't aggregate properly with the existing GAS or TPIA systems. So if we are to go forward with a proper wholesale system, all of the different technologies used to deliver the Internet as a last mile should connect to the same CBB-based model.
871 CNOC also requested disaggregation. Basically it's purely a means to escape the high CBB prices. The solution is to reduce CBB pricing.
872 Bell Canada has over 100 BRAS physical locations, at least four times as many central offices. An ISP of the size that they are currently might connect to a handful but still requires the full aggregation for the rest. So you connect to one CO but you still require the full CBB for all of the rest.
873 Connecting at the CO would require Bell to deploy aggregation equipment at the CO, which Bell in an interrogatory said did not exist at the moment. And also, connecting at the BRAS means that you skip half of the CBB but you still have the CBB between the BRAS and the DSLAMs. So now, you have a new regulation for a half CBB rate.
874 Videotron has a single POI physical location, so disaggregation is simply not possible. The solution: again, lowering the CBB rate.
875 Rogers has 31 or more aggregation points. ISP participants in the 2009-261 hearing provided plenty of evidence on why this was not workable and asked for aggregation. Rogers would now need to buy new routers to actually rebuild what they had when they had the 31 points of aggregation because those routers, Rogers had said, were being retired. Again, lowering the CBB rate solves the problem.
876 One thing to consider is off-tariff negotiations for disaggregated access which CNOC has requested are not prevented. So maybe they can go to the incumbents and say, look, we would like to do a disaggregation of certain COs, can we do this off-tariff? Nothing prevents that in the regulation.
877 Pour ce qui est du Québec maintenant, contrairement à l'Ontario où le territoire de Bell Aliant est branché au GAS de Bell Canada, au Québec le réseau de Télébec est distinct et n'offre aucun service GAS en gros.
878 Le territoire de Télébec s'étend de la frontière américaine jusqu'à Eeyou Istchee (la Baie-James), et de l'ouest de l'Abitibi jusqu'aux Iles-de-la-Madeleine : 150 000 clients, 300 municipalités, aucun service en gros disponible.
879 En Abitibi, c'est encore pire. Cablevision du Nord et Télébec sont toutes deux propriétés de Bell Aliant, créant un monopole sur les infrastructures, sans aucune offre de service en gros.
880 Au Saguenay, Bell Aliant a annoncé cet été qu'elle déployait du FTTP avec sa propre marque et, dépendant des technologies utilisées, n'est probablement même pas agrégé avec Télébec, donc, probablement un troisième système disponible. C'est pour ça qu'une agrégation... Pour que ça marche, il devrait vraiment y avoir une agrégation des technologies.
881 Avec l'intégration de Bell Aliant dans Bell Canada, il devrait y avoir une intégration des réseaux pour permettre au service en gros existant de Bell Canada de rejoindre les adresses desservies par Télébec et le FTTP de Bell Aliant.
882 Switching back to English, a lot of talk about FTTP. I've provided a lot of technical details in my submission, so I'm just going to have an overview here.
883 Whether FTTP is totally new or an upgrade, whether the incumbent benefits from incumbency or not, it does not change the fact that with exclusive access to FTTP, the incumbent gains a technological advantage (higher speeds and reliability) that ISPs cannot match, giving the incumbent unacceptable market power. FTTP has the same relevant downstream market as DSL and cable, has the same services offered on it: Internet, voice, television and whatever else will come in the future.
884 In areas such as Lavaltrie, Quebec, where FTTP is being deployed, it will be the only telco service available because Bell did not have any Internet service in Lavaltrie before. Because of the reach, it could not put DSL. So Bell will have a monopoly there, with no wholesale access at all.
885 In terms of the process, there are a number of technical aspects that need to be discussed, perhaps outside of this proceeding, such as policies and pricing for the CPE equipment (the ONT/UPS), aggregation, technologies and access to the VoIP channel, which has not really been brought up, but in terms of the discussions with ULL this morning this is a topic because fibre replaces copper.
886 There are no technological show stoppers in this. It can be done. It has been done. The Australian NBN, the original all-fibre model, described all the technologies to allow this to happen. So it's also possible.
887 In terms of cable, having both cable and telco wholesale is necessary to provide a very minimum level of competition for wholesale business. In the long term, when the ISPs grow to a large size, let's say, for instance, 45 percent market share, then they become meaningful customers to the incumbents and the competition between the two incumbents will become more interesting at that point and regulator interventions -- you've had the big CNOC omnibus bill -- are not going to be as necessary as before.
888 Cable has a superior technology at the moment, so they feel even less interested in gaining customers. Bell, with its FTTN that's lagging, has been more forthcoming in trying to regain customers it lost to cable. Hence, it has offered off-tariff rates in the last couple of years. I learned a couple of weeks ago that Rogers doesn't even have a wholesale product manager. This is how much they care about TPIA.
889 Another aspect is cable has not offered layer 2 connectivity to ISPs. Sometimes it's called Ethernet over coax. This is a relatively new technology in the last couple of years. This would allow ISPs to manage IP addresses, DHCP, provide IPv6, fixed IP addresses and solve a whole lot of problems that the CNOC members raise in their omnibus bill. It shifts responsibilities that belong to the ISP back to the ISP.
890 None of the cable companies proposed this to their customers. They didn't even respond to my interrogatory question of whether they were willing to do this or not. But this would be a serious improvement to the TPIA product, and it's not been discussed.
891 In terms of pricing, keeping regulated prices high to foster the climbing of the investment ladder may succeed in seeding facility-based competitor investment where there is a ladder to climb. There is no ladder to climb everywhere.
892 It achieves nothing when there's no ladder to climb such as the last mile.
893 First of all, duplication of last mile is not desirable. Do you want 100 separate FTTP cables on every telephone pole in the neighbourhood because you have 100 ISPs? At what level of number of cables do you stop; one, two, five, 10, 20, 100?
894 For the current size of the ISPs, there's a low number of customers per last mile segment, which means an ISP cannot justify to deploy a whole FTTP infrastructure to serve two customers.
895 Also, as the City of Calgary raised this, there's poles and capacity limits. I'll give you an example.
896 In Ontario, they raised the standards for poles -- the structural standards -- and a large proportion of poles are now non-standard, which means the minute you want to add a cable to it, you have to change the pole.
897 And from what I've been told, it's something like $35,000 a pole to change it, so it's a big ask to add more cables to telephone poles.
898 High prices that do not result in increased facilities-based competition hurt consumers because we end up paying higher prices. It limits the growth of use of the internet because of higher prices, and it's just not quite what the Telecom Act wants when it -- you know, in the Telecom Act objectives that say increased use and increased affordability.
899 In terms of the regulatory pricing now, high CBB rates greatly limits adoption of more internet application by consumers and hinders the ISP ability to compete against incumbents. This is especially for -- especially true for video and IPTV services, which, during the Talk TV and I believe CNOC and its members raised that issue.
900 The ability to challenge technology in cost studies is important. We've seen this with the E320 in a cost study a couple of years ago where the CRTC realized that the pricing offered by Bell was not realistic because the capacity was -- Bell was basically quoting a capacity of one gigabit for the router when, in fact, it's something like 80 or 90 gigabits.
901 You realize when you divide the capacity by 80, you raise the price 80 times. So when you actually use the proper capacity on it, you can reduce the price quite a bit.
902 Secondly, one gigabit links have not been used by carriers for a long time, so if Bell quotes you one gigabit links, you should ask questions because if you're using, for instance, a 10 gigabit link, we're talking three times less costly.
903 So in terms of CBB rates, if you can reduce by a factor of one-third those prices, that goes down a lot from $1,000 or $1,500 down to, you know, $300 or $500.
904 Carriers must not be rewarded for using antique telecom equipment which costs more. If regulated tariffs are adjusted to current equipment, then incumbents have incentives to actually upgrade their equipment or stop pretending they're using one gigabit links when, in fact, they're using 10 or 40 gigabit links.
905 Also -- and this may come with the AMPS. I think somebody told me it may be coming with, I think, C43.
906 If the Commission staff had the ability to physically travel the lines between the DSLAM all the way to the ISP to actually evaluate the speed of the links and the equipment being used, that would be an interesting audit to compare it against the cost studies from the incumbents.
907 J'aimerais maintenant conclure. Ahead of time. Miracle.
908 Le Conseil doit choisir une approche pragmatique et non dogmatique.
909 Une réglementation des services en gros existe pour augmenter la compétition au détail pour l'accès à l'Internet, et ce but est plus important qu'une idéologie visant à s'abstenir de réglementer à tout prix.
910 Les Canadiens bénéficient beaucoup plus d'un grand choix de fournisseurs sur un fil que d'avoir accès qu'à deux ou trois fournisseurs, chacun avec leur fil.
911 Je vous remercie et je suis prêt maintenant à répondre à vos questions difficiles.
912 LE PRÉSIDENT : Merci beaucoup. Le conseiller Shoan débutera les questions.
913 COMMISSIONER SHOAN: Good afternoon. Thank you for being here today.
914 I wanted to say at the outset I very much appreciated the visuals in your written submissions. It's often easier to understand how technology interconnects and is applied when you can actually see what it looks like.
915 And I actually found myself scanning my neighbourhood as I walked through it looking for those particular pieces of technology, so that was very helpful. Thank you for that.
916 I have a number of general questions, but before I get into that, I wanted to ask you some questions of clarification.
917 MR. MEZEI: Yeah.
918 COMMISSIONER SHOAN: In your January 14th submission, you stated at paragraph that the essential service framework should have two mandated wholesale systems. I didn't quite understand that.
919 Can you clarify, did you mean that it should be a goal of the Commission to have two competing wholesale providers or do you mean we should have an ILEC-mandated system or a cableco-mandated system? Can you clarify what that statement was?
920 MR. MEZEI: Unfortunately, my printer broke down and didn't print. Could you read me like just a sentence, if you could, or...?
921 COMMISSIONER SHOAN: Sure.
922 MR. MEZEI: It's been a while since January.
923 COMMISSIONER SHOAN: No problem. I just have to pull it back up.
924 MR. MEZEI: Just to put a bit of context.
925 COMMISSIONER SHOAN: It might take me some time to get it, so why don't you just have an undertaking to --
926 MR. MEZEI: Okay. You know, I think, as I said in this presentation, having two system -- two wholesale systems is important because it does bring a balance in competition between, let's say, Bell and Videotron or Bell and Rogers or Shaw and TELUS. And especially once the ISPs have grown sufficiently that they're no longer seen as something to get rid of, but, you know, as business to acquire, having two is important.
927 COMMISSIONER SHOAN: Right. So it was the ILEC cable that ---
928 MR. MEZEI: Yeah.
929 COMMISSIONER SHOAN: Okay. I understand. Great.
930 And at paragraph 14 of the same submission regarding off tariff deals, you stated that they should be permitted on the condition that they're offered to all wholesale customers.
931 Can you clarify that you meant they should be offered on the same parameters and conditions?
932 MR. MEZEI: The reason I said that is Bell started offering off tariff GAAS a couple of years ago, and the first deals that they offered, which were on the CRTC web site at the time -- that was before the rules were changed -- had limits in them that basically, without naming them, targeted three ISPs, the only ones to fit those parameters.
933 And basically, none of these three actually elected to choose these off tariff deals because of that selection and some of the limits imposed in there.
934 Then, Bell came back a year or two later with the mostly current -- I think it was January 2013 where the first ones came in that were offered to all ISPs, and there was a quick take-up on this. And I know the ISP use electronic box, quickly offered FTTN at much lower prices, so they actually lowered their prices, contrary to what Bell states in their submissions.
935 These deals would not apply to legacy, so legacy prices remain high, but the FTTN prices did go down.
936 Most of the ISPs took them up on this, and this was a great benefit.
937 And when you limit off tariff to a couple of ISPs, a couple of big ones, the small ones can't compete against the big ones and they can't grow to become big enough to matter, essentially.
938 So when an off tariff deal is offered to everyone, then all the independent ISPs get a chance to grow, and they have.
939 I can tell you ElectronicBox, when I joined with them, they had less than 1,000 customers. I think they reached their thousandth customer in 2009. And this year, they're about to hit 40,000.
940 It may not be as big as Tech Savvy, but this is -- in five years, this is a big growth. And it's the five years during which GAAS sort of came back and CBB came back, and they've grown a lot.
941 So there is success in this. You know, you -- there's a lot of talk about deregulating and letting go of the ISPs and going back to the two incumbents, but these ISPs are growing.
942 And if you let them grow, you know, it's not going to be an overnight success. Maybe five, 10, 20 years before they're the size of Bell. But you have to give it time. You can't just try the experiment and cut off the experiment, you know, five years into it when there is success happening.
943 I mean, there's a lot of complaints here, but you're here as the complaint department, basically, so yes, you do get the complaints, you know.
944 COMMISSIONER SHOAN: Okay. Fair enough. Well, let's stay on the topic of FTTB, then.
945 MR. MEZEI: Okay.
946 COMMISSIONER SHOAN: So in your January submission, you indicated, obviously, that the mandated wholesale access to FTP would influence technological choices to be made by network operators.
947 So can you comment on the impact that such access would have on the network owners' ability to innovate with respect to network enhancements and service delivery and how any such adverse impacts could be mitigated?
948 I know you touched upon it in your presentation, but if you want to expand upon that.
949 MR. MEZEI: The reason I brought that up in January and the reason it's important for you guys -- that I feel it's important for you guys to rule as quickly as possible on FTP -- I'm not working for next week, but, you know, in a general term.
950 As these deployments are still relatively new, the incumbents may have made technological choices to make it harder to do wholesale. And the reason I mention that is I want to make sure that if the CRTC goes out and say, "Look, you're going to have a mandate -- like it or not, you're going to have a mandate to do wholesale, so you better strive to fix up your technology to make it happen".
951 COMMISSIONER SHOAN: Right.
952 MR. MEZEI: From the interrogatories, for instance, I found that most of the incumbents used voiSip for the phone system over the fibre, which is compatible with competition, and it's possible to do wholesale on it. So someone could actually get the special bandwidth allocated to VoIP.
953 These are the types of -- that's the reason I raise that issue, is just to make sure that the technology that they choose in deploying is compatible either with a current requirement for wholesale or maybe if you decide five years down the road for wholesale, make sure that, by the time, the incumbents don't come out to you and say, well, it's too late. We've already deployed it. We can't do it.
954 COMMISSIONER SHOAN: Right. And you mention in your presentation today that, you know, there are different technical configurations for all these networks as well, so they have different challenges, so -- and I'm sure we'll hear more about that as the hearing commences.
955 But in your view, is there any way that we could mitigate those impacts on the network changes necessary if a mandated service were --
956 MR. MEZEI: Oh, yes. I don't think that you -- the only thing that the CRTC needs to do is to mandate that the -- all these systems connect together on the CBB system, which is technical possible.
957 At that point, all the traffic, all the packets will flow to the ISP and the ISP can handle some packets that are PPOE and some packets that are DHCP. There may be some VLANs involved and stuff.
958 It's all technically possible. There just has to be the edict to say we want -- for this to work, we want an aggregation of technologies in the same way that -- with 632 in 2010, you said we want an aggregation for cable for it to work properly.
959 And cable -- since the aggregation, cable has grown -- TPI has grown tremendously, so it has worked.
960 So this is just, really, a question from the Commission's point of view to say we want these technologies to work together and feed into CBB. At that point, it's feasible for the ISPs to take it over.
961 And it's not -- technologically, it's not a showstopper. You just need to build the proper wholesale system, basically.
962 COMMISSIONER SHOAN: Okay. So -- and also in a previous submission, you noted that the customer premises equipment would actually be the significant cost component rather than the fibre drop. And obviously, I think the alternative point of view is that having that mandated access would have a chilling effect on assessment.
963 So in the event that the Commission were to mandate access to FTTP facilities but require the service provider to install and maintain CPE, what sort of impact would that have on the service?
964 MR. MEZEI: Personally, I think there should be a Part 1 or a public notice on -- if you go FTTP, there should be a proper discussion on CPE because there's a lot of issues to consider when someone moves or -- you know.
965 The O&T, a bit like cable but more -- it's more strictly implemented. It's specific to a GPON system. The technology the vendor, that Bell or TELUS chooses, it is specific to that.
966 So the ISP -- if the ISP has to install the O&T, the O&T has to come from the incumbent, basically.
967 The provisioning of the O&T will be done by the incumbent from the OLT, which is the equipment at the central office. Whether there are tools to allow the ISP to do this is something to discuss, and that's why there should be -- you know, probably get Bell and CNOC in a bar and discuss this for a couple of weeks before they come to you.
968 There are issues --
969 COMMISSIONER SHOAN: But would it be difficult for competitors to bear that cost to install and maintain customer premises?
970 MR. MEZEI: No different than it is for Bell. It's -- look, it's like wireless phone. We're looking at maybe -- I don't know. I'm pulling this number out of a hat here. Let's say $200 for the O&T itself.
971 This is something they can do with a one-year contract or ask a customer to pay the $200 or something.
972 When you look at Bell Canada, they install that O&T with the UPS, and their prices on the internet when you look for the prices, if you're served by FTTP, if you want 25 megabits, it's the same price as if you serve FTTN.
973 So somewhere in there, they bury the cost of the equipment.
974 It is -- you know, it's more costly than what it is now because right now there is no equipment. The modems -- the DSL models are owned by the customer.
975 COMMISSIONER SHOAN: Right.
976 MR. MEZEI: So it is a change, but it's not a showstopper and it's something that can be done.
977 And interesting enough, the flex snap technology that's used on the poles is actually designed to make it less costly to do the drop cable to the house because it literally have to plug it in. Compared to copper, we have to test the lines and they have to find the plugs and stuff.
978 COMMISSIONER SHOAN: That was --
979 MR. MEZEI: It actually takes less time --
980 COMMISSIONER SHOAN: That was the Corning constructed equipment that you had in your submission?
981 MR. MEZEI: Yeah. It's like the soap on the rope, basically. That's --
982 COMMISSIONER SHOAN: Right.
983 MR. MEZEI: -- built into the cable on the -- between the telephone poles, has built in 12 plugs in it, and there's 12 fibres going to the box. And the 12 homes literally plug into it. Literally just a plug.
984 COMMISSIONER SHOAN: Okay. I'd like to turn to aggregation now. And I take your point that aggregation, disaggregation topic is really about lower price CBB, and I'll get to that in a minute.
985 MR. MEZEI: Yeah.
986 COMMISSIONER SHOAN: But I wanted to ask you generally that most competitors have indicated that there's a need for disaggregated wholesale HSA services to allow them to compete more effectively.
987 Now, you, in your submissions, have argued for aggregated HSA services, so can you comment on how competitors' concerns regarding transport costs for aggregated services can be addressed so they can compete more effectively?
988 MR. MEZEI: Okay. First of all, in terms of aggregation, I just want to clarify that there's two levels. There's -- for the one at the technology level where you have the HCCP where I want this to flow to the same thing.
989 And the other aspect is that aggregation, as you know, for CBB, that regulatory aggregation, if we could say.
990 In terms of the regulatory aggregation, the real issue here -- and I've spoken to my ISP, who's not a member of CNOC, and he's told me the real issue is the cost. He wants -- they've got an application in, and I think in January they have a hearing for getting a BDU licence for IPTV. And they're looking at the costs now.
991 And the current CBB costs makes it very hard for them to compete against Bell and Videotron and so on and so forth.
992 And you had -- during the Talk TV you had VMedia and Tech Savvy, who came in with the same thing.
993 The real concern right now, the band -- the average bandwidth used by each customer has risen and is now, for the independent ISPs, roughly around one megabit per second at the peak house. So this is what -- they provision their CBB capacity based on number of customers time, basically, one megabit.
994 This has risen quite a bit 'cause it used to be much lower.
995 So the CBB rates that are in effect today, which were designed five years ago -- four or five years ago back when estimated consumption was much lower, now we should have volume pricing because they buy by gigabits, not by 100 megabits.
996 And so the current CBB prices do not reflect what the industry pays for capacity these days in other areas.
997 And so the big question here, and that's really the big question, is whether, within the current regulatory environment, you can review the CBB rates, adjust them for -- you know, for instance, checking for -- that Bell uses current technology, et cetera.
998 Whether this could lower the CBB rate sufficiently to make them competitive with the new applications like IPTV or whether you really -- if this is truly impossible, then maybe go to aggregation -- disaggregation.
999 Disaggregation causes problems because you're going to have the haves and have nots.
1000 COMMISSIONER SHOAN: Right. Based on the --
1001 MR. MEZEI: Someone lives in downtown Toronto in a big CO where Tech Savvy has its own equipment versus someone that lives in Pointe Claire, Quebec, where Tech Savvy doesn't have that, you know, I'm going to be costing that ISP a lot more because I'm not disaggregated. I'm going to be still in a CBB rate.
1002 So the real solution is really to find a way to lower the CBB rate.
1003 COMMISSIONER SHOAN: Okay. So let's stick on the topic of CBBs.
1004 MR. MEZEI: Okay.
1005 COMMISSIONER SHOAN: You've made it very clear we need to review CBB rates.
1006 Given that CBB rates are cost-based, can you comment on how incumbents could recover the costs if lower pricing was applied to volume purchases of capacity?
1007 MR. MEZEI: Yes. I will be very honest and blunt with you. I think that the current CBB rates have a giant fudge factor in them, whether the fudge factor is coming from the way they were calculated or from how the incumbents submitted the costs to you. And that's why I'm asking.
1008 I really have a feeling that there is a problem with the way these things are calculated. They're out of order.
1009 And speaking -- and you can speak to all the ISPs are going to be in front of you in the rest of the week. They're out of order.
1010 One gigabit on a transit provider gives you access to the world is like, you know, I think $7,000 or something whereas here, we're talking, you know, we're talking 20 or 30 thousand dollars.
1011 The order of magnitude here is a little too big to think that it's proper.
1012 COMMISSIONER SHOAN: Do you have a costing methodology that you could propose as a replacement?
1013 MR. MEZEI: Well, I'm -- look, I support cost base. I have no problem with cost base. And the incumbents have a right to make a profit, a reasonable profit, and they have a right to be cost based and recover the investments. And I completely support the fact that the independent ISPs, when they buy their CBB, it should contribute to the incumbent's investments.
1014 So the philosophy behind it is correct. It's just the method to reach the calculate, which I think maybe could be looked at.
1015 And again, I'm not a costing expert.
1016 COMMISSIONER SHOAN: Right.
1017 MR. MEZEI: But everywhere you look, everyone you ask, the CBB rates are way too high.
1018 COMMISSIONER SHOAN: Okay. So we should look at our costing methodology.
1019 MR. MEZEI: Yeah.
1020 COMMISSIONER SHOAN: You don't have a specific --
1021 MR. MEZEI: But the philosophy itself, I have no problems with it.
1022 COMMISSIONER SHOAN: Okay. Fair enough.
1023 Let's move to essentiality.
1024 MR. MEZEI: Okay.
1025 COMMISSIONER SHOAN: So you propose in the central subject of phase-out category and in this approach, in your submissions, a consultation would be held to determine the parameters of conditions to be met to withdraw the service.
1026 So just for my clarification, you've argued for geographical consultations. Does that mean regional, provincial rate bands? What do you mean by "geographical"?
1027 MR. MEZEI: Good question.
1028 This summer, I went cycling a lot and I actually did see a lot of FTTP deployments.
1029 COMMISSIONER SHOAN: Okay.
1030 MR. MEZEI: As a matter of fact, I saw Bell crews working on them as well and got to talk to them, too.
1031 One of the issues here -- and this has happened in the States and happens in Europe everywhere. Once the fibre has been installed in a village, it takes a number of months. They first install it, then they have to install the OLT.
1032 Then they start to sign up customers, one by one. And eventually, they have enough customers in a geographical area, generally a town, where they decide to turn off the copper and remove the remaining, you know, 20 percent or 15 percent of customers over to the fibre.
1033 And once they turned off the copper, it means they can turn off the old DMS machines and they save a lot of money, which is the whole goal of FTTP, is to save a lot money in the long term because you turned off the copper.
1034 And so the reason I made that argument for the phase-out was to make it possible for the incumbents to turn off the copper as soon as possible because they -- you know, they should benefit from the investment to fibre.
1035 And if you -- you or the ISPs or whatever require continued access to the old copper, it denies the incumbents the benefit of being able to turn it off.
1036 So that was the goal of that argument in terms of that.
1037 Now, in terms of geography --
1038 COMMISSIONER SHOAN: Yeah.
1039 MR. MEZEI: -- because FTTP systems are deployed in very specific, focused areas one by one, I think the incumbent should be allowed to come and say, "Look, we want to tear down the copper in Laval, Quebec". And then you come in, rubber stamp it, fine, right.
1040 As long as the parameters have been established, you know, then it becomes procedural just to approve it and maybe not even have to approve it, but the parameters would be done. If --
1041 COMMISSIONER SHOAN: So according to -- in your scenario, in your proposal, it would be defined at the outset that we're putting fibre in this defined territory and then, afterwards, they would come back and make the argument whether or not they --
1042 MR. MEZEI: We've completed the transition to fibre --
1043 COMMISSIONER SHOAN: Right.
1044 MR. MEZEI: -- and we don't need the copper any more; please let us turn it off, you know.
1045 I think that would be the fair way, but you know, it's a big saving for the telcos to turn off the copper. And I think -- you know, I'm not fan of Bell and TELUS and stuff, but this is definitely something that they -- you know, we have to encourage them in some ways in exchange for the regulation.
1046 You can't -- the other aspect that I was afraid of is that the incumbents would come in and say, "Well, it costs us a whole lot of money to maintain that copper. We have to maintain it".
1047 If you come out and say, "No, fibre replaces copper and once you've converted people to fibre, you can turn off the copper", then, you know, the real purpose of the investment -- you don't have any regulatory gaming now where you have that -- you know, the two systems that co-exist and one's overlaid over the others, all the arguments that you've seen in this file.
1048 Once you agree that fibre replaces copper and that you can disable copper as soon as fibre's been deployed to all the homes, that's -- you know, makes it a lot simpler, a lot clearer at the regulatory point of view.
1049 COMMISSIONER SHOAN: Okay. So -- and the next question's a bit more of a philosophical one.
1050 In your first submission, you wrote about ex ante versus ex post regulation and you argue that we should avoid ex ante regulation and rely on ex post. But doesn't your proposal encourage an ex ante approach?
1051 MR. MEZEI: In terms of my proposal for the framework to turn off the copper, the reason I wanted this was basically to set up standards where once you reach the standard you can turn off copper. So to facilitate the regulatory process, basically, you have a standard and after that you do this.
1052 But for general forbearance, of forbearance if I look at wholesale Ethernet, for instance, which was forborne a couple of years ago, 2008-17 did an ex ante, saying in five years it will be forborne, and five years later it turns out there were problems and I think MTS gave you a mouthful of problems on that one.
1053 Now, I'm not going to judge whether those problems are sufficient or not. I'm not here for that. But you know there is the issue you can't declare something to be forborne until the conditions to forbearance have been met. Once they have been met you can forbear today.
1054 COMMISSIONER SHOAN: Right.
1055 MR. MEZEI: Right. Because forbearance happens once you no longer need the regulation because the competition has materialized. You can't just forbear in the hopes of competition coming in.
1056 COMMISSIONER SHOAN: Okay, fair enough.
1057 And you made a few comments about the shutting out or pulling out of copper and I noted that in one of your earlier filings you stated that there was absolutely no reason to retain the expensive copper which no longer generates any revenue. But the alternative point of view is that the copper lines have long since been paid off and could represent a lower-cost point of entry for lower speed internet service, that they are still revenue-generating. So although it is a legacy service isn't there a reasonable business case for copper, at least in the short-term future?
1058 MR. MEZEI: If you ask any telephone companies outside of Canada they will say absolutely not and if you speak to people even in Canada they will say, "No, we don't want to keep the copper because there is no point in having duplicate systems, one of which is inferior, no longer competitive and costs more to maintain when you have fibre that does all the job of copper and more".
1059 COMMISSIONER SHOAN: Okay.
1060 MR. MEZEI: There is no reason to keep both.
1061 And if you look at the Bell retail pricing, you know, for the 25 Mb service which is available on FTTN and FTTP, they are priced the same. So you know if you were going to move -- if you have, let's say, a low speed, I don't know, 300 bit service on copper today, there is no reason you couldn't provided it at the same price on fibre. Because once your fibre is there in the neighbourhood, you know, you might as well use it.
1062 And once -- because you know, you have to realize, it's not just their copper in the poles. It's also all the equipment at central office, all the equipment in the GWEs and all the maintenance you have to do and all the squirrels that nibble at it and the short-circuits that happen because of rain. There is a lot of cost to keep that running.
1063 COMMISSIONER SHOAN: Right.
1064 MR. MEZEI: And once your copper only has two customers on it that don't generate much revenue, the cost to maintain that infrastructure is way higher than your revenues.
1065 COMMISSIONER SHOAN: Okay, fair enough.
1066 So the last thing on the point of essentiality, you have argued there should be fewer classifications under the essential services policy other than your proposed essential subject of phase out. What would you suggest those classifications be?
1067 MR. MEZEI: Well, look, you either need to regulate or you don't. That's my philosophy, you know, we are going to justify whether GAS and TPIA need to continue, right. We are not going to say, no, you are going to have to half-regulate them. You know, either you need to regulate it or you don't, and that's where I see some of the essential nature of it.
1068 COMMISSIONER SHOAN: Okay. So right now there are mandated services under public goods for example or interconnection that don't technically qualify as essential. So are you saying that we should expand our definition of essential to include them or we should not mandate them at all because they are not essential?
1069 MR. MEZEI: No, I think you should expand essential to cover them.
1070 COMMISSIONER SHOAN: Okay.
1071 MR. MEZEI: Basically, I think having different classes that all mean the same, I think in a way, is redundant.
1072 When you read the filings you have all these classes. You have to figure out, okay, well, which one applies and, you know, this is an important -- you could rename "essential" to "important", essentially. This is important for Canada. A bit like the 9(1)(h), you know, these are channels of TV that are considered to be important for Canadians so we mandate that they be available to everyone. Sort of one classification where you say this is important. It has to be regulated.
1073 And I don't know that there is much need to have -- especially when you look at wholesale services. Now, you bring up, you know, 9-1-1 and stuff and this is not really wholesale anymore. So I was focusing much more on the wholesale at that point.
1074 COMMISSIONER SHOAN: Okay. Fair enough.
1075 I just have one more question, Mr. Chairman.
1076 My last question is about IPTV.
1077 MR. MEZEI: Yes.
1078 COMMISSIONER SHOAN: You mentioned it in some of your previous filings as well as your presentation, so I wanted to talk about the multicast access to IPT services. I'm just wondering from a regulatory perspective why should a broadcasting distribution issue influence an assessment of mandated wholesale access?
1079 As I said, I know you have touched upon this in previous filings, but if you wanted to expand further...?
1080 MR. MEZEI: I will mention the three word CBB again because of the high CBB rates. And from a technology point of view, distributing broadcast television over multicast is infinitely more efficient from the network bandwidth point of view because the packets are not duplicated. There is only one packet for one image of TV, one packet on every link and the packet actually gets duplicated every link. But on every link there is only one copy. Even if you serve 5,000 people there is just one copy in the stream.
1081 On CBB based, the GAS rate, you have -- if you have 5,000 listening, 5,000 people listening to the Super Bowl, you get 5,000 identical streams one next to the other taking 5,000 times the same amount, you would have a multicast. So from an efficiency point of view it's a huge difference.
1082 COMMISSIONER SHOAN: Right. So from a point --
1083 MR. MEZEI: And that would allow, if you look at -- if you were to take the CBB mentality of cost-based staff, the capacity needed on a multicast system would be far less to carry to serve a lot more people.
1084 COMMISSIONER SHOAN: Right. So from the telecom policy objective standpoint it would be with respect to the efficient order.
1085 MR. MEZEI: Efficient order, yeah, yeah.
1086 COMMISSIONER SHOAN: Okay.
1087 MR. MEZEI: Now, of course you get into the interesting issue that these BDU systems like the Bell Fibe network is probably broadcasting so maybe not telecom and, you know, the meddling of the two is going to become more and more irritating until there is probably going to be a public hearing sometime, hopefully soon, to look at whether BDUs are telecom or broadcasting.
1088 But from a service point of view if you look at an ISP, the ISP wants to offer IPTV service in order to grow its customer base. Because, you know, initially they started with geeks and now they are growing into normal people and as they get to older people who want their conventional television, they want the bundle and to offer the bundle you have to offer broadcast TV, a BDU service. And it's just a question of finding a way to efficiently, and cost efficiently and technically efficiently distribute the service.
1089 COMMISSIONER SHOAN: Okay, great.
1090 Those are my questions, Mr. Chairman.
1091 Thank you for being here today.
1092 THE CHAIRPERSON: Thank you.
1093 Vice-Chair Telecom, please.
1094 COMMISSIONER MENZIES: Thanks.
1095 Just a couple of points maybe you can help me with. I get it that the rent is too damn high, essentially in terms of the argument, but part of the thing with finding the price isn't whether it's popular, it's like whether it works. And it seems to me that in recent years the ISP shares of the market has grown from 6 percent to 8 percent. Correct?
1096 MR. MEZEI: I thought it was more over, slightly over 10.
1097 COMMISSIONER MENZIES: Okay. But it has grown?
1098 MR. MEZEI: It has grown, yes.
1099 COMMISSIONER MENZIES: So what's the problem?
1100 MR. MEZEI: The problem is that because of the new video-based services, the ISPs have been able to grow with CAD videos on YouTube, right, but once they start to get into HD streams from Netflix and whatnot, and if they want to do like VMedia when they actually stream television broadcast signals over it then the cost, because the costs are high --
1101 COMMISSIONER MENZIES: Okay. I get that. But wouldn't that be the point at which you grab for the next rung on the ladder of investment?
1102 MR. MEZEI: The problem with the next rung on the ladder of investment in this case is going from fully aggregated to no aggregation at all, if you really want to climb that ladder. And there is no -- I don't think there is any ISP in Canada who are currently big enough to do that.
1103 COMMISSIONER MENZIES: Okay. That just actually segues to my other question.
1104 You talked about the ISP framework in the country. What is your view on what would sort of be an ideal structure in that area? What would be -- because you mentioned something and it tweaked my curiosity when you said the problem is that some of the smaller ISPs can't compete with some of the larger ISPs.
1105 So how many ISPs should we have? I mean 1,000, 2,000, 20, 10? What sort of framework? Because if you are trying to build a regulatory framework there is a big difference between building an appropriate regulatory framework for an ISP that has 100,000 customers and an ISP that has 625, right?
1106 MR. MEZEI: I agree.
1107 COMMISSIONER MENZIES: So what sort of framework do you think we should be putting in place for it, because there is a certain lowest common denominator that maybe there isn't -- you know, that doesn't work and there is another structure that does work?
1108 MR. MEZEI: Well, the politically correct answer would be let the market decide. I agree with your point, I agree with --
1109 COMMISSIONER MENZIES: If we let the market decide you wouldn't be here, right?
1110 MR. MEZEI: True.
1111 I agree with your point there needs to be a balance. And as a matter of fact, I think the policy direction about the inefficient entry of competition deals with that aspect. Look, when you look at GAS and TPIA there are already costs, especially TPIA with cable. There are fairly large sums of money you have to invest to get started and that's basically -- that is a filter of all the small mom-and-pop shops with 20 customers who can't afford to set up TPIA because of all the costs.
1112 So at that level I think the incumbents have done a fairly good job, I think, of weeding out the ones that are too small.
1113 Now, there are a fair number of small ISPs on GAS, the regional that sort of basically started off as dial-up as a town and then they grew up to DSL in that town. So they remain small. Do they hurt the cause? No. They do provide limited competition in that limited geography, the town. They may expand. When they grow they may just shrink out of existence.
1114 And then you have the big ones like TekSavvy, Primus and Distributel who have grown and have ambitions to grow to be very big. I think the diversity is important. I mention that. Diversity of the ISPs is very important in there because --
1115 COMMISSIONER MENZIES: Sure. I think we can agree on that, but I mean you can say "I don't really have a set number", but I was trying to look at, you know, what you think is sort of an ideal, you know, whether the country would be well served with, you know, I don't know, think of it as baseball, you are going to have major league, AAA, AA, single-A type of players.
1116 MR. MEZEI: In terms of Quebec and Ontario in the Bell Canada territory, I'm pulling a number out. I think 100 might be good --
1117 COMMISSIONER MENZIES: Okay.
1118 MR. MEZEI: -- reasonable. Because that gives you the diversity and allows -- it's a bit like restaurants, you know, a lot of them can start and fail, but some of them will actually start and become big, you know. TekSavvy, too, was small one day. You know, they had fewer than 1,000 customers back in the early 2000s and they have grown. I don't know if they are 300,000 or 400,000. I think they grew by hundreds of thousands at a time. There are successes.
1119 And if you start to weed out the entry that the garage companies, you know, you also end up weeding out the ones that grow. So there is a danger there.
1120 COMMISSIONER MENZIES: Okay. I just want to -- I take it from -- just my last point was, I take it from what you have said that you believe that some of these changes in mandate and that, that you suggest could be achieved without really interfering with investment in build-out and that sort of stuff, as we heard earlier today. The argument is made that Canada is lagging behind in terms of investment and that.
1121 And you mentioned the Telecommunications Act and, I mean, it does want a system that is affordable, like within reach for people, but it also wants a service of high quality. You know, that's always the balance, right, because we can make something cheap, right, but I'm not sure people want cheap, right?
1122 MR. MEZEI: Yeah.
1123 COMMISSIONER MENZIES: I mean because cheap is generally cheap rather than you want world-class quality at an affordable price, not necessarily the cheapest price possible.
1124 MR. MEZEI: I agree.
1125 COMMISSIONER MENZIES: I agree.
1126 MR. MEZEI: I agree with you, but one of the issues -- I have been participating in CRTC now for six years already, unfortunately, and I have come to understand a bit the modus operandi of the incumbents in their spin. And unfortunately for me, I have suffered the spin of FTTN.
1127 We went through this with the matching speeds. We went through all the arguments from Bell about how this was a brand-new technology; reliable. We had to pay $85 to ensure that we had the speeds that we bought for and they had two installers coming in. I made the mistake of ordering FTTN. I am now back down to ADSL2 and I don't meet obligation to serve. As a matter of fact, my speed dropped yesterday from 888 kilobytes to 825, and this is out of FTTN.
1128 So you know, you talk about quality and investment --
1129 COMMISSIONER MENZIES: I'm not quite sure you understood my question.
1130 MR. MEZEI: Oh, I understand very well. I'm getting to the point. I just wanted to let the smoke out of that one.
1131 You know, the problem is you get this spin about investment, the spin about quality of networks and stuff. And they will spin this to you and you have to take this with a grain of salt. I think generally speaking and looking, you know, what happened with Bell in the 2000s, they had a number of restructurings. They had the first purchase of CTV and then they basically had indigestion and they got rid of it. Then they had the teachers privatization which failed and now they are giving back -- my gut tells me that they had a period of disinvestment.
1132 And the numbers may not show this, but when you look at their DSLAMs that they are installing, they installed until 2012, they installed discontinued FTTN DSLAMs that dated back from 2005. They must have gotten that from a garage sale or something. Not exactly state-of-the-art stuff and that's why I'm not getting my service, by the way. So their whole story about investment and quality of service, you know, you have to look at this.
1133 Now, when they go with fibre, fibre gives you the reliability because it works or doesn't work. So when the installer comes in, you get your lite signal, you get the proper speed, so that works. And this has to be encouraged, but you still have to look at, in terms of the quality of service now it will become the quality of the wholesale service in terms of a relationship between Bell -- between the incumbent and the ISPs, and so on and so forth.
1134 There is an improvement coming in with fibre, but fibre is not going to reach us, everyone, for a number of -- I don't know, maybe you could ask Bell when they are going to be there.
1135 COMMISSIONER MENZIES: So in other words, we shouldn't believe everything they tell us.
1136 MR. MEZEI: Exactly, yes.
1137 COMMISSIONER MENZIES: Thank you.
1138 MR. MEZEI: So there is a limit to this. And they are investing right now.
1139 And for the record, FTTP is being invested. We are late, quite late compared to other countries. So if the incumbents come and tell you that "We will lower investment if you regulate us", well, you should ask them, "Well, how come you didn't start earlier because you were not regulated? How come you are behind the rest of the world, you know" they weren't regulated. They haven't been regulated for FTTP so far, and they are late.
1140 So, you know, it cuts both ways and I don't think that any incumbent will delay investments for other than political reasons because of regulatory gaming. They have a business to run, it's to their advantage and they may not like TekSavvy and all the other ISPs, but they make a lot of money from them, you know.
1141 COMMISSIONER MENZIES: I'm done.
1142 THE CHAIRPERSON: We will have a chance to ask their views on that at one point. Okay.
1143 Vice-Chair Broadcasting...?
1144 CONSEILLER PENTEFOUNTAS : Merci, Monsieur le Président.
1145 I don't know if it's unfortunate for you or for us or for anyone else, those six years you spent in front of the Commission, but I won't ask you to elaborate on that question.
1146 Mais j'aimerais ça reprendre votre exemple de Lavaltrie. Je comprends que Bell n'était pas présent, il n'y avait pas de service GAS, mais Cogeco est présent dans le coin de Lavaltrie et Joliette.
1147 M. MEZEI : Oui.
1148 CONSEILLER PENTEFOUNTAS : Il me semble que c'est une région desservie. Alors, le fournisseur de services indépendants aurait pu se brancher sur le réseau de Cogeco, n'est-ce pas?
1149 M. MEZEI : Oui, sauf qu'au Québec, il n'y pas... je ne sais pas s'il y a beaucoup de fournisseurs d'accès Internet qui sont branchés sur Cogeco.
1150 CONSEILLER PENTEFOUNTAS : O.K. Pourquoi pas?
1151 M. MEZEI : La majorité sont sur Vidéotron.
1152 CONSEILLER PENTEFOUNTAS : Je comprends, mais il n'y a pas d'empêchement technique de se brancher sur le réseau de Cogeco?
1153 M. MEZEI : Non. Effectivement, vous êtes correct sur ça, oui. Mais écoutez...
1154 CONSEILLER PENTEFOUNTAS : Alors, il y avait une offre quand même?
1155 M. MEZEI : Effectivement.
1156 CONSEILLER PENTEFOUNTAS : Mais je vous pose la question. Effectivement?
1157 M. MEZEI : Oui.
1158 CONSEILLER PENTEFOUNTAS : Deuxièmement, j'ai vu que... puis ça ressort de cette question-là. J'ai vu que vous suiviez attentivement les représentations faites par le Bureau ce matin.
1159 M. MEZEI : Oui.
1160 CONSEILLER PENTEFOUNTAS : Êtes-vous d'accord qu'on a besoin de deux fournisseurs ou deux... c'est-à-dire que le petit fournisseur de services doit avoir accès et à un cableco et à un ILEC, dans le langage antérieur si vous voulez.
1161 M. MEZEI : Oui, oui.
1162 CONSEILLER PENTEFOUNTAS : Est-ce qu'on a besoin d'avoir ces deux fournisseurs pour créer un environnement qui sera assez concurrentiel?
1163 M. MEZEI : Écoutez, je pense que je dois faire une différence entre est-ce qu'on a besoin ou est-ce que c'est désirable. Du point de vue du CRTC, c'est très désirable parce que quand... même si c'est un duopole au point de vue du service en gros, Bell contre Vidéotron par exemple, il y a quand même une certaine petite compétition entre les deux.
1164 Bell, par exemple, a offert des off-tariff pour les ISP qui ramènent des clients de Vidéotron vers Bell. Ils ont des deals. Le deal off-tariff inclut des promotions pour ramener. Donc, il y a une certaine concurrence entre les deux qui donne... et cette concurrence-là fait que, par exemple, Bell a baissé ses tarifs off-tariff beaucoup comparés aux tarifs du CRTC, et ça bénéficie l'industrie et ça bénéficie évidemment les clients. Donc, cette petite concurrence qui existe, qui n'est pas très grande mais quand même petite, bénéficie l'industrie.
1165 Par contre, si on avait un ILEC seulement ou un câble et que vous aviez le même type de réglementation, on n'aurait peut-être pas les off-tariff, mais on aurait quand même le même service.
1166 Donc, ce n'est pas nécessairement requis. Et pour ça, je peux vous donner des exemples où Bell dessert une ville et qu'il n'y a pas de câblodistributeur dans cette ville. Donc, il y a quand même... Ce n'est pas un requirement, c'est vraiment... et je dirais très désirable pour ça. Et ça, je parle au point de vue juste en gros.
1167 CONSEILLER PENTEFOUNTAS : Et dans le cas du FTTP, pour reprendre la position du Bureau de ce matin, est-ce que deux fournisseurs sont suffisants?
1168 M. MEZEI : Là, c'est la question d'un million de dollars. Dans le cas... Si on compare le câble versus le DSL, le câble a une supériorité technologique substantielle. Quand on compare la fibre avec le coax, la fibre a supériorité, mais la différence est beaucoup moins grande. Alors, à ce point de vue là, si on a la fibre avec le coax, on n'a pas besoin de deux fibres. Mais si la compagnie de câble décide de faire un upgrade de son coax à la fibre-à-la-maison, à ce moment-là, on a deux fibres. Est-ce que c'est nécessaire?
1169 Écoutez, on pourrait aller dans un scénario comme l'Australie où ils vont mettre une fibre à tout le monde qui est structurally separated -- excusez le terme anglais...
1170 CONSEILLER PENTEFOUNTAS : Mais ici, on risque d'avoir deux fibres...
1171 M. MEZEI : Mais ici, on risque d'avoir deux fibres. Mais écoutez...
1172 CONSEILLER PENTEFOUNTAS : ...dans les régions urbaines certainement?
1173 M. MEZEI : Oui. Oui.
1174 CONSEILLER PENTEFOUNTAS : Et est-ce désirable?
1175 M. MEZEI : Oui.
1176 CONSEILLER PENTEFOUNTAS : Est-ce la meilleure utilisation de nos ressources?
1177 M. MEZEI : Écoutez, du point de vue efficacité totale, si on regarde au point de vue de l'économie globale, le système australien est plus efficace parce que t'as un investissement et après ça c'est un service ouvert où le NBNco est vraiment structurellement séparé, qui n'a aucun service au détail et qui dessert tous ses clients de la même façon, tous ses clients qui sont des clients de ISP de la même façon. C'est un modèle où l'efficacité de l'investissement est le maximum.
1178 Mais, par contre, au Canada, on a une structure différente, contrairement à l'Australie qui avait Telstra, qui était facile essentiellement à nationaliser pour créer le NBN. Au Canada, on a Bell, on a Vidéotron, Rogers, Cogeco, Shaw, et cetera. C'est un peu plus difficile à arriver à un investissement le plus efficace possible.
1179 À ce moment-là, si on est d'accord qu'on garde le telco puis le cableco, la technologie que chacun des deux utilise ne devrait pas être une grande considération, le fait qu'il y en ait deux. Et si elles veulent investir, c'est correct. Ce sont des grosses compagnies, elles ont le pouvoir d'investir. Comparativement à un petit ISP qui n'est pas capable de déployer de la fibre partout, ce sont des compagnies...
1180 CONSEILLER PENTEFOUNTAS : Mais certainement, ça serait à l'avantage de l'ISP d'avoir ces deux concurrents?
1181 M. MEZEI : Oui, pour négocier. Et encore là, je reviens à ce que j'ai dit. Quand les ISP... donnez-leur cinq à 10 ans. Quand les ISP auront grandi assez substantiellement qu'ils vont être capables d'aller aux incumbents puis dire : Écoutez, cher titulaire, moi, je vous amène 20 millions de dollars par mois, fais-moi un deal, à ce moment-là, les deals vont peut-être se faire plus naturellement.
1182 CONSEILLER PENTEFOUNTAS : Vous arrivez à ma deuxième question. Vous avez parlé de part de marché et vous avez dit, bon, ils sont à 9 pour cent ou 10 pour cent, peu importe, et un jour ils seront à 35. Y a-t-il un idéal quant à la part de marché de ces fournisseurs indépendants de services?
1183 M. MEZEI : Je ne suis pas un expert là-dedans. En ce moment, on a le duopole câble-téléphone qui ont acquis une marge de contrôle du marché très grande. Je pense que tout le monde s'entend sur ça. La faire descendre de 90 pour cent à 70 pour cent, c'est déjà quelque chose de très bien. Est-ce que c'est assez? Peut-être que non.
1184 Par contre, si on arrive à une situation fictive où, disons, juste TekSavvy survit dans les ISP et que TekSavvy arrive avec 33 pour cent de part de marché et que Bell a 33 pour cent de part de marché et que Rogers a 33 pour cent de part de marché, alors, trois ISP à part de marché égale, à ce moment-là, le 66 pour cent acquis par les titulaires n'est pas un contrôle peut-être trop grand, c'est peut-être raisonnable. Par contre, si les ISP sont tous des petits ISP à 500 clients puis il y a trois millions d'ISP, aucun ISP pourra faire de force de marché suffisante pour concurrencer.
1185 CONSEILLER PENTEFOUNTAS : Et vous ne seriez pas troublé par le fait qu'un tiers du marché peut être accaparé par les petits fournisseurs de services indépendants sans qu'ils investissent dans les installations?
1186 M. MEZEI : Écoutez, il faut s'entendre, et je reviens encore sur la façon d'élaborer les tarifs CBB. On s'entend que quand un ISP achète du CBB de Bell...
1187 CONSEILLER PENTEFOUNTAS : Oui.
1188 M. MEZEI : ...qu'une partie de l'argent qui s'en va là couvre l'achat des équipements, de l'investissement. De la même façon que quand vous achetez une auto, vous aidez à payer Ford les robots qui sont utilisés pour construire cette auto-là.
1189 CONSEILLER PENTEFOUNTAS : Je comprends ça. Mais que le fournisseur indépendant de services reste ad vitam aeternam dans un état de revendeur...
1190 M. MEZEI : Oui.
1191 CONSEILLER PENTEFOUNTAS : ...est souhaitable, de votre point de vue?
1192 M. MEZEI : Je vais répondre rapidement et je vais dire oui. Je sais que c'est une réponse difficile, mais je pense que la business d'un ISP n'est pas nécessairement et ne devrait pas requérir l'investissement dans des fils, dans des câbles, parce que la définition de facilities-based, telle qu'on me l'a expliquée, c'est vraiment la fibre en tant que telle ou le cuivre en tant que tel. Les ISP, traditionnellement, si on regarde dans les années 90, les dial-up, ce n'était pas... ils n'avaient pas leur système téléphonique, ils utilisaient les services des autres.
1193 CONSEILLER PENTEFOUNTAS : Oui.
1194 M. MEZEI : Si vous regardez les banques, les banques n'ont pas leur propre système de télécom, ils achètent leur télécom de Bell, d'Allstream, et caetera. Il n'y a rien de mal d'acheter des services de télécom.
1195 Les ISP, ce qu'ils font, c'est qu'ils achètent différents services et ils mettent ça ensemble pour créer un service ISP. Bell achète différents services et fait quelque chose pour sa télévision, fait un service ISP, fait un service téléphone, fait un service de facturation qui charge deux dollars pour vous l'envoyer par la poste.
1196 Toutes les compagnies aujourd'hui utilisent d'autres compagnies pour créer leur offre. Donc, moi, je n'ai aucun problème à ce qu'un ISP reste éternellement un agrégateur de service acheté des autres, parce que le service qu'il achète, quand il achète du transit pour aller sur l'Internet, du côté qui fait face à l'Internet, il contribue à la compagnie qui lui vend, comme Hurricane Electric ou Cogent, il contribue à leurs investissements qu'eux investissent dans de la fibre et investissent dans d'autres liens.
1197 CONSEILLER PENTEFOUNTAS : Et il y a une formule par laquelle même à un tiers du marché, l'investissement sera présent et nous resterons à l'avant-garde... nos réseaux resteront à l'avant-garde de tout ce qui se fait à travers le monde?
1198 M. MEZEI : Écoutez, moi, je dirais encore plus oui, parce que si vous forcez chaque ISP à investir... Je prends l'exemple un peu ridicule d'avoir 100 fils à chaque pôle téléphonique.
1199 CONSEILLER PENTEFOUNTAS : Oui.
1200 M. MEZEI : O.K. Chaque ISP aura un investissement qui est très inefficace parce qu'il va mettre deux ou trois clients par fibre. Ça va donc coûter beaucoup plus cher par client. Donc, l'industrie en général sera moins efficace et aura moins d'argent à investir dans la nouvelle technologie, parce que ça va prendre plus de temps à repayer ça.
1201 Si vous mettez toute la capacité sur une fibre, à ce moment-là, cette fibre-là est utilisée à son maximum, la plus efficace possible et est repayée le plus rapidement possible. Donc, t'as l'argent ensuite de ça pour investir.
1202 Donc, c'est choisir peut-être le juste milieu, mais comme je dis, il ne faut pas que ce soit une religion de vouloir que les ISP investissent dans des câbles, parce que ce n'est pas nécessairement ça la meilleure solution au point de vue d'efficacité.
1203 CONSEILLER PENTEFOUNTAS : Merci, Monsieur le Président. Monsieur Mezei, merci.
1204 THE CHAIRPERSON: Commissioner Molnar...?
1205 COMMISSIONER MOLNAR: Thanks. Just a couple.
1206 And you have just been having the discussion that you shouldn't expect 100 separate cables on the pole, so fair enough, but why should we be comfortable with just one or two? Like, shouldn't it be a goal to have as much facilities-based competition as the market can support?
1207 MR. MEZEI: If you were to define facilities-based away from the actual cable I would agree.
1208 COMMISSIONER MOLNAR: No, I'm not. I'm talking about the actual --
1209 MR. MEZEI: About the cable.
1210 COMMISSIONER MOLNAR: The end-to-end delivery of the facility. I'm talking about the last mile, I'm talking about fibre-to-the-prem. To be clear, I am talking right now fibre-to-the-prem.
1211 MR. MEZEI: Yes.
1212 COMMISSIONER MOLNAR: Is it an over build? You know, all parties are pretty much starting at relatively equivalent spots here. They have to get to the prem.
1213 MR. MEZEI: Yeah. From an efficiency point of view it doesn't make sense to have two or three or four underused cables when you could aggregate everything into one. The cable is just a pipe.
1214 COMMISSIONER MOLNAR: I know. I mean maybe some parties could get together and seek to share the cable.
1215 MR. MEZEI: Ah-ha, yes.
1216 COMMISSIONER MOLNAR: There are different strands in it. I mean there are different ways of achieving multiple facilities-based providers, but I don't know why we come in this saying there should be no duplication of the last mile. I mean if you cut it once, what happens?
1217 MR. MEZEI: From a realistic point of view, I know we can talk about the philosophy of a facilities-based, but from a realistic point of view this was brought up in the hearing that led to the 632 Decision.
1218 To get from here to there you have to consider you have small ISPs right now who are not big enough to deploy that fibre. So does the government come in and give $500 million to TekSavvy to deploy fibre to every home? How do you reach this, you know, and that's -- I think that's the difficult part.
1219 COMMISSIONER MOLNAR: It is a difficult part and I think it's perhaps not reasonable. I mean, clearly 100 separate cables is not reasonable, but why can't we shoot for three?
1220 MR. MEZEI: What is the difference between three and two?:
1221 COMMISSIONER MOLNAR: The extent to which there may be an interest in having a wholesale market.
1222 MR. MEZEI: Okay. If the third wire was a structurally separate entity --
1223 COMMISSIONER MOLNAR: And you could say four, but I just said three. It's more than two.
1224 MR. MEZEI: Okay. Let me put it this way.
1225 If one of the wires, no matter the number, if one of the wires is from a structurally separate entity who does not have its own retail service, that company has every incentive to sell to as many ISPs as they want and to be neutral, offer all the services, et cetera. Then I have no problems with that. That third wire is structurally separate. That's all you need. So you could have your incumbents.
1226 COMMISSIONER MOLNAR: And would you see that under the wholesale arrangements and regime that's available today anyone would have the incentive to put up that third wire?
1227 MR. MEZEI: If the goal is to put a third wire, then boost the GAS and TPIA prices by twice. But at the end of the day all you are going to do is hurt me, the consumer, because my prices are going to go up.
1228 In the internet, although Canada hasn't really recognized it really has become essential, you know. I get on the train. I have to show my little barcode to the guy and it comes over the internet. So as a Commission regulator you have to make sure that achieving your policy goals of facilities-based does not end up hurting consumers.
1229 COMMISSIONER MOLNAR: Yeah, fair enough.
1230 MR. MEZEI: And it has to be --
1231 COMMISSIONER MOLNAR: But both ways. I guess that's my question.
1232 I just threw out a third wire because there is the discussion that you cannot duplicate the last mile. Like nobody -- I did not see the evidence that you could not on a go-forward basis. I heard companies say, well, we don't have a large enough customer base to make it cost-effective for us today, but I'm not sure that I saw the evidence when you were over building how it is not economically efficient for more than one to over build, or what could be done besides that could facilitate that build versus just accepting, you know, sort of mandated wholesale forever?
1233 MR. MEZEI: Well, if you want to facilitate --
1234 COMMISSIONER MOLNAR: I just want to give some parameters here. My concern really is the mandated wholesale forever. You know, in a perfect world you would -- the wholesale would be encouraged and companies would be encouraged to negotiate and create wholesale agreements without mandating. We are not there.
1235 MR. MEZEI: Ideally.
1236 COMMISSIONER MOLNAR: A third wire might make that possible.
1237 MR. MEZEI: Unfortunately, the size of the population, the size of the market of Canada at the moment -- maybe when we grow out to 300 million people that will be different. But at the moment I don't think that we are big enough to financially justify that third wire. And you know, for all their spin the incumbents do have an advantage when they are deploying their fibre. They have got the polls already there. They have got the rights to the polls already. Bell actually hands it --
1238 COMMISSIONER MOLNAR: But anybody can go on those poles.
1239 MR. MEZEI: No, but Bell can hang -- their fibre is actually hung on their existing copper so it's not an extra altitude that they rent on the pole. It's built into their existing deal.
1240 COMMISSIONER MOLNAR: Okay.
1241 MR. MEZEI: So, you know, there are advantages that are not available to the third wire. The story of the polls in Ontario for instance is a big showstopper for anyone trying to deploy fibre in Ontario.
1242 COMMISSIONER MOLNAR: So perhaps my question didn't fit well right now, but --
1243 MR. MEZEI: I understand. I understand your goal.
1244 COMMISSIONER MOLNAR: -- we are coming in here saying we need to maintain the mandated wholesale regime
1245 MR. MEZEI: For now.
1246 COMMISSIONER MOLNAR: For now.
1247 MR. MEZEI: For now.
1248 COMMISSIONER MOLNAR: But there does not appear to be a for later and that's where I would like -- I would be interested in knowing if there are things as a regulatory -- I understand that there is economics and there is business cases that need to be -- you know, is your first concern, but if there are regulatory issues that would prohibit a build, I would be interested in knowing what those are, like access to the strand.
1249 MR. MEZEI: Okay. Can I give you -- I just thought of an answer to your --
1250 COMMISSIONER MOLNAR: Okay.
1251 MR. MEZEI: -- the big picture problem. Yes, it would be nice to reduce the mandating and CNOC asking for disaggregation, so the run up the ladder closer is a step in that. Yes, it will happen. I don't think that they are big enough yet to make this realistic. It's a nice concept that pleases you.
1252 Realistically, I don't think it is going to scale to a point where it really matters at this point in time. The way to reach it is to make GAS and TPIA very affordable, make those ISPs grow, and five, 10 years down the road we are going to be back here. I am going to complain about having been here 10 years and then you are going to see the ISPs say, "Look, we have negotiated off our deals with Bell, we have disaggregation on our own. We don't need the CBB rates anymore".
1253 I think that's how it's going to happen. You make them successful and you help them grow.
1254 The job isn't done yet. You've got these ISPs, who have been literally around since 2008-17 where basically the deal was to get rid of it, turned around since then. We had the UBB deal and all that, CBB and of all these three-letter acronyms. Now that we are starting to be successful, give them a bit more time. Let them grow, let them be successful and then you may find that as a regulator it will come naturally. There is no promise.
1255 But I think that if you start prematurely to force them into facilities based before they are big enough, you are essentially cutting off their legs and they are not going to be able to grow after that. That's a danger.
1256 COMMISSIONER MOLNAR: Okay. I'm going to ask more people that question, just so they can be prepared with the answer.
1257 The only other thing I wanted to ask you about was your issue with the CBB rates and yet you continue to believe that Phase II costing is the appropriate means. I appreciate theoretically Phase II costing is the appropriate means, but you and I both went through years of trying to get that rate right with Phase II costing. So is there really no reasonable alternatives that could create a more timely outcome?
1258 You improve the certainty. I mean the other element of that is all parties were uncertain, right? It created a lot of uncertainty in the marketplace as to where these prices would land.
1259 MR. MEZEI: Yeah, they were interim forever and R&Vs and stuff. I agree with you.
1260 I think that we have gone through a unique period of restructuring, you know, from a fixed rate before usage of the internet was huge. Now, we have come to a place where we have variable rates with the capacity base, which is the correct philosophy for charging. We have done a lot of things that are right and we have gone through a lot and I think now we are more at the stage of fine-tuning.
1261 You know, even though the ISPs are going to be asking you for big CBB rate decreases and stuff, I think it is more fine-tuning that's needed now. You know, maybe I can take Mr. Bibic out to a bar and convince him to lower the rates. Maybe that would work, but I doubt it.
1262 And again, once --
1263 COMMISSIONER MOLNAR: But that would not be Phase II costing. I mean what you have said is we should rely on Phase II costing.
1264 COMMISSIONER MOLNAR: I mean, you have just provided an alternative that would be much more timely if you can still make that happen.
1265 MR. MEZEI: If I can, yeah.
1266 You know and, again, I will repeat this. Once the ISPs grow it will become easier, I believe. Because you have to realize, and I have seen this and I haven't seen through all the hashtags, and I'm sure you guys have probably seen this much more intensely than I have, but the incumbents have an actual instinct to, you know, raise their costs as much as they can because it raises their revenues.
1267 So I'm pretty sure you guys are being fed a lot of very -- pardon the bluntness -- a lot of very inflated cost. Because, you know, if you go to your mother and say, "I need to buy a new of jeans", you are not going to say, "I need 25 bucks" you are going to say, "I need 100 bucks", right?" This is natural.
1268 COMMISSIONER MOLNAR: Just to be clear, I am aware of what is filed. I am aware of why it took so long to get those rates. I am aware that no party is happy with those rates. So tell me how it's going to get better if we continue with the same process.
1269 MR. MEZEI: Well, it's going to get better once the ISPs are big enough that they are taken seriously by the incumbents.
1270 COMMISSIONER MOLNAR: Where they can negotiate outside of those rates --
1271 MR. MEZEI: Yes.
1272 COMMISSIONER MOLNAR: -- is essentially what you are saying?
1273 MR. MEZEI: Yes, but until that time I think you need that. You need to help the ISPs grow to the point where, you know, where it becomes less reliant on the regulator. I think that happens a bit, actually.
1274 And the analogy I was thinking about was an airplane. You can't start --
1275 COMMISSIONER MOLNAR: I just want to feed back to you your answer to how the Phase II costing process would get better, as essentially you said it's going to get better when they no longer have to rely on it because they are going to negotiate. Is that what you think?
1276 MR. MEZEI: Because the ISPs are big enough.
1277 COMMISSIONER MOLNAR: Right, okay. Thanks.
1278 Those are my questions. Thank you.
1279 MR. MEZEI: Okay. I'd just like to finish my analogy of the airplane. You know in the airplane the engines can't spin on themselves. You have the APU in the back that gives them the push, the bleed air or whatever, to start spinning, and it starts (sound effect), but once they get going they really get going and they push that plane up at 500 miles an hour.
1280 I think this is what you should be hoping for. We are in that (sound effect) stage right now with the ISPs where they need the regulatory help until they are big enough to be taken seriously. Because right now they are small enough that the incumbents can say, "We can still get rid of them", right. But once they are too big for that then I think it will come naturally. That's my hope, fingers crossed.
1281 COMMISSIONER PENTEFOUNTAS: The entente between Bell and TakSavvy, that's hearsay, what you brought to the fore earlier, Mr. Mezei?
1282 MR. MEZEI: Which one?
1283 CONSEILLER PENTEFOUNTAS : À l'effet qu'il y a entente entre TekSavvy et Bell : Si tu voles des clients de Vidéotron, bien, on va aller...
1284 M. MEZEI : Je ne pense pas avoir mentionné TekSavvy...
1285 CONSEILLER PENTEFOUNTAS : Bien, peu importe.
1286 M. MEZEI : Mais avec les... Écoutez, les ententes off-tariff ne sont pas publiées. Donc, effectivement, oui, c'est du hearsay que j'ai entendu. Mais effectivement, les deals...
1287 Comme, par exemple, moi, j'étais un client déjà DSL. Je n'ai pas bénéficié... Quand j'ai fait mon upgrade au VDSL2, j'ai dû payer le 85 dollars de frais d'installation, tandis que quelqu'un qui était de Vidéotron ne le paie pas, et ça, ça fait partie du off-tariff que Bell offre aux ISP. Quand ils volent quelqu'un de câblo, qu'ils l'amènent chez Bell, à ce moment-là, les frais d'installation...
1288 CONSEILLER PENTEFOUNTAS : Mise à part votre expérience personnelle, c'est du ouï-dire, on s'entend là-dessus?
1289 M. MEZEI : Excusez?
1290 CONSEILLER PENTEFOUNTAS : Mise à part votre expérience personnelle, c'est du ouï-dire, on s'entend là-dessus?
1291 M. MEZEI : Oui, parce que ce n'est pas publié.
1292 CONSEILLER PENTEFOUNTAS : O.K. Merci.
1293 LE PRÉSIDENT : Merci beaucoup. Ce sont nos questions.
1294 Donc, on va prendre une pause jusqu'à 3 h 35, pour entendre la présentation des derniers intervenants. Merci.
--- Upon recessing at 1521
--- Upon resuming at 1535
1295 LE PRÉSIDENT : À l'ordre, s'il vous plaît.
1296 Madame la Secrétaire.
1297 THE SECRETARY: Yes, we'll hear the last presentation by Cybera.
1298 Please introduce yourselves for the record. You have 20 minutes.
1299 MR. WINSOR: (off mic)
1300 THE CHAIRPERSON: You've got to use the button, though.
1301 Thank you.
1302 MR. WINSOR: First time up and learning already. Button, thank you.
1303 Thank you, Mr. Chairman, Vice-Chairman, Commissioners, for the opportunity to present today.
1304 I'm Robin Winsor, President and Chief Executive Officer of Cybera. My colleagues to my right, Dr. Byron Chu is a Project Manager on our broadband file, and to my left, Dr. Barb Carra is my Vice-President, Policy and Strategic Initiatives.
1305 A little bit about Cybera first. Cybera is a federally incorporated not-for-profit organization that operates and manages Alberta's unmetered research and education network as part of the National Research & Education Network.
1306 Our mandate is to spur and support innovation for the economic benefit of Alberta through the use of cyberinfrastructure and we focus mostly on enabling the public sector.
1307 We have 60 member institutions, including post-secondary institutions such as the University of Alberta and the University of Calgary, many of the colleges and a growing number of K-12 school boards. Today, Cybera's connectivity services 87 per cent of Alberta's post-secondary students and more than 52 per cent of the K-12 students.
1308 Additionally, we count several business incubators as members such as Innovate Calgary and TEC Edmonton. Broadband is essential infrastructure and a driver of innovation, especially as the Internet Of Things gives rise to new products, new business models and new companies.
1309 Cybera does not own fibre assets directly; rather, we are a user or consumer of existing infrastructure sources. Nor do we operate our own datacentres, instead using a mixture of university assets and commercial providers where appropriate to house our computing facilities.
1310 We leverage the resources of our federal counterpart CANARIE, from whom the Commission will be hearing later in the proceedings, as well as the Alberta SuperNet, about which I'm going to talk about a bit, commercial services and municipal fibre to connect our members to the research and education network.
1311 We are funded by membership fees from our institutions, by operating grants from the Government of Alberta and by project-based funding from CANARIE, who in turn is funded by Industry Canada.
1312 Cybera does not compete in the private sector market as this would be unfair given our access to government grants; instead, we strive to maximize the efficiency of publicly funded institutions.
1313 The focus of our response today is on the socioeconomic benefits of networking and the need to provide adequate regulatory protection to consumers, especially in underserved areas of the country.
1314 We're presenting our experience in Alberta as a case study.
1315 I'd like to talk about the Alberta SuperNet for a moment and the idea of scarcity versus abundance.
1316 The Alberta SuperNet was a strategic infrastructure investment by the Government of Alberta, using a public/private partnership model involving Bell Canada and Axia Net Media. It was completed in 2005. Final costs, including subsequent extensions, were in the order of $330 million. At the time of completion, it represented the first jurisdiction-wide fibre-optic network in North America designed to connect public institutions across the province: schools, hospitals, colleges, universities, libraries and municipal offices to a broadband network for high-speed Internet access.
1317 In reality, the Alberta SuperNet is a backhaul network, or middle-mile, that connects on one end to local access networks, or last-mile, and on the other end to networks that connect to the Internet. The SuperNet does not directly serve residential homes, however, the intention was, and still is, to provide affordable wholesale Internet access to local third-party Internet service providers through interconnection points known as PoPs, Points of Presence.
1318 These ISPs can then provide last-mile connectivity and Internet service to residents of the 429 SuperNet communities. In practice, however, the high costs for non-incumbent ISPs to essential infrastructure still prevents them from serving the Alberta rural market. This has led to some communities having unserved or underserved Internet needs despite having a SuperNet PoP in town.
1319 The Alberta SuperNet represents an important Canadian example of how wholesale services regulation can have an important role in giving all Canadians access to high-speed Internet service.
1320 Although many good things have come from the build of the SuperNet, its capacity has been vastly under-realized and under-utilized.
1321 These failures can be used to learn important lessons and guide the CRTC in regulating fibre access going forward.
1322 An important lesson learned relates to the capacity of fibre networks and whether the resource should be regulated on a basis of scarcity or abundance. We will argue that, strange as it may seem, both apply here.
1323 Regulation tends to be required where there is insufficient resource for everybody and controls are needed to promote a fair distribution of that limited resource.
1324 Scarcity comes from the fact that there are not many, or certainly not enough fibre-optic cables in place today and, based on that scarcity, regulation is required to ensure all Canadians have access by requiring carriers to share the resources and, indeed, to build resources. Canada is simply too large a country for us to be able to afford facilities-based competition; we need services-based competition instead.
1325 The abundance side comes from the advances in technology and the increased carrying capacity of the fibre-optic cables. And I'd like to illustrate this point graphically. So I brought with me today a piece of the SuperNet.
1326 So here we have a piece of the SuperNet and no networks were harmed in the making of this prop, but you can see it's a very solid piece of cable inside, and I'm sure many of the Commissioners are aware of this, but I think it illustrates the point well. Inside we have 20 wires or cables. Within each of those wires we have 12 tiny little hair-like fibres.
1327 The point here is that if we had access to just two of these little hair-like fibres in just one of these 20 cables, we would have enough capacity to connect the two largest research institutions in Alberta and today we do that at 200 gigabits connections between the University of Calgary and University of Alberta on a single fibre pair.
1328 Once access to the cable is achieved, we basically have moved from scarcity to abundance, we can move a lot of data down these cables.
1329 Despite this huge carrying capacity, the SuperNet remains unavailable at affordable rates to the universities and millions of dollars are being spent by federal and provincial governments to buy capacity from Bell Canada and other major carriers to link the province's post-secondaries and, indeed, the K-12 schools while the SuperNet remains inaccessible and under-used. So why is that?
1330 The rate-setting done when the SuperNet was built and the contracts written did not adequately provide for the huge change in Internet use, the demand for bandwidth and new technology. This is an important lesson that we hope the Commission will take to heart when helping Canadians access these services. Access must be done through economic regulation within the power of the Commission to adjust at regular, and at least semi-annual intervals. To fix a rate in policy or in a contract, or worse, to enshrine it in primary legislation, is to ignore the tremendous rate of change in this sector.
1331 We believe that full reviews of wholesale services at approximately three-year intervals are required. Outside of the full reviews, however, we believe it is also necessary for the Commission to be able to make semi-annual adjustments to rates based on performance measures such as a flexible economic benchmark that would monitor and be inclusive of the fast-changing cost structure associated with high-speed Internet access services. In this system, benchmarks or targets would be updated at least annually, and ideally semi-annually, based on average Internet costs and speeds within a peer country or group of peers, such as other G7 nations. This will ensure that Canadians are receiving the highest quality and best-priced Internet and that the country as a whole remains a leading nation when it comes to technology adoption.
1332 Further illustrating the problem of locking into long-term contracts during times of rapid technological change, we have observed significant disparity in Internet prices paid by public institutions. For example, in the education sector, one school reported paying $185 per megabit per second per month in rural Alberta at a time when other post-secondary institutions in urban communities were paying less than $10 per megabit per second.
1333 In 2011, Cybera, recognizing this problem, instituted an Internet buying group to help increase the purchasing power of public institutions by aggregating their demand. This Internet Buying Group has spurred the major carriers to compete with each other for the Internet buy of Alberta's educational institutions and, in so doing, has dropped rates from hundreds of dollars to around $10.
1334 Cybera also found through its experience with the Internet buying group that bandwidth prices in Alberta are dropping faster than expected. This is due to the increased number of users in the Internet buying group, which join because they realize it is the only way to obtain reasonable rates from the dominant carriers.
1335 The price of bandwidth is also decreasing as very large Internet service providers move into Canadian cities. In response, Cybera has increased the frequency of its review of its Internet buying group pricing from annually to semi-annually and dropping our prices to members at each review, and we suggest that similar reviews of rate-setting by the CRTC be held frequently.
1336 Currently, there's a lack of high-quality, high-speed and affordable Internet service in rural environments. Regulating wholesale high-speed access services such as FTTP to rural towns will help to ensure that rural residents, businesses and cultures thrive and are not lost to large urban centres. The digital divide between urban and rural markets will continue to grow unless some action is taken.
1337 The rural town of Olds, Alberta, population 8,500, provides an excellent example of a proactive approach to combatting the digital divide. This community built its own fibre network called O-Net and started its own not-for-profit Internet service provider as a means to attract tech companies to the town and the other benefits that come with having high-speed fibre. It now offers an Internet speed of a gigabit per second at reasonable rates and expects 50 per cent of the population to connect in 2014.
1338 This is a great start, but without regulation it doesn't reach far enough.
1339 Consider the case of two children who attend school in a small Alberta town. During the day in class they have access via the school's Internet connection to worldwide educational resources. After school, however, the situation changes. A child who goes home to a house within the small town will likely have service available from a wireless ISP and can use tools such as Google, Wikipedia and others to do his homework.
1340 Another child goes home to a farmhouse a few kilometres outside town where there is little or no connectivity. She will be stuck with 20th Century tools such as an encyclopedia or a dictionary. The next day when the children return to school what will the teacher to do; will she separate the class, saying 20th Century learners in this corner and 21st in the other? Or will she teach to the lowest common denominator holding all the children back?
1341 This is an unacceptable situation and one that will have long-term economic impact on Canada if we continue to raise a generation of digital haves and have-nots.
1342 In Canada, the CRTC's basic service objective established a baseline Internet availability target of five megabits per download and one megabit for upload for all Canadians by 2015. Cybera believes that these targets should now be considered too low based on current and expected uses of the Internet in the near future.
1343 We believe the basis for setting such targets should be the ability of Canadians to use the Internet interactively and not just as passive consumers. As such, upload speeds have to be higher and should be symmetric with download speeds to allow consumers to carry out digital activities such as video conferencing and telecommuting. I'll talk more about that in just a moment.
1344 Moreover, the baseline download and upload targets should be updated frequently to match leading international benchmarks.
1345 Cybera recommends setting a near-term target of 35 Mbps symmetric internet bandwidth for all citizens by 2018, which would place Canada among the current top 20 countries for average internet speeds and a 2020 target of 100 Mbps symmetric.
1346 For consumers to use these high speed connections, they must be able to have confidence they will actually receive them. Most commercial plans today specify speeds as "up to" a certain rate.
1347 If Canadians are to use these connections to their full potential, speeds must be specified as "at least," thereby setting a useful floor, rather than a theoretical ceiling. Such a change will require regulation.
1348 Let me describe how high speed symmetric connectivity can serve to promote both cultural and economic development.
1349 In Cybera's Calgary and Edmonton offices we use telepresence robots to allow staff to work from anywhere in the world or at least anywhere with good connectivity, and yet be physically present in the office with their colleagues.
1350 These telepresence robots are cheap, costing less than a fully configured laptop computer, they use a Segway style base and a tablet for a head.
1351 We had actually hoped to bring one today to demonstrate and maybe even test, but unfortunately they wouldn't let him on the airline, which was a little awkward.
1352 Although simple sounding, the difference between the telepresence robot for a remote worker and the more traditional work-from-home model where the worker is not seen through the day except when they make Skype call to colleagues or to join a meeting is considerable.
1353 I myself have found that when using such a robot and encountering people who don't know me, I am basically treated the same way as a disabled worker; people are a little friendlier, they hold the door for you a little longer, which is good because the robot doesn't have arms, and are happy to help a co-worker who is just a little less mobile than their able-bodied colleagues.
1354 For all they know, I may be confined to a hospital bed, perhaps with a broken neck, and this is how I go to work. Indeed, it could be.
1355 So what does this mean for economic development beyond the obvious opportunities for disabled workers?
1356 Consider, if you will, the vast natural resources in Northern Alberta's oil sands. In recent years the Mayor of Fort McMurray called for a slowdown in oil sands development for the simple reason the town could barely accommodate the influx of workers from across Canada and around the world.
1357 With adequate symmetric bandwidth telepresence robots could be used, and for many jobs workers need not be physically present in Fort McMurray. They could be at the other end of the province in Fort Macleod.
1358 Indeed, pervasive fibre optic networks allow the workers to be drawn from across the country, sharing the wealth creation and employment opportunities without the carbon footprint and stress on the town of flying them in and accommodating them.
1359 For a cultural example from the other end of the province, consider the benefits of symmetric broadband to a UNESCO heritage site like Head Smashed In Buffalo Jump in southern Alberta.
1360 With adequate fibre connections telepresence robots can allow visitors from Victoria to St. Johns to connect to a robot and explore the world class museum at the site.
1361 Very few of these potential visitors would ever have the chance to visit in person. To carry it even further, they could use technologies such as Google hangouts on mobile devices to meet the member of the local First Nations community, get a guided tour of the site and explore their culture.
1362 This rich immersive and interactive cultural experience does not require new technology to be developed, but only fair and open access to the essential telecommunications infrastructure that is within the power of the CRTC to regulate.
1363 Some of these opportunities are profitable at one end of the wire, but not the other. Some are not profit-driven at all, but go to promotion and preservation of Canadian culture.
1364 The dominant carriers can be counted on to address the profitable portions. We hope the Commission will require that they also operate in such a manner that all Canadians and Canadian culture will be served as well.
1365 Previous CRTC telecom decisions which regulated the wholesale service industry made cable and dial-up internet services more affordable in Canada. Given the country's low population density, service-based competition must displace facility-based competition.
1366 Giving small providers mandated access to FTTP infrastructure will facilitate market competition and ensure consumers gain access to high speed connections at reasonable rates.
1367 Regulation will also provide protection from the large carriers abusing their dominant position by entering small markets and serving only the most profitable areas such as the business core.
1368 Drawing again on the example of Olds, Alberta, their business case shows that the community broadband initiative can be cash flow positive within a year of the build out, assuming there is a sufficient take rate from the community.
1369 If a major comes to town and offers services for voice and internet via fibre to the businesses in town the community broadband is left with the task of serving the last profitable residential market.
1370 The reduced take rate and profitability per customer served means that the business case no longer works, and the residents may never get high speed connection.
1371 Hollowing out the middle of small towns is good business for carriers and bad for the people who live there. In an unregulated market that is exactly what we expect to see happening.
1372 So in conclusion, our message is clear. Networking infrastructure is essential and, therefore, it needs to be regulated. We are concerned that as technology changes rapidly, the regulation must keep up.
1373 Excellent results have been achieved through the Commission's regulation of telephone service, internet access, and access to the separate, but also very important research and education network, of which we are a part, is increasingly dependent on access to fibre connections in order to achieve the bandwidth required for modern and future use.
1374 Fair, affordable, non-prejudicial access to this fibre will not happen without regulation. Without such access, Canada's digital economy cannot reach its full potential.
1375 Thank you, and we would like to take any questions.
1376 THE CHAIRPERSON: Thank you very much for that.
1377 I will pass you off to Commissioner Shoan, who will start off the questions.
1378 COMMISSIONER SHOAN: Good afternoon.
1379 So you have provided a very targeted intervention with respect to mandating wholesale access in order to address the urban rural disparity, and I have a couple of questions on that.
1380 Before I get into that I wanted to ask you a few questions of clarification based on your presentation.
1381 You noted at paragraph 5 that you don't own your fibre assets directly. Who does own your fibre assets?
1382 MR. WINSOR: The major carriers: Shaw; TELUS; Bell, we buy from wherever we can get good rates and we try and get them to compete when we are buying.
1383 We are also finding that the major municipalities are helping us with that too. Most municipalities, like the City of Calgary, City of Edmonton have considerable fibre assets which they don't make available to the telcos for the obvious reasons.
1384 But for a not-for-profit NGO like Cybera, they are happy to work with us and make assets available so that we can connect schools, colleges. And along the way things like fire halls, although that is their business, not ours.
1385 COMMISSIONER SHOAN: Great, thanks.
1386 At paragraph 23 you discussed setting benchmarks based on average internet costs and speeds within a peer country or group of peers, such as other G7 nations.
1387 My question to you is doesn't that ignore the challenges specific to Canada? (i.e. as you mentioned, the low-population density covered with a large geographical space)
1388 Are there really countries upon which we can measure ourselves against?
1389 MR. WINSOR: It is certainly true, that you cannot ignore our geography. From time to time people say, let's follow the example from the Netherlands or from Singapore where their population densities are in the order of 5,000 or 10,000 people per square kilometre and we have 3,000.
1390 So we have to be reasonable about it. But the fact of the matter is that, yes, we have a difficult geography and some things will work and some things won't.
1391 But if we take that geography to mean, gosh, it is hard, let's not do it, then we may as well accept the fact that we are going to continue to be hewers of wood and drawers of water and not be able to get into the knowledge economy. Hard doesn't mean you shouldn't do it, it just means you have to work harder.
1392 COMMISSIONER SHOAN: Right, fair.
1393 I wanted to ask you about the internet buying group that you mentioned in your intervention. I found that a very interesting concept. Can you describe it in a little greater detail for me please?
1394 MR. WINSOR: Sure, happy to.
1395 When we saw that some of the post-secondaries were paying close to $200 a megabit and the rate in Boston at the time was $1 we realized we had to do something to try and bring the rates down.
1396 The biggest kid on the block within the educational space was the University of Alberta and they were looking at rates at that time of about $10. And they were just excellent corporate citizens if you will, part of the group. They brought their muscle in as the biggest and allowed the other schools to join with us.
1397 The first thing we did, even ahead of the buying group, was we set up a peering arrangement through the Seattle Internet Exchange because strangely enough the SuperNet, when it was built, allowed you to connect from Place A in Alberta to Place B, but not to get to the internet. That portion of it wasn't done.
1398 And it's hard to look at that today in 2014 and think why would you not connect it to the internet? But 10 years ago there was some misses.
1399 So when we connected our network to the SuperNet, which we can do basically on a privileged position, and then connect it to Google, Microsoft, YouTube and all those through the Seattle Internet Exchange in a peering arrangement two-thirds of the traffic from the post-secondaries immediately moved over our network, across the SuperNet, many of them were directly on our network and then out to those places.
1400 We then put the internet buying group together and we went through everything, as you would expect, we went to request for proposals. But it was effectively winner takes all.
1401 So TELUS was the main provider for the University of Lethbridge, Shaw for Calgary, and Bell for the University of Alberta. And had they all ignored our RFP they could have continued to charge what they wanted to if they trusted each other, not to undercut each other.
1402 But with an RFP in front of them they did compete and the rates immediately tumbled to well under $10. And picking up multiple feeds, we were able to get service out to our members at around $15 for a double feed with full redundancy.
1403 A big improvement over a couple hundred dollars. Now of course, some people had tied themselves into longer term contracts. But as those come up for renewal, more and more are joining. As our buy grows, we are attracting people like Hurricane Electric in town. We needed an internet exchange to really make that go as well, which we have established.
1404 So prices are falling rapidly because we have pushed to make competition happen for the folks who are dependant on public funds. We are not providing services to Cenovus in Canada, not that we are not fans of big Canadian companies, but we figure they can look after themselves.
1405 COMMISSIONER SHOAN: Right. It is an interesting arrangement, in the sense that you are managing the fibre optic backhaul for the major providers and yet representing their ultimate end consumers back to these major providers.
1406 And there was no pushback there, you found that the actual RFP process went smoothly?
1407 MR. WINSOR: Well, there was some pushback, but ahead of that we had explained everything to the Government of Alberta, who is our primary funder, that while the rates were $1 in Boston they were, you know, in the hundreds of dollars for educational institutions in the province.
1408 So when some of the pushback was directed to the government saying, stop funding Cybera, we don't like what they are doing, the government's answer back to the telcos was stop charging so much, we like what they are doing. So it was fine.
1409 COMMISSIONER SHOAN: Great. So you have argued that FTTP should be unbundled for rural communities. But rural communities are not usually ideal places for telecom service providers to invest --
1410 MR. WINSOR: They are not.
1411 COMMISSIONER SHOAN: -- due to, as you mentioned, the low population density and the extra deployment costs, factoring in distances, amongst other factors.
1412 So can you comment on whether service providers may be less likely to invest and deploy these networks in rural communities if FTTP is regulated, mandated?
1413 MR. WINSOR: Indeed they are disinclined to invest in those communities and it is going to take a fair bit of persuasion for them to get out to those communities.
1414 As you pointed out, our geography is, to some extent, special. We have people living a long way from major centres. But we have found it possible to get those people telephones. And we see this as essential infrastructure.
1415 I often refer back to the history of Canada. There is a reason that every Canadian recognizes the pictures of all the people in top hats driving in the last spike; it is not because we love railways, it is because that is essential infrastructure. The 19th Century built our country, it is how you move your goods from where they are produced to where they are consumed.
1416 In the 20th Century it is the highways. And in the 21st Century it is fibre optic networks. And we need to find ways to make sure that all of us get connected and a mixture of regulation and profit motive will do it.
1417 There is a lot of money to be made connecting customers in major centres. Some of that should be required to connect people in the smaller towns, otherwise they are not going to get connected, and they must be.
1418 COMMISSIONER SHOAN: Okay. And based on your experience -- I guess I am trying to reconcile the desire for more retail competition for the provision of the FTTP, which makes perfect sense, with the need for initial investment.
1419 So in your experience, in your jurisdiction, I guess which is what you can speak to, is there a desire? Have businesses approach you and say, yes, we would invest and build out to these communities were we provided reasonable access?
1420 MR. WINSOR: No, they have not. But what you see is communities saying we are going to have to invest ourselves. So again, if I go back to places like Olds --
1421 COMMISSIONER SHOAN: Olds, Alberta, yes?
1422 MR. WINSOR: -- Olds has said, we have to have this, and the incumbents are not interested in serving it, so we will build our own. And they have had a Herculean struggle to get it done.
1423 They approached telcos and said, once we lay this fibre will you provide services over it? And they answer from the telcos was, no, if you lay your fibre, we will lay ours right alongside yours and compete with you.
1424 That is not helpful, especially in those low-population density areas. That is where the argument of facilities versus service really comes to the fore.
1425 So will the telcos go into the less profitable markets? They probably won't with fibre. But if the community needs it, they will find a way to build it. We need to make sure that that community effort doesn't then get derailed by a quick grab for the profitable piece of town, effectively hollowing out those services, taking the profitable bit and leaving the other folks unserved.
1426 If you are going to be able to jump on a robot halfway across the country and do interesting things, you are going to need good connectivity.
1427 COMMISSIONER SHOAN: Right. And thank you for that clarification. It wasn't clear to me from your submission that it was municipalities that you were actually targeting in terms of that last mile build out, but it is certainly clearer now.
1428 And it is something that I have been hearing in my region of Ontario with respect to the Eastern Ontario Wardens' Caucus and the Western Ontario Wardens' Caucus, a number of municipalities are looking at the same sort of approach. So definitely something that seems to be bubbling to the surface.
1429 And I thank you for your submission today. Thank you.
1430 MR. WINSOR: Thank you.
1431 COMMISSIONER SHOAN: Those are my questions, Mr. Chairman.
1432 THE CHAIRPERSON: Thank you. Mr. Vice-Chairman? Telecom?
1433 COMMISSIONER MENZIES: Thanks. I am curious to know just on your theme of the need for ubiquity of access and that sort of stuff. I need to know sort of within the context of this proceeding what suggestions, apart from fibre mandated access you have.
1434 Because when you get into these more remote areas, like using your Alberta example, even the government there trying to finish the job and get to that last 3 per cent or whatever it is, the barrier I understand is that it is incredibly expensive.
1435 And I mean, Alberta is probably, because of its geography, a bit better advantaged than some of the other provinces. But once you get north of 55 degrees or even in Ontario, north of 47 degrees, things get pretty remote pretty fast. I mean you can drive three-quarters of an hour north of here and access becomes issues.
1436 So given the expense of all that and given the conflicting demands for lower rates and faster speeds, you understand the difficulty of this? Somebody has to pay for it. Saskatchewan is the only province in the country right now not running a deficit. How is it going to work? How are we going to get there? You are smart folks.
1437 MR. WINSOR: Thank you, or at least these guys are, and they make me look good.
1438 MR. WINSOR: There is a couple of points to come back to on that.
1439 If you look at what Alberta did in terms of trying to address that 10 years ago, Alberta built the SuperNet, spent $350 million putting a fibre cable into every small town that had any of the four categories in it; a school, government office, library, or a healthcare facility. We are not talking like a full-out hospital, I mean you can get a SuperNet connection into your town for almost any of these reasons.
1440 The idea there was that many of those towns were simply too expensive, not profitable enough if you will, for the majors to go into them. And the theory was that many small ISPs would spring up, serve the customers, and then they would be covered.
1441 In fact, many of those small ISPs that sprang up went out of business fairly quickly because they still couldn't make a profit.
1442 So how do you get around that? Well, to some extent there is a role for government to get involved in actually putting much of the infrastructure in place, just as there is for building roads and there was for railways.
1443 This is essential infrastructure. And if it is essential infrastructure then, yes, we may be running deficits, but we have to build it if we are indeed to be able to move forward towards the knowledge-based economy we hear about so much.
1444 We don't have four highways from Calgary to Edmonton with people saying, no no, drive on my road, it is better. We built the road once and we built it using public funds. And then we have people drive the different trucks up and down. And I can choose between, you know, a FedEx truck or a UPS truck to get my package down that highway.
1445 This is infrastructure that, yes, it is costly. And I think that you are pointing out to me that I can have any two of better, faster or cheaper. But it has to be spent.
1446 And I think that if we could force the incumbent carriers to participate in that build by moving some of the profit away from areas that they want to serve to a requirement that they also serve some of the other areas, that would be a long step towards it.
1447 COMMISSIONER MENZIES: That is probably for a future proceeding.
1448 But your main point now is that you think mandated access to fibre is a start --
1449 MR. WINSOR: It is a start
1450 COMMISSIONER MENZIES: -- down that road because the argument against is that it of course disincents investment rather than incents. And that you would have more access but less fibre.
1451 MR. WINSOR: And that is something that -- it is an argument that we have heard, but we are not a telco. We try and make telcos do things by making them compete with each other, we certainly don't compete with them.
1452 They will talk to their own economics. We can talk from the consumer's side, from the need for the schools, the colleges, to get this fibre, and it is essential. We have had some success in improving competition in Alberta and we hope that you, who are smarter than we, will find other ways to make that happen.
1453 COMMISSIONER MENZIES: Okay, I will leave on a compliment and turn it over to somebody else.
1454 COMMISSIONER MENZIES: This is probably the highlight of the day.
1455 THE CHAIRPERSON: That is very good. Well, thank you actually for bringing a different perspective as well to our proceeding.
1456 There is a lot in your submission that, as the Vice-Chair pointed out, will be very pertinent to the basic telecom service proceeding that we have said we will be holding our three-year plan.
1457 And of course, you remind us that it is more than just to get access to entertainment programming. There is other public goods there, whether it is eLearning in your case or eHealth and a lot of other applications down the road.
1458 So it is refreshing to have a different perspective in this.
1459 Your buying group idea though, if it works in your region, are there any attempts to bring it beyond the jurisdiction?
1460 I am aware of, for instance, in the copyright field that licences are negotiated on a national scale. Would that not be part of the solution in your case?
1461 MR. WINSOR: It might well be. Cybera is the Alberta version of the Research and Education Network and in Quebec it is RISQ, and in Ontario it is ORION. We are actually the largest of those provincial groups in that we have people who do cloud computing and networking and a lot of services above the network as well.
1462 Because although networking is our core piece, we would like to point out that, as much as we like them, networks themselves are not useful. It is what you do with them that matters.
1463 So whenever possible, if there is something that we do in Alberta that is successful, we try and share it with our colleagues across the country. And CANARIE, our national backbone operator, is terrific at helping us coordinate those as well. And you will be hearing from CANARIE later on.
1464 We certainly shared our successes. And in British Columbia you see a slightly different flavour going on where they are aggregating demand for other portions that are above the network services rather than the network itself.
1465 In B.C. they actually own a lot of their own fibre. We don't in Alberta, in part because of the SuperNet. With the SuperNet available, it didn't make sense to build out our own fibre assets. So we have had to do things like the Internet Buying Group because for arcane legal reasons we actually can't get the best use out of the SuperNet.
1466 For example, there is a provision in the SuperNet operating agreements that provide for a fibre repair to be provided for any two post-secondaries to connect on an unmetered basis.
1467 But for, again we consider them rather arcane contract reasons, that has been blocked. And so those universities are not allowed to access it and have to go and buy commercial services while the SuperNet sits unused.
1468 THE CHAIRPERSON: Although it is interest that with hindsight it seemed like a bad idea, but at the time of creating the SuperNet it seemed like a great idea, right?
1469 MR. WINSOR: Some if it. That particular provision was put in and was intended to be used. Unfortunately, nobody told the universities and we had to get a hold of it by freedom of information filings eight years later, by which time it was too late to use it apparently.
1470 THE CHAIRPERSON: Okay. So I am happy to hear though that the SuperNet continues to operate even though you have --
1471 MR. WINSOR: Yes, we have not broken it.
1472 THE CHAIRPERSON: -- you have a few centimetres of it there on the table in front of you.
1473 Thank you very much. Those are all our questions for you today. Thank you for participating, it is very useful. And I do hope to see you again during that future proceeding both Vice-Chair and myself have mentioned on the basic telecom service proceeding.
1474 MR. WINSOR: We look forward to it.
1475 THE CHAIRPERSON: Okay. Thank you very much.
1476 So I think we are adjourned for today. I don't think legal has any...? No, we are good.
1477 So we will adjourn until 9:00 tomorrow morning.
1478 Thank you very much.
--- Whereupon the hearing adjourned at 1612, to resume on Tuesday, November 25, 2014 at 0900
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