ARCHIVED - Transcript, Hearing 25 November 2014

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Volume 2, 25 November 2014



Review of wholesale service and associated policies


Outaouais Room
Conference Centre
140 Promenade du Portage
Gatineau, Quebec
25 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


Jean-Pierre BlaisChairperson

Peter MenziesCommissioner

Tom PentefountasCommissioner

Candice MolnarCommissioner

Raj ShoanCommissioner


Lynda RoySecretary

Eric BowlesLegal Counsel
Valérie Dionne

Lyne RenaudHearing Manager
Philippe Kent


Outaouais Room
Conference Centre
140 Promenade du Portage
Gatineau, Quebec
25 November 2014

- iv -





5. Canadian Network Operators Consortium Inc.263 / 1485

6. Primus Telecommunications Canada Inc.441 / 2544

7. British Columbia Broadband Association485 / 2781

- v -



Undertaking287 / 1621

Undertaking331 / 1867

Undertaking433 / 2492

Undertaking483 / 2763

Gatineau, Quebec

--- Upon resuming on Tuesday, November 25, 2014 at 0903

1479   LA SECRÉTAIRE : À l'ordre, s'il vous plaît. Order, please.

1480   LE PRÉSIDENT : Bonjour, tout le monde.

1481   Madame la Secrétaire.

1482   LA SECRÉTAIRE : Merci, Monsieur le Président.

1483   Just for the record, the Commission sent Requests for Information to parties at the end of the day yesterday. Responses to these Requests for Information are to be filed with the Commission and served on all parties to the proceeding by 12 December. This letter has been added to the public record and copies are available in the Examination Room.

1484   We are now ready to hear CNOC's presentation. Please introduce your panel for the record and you have 20 minutes.


1485   MR. TACIT: Thank you, Madam Secretary.

1486   Mr. Chair, good morning. My name is Chris Tacit of Tacit Law, counsel with CNOC.

1487   With me are:

1488   - William Sandiford, Chair of the Board and President of CNOC;

1489   - Peter Rocca, CEO of Start Communications and Chair of the Regulatory Committee of CNOC;

1490   - Keith Stevens, Chairman of Execulink Telecom and Vice-Chair of the CNOC Regulatory Committee;

1491   - Marc Gaudrault, CEO of TekSavvy Solutions and Vice-Chair of the CNOC Regulatory Committee;

1492   - Matthew Stein, CEO of Distributel and Chair of the Carrier Relations Committee of CNOC;

1493   - Paul Andersen, President of EGATE Networks and Vice-Chair of the Carrier Relations Committee of CNOC;

1494   - Bram Abramson, Chief Legal and Regulatory Officer of TekSavvy Solutions;

1495   - Christopher Hickey, Director of Industry Affairs for CNOC;

1496   - Stuart Jack, Partner, Nordicity Group Limited;

1497   - Dustin Chodorowicz, Partner, Nordicity Group Limited, who is appearing by videoconference link;

1498   - Alex Pavlovic, Director of Technology, Nordicity Group Limited;

1499   - Ricardo de Avillez, Manager, Nordicity Group Limited; and

1500   - Dr. Markus von Wartburg, Senior Economist, Analysis Group.

1501   I will now turn the presentation over to Bill Sandiford.

1502   MR. SANDIFORD: Good morning. My name is Bill Sandiford and I am the Chair and President of CNOC, an association of 34 competitive telecommunications service providers, many of which rely on the regulatory framework presently under review.

1503   Let me tell you why we think the remedies we will be proposing are necessary.

1504   The reality is that retail competition, especially in broadband markets, is underdeveloped in Canada. Whether we look at the low market share held by non-incumbents, the high prices paid by consumers or the limited adoption of higher-speed services, the picture is clear. Canadian consumers deserve better, and our proposal is designed to improve market outcomes for their benefit.

1505   In this proceeding we are asking the Commission to strengthen the existing regulatory framework by:

1506   - increasing robustness of the economic foundation upon which it is constructed;

1507   - ensuring that prices for wholesale services, including mark-ups, are cost-based and that the rate-setting process is accurate and efficient;

1508   - restricting the ability of incumbents to engage in non-pricing discrimination by adopting equivalence of inputs, or EOI, as a fundamental regulatory policy;

1509   - requiring the incumbents to offer broadband access service, or BAS, for both ILEC and cable carrier networks; and

1510   - mandating aggregated and disaggregated forms of fibre-to-the-premises, or FTTP access services.

1511   In this presentation, we are addressing these requests in the course of responding to the questions in the Commission's Organization and Conduct Letter. Improvements in these areas will promote greater competition.

1512   The first question posed by the Commission is whether modifications should be made to the structure and implementation of the wholesale services framework.

1513   We are of the view that the framework's purpose and application would be improved considerably by the adoption of measures in three main areas:

1514   - regulation or forbearance of wholesale services must be based on sound economic principles, applied efficiently and practically;

1515   - prices must be cost-based, including mark-ups intended for the recovery of fixed common costs; and

1516   - the regulatory framework must include clear policies that forbid incumbents from engaging in non-price discrimination.

1517   With respect to the economic aspects of the regulatory framework, the Commission already got most of this right in Telecom Decision 2008-17. We have some recommendations that would further streamline and add precision to this economic framework, specifically:

1518   - the way that markets are characterized from a geographic perspective;

1519   - aspects of the essential facility definition; and

1520   - simplifying the basket structure.

1521   A significant concern is the Commission's characterization of markets for wholesale services being national in scope. This approach masks important differences in market characteristics among various regions of the country. It lumps markets where there may be multiple service providers with markets in which there may be only one or two providers at most.

1522   As a consequence of defining markets nationally, services may be inappropriately forborne, with potentially serious economic repercussions. A vivid example is the forbearance of access and transport services, whether fibre-based or Ethernet, throughout the country, even though competitive supply is not even available in some parts of Toronto. We therefore ask the Commission to ensure that future market analyses reflect the local and regional characteristics of markets.

1523   We have also proposed two changes to the definition of an "essential facility."

1524   The first change amounts to a no head-start rule. Whenever an incumbent deploys an essential facility, the incumbent would make it available to competitors in accordance with EOI principles so that we can launch retail services that are reliant on it at the same time the incumbents do.

1525   The second change would shift the focus of part of the test to whether duplication of a facility is economically efficient. The change would emphasize that duplication of facilities should be avoided if it is wasteful from a whole economy perspective. It does not make sense to mandate the deployment of additional lines instead of using what is already there to foster competition.

1526   We also believe that the wholesale regime could be streamlined significantly by grouping all of the mandated categories of services into one essential facility basket if you agree with us that all of these services do, in fact, meet an essential facility test, whether it be the one that we are proposing or the Commission's test from 2008-17. The Commission has acknowledged that the services in all of the mandated categories are necessary to prevent a substantial lessening of competition in downstream retail markets. If and when any forbearance materializes, it should follow the correct application of proper forbearance tests applied to the correct product and geographic markets, and the absence of any other compelling evidence that incumbents hold residual market power in the relevant markets.

1527   The approach we are proposing would be simpler than a requirement to maintain six distinct baskets and leads to our second suggested area of improvement to the existing regulatory framework, namely ensuring that prices for regulated wholesale services, including mark-ups, are cost-based.

1528   More specifically, we believe that the mark-up over Phase II costs for all mandated wholesale services, which compensates incumbents for fixed common costs, should be no more than 15 percent since those costs continue to decline.

1529   This approach is also consistent with our view that mark-ups for wholesale services should not vary based on any perceived risk differentials or other factors.

1530   If it is necessary for the Commission to acknowledge a higher risk profile for a certain incumbent wholesale service, any corresponding risk premium should be calculated in the same manner that the incumbent calculates the risk premium for itself. In other words, the risk premium should be reflected in the cost of capital applied to the Phase II costs for that service, rather than through an arbitrary mark-up.

1531   Even if prices for wholesale services are cost-based, retail competition can be undermined when incumbents discriminate on a non-price basis against their competitors. Over the years, consumers have suffered from various forms of non-price discrimination that incumbents inflict on their competitors. These forms of discrimination include routine service provisioning delays for installations, repairs and disconnections, and inferior service quality relative to their own retail operations.

1532   This is how the incumbents have designed the system.

1533   The failure of this system is the reason we are advocating for the adoption of EOI principles in this proceeding. The idea behind EOI is very simple: incumbents should treat others as they treat themselves. This is why the European Commission has identified EOI as the "surest way to achieve effective non-discrimination."

1534   Under EOI, incumbents should be expected to treat their own retail operations and their competitors in the same manner with respect to the delivery of wholesale services. We are asking the Commission to entrench this principle in Canadian regulatory policy.

1535   This means that an incumbent should provide the same service offering to its competitors as it does to its retail operations, having regard to:

1536   - processes and systems;

1537   - timescales; and

1538   - information.

1539   I want to be very clear. We are asking the Commission to entrench EOI principles to govern the delivery of regulated wholesale services by incumbents, especially where newer technologies such as FTTN and FTTP are concerned. This is a clear pro-consumer policy and will address non-price discrimination actions by the incumbents.

1540   We acknowledge that a number of tools and capabilities have to be developed in order to give effect to EOI and we expect that this would happen in a follow-up proceeding once the Commission adopts EOI in principle.

1541   MR. GAUDRAULT: My name is Marc Gaudrault. I am the CEO of TekSavvy, out of Chatham, Ontario. We serve 250,000 homes across Canada.

1542   Commissioners, your letter's second question started with the mandated provision of wholesale high-speed access services, including FTTP and the proposed broadband access service, or BAS.

1543   I want to start with BAS, a disaggregated model for both ILECs and cable carriers that is doable, makes sense and will be a foundation for sustainable competition going forward. Here's why.

1544   As companies like ours grow, investing in middle-mile transport facilities is how we reduce costs. We have a natural incentive to invest in our network because, at scale, it's cheaper, but without a disaggregated option for interconnection, we can't act on the incentive to invest in those middle-mile facilities. If we haven't had middle-mile facilities built out, then we can't take the next natural step: to load them up by adding customers all along the route.

1545   This is not just a theory. As you know, until Telecom Regulatory Policy 2010-632, interconnection on the cable carrier side was disaggregated. We invested a lot of money deploying to those disaggregated POIs. The policy change meant that we had to strand those deployments. Instead we had to plug everything in at a single aggregated POI. The whole point of BAS is to restore the incentive and ability to deploy transport to where our customers are.

1546   On the ILEC side, this would be the first time that would be possible. Current co-location and unbundled local loop services don't let competitors reach all end users on a disaggregated basis with competitive speed offerings. BAS would.

1547   If you want to enable not just market entry but sustainable competition, the BAS model is essential because it unshackles competitors to substitute bundled transport components with competitive supply.

1548   That brings us to FTTP. As you know, to meet bandwidth demand, fibre has been pushed out further and further towards the customer. Cable companies have hybridized coax with fibre. Telcos have pushed fibre out to the node. Now, fibre is being pushed out further, to the premises.

1549   FTTP is not some magical new network and adding that last-mile fibre does not make the access facility any less essential. It doesn't make any sense to mandate the building of multiple fallow fibre segments to the premises, any more than it does to mandate multiple half-empty cellular towers in a neighbourhood. That would be wasteful. It would be economically inefficient. It would create serious barriers to entry. It is consumers who would pay.

1550   Bottom line: failing to mandate FTTP would be a radical roll-back of the competition model that consumers have hailed. With BAS, we have asked you to restore a model that actually lets us invest in the next phase of the network, the middle mile. These are crucial building blocks for the next generation of sustainable broadband competition in this country.

1551   MR. ROCCA: My name is Peter Rocca and I am the CEO of Start Communications, a telecommunications service provider in London, Ontario.

1552   I will be discussing why the regulation of the remaining services described in the second question in the letter is required. I will also address factors that the Commission should take into account when making its decision to forbear from regulating a mandated service in a given geographic market.

1553   As a starting point, we endorse the Commission's approach to forbearance set out in Telecom Decision 94-19. Since this test is prohibitively time-consuming and cumbersome to apply in practice, forbearance proxy tests are used.

1554   Since these tests are approximations for a more detailed competition analysis, a safeguard is required to prevent any inappropriate forbearance determinations. Therefore, every forbearance application should be open for comment to ensure that determinations are made on the basis of a comprehensive record.

1555   CNOC's proposed forbearance framework for aggregated HSA services is technologically neutral. For example, equivalent speed wholesale services offered over FTTP, FTTN or even copper would form part of the same product market. On the other hand, wholesale services available exclusively over certain platforms such as FTTP or FTTN would form distinct product markets.

1556   The aggregated HSA forbearance test is based on the forbearance test for local voice services. That test addressed proper product and geographic definitions as well as market presence and adherence to quality of service requirements. Our test also includes these factors.

1557   In terms of market presence, we believe that four independent wholesale competitors are required. We have also added a market share loss component which is required to guard against premature forbearance before a reasonable competitive outcome is actually achieved.

1558   For ULLs, we are of the view that a forbearance test is not appropriate. This technology is the only means of providing traditional wireline voice services to the substantial segment of subscribers who do not perceive VoIP as a substitute. It is also required to provide affordable low-speed broadband Internet to consumers given that incumbents are progressively withdrawing their lower-speed offerings.

1559   In the case of high-speed access and transport services, whether fibre-based or Ethernet, CNOC's forbearance test proposals were based on the test adopted by the Commission for digital network access which connects competitor customers to co-located switches. That test includes proper product and geographic definitions as well as a market presence.

1560   In terms of market presence, we, once again, believe that four independent wholesale competitors are required. A market share loss component is needed to guard against premature forbearance before reasonable competition materializes.

1561   Although the letter did not explicitly address this, we are also of the view that a forbearance test for low-speed CDN transport services is not appropriate. ILECs are the only suppliers that ubiquitously support these services through copper facilities.

1562   MR. STEVENS: Good morning. I'm Keith Stevens, the Chairman of Execulink Telecom, a 110-year-old TSP based and operating primarily in Southwestern Ontario.

1563   The final question posed in the letter was whether modifications should be made to the Commission's wholesale services' rate-setting approaches, the underlying principles or the associated processes in order to improve the overall timeliness, accuracy or consistency of the rate-setting exercise.

1564   We support the continued use of Phase II costing as the basis for pricing regulated wholesale services.

1565   Any proposals for retail minus pricing are unworkable and should be rejected. Retail and wholesale services are not equivalent. Wholesale services are just some of the many inputs employed by competitors to deliver their own retail services.

1566   Arbitration will also not be effective and should be rejected. This has been amply demonstrated by the failure of such a regime to generate reasonable wireless domestic roaming rates.

1567   Execulink has experience conducting a Phase II cost study as well as responding to the cost studies submitted by the incumbents. Having lived both sides of the "costing coin," it is clear to me that the Commission's rate-setting exercise can be improved and streamlined by:

1568   - creating a rigorous approval process for changes to pricing principles and parameters;

1569   - developing ILEC and cable carrier efficient operator models and costs;

1570   - renewing institutional commitments to Phase II costing, including the creation of a CISC Costing Working Group;

1571   - conducting a review of current mark-up policies as already discussed;

1572   - benchmarking Phase II rates against other relevant measures;

1573   - not freezing legacy service pricing at existing rates; and

1574   - developing a process for keeping wholesale service costs and rates more current, the lack of which is presently leading to highly inflated usage-sensitive HSA rates.

1575   MR. TACIT: Before concluding, I want to discuss the legal issue of the Commission's role under the Policy Direction. That document is often cited by incumbents as a reason why the Commission should stop or reduce its regulation, but it is much more than that.

1576   The Policy Direction requires the Commission to ensure that the economic regulatory measures it employs do not deter economically efficient entry nor promote economically inefficient entry. Our proposals for improving the economic foundations of the regulatory regime as well as service pricing and costing are meant to do this. They are focused on improving consumer outcomes, rather than wasteful duplication of facilities.

1577   The Policy Direction also requires non-economic regulatory measures to be enforced in a symmetrical and competitively neutral manner, which is precisely what our EOI proposal is all about.

1578   The Policy Direction also requires the Commission to ensure the technological and competitive neutrality of interconnection and network access arrangements or regimes to the greatest extent possible to enable competition from new technologies and not to artificially favour either Canadian carriers or resellers. Our BAS and FTTP proposals are designed precisely to achieve this objective.

1579   Finally, I want to comment on the importance of having a timeless regulatory regime in which competitors do not have to put up with years of opposition and delay by incumbents to obtain access to new and emerging technologies.

1580   We are encouraged by the changes that the Commission has instituted for the benefit of Canadians in the last few years. We are excited that if the Commission adopts CNOC's submissions, competition and consumer choice will be strengthened even further.

1581   This concludes our presentation and we would be pleased to respond to the Commission's questions.

1582   THE CHAIRPERSON: Thank you very much, gentlemen. The Vice Chair Telecom will start us off.

1583   COMMISSIONER MENZIES: I was tempted to ask where do you want to start, but --

1584   MR. TACIT: Sorry?

1585   COMMISSIONER MENZIES: -- why don't we start with -- why don't we start with the definition of markets? You say local and regional. How specifically should we define those?

1586   MR. TACIT: Well, we have made some suggestions, for example, with regards to wholesale aggregated high-speed services that that should be the local exchange with regard to Ethernet, transport and access services. We have used the wire centre. And we have done this because we think there are a lot of analogous characteristics to these markets to the markets that were forborne in the local competition decision.

1587   COMMISSIONER MENZIES: It's a facilities-based definition.

1588   MR. TACIT: It's a facilities-based definition.


1590   And in your talk about the forbearance test you mentioned that there needed to be four, I think you said, independent wholesale competitors in a market.

1591   MR. TACIT: Correct.

1592   COMMISSIONER MENZIES: Can you give me an example of a market where there are four independent wholesale competitors?

1593   MR. TACIT: Well, that's the problem, there aren't.

1594   But, for example, if we had BAS available we could see situations where where BAS is deployed. The TSPs that have access to BAS would actually develop their own aggregated high-speed wholesale services.

1595   So that you could presumably in markets, especially denser markets, have the cable company, the ILEC, plus two other independent providers providing aggregated wholesale services. And if the conditions of the forbearance test were met, one could proceed to forbearance in that market.

1596   COMMISSIONER MENZIES: Well, I guess what I'm trying to get out there is, why would there ever be four? I mean, where would the incentive be in this if there was the regulatory regime you wanted and you set the bar at four independent wholesale providers? What about the structure would incent people to become a wholesale provider?

1597   MR. TACIT: Well, I think it's because --

1598   COMMISSIONER MENZIES: I mean, why four, for instance? I mean, the Competition Bureau is more two.

1599   MR. TACIT: Understood. Well, the Competition Bureau also changed its story from the wireless markets which I think their analysis was much more accurate there and, you know, certainly the Government of Canada believes that you need four. But it's not a numbers game per se.

1600   What we have observed, though, in other countries and especially in the wireless context is that when you get to around four competitors that's where you start getting a lot more competitive behaviour in wholesale markets. So we see that as a good benchmark in telecommunications generally to apply and if the proper disaggregated services are available, which are not today, to enable those wholesale markets to develop, I think that will happen.

1601   The reality is that there is a lot of incentive for carriers who have disaggregated services to fill up those services, to fill up the transport elements that they are either building or leasing from others and maximize the number of customers on their networks.

1602   COMMISSIONER MENZIES: You agree, though, that there is a lot more to competition than a number?

1603   MR. TACIT: Absolutely, which is why we have also included things like a market presence test and a --


1605   MR. TACIT: -- market share loss test, and so on. There are three fundamental economic elements to this that we are trying to capture. One is sufficient supply capacity, rivalrous behaviour and the actual evidence that competitive behaviour is disciplining the market power of incumbents.

1606   COMMISSIONER MENZIES: Okay. Thank you.

1607   I want to talk about the essential facility test. Just to be clear from what you have said today and what you have written before, do you want us to expand or alter the essential facility test itself?

1608   MR. TACIT: Sorry. Yeah, we have proposed a couple of minor tweaks.

1609   The first is to the second branch of the test. Instead of having two versions we would have one that reads "the facilities controlled by a firm that possesses upstream market power such that not providing access", et cetera. Those would be the words.

1610   And in the third case we propose "it is not economically efficient for competitors to duplicate" instead of the words that were there previously. However, I would add that in the case of the second change we could equally see that being implemented through a clarification that the existing languages meant to include an economic efficiency element to it. We just think that that's an important element that was not explicitly addressed and it is perhaps really the key element of that branch of the test.

1611   COMMISSIONER MENZIES: What if we were to formalize a set of principles that helped define where we mandate, sort of in addition to the essential facilities test into the other areas?

1612   I'm not clear if you are just looking for a single basket or if you are looking for a better definition of the criteria or the principles that we consider in order to place mandated services in other areas.

1613   MR. TACIT: Our view was that when you look at the various baskets of mandated services today we think they all would come into this new definition. But if you disagree with us then certainly we believe, as you do, that the services in those baskets still are necessary for competition to continue, whether they meet some strict technical test or not. And in fact the Commission believes that, too, or it wouldn't have mandated those additional services.

1614   So, you know, if you prefer to maintain a multiple basket structure we wouldn't argue with that, we are just trying to streamline things a bit.

1615   The central point we wanted to make with regards to the collapse of the baskets -- well, there were two, actually -- one was just a bit of streamlining to make things a little easier. But if that's not possible for practical reasons a set of principles would be fine with us.

1616   The second was just to point out the inconsistency in the markups in the various services across baskets which we don't think leads to an economically efficient result. That's one of the purposes why we collapsed the baskets as well.

1617   COMMISSIONER MENZIES: Okay, thanks.

1618   Do you have some suggestions as to what sort of principles we might use?

1619   MR. TACIT: I would like to think about that and perhaps take an undertaking.

1620   COMMISSIONER MENZIES: Sure. That would be fine.

1621   MR. TACIT: I don't want to do it on the fly.



1623   How would your no head-start proposal work in terms of notification?

1624   MR. TACIT: So this would operate perhaps differently if we are talking about a radically new service as opposed to, you know, something that is just another speed for example.

1625   So let's say that we have certain new retail services that an incumbent is thinking of rolling out that are somewhat different from what it has done before. But in order to do that it needs to employ the types of facilities or services -- inherently conceptually it has to use those itself to deliver those retail services which the Commission requires to be mandated traditionally.

1626   So let's say there is some new type of service that requires access, just to be simple about this. Before they would do that they would set out the processes, systems and all of that and share that information. They would share the information of the characteristics of the wholesale market, and so on, and before they actually launched as a retail service so that we would be in the same position as them with regard to a launch date.

1627   COMMISSIONER MENZIES: You could compete with the customer for that customer then prior to the launch, knowing there would be a launch date. If the launch date was January 1, you could begin marketing or whatever you needed to do.

1628   MR. TACIT: Well, they would begin marketing, too. We are not trying to suggest anybody can't market, but the reality is the way it works now we are always playing catch-up. We are always -- you know, even under the current speed matching rules a new speed comes out. You know, they file in a time period that's way too short, relative to when they actually introduce their own service.

1629   I think Peter would like to add something. Sorry.

1630   MR. STEIN: Matt, actually.

1631   The suggestion here is that that information be shared and then its knowledge be embargoed. So it wouldn't be to gain an advantage to sell or market the product prior to it being released. It's so that it could also be sold and marketed when that product is released, not in advance.

1632   MR. GAUDRAULT: And of course the idea there is that it's essential. So if it's essential than it ought to promote competition. And if we are going to compete, well, we shouldn't start learning about the thing by the time they already, you know, went through six months, 12 months, who knows what.

1633   COMMISSIONER MENZIES: Right. Pretty much everything is essential in this sense, right. Okay, I understand your position, that's good.

1634   You said sort of in your oral presentation this morning in paragraph 13, you sort of said -- well, you didn't sort of say, you said exactly:

"Whenever an incumbent deploys an essential facility..."

1635   So they would be the only -- it sounds like only incumbents would -- the world you envision is one in which only incumbents are deploying essential facilities. Is that --

1636   MR. TACIT: For the most part, yeah. There might be some exceptions.

1637   But I would say that, you know, if history is any precursor of what is to come, I think that it's pretty clear that they are the ones who tend to deploy essential facilities, not so much others.

1638   COMMISSIONER MENZIES: Right. So how do we square any of this with the desire to have, or the ambition to have facilities-based competition?

1639   MR. TACIT: I'm not sure I see a conflict. I don't understand the question.

1640   COMMISSIONER MENZIES: Well, in terms of -- in terms of a couple of those things, if their role is to build essential facilities for them to use and for you to use, what about that incents you to become -- any of you to become facilities-based competitors?

1641   MR. TACIT: Well, at this point I --

1642   COMMISSIONER MENZIES: What I'm seeing is a role in which there are facilities-based providers and then there are resellers essentially, right, and the more comfortable the role is for existence as a reseller I'm not seeing what the incentive is to become a facilities-based provider.

1643   MR. GAUDRAULT: So what incents me is to try to lower my costs.

1644   So if I have access, for example, for BAS, then I have a reason to go to a certain place because I have customers there, right? So I deploy facilities. And maybe in the beginning maybe I lease it from somebody else, but eventually it makes sense for me to actually lay my own fibre there. Then once I have got fibre there, then I can start building out from there.

1645   But the notion that, you know, the incumbents, that anybody other than the incumbents are in the best position to lay fibre in their own territory, like they are in the best position to do that.

1646   COMMISSIONER MENZIES: Okay. But I was going to ask that about the BAS, that you pointed out that your incentive to be a middle mile, to build out your middle mile facilities was to reduce your costs; right?

1647   MR. GAUDRAULT: Correct. Which --


1649   MR. GAUDRAULT: It reduces my cost, but also I have more control over the supply. So once that's built out I can leverage it to leapfrog into something else. Maybe there is an underserved community that I may want to lay fibre to.

1650   COMMISSIONER MENZIES: So there is more to it than just the costs, because what I was trying to get at was --

1651   MR. GAUDRAULT: Right.

1652   COMMISSIONER MENZIES: -- if the rate goes down because, you know, I was trying to square that, like if the rate were to go down it might remove the incentive for you to save costs by building middle mile facilities, but there is more to it than that.

1653   MR. TACIT: There is more to it than that and actually I would like to invite Markus to talk about the role of facilities-based.

1654   COMMISSIONER MENZIES: Because it seemed that the two ambitions seemed a little conflicting, right?

1655   MR. TACIT: So I'm going to invite Markus to talk --

1656   MR. GAUDRAULT: They are not conflicted for me.

1657   MR. TACIT: -- a little bit about facilities incentives and what that means and then I'm going to add something after.

1658   MR. von WARTBURG: I think facilities-based competition is kind of a goal, but it's not achievable for all elements of a network. So there are some elements, for example, the middle mile that we can have facilities-based competition and it is efficient to do so because entrants find it in their interest to enter those segments.

1659   There will be elements of a market where facilities-based competition is not very helpful in a sense that if you enter those elements -- for example, the very last mile, the fibre drop, it leads to duplication which can really push up industry costs. If you have two fibre drops it pushes up costs and eventually it's the consumer who pays.

1660   These costs have to be covered. Nobody in this room is in the business of running a charity. So eventually if you have -- if you duplicate facilities somebody is going to have to pay and it ends up in kind of the consumer who has to do that.

1661   MR. TACIT: But getting perhaps a little more precisely to your question, the reality is that if you have a service like BAS available there will be incentives for people to deploy in order to minimize their own costs even though there may be other services available as well, because services that are sold by others have markups on them that reflect those parties' profits as well.

1662   MR. GAUDRAULT: If I could add, too, like I think like the purpose of investing in facilities for the purpose of investing in facilities is not I think what we are after. What we are all after is, you know, the purpose of what consumers want, which is they want great access to services, they want quality, they want all this stuff. So on the one hand you are investing in these facilities so that we achieve these goals.

1663   So the point is that if laying a third fibre leads to, "Oh my God, we all have to raise our rates because we are all competing for a third of the market", well, the net result is that the stuff we were after never ends up happening. So the point is, you have to be efficient about what you're using and what you're doing. You are better to incent those who are in the best position to create the best possible opportunity for those end effects to happen. And that's where we play a role, on the end effects.

1664   COMMISSIONER MENZIES: Let's talk about bundling for a minute.

1665   So, as noted, incumbents and the cable companies are increasingly reliant on marketing in terms of bundling, whatever they may be, triple or quad. Do you think this has created a different product market?

1666   MR. GAUDRAULT: I think it has. I think bundles are distinct product markets and so to the extent that there is anything in the current regulatory framework -- and there are a few such pieces that present obstacles to competitors being able to bundle, then they are disadvantaged, then it is not an economically efficient arrangement.

1667   COMMISSIONER MENZIES: That would lead to a different test of the retail product market?

1668   MR. TACIT: Well, it would amount to, in the second branch of the test, you know, where you look at a provider has an upstream capability that gets leveraged in the downstream, that downstream would be defined differently in the case of a bundle, absolutely.

1669   And as I say, there are a few areas; for example, some of the rates that have come out for our usage, sensitive services like CBB and cable access rates, the lack of multicasting, these are things that serve as obstacles to us to be able to bundle at the moment.

1670   COMMISSIONER MENZIES: What about slower versus faster retail internet services?

1671   MR. TACIT: Absolutely they are different -- they can be different markets. You can do very different things with a slow speed then you can with a faster speed. A lot of that depends on the types of functions that are developing. It depends, for example, on how many people and who you have in a household as well whether they will perceive a 1.5 Mb per second the same as a 50 Mb per second. It really depends a lot on that.

1672   If you have a few people -- a couple of people using Netflix and one gaming and, you know, one doing work and one browsing all at the same time, they are not going to be able to get by on a 1.5 or 5 meg service. So absolutely speed matters in terms of retail perception, a value which is why pricing is different for different bandwidths.

1673   COMMISSIONER MENZIES: So do we have breakdowns in terms of consumer behaviour that would inform us as to where, if we were to look at that, separate market definitions where that high speed threshold might be? Like is it 20 megabytes, 50, 75? Is the majority of higher speed users -- sort of what speed are they using? Is there any data that we --

1674   MR. TACIT: Well, it's a tricky thing because -- and this is why for example when we were constructing our forbearance test for HSA, you know, we said that the actual product market would have to be defined at the time of the application, because if you look at even in the last five years how usage patterns have changed relative to speeds available, it is very much a quickly evolving thing.

1675   So even if I were to give you a precise answer today, and I don't have one at the ready right now, but even if I was able to give you that, in a year it might change. So when you are looking at those things, especially for something like a forbearance test then, you know, you need to look at it at the time.

1676   We do know some things. Like, we know for example that to provide a stable, reliable IPTV signal you need a certain -- you know, you need a certain minimum speed. It's certainly not 1.5 Mb per second or whatever.

1677   So we know some of these things. We know that as we get into things like 4K video we are going to need much greater speeds than we have traditionally wanted.

1678   So there are some benchmarks. The reality is we will need to gather some more data to figure out exactly where some of those points are. But your point is absolutely correct, the market is segmented by speed based on the retail use of those speeds.

1679   COMMISSIONER MENZIES: Okay. How would we gather that data?

1680   So what's your suggestion? Or how do you gather that data?

1681   MR. TACIT: I don't think we have gathered it, per se.

1682   I don't know if our friends back here have any suggestions about how that might be gathered.

1683   MR. PAVLOVIC: We used -- I am from Nordicity.

1684   We used a lot of secondary research, but also relied on the past and current issue of the communication monitoring report to base some of our assumptions.

1685   COMMISSIONER MENZIES: Okay, thank you.

1686   MR. TACIT: The point is, you know, one of the questions that you asked in the Notice of Consultation was what kind of data do we need to gather as an industry. You know, maybe that is one thing as a follow up that the Commission does need to consider, is what is the data we need to collect to be able to look at these markets more precisely, define them more precisely for the purpose of regulation and forbearance.

1687   I don't think we have all the data today. In that sense I have a little bit of sympathy with, you know, the Bureau's submission yesterday that lack of data is a bit of a problem.

1688   COMMISSIONER MENZIES: That's a perfect segue to talk about the Bureau in terms of that. They, and others, have suggested that the right thing to do with fibre right now is essentially do no harm, keep a moratorium on mandated access to fibre-to-the-home because, I mean, in the Bureau's position concerns about fragility of investment and build in that area. So I would like to hear your comments on that.

1689   MR. TACIT: Well, I think Keith has some experience deploying fibre, so maybe he can talk about it from a practical perspective and then I will give you some other views as well.

1690   MR. STEVENS: Yes. We have built some fibre-to-the-home. I mean, it's not inexpensive, but there is a business case to do it in, I believe, in most urban and suburban areas, small towns. I am doubtful there is a business case in rural areas, pure rural.

1691   But there is only really a business case for one fibre to be built, not two or three. I know, Commissioner Molnar, you were wondering yesterday if there should be three fibres-to-the-home. I am doubtful we are going to see two fibres-to-the-home for many, many, many years, if ever, in most areas. It's really that's reality, to get the capacity for one. So I think that's what's going to happen, but I don't think there is a disincentive.

1692   The incentive is there to build it for the first person to go in. Whether that is when you have a wholesale responsibility for that or not, I'm not sure. I don't think that would change the decision to actually build for the first player to go into build, but there is right now virtually no business case for the second. So that it's reality. First in sort of gets the customer and would have those for a long time.

1693   COMMISSIONER MENZIES: So where is your primary business incentive to build even when you do have to provide competitor -- even if you do have to provide competitor access? What's the --

1694   MR. STEVENS: Well, I think, having competitive access -- as long as the Phase II costing, assuming you are using Phase II costing and it's done correctly, there is neither incentive or disincentive to have competitors in the mix. It doesn't change it.

1695   If you do your model and assuming the pricing is done correctly, yes, you get lower revenue from the competitors, but also you don't have the same costs. You don't have to buy signals from video providers, et cetera. So I don't think it makes a -- I don't think it's going change your equation at all for whether you do your business case.

1696   Your business case is really based upon, you know, your cost to bury each house, how many houses you're going to get, how many customers you can estimate you are going to get to switch from the existing providers. Because your competitors are now the existing cableco, telco, wireless ISPs. They are your existing -- they are your competitors, and how many of those can you get to convert to you, that's what the business case is.

1697   COMMISSIONER MENZIES: So what sort of assumptions would you make in your business plan about what share of the market you would need to capture to make the fibre build worthwhile, whether it be a subdivision or a town?

1698   MR. STEVENS: Yes, and I'm not sure -- I'm not necessarily sure of the exact numbers, but we have had -- we started slowly building from small towns -- gained some information. And as we keep building and I'm sure as everybody else is building fibre-to-the-home is gathering that data -- what number of customers do you need to get and what can you get? And of course that is based upon the quality of the competition there.

1699   I mean, there are some towns without cable TV now, so there you can assume you're going to get more customers there than in a town where they do have good quality cable TV, et cetera. So they are the factors you look at and what percent you can get, as you go forward for that.

1700   COMMISSIONER MENZIES: What's the main selling point in terms of when you provide fibre, is that the quality of the internet, the quality of IPTV offerings?

1701   MR. STEVENS: I'm probably going to say "yes" because it's all of those, but it is the quality.

1702   I mean those that -- the experience on the internet, the TV, et cetera, it's just phenomenal. What people are often very surprised about, of how much better HD can be over a fibre than it is over satellite or over a coaxial cable. Again, it's how much compression you put on the signal, because all HD signals aren't equal because of how you treat them.

1703   So there is some of the experiences the customers receive and then are very surprised with. I mean, the biggest shock that our customers had, and it was a surprise to us, too, was the quality of the sound, because we have enough bandwidth -- we are capable and we do send down the stream the same quality of sound we do on surround sound in a movie theatre, the Dolby Sound. So they get -- they suddenly realize that if they put the right equipment on it they can have that experience of music in their home over the fibre they could never get over satellite or over radio. So there are some of those issues of higher quality experience that people are going for it.

1704   But having said that, it still has to be -- you've still got to be in the right ballpark for price. You can't charge three times as much. They aren't going to take it. So you know, they will pay a premium, but not a huge premium for the quality.

1705   MR. TACIT: So getting back to the other part of it --

1706   COMMISSIONER MENZIES: Yes, I was just going to -- the Competition Bureau basically is saying, "We don't have the data or the data doesn't exist yet to make the call on that and that we would be wise to not do it".

1707   MR. TACIT: So I come from a fundamentally opposing view for a very simple reason. FTTP is access. And we know through a long history, more than 150 years almost of regulation, that access is an essential facility. Whatever other things we might disagree about, it's really hard to disagree with the notion that an FTTP access is not an access facility. So if you start from that premise and if you start from -- then regulation is required.

1708   So the counterargument that I have heard is, well, if you get us to regulate there is going to be a reduced incentive to invest. There is not an outright denial that this isn't an essential facility. It's just, you know, we are not going to be able to invest.

1709   To that I say a couple of things from a purely costing perspective it's possible to capture any risk premium associated with the actual build through a cost of capital adjustment. And yes, we believe strongly that it should be done through cost of capital adjustment in Phase II and not through markups.

1710   So you can -- as Keith said, you can make that competitive or decision neutral for the incumbent by capturing that the same way they capture risk when they do their business planning and they apply a particular hurdle rate for the purpose of deciding whether to go ahead with a project or not. All you need to do is study that part.

1711   And then besides that, you know, the goal is we actually by being on their network, actually reduce their risk because we are actually adding customers. We end up being a marketing arm for the incumbents.

1712   To that extent that part of it actually de-risks their investment. So yes, they can say legitimately, okay, if there is a bigger risk of FTTP deployment we need that to be reflected in the rates. Fair enough, but it should also be acknowledged that when we come in we actually help fill those networks, which is what they really want. You know, they want those networks to be filled and if they can't go out there and sell to all the retail customers and we are able to incrementally add to that base, we are actually helping them.

1713   I don't know if, Markus, you have anything to add. Oh, Keith, you had some?

1714   MR. STEVENS: Yes, I could add a couple of points. One is the idea that the fibre-to-the-home is something -- a brand new build all the way.

1715   From an incumbent point of view, I mean, 20 years ago we started putting fibre to remotes on the DMS switching platform. FTTN was just really going a little bit closer because you can get higher speeds, so they put the fibre bit closer to the home.

1716   The next step from the incumbent point of view -- and that's cable companies apply it the same way because they have fibre-to-the-nodes for their cable distribution -- is just putting the fibre now, that last two or three blocks in the city to the house from the node. It's not going all the way back to, you know, 151 Front Street. It's just doing the last two or three blocks. So it isn't a -- it's just a natural extension of something that telephone companies and cable companies -- we started doing 20-30 years ago -- it was just the next step, getting fibre-to-the-home.

1717   And about the -- I wanted to comment about the risk. I think the biggest risk for the incumbents is not doing it because, as we said before, the first in gets a real advantage for that from the business case.

1718   Also, when you look at the speed, I think most of the average customers right now have 1.2 Mb or whatever they're using, but it's growing exponentially at 40 -- 30, 40, 50 percent. If we look out 10 years from now they are going to need not 1.2 Mb. Those customers are going to want 100 Mb 10 years from now if you do the exponential growth on that 1.2. And 100 Mb you can't do over copper.

1719   So there is a real -- what's the incentive for the ILECs to do it? It's survival.

1720   COMMISSIONER MENZIES: Okay. So where is your risk?

1721   MR. TACIT: Pardon me?

1722   COMMISSIONER MENZIES: Where's your risk? You were talking about the risk factor for incumbents and for the build. Where is the risk for you in this, in the grand scheme of things? They have risks in terms of their build. Where is your risk?

1723   MR. TACIT: Marc is going to talk about that.

1724   MR. GAUDRAULT: Yeah. I guess in general I feel that there is a lot of risk. So I am looking to sort of go the other way and say, "Look, I have got a retail wing and I'm trying to, you know, do more stuff". So on the risk front, the risk is if I am not able to leverage the business I have and to sort of do the things, you know, I need to do to grow the business.

1725   So for me it's inherent that if we can't move forward on this stuff I'm kind of stuck. It's kind of how I feel right now where, you know, I was forced to get out of disaggregated TPIA. The last go-around we were asking for ADSL-CO. That didn't happen.

1726   Right now the message I have received pretty much is don't invest. That's what for me I have received from -- that's the signals I'm getting from you guys.

1727   So for me, I'm saying, "I'm ready, I'm willing and there is risk involved and I am totally willing to go", but I have nowhere to go.

1728   COMMISSIONER MENZIES: Okay. It's just so what happens if you win the argument and fibre-to-the-premise access is mandated? What happens in the case where not all services -- a competitor wins one of the services? Say Bell builds and they provide telephony and TV and a competitor is providing internet. How would that work? Would you need a second drop or --

1729   MR. TACIT: Alex can probably address that.

1730   MR. PAVLOVIC: What we have asked for really is virtual unbundling of the FTTP because of the underlying technologies' inability to actually do the unbundling on the fibre level. So the technologies -- the underlying technologies for delivering FTTP; namely GPON and EPON, are not really new. They have been around for more than 10-15 years. They have been quite mature and they all technically revolve around the ability to transport ethernet frames from the customer prem to the nearest point of switching and aggregation and further into the network.

1731    So what we asked for is really for the ability to unbundle that from the customer prem to the nearest point of the CO office where this handing off to the competitor naturally could be done on the layer to ethernet level.

1732   So when this happens you have really the ability to do VLAN or tagging of certain frames, so by doing so you will be able to identify different types of traffic. So the traffic that is delivered is video traffic, but the incumbent can continue to go on using their infrastructure while the TPIA traffic will be handed off and handled by the competitive carrier.

1733   So technologically it is fully feasible. It has been done in a number of different countries, mostly in Europe and the European Commission is currently working on a harmonized approach for what they call the EU VULA or virtual unbundled local access. That will have harmonization capabilities and will be automatically put in force by the NRAs, national regulatory agencies, once adopted. So it is a part of their regulation single market connected continent that is really in process right now.

1734   MR. SANDIFORD: I think the short answer is that a second drop is not required. The technology already exists to do it and it's being done today.

1735   COMMISSIONER MENZIES: So you would be making an assumption that the technology would be in place when the build is there or does it just exist?

1736   MR. SANDIFORD: It is in place.

1737   COMMISSIONER MENZIES: It exists with the --

1738   MR. SANDIFORD: The electronics and the equipment that are being deployed today by all major equipment vendors already do this today.

1739   COMMISSIONER MENZIES: Okay. And is there a cost to that?

1740   MR. SANDIFORD: Is there an -- are you asking is there an incremental cost for the feature?


1742   MR. SANDIFORD: Not that I'm aware of.

1743   COMMISSIONER MENZIES: Okay. If there was, who would be responsible for that cost?

1744   MR. SANDIFORD: It would be built into the Phase II costing.


1746   So speaking of drops, in your proposal if a competitor is the first provider of fibre-to-the-home, the competitor would be responsible for deploying and maintaining the drop, right?

1747   MR. TACIT: Well, that was our original proposal. So what we had suggested was a way -- you know, because we were hearing the message from the incumbents that they were concerned about risk we said, "Okay, well, let us take responsibility for that asset if we get a customer on it and that relieves you of the risk". Unfortunately, instead of relief on their part that they were being helpful we got met with, "Oh, the Commission doesn't have jurisdiction to do this", and so on.

1748   We don't want to see this proceeding -- although we think the Commission does have the jurisdiction to do it, it's not our aim to cause a whole bunch of appeals to come out of this and create more delay. So we are really simplifying our proposal significantly by just saying, "Look, to the extent that you can be persuaded empirically that there is a risk just captured in the cost of capital and let's be done with it."

1749   So that whole thing about, you know, it should be permissive rather than mandatory. In other words, we would encourage you in the tariffs to put that as an option for those incumbents who are willing to do it, but not necessarily to force them to do it.

1750   COMMISSIONER MENZIES: So you don't have any concerns really any more over the incumbent maintaining -- being responsible for the maintenance and the build of --

1751   MR. TACIT: Well, we have concerns that, you know, it's not economically as efficient as allowing us to relieve them of that risk and take it over when we have the customer. But if that's the way they want it -- I mean, you know, they maintain the endpoints of their networks at people's houses today so it's not much different.

1752   And this equipment is quite reliable and easier to maintain. Once it's in place you don't tend to get the problems you get with copper where you don't really know what speed you are going to get in and, you know, weather can affect it and all sorts of other things.

1753   COMMISSIONER MENZIES: BAS, would you still require BAS if CBB rates were what you seem to prefer?

1754   MR. TACIT: Yes.


1756   MR. TACIT: Well, the reason is simple, because it allows a migration towards economic efficiency. Regardless of how properly costed CBB rates are, as players get larger or have customers in densely populated area, their natural desire is to add as many customers as they want and it's easier to do that and it's easier to reduce your cost if you have a disaggregated service where you can control your network and you can provide better differentiated services.

1757   I think -- Marc, I think you may have some views on that.

1758   MR. ROCCA: I have something I would like to --

1759   MR. TACIT: And Peter as well.

1760   MR. ROCCA: Thank you.

1761   You know, I think, you know, facilities is an incremental process. You know, a lot of us competitors here have invested in facilities of the 1st mile, let's say, our interconnections, our buildings, our processes, operations, our services.

1762   You know, the next incremental step to that is that middle mile and with BAS, you know, regardless of an attractive CBB rate there is still an incentive to build our networks out, to build that facility and continue to invest in that middle mile.

1763   MR. GAUDRAULT: And further, I mean, so once we have a network there we can start doing other things. So it's leveraging what we have.

1764   And then, conversely on the CBB rate, well, right now as it is the rates the way they are, already we can't compete on the higher speeds. Like just, you know, the growth, the average growth per user, the same, same user in a year from now is going to use 30, 50 percent more bandwidth. So if you look at the CBB rates as it is today, if they go up by 30 percent you are talking like $4.00 to $8.00 price hike just to cover that difference for the same user.

1765   COMMISSIONER MENZIES: What do you think would be an appropriate CBB rate?

--- Laughter

1766   MR. TACIT: The business people here are better placed than me to say that. I mean, they can tell you what sort of rates they see.

1767   COMMISSIONER MENZIES: Something more specific than "less than what it is now".

1768   MR. TACIT: Yes.

1769   Matt, do you have a view on that?

1770   MR. STEIN: I do. I just want to first address -- in the previous question it almost supposes the way that you ask the question, or at least I interpreted it, that the key differentiator of BAS would be cost. That's one, but to extend a little bit on what my colleague said, so are control and the capabilities that you would have with BAS, so I would like to get that across first.

1771   I do have a lot to say on CBB rates and don't worry, I won't go on too long. But the short of it is that CBB right now, it's very -- I will say it's all around unicast. There is no way to multicast around it.

1772   And if you are using it for both kinds of things, broadcast live video and so forth, at the same time as you are using it for internet and the same time you are using it for phone and for whatever other applications will come down the pipe, it is sort of too broad and sweeping in its rate. So in order to fix it, it would have to be a small fraction of what it is today, in the few dollar range based on today's needs if you were trying to use it for all of those things.

1773   COMMISSIONER MENZIES: I take it that means a few dollars less?

1774   MR. STEIN: No.

1775   COMMISSIONER MENZIES: No? A few dollars more.

1776   MR. STEIN: No, I meant a few dollars per megabit.

1777   COMMISSIONER MENZIES: Oh, I'm sorry. Okay.

1778   MR. SANDIFORD: About 10 percent of what it is today.

1779   MR. TACIT: The thing is, when you look at what they are providing on a retail basis, if they had to -- if they were somehow structurally separate and they had to pay these rates, they wouldn't be able to do it.

1780   MR. STEIN: Let me just explain one notch further. I'm trying to be brief, I'm trying to get a lot into it going.

1781   Right now if you are going to use CBB to deliver multiple different kinds of applications, you are paying for all that CBB regardless of what the application is you are putting across it. It's one rate.

1782   So for video where you are putting 5, 8, 10 megabits for a single channel and you are still paying $14 per megabit just to carry it during peak hour, it's too expensive to carry that kind of an application. On the other hand, voice isn't terribly expensive, but it still has a different profile from sort of general internet use. So that's what I was trying to get across.

1783   So if you are trying to pick one rate that suits all of those application types, it would have to be a dramatically lower rate.

1784   COMMISSIONER MENZIES: So this is primarily related to changes in consumer behaviour and demand --

1785   MR. STEIN: Yes.

1786   COMMISSIONER MENZIES: -- in recent years.

1787   MR. TACIT: That's part of it.

1788   MR. STEIN: Their appetite for different applications, their appetite for different usage patterns, et cetera.


1790   MR. STEIN: Video. Whether that is over-the-top video in certain respects or IPTV.

1791   MR. GAUDRAULT: Like, you know, Bill mentioned 10 percent there. I mean, when you look at the rates currently it ranges from -- you know, and it goes by increments of 100, right? So it goes from 200 or $2.00 per megabit up to $20 per megabit or 2,000 per hundred megabit. I mean, you can't look at that and not scratch your head, like how is that possible?

1792   Like fundamentally you think there is a question of this is why we are asking for Phase II, like looking at how these rates were arrived at in the first place.

1793   COMMISSIONER MENZIES: My lights on, okay. You guys had cut me off.

--- Laughter

1794   COMMISSIONER MENZIES: So do you still want to build fibre, Keith?

1795   MR. STEVENS: Yes, I do. And I could answer though, as well, why our CBB rates are so out of whack right now. It's because the cost, input costs are changing exponentially, both the cost of the inputs from the bandwidth, but also the cost of the equipment to provide this out.

1796   When we do your Phase II costing you often look forward 10 years and you may assume some growth rate or decreased rate in cost, but when things are going exponentially, if you assumed it's going to happen at 20 percent and it actually happens at 50 percent and you exponentially extend that out, two or three or four years later you are so far out of whack that rates just are out. And that's what's happened, the rates are just so far now out of sync because of those assumptions and the projection forward.

1797   That's why the rates are out of whack and that's why we are also proposing for Phase II. We need some way to adjust those on a more timely basis. We are also saying that without going through a Phase II application. There must be a better way of doing that.


1799   MR. ROCCA: So just as one further example in terms of what would that rate be, for us to build out, even if we were to lease facilities from the incumbents at retail rates, we are talking $.50 a megabit as opposed to the $10 we could build that same transport network.

1800   MR. TACIT: I just want to add one final comment and that is that on -- CBB rates are particularly sensitive to three things. One is assumptions regarding peak usage, the end-user peak usage. The other is the costs of transport equipment and the other is competitor demand.

1801   So those are things that in order to make sure -- and not just CBB rates. This is also true of the cable TPIA access rates which also have a big usage sensitive component in them, so to make sure that those rates are right those three things do need to be updated from time to time because they are changing very rapidly in the marketplace.

1802   Now, you know, there's a different reason why the initial set of rates ended up the way it is and it was really through no fault of the Commission's, it ended up that when original CBB rates were set the Commission was going along doing speed-matching rates from the 2010 decisions and then the UBB case started, the model changed to CBB and partway through all those tariff notices that were working their way through, which had been built on a certain premise, almost did a U-turn and the Commission had to do that U-turn to analyze them, but the modelling that was done, a lot of the modelling was done based on usage and not capacity, and so the Commission staff had to use conversion factors and all this stuff.

1803   What we need right now is to have -- to basically start with the right models, which is to get the incumbents to give you the information on a capacity-based business and then to really scrutinize these three areas and make sure that they're kept up to date over time and I think that would help a lot.

1804   MR. STEVENS: I should correct on my answers, interest in building fibre at home, yes, but that's on our own facilities not using CBB. I mean, that's the different rate.

1805   I couldn't justify using CBB right now. If I had to get it on a wholesale basis from Bell, I could never justify doing the build.

1806   COMMISSIONER MENZIES: Okay, thank you. Primus made the point that in addition to the avoidance of CBB transport costs, BAS access was attractive, necessary, whatever due to avoidance of traffic management in terms of that.

1807   TELUS makes the point, though, that even on their network due to the network architecture that even with that level of access that transport management is still necessary.

1808   So would that restriction impact your decision to use BAS?

1809   MR. TACIT: I'm sorry, I didn't quite understand the question.

1810   COMMISSIONER MENZIES: Well, Primus was making the point that it was avoiding traffic management as well as the transportation costs; right.

1811   MR. TACIT: Okay, got you.

1812   COMMISSIONER MENZIES: And TELUS is saying it doesn't matter, you're going to get traffic management anyway. So would that impact your decision...?

1813   MR. TACIT: Mark has an answer.

1814   MR. STEIN: I'll go first. No, I don't think that that would impact the decision dramatically.

1815   At different points in the network there's different traffic management that's required, we understand that. I don't know exactly, or I can't comment on what TELUS or Primus had suggested there, but we would still want BAS even if that meant that there were some elements of traffic management that had to be applied, if they were applied transparently, fairly, we were made aware of them, et cetera.

1816   MR. GAUDRAULT: I mean, what makes sense makes sense and at the same time, though, I would say that it should be limited to the strict, you know, the necessity of the thing.

1817   So, you know, presumably we would have more control on all those other factors.

1818   COMMISSIONER MENZIES: Okay. So if we decided not to mandate BAS, what proportion, rough guess, of your potential market would be impacted? I mean, what sort of services are you looking to provide and how would that impact your potential market for customers if --

1819   MR. TACIT: I'll let the various business people answer then.

1820   MR. ROCCA: So, disaggregated BAS, again, is not just about the cost, it enables you to be closer to the technology. So multi-cast would be something that would be relatively trivial to deploy for competitors using BAS.

1821   So if you say the flipside of that, not having that, IPTV is significantly restricted in the business case of being able to deploy that service.

1822   COMMISSIONER MENZIES: Now, the next one I'm giving you some options. You don't have to pick one, but listen to the question then decide how you want to answer.

1823   So if you had to choose between (a) aggregated wholesale high-speed access service and no BAS; or (b) BAS with phasing out of aggregated high-speed access over a specified period, which would be the more acceptable option and why?

1824   MR. TACIT: So I'll take you up on your offer not to answer that directly.

--- Laughter

1825   MR. TACIT: But I will put a little twist on what you said because your second option is not that far from what we're proposing, except we wouldn't use a sunset clause because we've found those to be problematic.

1826   If you look back at the, you know, at the long-distance days and the local competition days, local competition decision there was a sunset clause for certain services and when we got there the Commission realized there was no way that that would work and had to basically get rid of the sunset clause permanently and then it looked at what happened in the market. So sunset clauses are not the way to go.

1827   And I think the same thing effectively happened with Ethernet and high-speed fibre, it really turned out to be a sunset clause approach and it didn't really match what happened in the market.

1828   So what I can tell you is that if there is BAS, there is a significant likelihood that in those areas where BAS is deployed you will get sufficient competition so you can meet a forbearance test for aggregated wholesale services.

1829   And if you do it on that principled approach rather than some sort of, you know, timeframe which may or may not bear any relationship to market developments, then I think you're getting close to where I think the question is trying to go.

1830   COMMISSIONER MENZIES: So if we did go in that direction, help me understand the process of migrating from an aggregated platform to BAS for you?

1831   MR. GAUDRAULT: Well, in our case, I mean, we did it, we were on disaggregated TPIA and we were deployed I think in like 30 POIs, so I mean, by mandating it we can then start making use of it is -- I'm not sure that answers what you're getting at, but...


1833   MR. TACIT: I think if there are technical challenges, there's a number of industry methods that we have to figure them out, but migrating customers around a network is -- are things that we already do and have done.

1834   COMMISSIONER MENZIES: Okay. And if we do mandate it, if we were to do that, how would that be implemented? I mean, the incumbents would have to make changes to their networks; correct.

1835   And you wouldn't necessarily use the service at all of an incumbent's sites; right. So what approach --

1836   MR. TACIT: What do you mean, you wouldn't use the service?

1837   COMMISSIONER MENZIES: Well, I'm asking, would you be using the services at all of their sites?

1838   MR. STEIN: We'd be using it --

1839   MR. TACIT: Well --

1840   MR. STEIN: We'd be using it at the ones that make the sense for our network based on where our customer density drives it, our marketing activities and so on.

1841   Many of our members only market in certain areas and don't need the other half of that province, or the other province, or --

1842   COMMISSIONER MENZIES: Well, I guess what I'm really trying to get at is, if it was mandated --

1843   MR. STEIN: M'hmm.

1844   COMMISSIONER MENZIES: -- and given that incumbents would have to make adjustments; right, how do we avoid -- what process would you suggest it's laid out and agreed to so that we can avoid a big fight?

1845   MR. TACIT: Well, there could be a process where, you know, there's a notification period and then they have so many days to make sure that that central office is compliant for BAS and then you go.

1846   I mean, once the interconnection details are done, this is all -- my understanding, although I'm not the technical expert here, but my understanding this is all done using available, you know, layer 2 equipment, so it's not --

1847   MR. GAUDRAULT: I can speak to, when we went from disaggregated to aggregated, right, so essentially that's the same kind of process that you're talking about except in the reverse, right.

1848   So in that process, like the thing that worried me the most was to make sure our customers were not left in a situation where they were adversely affected. So I think that's the primary concern that you would want to make sure.

1849   So that, you know, for example, as there's a schedule out of, let's say, a physical link in one area and the other one is getting turned up in the new area, that the timing doesn't -- you throw things off, or that capacity planning wise as consumers keep using more, right.

1850   So we need to -- even though we may be moving away from a thing, we may still need to increase and to do things. And so these are to me the two factors. At the time when we did it, when we were moving away from disaggregated, the sense was that, you know, the incumbent didn't want to invest in the thing that was going away, except that we kept having to sell that, yeah, and they kept using more the existing users, so we had to increase it.

1851   And so here we were telling them, well, we need more here and they were saying, well, we're kind of moving away from that.

1852   And so those are the factors to me that I experienced where, you know, I would hope, you know, that maybe it could be looked at more carefully when and if we do that.

1853   COMMISSIONER MENZIES: Okay. So, if there's competitor access to BAS, if you're going to use it at the sites that make the most sense and requests are going to come in to the Cablecos and ILECs at different times from different competitors, what do you think is the fairest way for them to recover their costs, either through an up-front charge or recovered in a monthly rate, or what's your suggestion?

1854   MR. TACIT: I think we use the Phase 2 process, use a 10-year study period, have an install fee that is meant to recover the one-time charges and have an ongoing fee for the ongoing incremental costs.

1855   It really conceptually is really no different than any other wholesale service that they provide. I don't believe it requires any kind of special rate treatment that's any different structurally from what we normally see in a rate.

1856   MR. GAUDRAULT: And to support that, I mean, the customer's still plugged into the same wire, it's not like something new is getting plugged into the home there. The customer -- like when we migrated from disaggregated to aggregated, the customer was just still plugged in, so it was just stuff that was happening in the background to them.

1857   COMMISSIONER MENZIES: Okay. So what kind of customer volume and whatever bandwidth gets associated with that customer volume would you be using to make the decision to migrate to BAS at a central office?

1858   MR. TACIT: If we have answers to that, I think they might be confidential, so perhaps...

1859   MR. STEIN: Well, I think answering without an exact number it's simply that those would be decisions that are made the same way that all our network planning decisions are made.

1860   We would look at the costs, look at our ability to deliver a service over it and, where it makes sense, move over. In some places you wouldn't move for a great length of time; in some you'd move right away and it would be driven based on the business case in each region.

1861   And you're right, input our subscriber counts and bandwidth consumption and capability and all those things, but everybody at this table and all the many members, you know, that aren't here would each have their own business case to make that decision.

1862   MR. STEVENS: If I may also, but you could also have potentially the types of applications that you're seeing from subscribers if you're offering television or you're offering voice where you feel that you need more control, either through multi-cast or quality of service, that would also factor and not just strictly cost and subscriber count.

1863   MR. GAUDRAULT: I'm not sure if you're looking for specific numbers, but in general, like for me it's -- like we've got the number, so we do quite a bit.

1864   COMMISSIONER MENZIES: If you could provide those numbers confidentially.

1865   MR. TACIT: We will.

1866   COMMISSIONER MENZIES: That would be helpful. Thanks.

1867   MR. TACIT: Thank you.


1868   MR. STEIN: Of course, the factors that go in a business case involve prices which obviously -- but...

1869   COMMISSIONER MENZIES: Both Shaw and Cogeco stated that if BAS was implemented at each of its head ends they would require a transport component to bring the traffic back from a more centralized location.

1870   So would the inclusion of transport impact your use of those companies' BAS?

1871   MR. TACIT: Well, that comes back to the CBB rate; doesn't it? I mean, all of these things are interrelated.

1872   To the extent that there's still some type of transport element that needs to be recovered through a CBB type of mechanism, it will be very important to get those rates right, but I think if they are and if there are parts of the transport that can't be eliminated, it will work, the system will work with proper rates.

1873   COMMISSIONER MENZIES: And it's all about the price. I'll let the Chairman --

1874   MR. TACIT: No, it's also about --

1875   COMMISSIONER MENZIES: No, but this would probably be a good time to take a break.

1876   Do you have something to add before...?

1877   MR. GAUDRAULT: I was just going to say, it's not just about price, it's also about the non-price discrimination as well.

1878   MR. ROCCA: Well, I think what you're hearing is there's a number of different competitors that would deploy for a number of different reasons; some solely for price, some to extend their reach, some because of service delivery, some because of quality of service that they can deploy over that infrastructure.

1879   There's a number of different reasons and a number of different competitors that would use it in different ways.


1881   MR. GAUDRAULT: And for all those reasons, we would -- like for me, it's not just price, it's all of the above, so...

1882   COMMISSIONER MENZIES: Okay, thank you.

1883   THE CHAIRPERSON: It's probably time for a mid-morning break. So we'll be back at a quarter to 11:00.

1884   Thank you.

--- Upon recessing at 1027

--- Upon resuming at 1047

1885   THE SECRETARY: À l'ordre s'il vous plait. Order please.

1886   THE CHAIRPERSON: So when you are ready.


1888   Okay, the exciting stuff, unbundled local loops. Are high speed access services in the same wholesale market as unbundled local loops?

1889   MR. TACIT: In some cases yes and in some cases no. You know, there are some things you can do with unbundled local loops that you can only do with unbundled local loops. And there are some things that you can do with unbundled local loops that you can do with FTTN and FTTP.

1890   So it really depends the use to which you put them.

1891   COMMISSIONER MENZIES: You got any examples?

1892   MR. TACIT: Well, you can do -- you know, wireline telephony is a distinct use. We heard yesterday about the business uses for out-of-territory TSPs. And for those who only want the very low speed internet service capabilities and don't need higher speeds, those are all areas where ULLs are distinct.

1893   But for those who simply don't care, they just happen to get it because they don't really have a need for something else and, you know, could easily be in the same market.

1894   And, you know, somebody could sign up to FTTN or FTTP and not use its full capabilities, use no more of its capability than what an internet service that ULLs can provide as capable of. I guess that would be their choice. But in that case, they would be a common market.

1895   COMMISSIONER MENZIES: So how is the demand for unbundled local loops evolving? Like, what do you see the future looking like for it? Like, what downstream services would it be supporting in the future?

1896   MR. TACIT: Peter is going to take that.

1897   COMMISSIONER MENZIES: Would there still be a market for it?

1898   MR. ROCCA: I think the market for HAS over unbundled local loops is dwindling. I think it is being restricted to the lower speed broadband offerings.

1899   But in the case of voice services, I think that market is still aggressive, there are people that are still using them for wireline services. We use them for intercity point-to-point connectivity between locations.

1900   The demand is still there on the non-internet side. And on the internet side I think it is declining, but towards the lower speed, which is a more affordable product, especially as the HSA, the higher speed cable FTTN speeds are disappearing on that market segment.

1901   You heard from a consumer yesterday that did a presentation saying that he had 800 and some odd kilobits of internet and that was sufficient for him. There is still a market I think in that. And unbundled local loops can still deliver that product.

1902   COMMISSIONER MENZIES: If we were to decide to stop mandating unbundled local loops, what sort of phase out period do you think we should be looking at?

1903   MR. TACIT: I don't think it should happen before there is a critical mass of fibre to those locations, literally to the actual homes. Because, as I say, there is a market segment that still relies on them, so there has to be a critical mass where such a small percentage of the population is using copper services generally that it makes sense to phase them out. But we are nowhere near that today.

1904   So I don't think, again, it is not about time, as you would have to look at market conditions.

1905   MR. ANDERSEN: If I can add too?

1906   Sorry. Just when you talk about applications, especially on the business side, there is also the segment of devices that aren't connected today that may be connected when you get to that internet of things when you are talking about potentially monitoring large-scale, sometimes, you know, hooking up point of sale, monitoring stuff like traffic lights, conditions.

1907   On the business side we are seeing a larger and larger rollouts where businesses want to connect things that they didn't connect before so that they can keep monitoring, and those typically work very well over those lower cost low speed loops.

1908   COMMISSIONER MENZIES: So the specific conditions that we would want to be looking at in terms of that would be primarily what you termed as critical mass of fibre?

1909   MR. TACIT: That would be one driver. And I should add that, you know, as Alex pointed out, unbundled local loops can also be provided virtually over fibre. So I am talking only about the copper ones specifically here.


1911   MR. TACIT: You know, the market will tell you when these things aren't needed and used. And I guess I would rather follow the market signals than have sort of a time period --

1912   COMMISSIONER MENZIES: No, it doesn't have to be a time period. It has to be what sort of -- I mean, to be of assistance to us, is kind of knowing what sort of conditions should we be looking at?

1913   Because there is no point in, you know, continuing to mandate a service that there is alternatives to or there is no demand for in the future.

1914   So I am just trying to get a sense of what, if you were in our shoes, what we should be looking at in terms of making that determination?

1915   MR. TACIT: So I would ask questions like are you going to strand some businesses that need this right now to provide service out of territory? Do they have other alternatives? I would ask that question.

1916   Do people have other local service options that don't rely on this that they are willing to take, that they are happy to take? Have prices dropped so much at the low end of the market, regardless of technology, that people don't need this specifically in order to get affordable low speed internet?

1917   So when you can answer those questions in a way that, you know, you can have checkmarks beside them, then I think that would be the time. I don't know any better way than that to be helpful. I don't know if that helps.

1918   COMMISSIONER MENZIES: Okay. Bell suggests that we would be wise to stop mandating unbundled local loops in Bands A and B.

1919   What would be the impact on your businesses if we were to take their advice?

1920   MR. STEIN: Some of our members do use unbundled local loops, not all. Obviously the ones that use it would have the biggest impact.

1921   Later today you are going to hear from a member that does use unbundled local loops and I suggest that you take that question to them this afternoon.

1922   MR. TACIT: But what I can tell you is, you know, I am on some of the lists, because of the work I do, where I get to see the CLEC expansion notifications. And what I see is that there is an expansion of those constantly, which tells me that ULLs are -- the demand is only increasing and not contracting.

1923   So I would have trouble basing it on that. I would also have trouble -- again, you have to be very very careful on what your geographic market definition is.

1924   If you get to a point where you want to consider some sort of ULL forbearance, I would be very wary of just doing it by band necessarily. I think you would have to look at the local conditions. Because not every exchange in a Band A looks the same competitively by any stretch.

1925   So I think you might want to refine that and look at local exchanges and perhaps even wire centres. You know, this is not something that we have really thought ought to be considered anytime soon, so we didn't really get into it in a great deal.

1926   But I would just caution to look at the geographic market very carefully as well.

1927   MR. ROCCA: To answer directly from a personal point of view, it would strand investments that we have already made in central offices.

1928   You know, there is a number of competitors who have built out central offices, deployed their own DSLAMs, concentrator switching, transport. If you took the ULLs away from that, they would all be abandoned.

1929   COMMISSIONER MENZIES: Okay. High speed CDN and ethernet, so talking wholesale. Should they be in the same product market?

1930   MR. TACIT: No, I think the Commission got it right in the DNA decision. You know, they have different characteristics in terms of some services are shared, others are not, some have commit rates, others don't, some are bursty, some aren't.

1931   So the characteristics of the non-ethernet, I will just call them non-ethernet, versus ethernet are very distinct and should be kept as separate product markets.

1932   COMMISSIONER MENZIES: Back in 2007-35 in the DNA forbearance framework we set out -- the conclusion there was that the route was the relevant geographic market. We chose the wire centre as the appropriate geographic market for administrative practicality.

1933   So assuming we consider reregulation appropriate there, would that same approach used in 2007-35 be appropriate for wholesale high speed CDN?

1934   MR. TACIT: Yes. In fact that is the test that -- we have proposed a forbearance test that was really just an extension of the 2007-35 test.

1935   COMMISSIONER MENZIES: And for wholesale ethernet as well?

1936   MR. TACIT: Sorry?

1937   COMMISSIONER MENZIES: For wholesale as well, sorry?

1938   MR. TACIT: Yes. Yes, although we kept them as distinct markets. But we have basically proposed the same approach; by wire centre, market presence test and so on.

1939   The thing that we have added, the two things we have added is the minimum four competitor requirement and a demonstrable market share loss before you actually forbear. Because you want to actually see an outcome.

1940   You know, at the end of the day regulation is about outcome for consumers. And, to me, you have to see some measureable loss rather than just theoretical conditions before you actually forbear.

1941   COMMISSIONER MENZIES: Okay. Do you suggest any other approaches other than the ones we have used for geographic market definition?

1942   MR. TACIT: We are content with the wire centre.

1943   And now for the transport piece, just to be clear, that is a little different because we are talking about transport between wire centres. So in that one we are looking a pair of wire centres and making sure that there is a sufficient density of competition between various points in the two wire centres.

1944   The DNA services was an access service, so we didn't have to deal with the transport kind of complication elements. But we are still patterning it on the wire centre, except in the case of transport. It is a pair of wire centres as opposed to one.

1945   COMMISSIONER MENZIES: Okay. A couple of questions on what I call high bandwidth applications.

1946   So if we were to insist that the incumbents make multicasting functionality available, why or would a lower CBB video rate be appropriate?

1947   MR. TACIT: A lower CBB rate should be appropriate because it is based on proper costing and mark-up. It is not related to multicasting.

1948   If you are going to have a cost-based regime, it has to be cost-based. Multicasting gives you other efficiencies, and I think Matt can mention that. But --

1949   COMMISSIONER MENZIES: They wouldn't be separate at all then?

1950   MR. TACIT: But what do you mean, separate?

1951   COMMISSIONER MENZIES: For the provision of those services for multicasting for IPTV, for instance, and that sort of stuff. The rate would apply --

1952   MR. TACIT: Oh, I see what you mean. Should you have a differentiated...?

1953   I don't think so. I mean, the costs are the costs. If we are not imposing more costs on the incumbent and the cost of capital is calculated properly and there is a mark-up that the regulator has deemed to be appropriate applied, that is the result.

1954   MR. GAUDRAULT: I think there should be an exercise done for that purpose though, separate --

1955   MR. TACIT: Yes, fair enough.

1956   MR. GAUDRAULT: -- not one and the same exercise that bundles it all in. You would want, you know, as it is today and plus you would want to look at it at the other -- if that is where you were, you know, leading off of what you are suggesting.

1957   COMMISSIONER MENZIES: I am not sure where I was going with that. Just a question.

1958   MR. GAUDRAULT: Okay, all right.

1959   COMMISSIONER MENZIES: So what benefit would Canadians derive from implication of VLAN functionality?

1960   MR. ROCCA: Are you speaking about VLAN as in a disaggregated BAS, how we would be tying in or a Layer 2 product all the way to the customer?

1961   COMMISSIONER MENZIES: Disaggregated BAS.

1962   MR. ROCCA: So I think you would see a number of improvements, again for different reasons.

1963   Some competitors would be able to lower their costs, which would be passed on to consumers. Some competitors would use it to deliver a better customer experience, which would also benefit consumers. They would be able to deploy new innovative products, which would benefit consumers.

1964   I think there would be a lot of different benefits that you would see and each competitor would bring either, you know, a subset or the complete package in terms of what that would mean, that product would mean to them.

1965   COMMISSIONER MENZIES: While I have you, how does your business operate so that if you come out of processes like this with lower rates that gives us comfort that those lower rates are of benefit to consumers and not just to you, right?

1966   Because I don't really want to buy you a new BMW --

1967   MR. ROCCA: I still drive a Civic.

1968   COMMISSIONER MENZIES: Okay, good answer.

--- Laughter

1969   COMMISSIONER MENZIES: I don't want to buy anybody a BMW.

1970   MR. ROCCA: No, understandably.

1971   COMMISSIONER MENZIES: But we need to make sure that the benefit is public, right? We are not opposed to people making money, but that purpose isn't enriching anybody, it is making sure we --

1972   MR. ROCCA: No, absolutely not.

1973   COMMISSIONER MENZIES: -- have a good framework.

1974   MR. ROCCA: I think if you look around, you know, most of the competitors, we don't have huge dividends that we are paying out people. Almost every dollar is reinvested back into our companies, back into our network or the incumbent, you know, for us.

1975   I know there was a comment about how much money goes back to the incumbent. For us, it is 71 per cent of every internet dollar that we receive goes directly back to the incumbents. So we are certainly not enriching ourselves.

1976   And of that 29 per cent over operational, our interconnections, our transit, our marketing, our network, and we still manage to take some of that money and invest it back in.

1977   We have invested, you know, a relatively small company invested a million in hardware in the last 18 months in terms or being able to deliver better customer experience using those products to deliver a more consistent experience, protect against some DDoS issues that were coming.

1978   So I mean that money that, if the rates were lower, I think you would see a combination. You would see some lower costs that were passed on, but I think you would see reinvestment in the networks of continuing to deliver new innovative products, services, and experiences for customers.

1979   COMMISSIONER MENZIES: To what extent is the retail rate that you charge? The feature in your competitiveness with the big guys, how much of your market is focused on rate and how much of it is on other factors, and what other factors?

1980   MR. ROCCA: So I think we have a competitive rate, but we are by no means the lowest rate in the industry. We focus on a different customer segment and we focus on delivering a better customer experience.

1981   For us, that would continue to be, you know, a major selling feature of why people choose us as opposed to an incumbent. I mean, the price has to be there, we can't be priced higher than the incumbents. But, you know, price part of the picture, but certainly not the entire picture.

1982   MR. TACIT: And, you know, in this area I want to just point out two things. Because on the record, you know, we were accused by some incumbents that when we did receive some price reductions they weren't passed on, and that has certainly not been the experience.

1983   And you know, Distributel, for example, Matt could tell you about that.

1984   But before getting him to comment on that specifically, I also want to just make the general point that the purpose of competition is to incent people to do different things. So some competitors will choose to compete on price. So every time they get a cost reduction, all of it will go to the bottom line. That is fine.

1985   Others will choose to differentiate themselves by adding new innovative service, better customer service. That is the point. The guy that sits there driving his BMW won't be driving it for long because competition will drive him out of the market.

1986   If you are not doing something productive in a competitive environment, you are not going to stick around very long.

1987   COMMISSIONER MENZIES: How do you define an efficient competitor? And you are using your efficient competitor costing model, or is it just an efficient competitor costing?

1988   MR. TACIT: Are you talking about the cost -- oh, efficient --

1989   COMMISSIONER MENZIES: Yes. What I am actually trying to get at in terms of that is, I mean, Phase 2 costing relies on company-specific costs, right? So how would the efficient competitor model address company-specific costs?

1990   MR. TACIT: Well, I think what we want to do is drive the incumbents towards, you know, operating in the most efficient way possible. And the way that I think you do that is by having a set of efficient operator costs that are used as the basis, you know, for setting rates.

1991   Not every rate has to be built precisely upon a precise cost that matches an incumbent one by one.

1992   I think if overall you are being fair to them and you are driving them to be more efficient, then I think that is fine. I mean, it is still cost-based, it is just a different way of doing it.

1993   And the benefit of this approach is: a) it is more economically efficient overall in the industry; b) it is a lot more transparent to everybody because you know what model you are working with, there is no need to hide it and there is no need to hide the cost elements and, you know, people can comment about, you know, what is the latest cost of transport that you have built in to your model?

1994   And people can comment on that intelligently and say, well, that doesn't make sense. If I go by transport, I can get it at this much per, you know, megabit per second. And you are telling me in your model you have it at 10 times that price. Doesn't make sense.

1995   COMMISSIONER MENZIES: Right. Well, the ILECs suggest that they wouldn't be recovering their company-specific costs and, therefore, costs wouldn't be considered just and reasonable.

1996   So how do you --

1997   MR. TACIT: Well, I think that is a leap to say that it wouldn't happen that way. It really all depends on how it is properly designed. I think there are ways to design to make sure that people recover their costs.

1998   You know, I am very sceptical of those sorts of claims. This isn't something that hasn't been done elsewhere or it has, you know, never been contemplated. We didn't come up with the concept of efficient operator model.

1999   COMMISSIONER MENZIES: But, in part, is there something...? I mean, we can all be sceptical. But is there something specific that you can give me to show why they are wrong?

2000   MR. TACIT: Well this is, you know, another --

2001   COMMISSIONER MENZIES: Are they wrong or are you just sceptical about them, whether they are right or not?

2002   MR. TACIT: Well, we can't say they are right or wrong, you know, in a policy proceeding. Because this is really an implementation issue I guess is what I am saying.

2003   What I am saying is if you implement it right, you will be fine. And the way you can do that -- you know, one of the other principles that we are advocating for in terms of Phase 2 reform is benchmarking.

2004   And we have said, you know, when you look at outputs of the model they have to make sense relative to other things that you can observe in the marketplace, whether it is our marketplace, a different marketplace, other analogous things.

2005   But benchmarking, you know, could also be used to test the efficient operator model against individual company costs. I mean, they can provide that data to you and you can decide if the model is operating in a fair way to everybody. They are ways to deal with this. It is just a matter of implementation.

2006   I think transparency is a big -- like put some eyes out, get some people who know about this stuff to get some feedback into the thing.

2007   COMMISSIONER MENZIES: Okay. So are we talking about one model for each service?

2008   MR. TACIT: All right, so the way that this would work conceptually is there would be one model for each type of service.

2009   So one of the beauties of this would be that if somebody has a 50 Mbps service today and they introduce a 55 Mbps tomorrow, you would know in that model what the extra 5 Mbps drives in terms of costs instantly. You wouldn't need to do another big study. You know, you would get that output instantly.

2010   So, you know, that is exactly part of the beauty of an efficient operator model, is you don't have to have a new study for every new speed or every new service that comes out. You know what your base model is for aggregated, you know what your base model is for BAS, you know what it is for whatever, and when there are additional speeds or tweaks or whatever, you just plug those inputs in and, you know, you get your output.

2011   MR. STEIN: In the example that Chris just used, Chris said if somebody would have a 50 MB service then release at 55. But it is also true that if somebody else were to launch a 50 MB service you could still use the same model to compare. There is a lot of value in that as well.

2012   COMMISSIONER MENZIES: So as a for instance, how would we or how would this system account for things like supplier discounts and operational differences, technical provisioning, those sorts of things. How would those be accounted for?

2013   MR. TACIT: Well, again, those are implementation details. I am just telling you that there are -- you know, that it is has been done elsewhere. I am not a -- you know, I didn't get into the technical details of how you do this. But our view is that it is doable and because it has been done, so...

2014   COMMISSIONER MENZIES: Okay. So in terms of negotiated agreements, inevitably there is a sort of inherent, in any negotiation, imbalance in the power of the various parties.

2015   So how can we or should we worry about assuring ourselves that the outcome is going to include just and reasonable rates?

2016   MR. TACIT: Sorry, are you making any assumptions about there not being tariffed rates instead or negotiations instead of tariffing or as an adjunct? What is the context of the question?

2017   COMMISSIONER MENZIES: I think instead of tariffed rates.

2018   MR. TACIT: Well, I would certainly not advocate for negotiations without a tariff backstop because then we're again just at the mercy of an incumbent who for its own reasons is interested in foreclosing the market and they can do that by just offering a price and sticking to it that's just totally unrealistic.

2019   COMMISSIONER MENZIES: And in the case of -- how does the tariff provide the safety net?

2020   MR. TACIT: Well, because they know that at the end of the day if -- you know, if they want an off-tariff agreement it's because they want to incent some commercial behaviour that also helps them but they know at the end of the day that if they don't get us to cooperate with them in a way that is mutually beneficial we can still get access at the tariffed rate.

2021   You know, so it's sort of like given that we have to do this, how can we make the best of it? From their perspective, negotiation is how can we make the best of the fact that we have to give them these services? But in the absence of a tariff backstop, it's like well, we just don't have to give it to them, we don't have to make the best of it because we can just keep them out of the market.

2022   COMMISSIONER MENZIES: Are there any instances where you think it might be appropriate to use a method other than Phase II costing principles for any specific wholesale service?

2023   MR. TACIT: I cannot --

2024   COMMISSIONER MENZIES: Should there be -- go ahead.

2025   MR. TACIT: I cannot think of anything for which I would say -- look, the reality is we've had Phase II in place for a very long time and so there are a lot of very, very sound aspects to the approach, both conceptually and even in its implementation.

2026   What we've suggested are just some tweaks to make it more -- to make the process understandable, to make sure that everybody in the industry understands how it's being used, to be able to observe the process as it unfolds.

2027   The best kind of regulation is transparent regulation. So the kinds of changes we're proposing aren't really radical. You know, they're things like education, things like making sure that certain factors that drive costs are looked at a little more frequently.

2028   It doesn't mean you have to redo everything all the time, so just some refinement to bring -- you know, so that the system can respond to the demands of the turnaround times of the 21st century, but not to throw it out any way.

2029   COMMISSIONER MENZIES: Okay. Do you have any suggestions for us on how we can ensure that costs and cost studies are reasonable other than by asking, you know, through request for information or benchmarking? Like, for example, cable companies report annual capital expenditures on their cable plant broken down by different categories. So what would be the harm or the issue or whatever in using those numbers in relation to bottom-up Phase II costing?

2030   MR. STEVENS: Well, I don't know if Chris has any concerns.

2031   We do have concerns in a way and they may work but I mean -- let me comment about Phase II, having lived it. I mean it's not my favourite thing because it's not easy but it's the best we have. I think it's best because inherently -- it's been built, it works, it is also inherently fair because it is -- it's not undue preference. It's not like choosing, say, well, let's lower rates 10 percent to incent something. This is really -- inherently, it's cost-based.

2032   The benchmarking though, Commissioner Menzies, you mention there -- the cost-based, that's not really much different than benchmarking. Looking at what they have, the Commission has to reassure themselves that those numbers are reasonable and fair and then they can be used. I mean that's -- there's nothing wrong with that, where they come from, but they do have to be defensible and transparent.

2033   MR. TACIT: And existing rates are one source, you know -- sorry, existing costs like unit capital costs or whatever are one source of information. They're not the only ones. You also have to look at the trends and see, well, based on what's happened and what I think will happen, because it is a forward-looking incremental costing system.

2034   So you need to be looking at what's ahead and not just what is, but certainly, your starting point always is what is and as long as you are assured that the information that you're receiving is reliable in terms of what is and the kinds of projections that people are making are reasonable, there's nothing wrong with that.

2035   COMMISSIONER MENZIES: I would like your view on TELUS' advice that mark-ups should address proportionate recovery of fixed common expenses, network risk and return to shareholders.

2036   MR. TACIT: So --

2037   MR. STEVENS: The mark-up was designed originally for your fixed common costs, nothing else. It's just really your mark-up for that. And that, again, is cost-based. It's based on the costs the companies have and I think there were studies on this 20 or so years ago, what those fixed common costs were as a percent of their total costs.

2038   The other factors you are mentioning -- and perhaps for fixed common costs, we probably have the wrong name on it. We call it a mark-up. It really should be the fixed common cost factor because really all it is is a percent to recover your fixed common costs. The other things are legitimate costs but they aren't part of the -- they aren't fixed common costs, they're other costs and need to be build into the cost of capital or other parts of the formula.

2039   They're all there. Phase II covers all those items and they're all inputs. It's just, I think, by putting them in the wrong spot you're just going to get yourselves in more and more trouble in the future. You have to keep, you know, which basket they belong in.

2040   COMMISSIONER MENZIES: Well, your suggestion is, if I remember correctly -- and I'm sure you will correct me if I'm incorrect -- for a 15-percent mark-up --

2041   MR. TACIT: So what we're saying is --

2042   COMMISSIONER MENZIES: -- across the board?

2043   MR. TACIT: -- yes, if the mark-up is designed -- the Commission did do a study of what sort of will provide a sufficient recovery to fixed common costs of carriers, of all the major ILECs that it regulates and found that 15 percent was certainly enough to allow for recovery in the essential services basket.

2044   But then it went and applied different mark-ups, without any particular explanation that we're aware of in the industry, to different services. So, for example, we know that wholesale aggregated copper services and TPIA have a 30-percent mark-up, we know that FTTN has a 40-percent mark-up.

2045   But we're talking about the same company, the same fixed common costs. So if 15 percent is reasonable for a service to generate, then that's what it should be. If you have to measure any kind of return, the proper way to do that is in the cost of capital which is applied that generates your Phase II costs. That is where it's proper to apply it.

2046   And, you know, incidentally, we've had tremendous interest rate reduction since a lot of those costs of capital were initially set and they haven't come down either. So I'm not sure that even on the basis of cost of capital they're particularly being undercompensated for shareholder risk and return and all that.

2047   But that's conceptually the proper place to do it. If all you want to do with the mark-up is make a contribution to fixed common costs, then that's what it should be used for. Figure out what that right mark-up is to make an appropriate contribution towards that fixed common cost in the sense that we pay our fair share as an industry, because of course they have to contribute as well because, you know, they're also providing services.

2048   And that's what it is. There shouldn't be a differential to try and, you know, achieve other policy objectives through the mark-up. That actually just muddies the water and sends wrong economic signals.

2049   COMMISSIONER MENZIES: So you think that -- just to summarize, if I got it correctly, what TELUS is suggesting in regards to cost of capital and return to shareholders is not appropriate in the mark-up but is appropriate?

2050   MR. TACIT: Correct, with one other qualification. They've also said --

2051   COMMISSIONER MENZIES: Just help me understand what difference it makes, right, because at the end of the day what matters is the price.

2052   MR. TACIT: Well, the reason it matters is, again, it's a question of transparency. Because you can go to TELUS and say, what is the actual cost of capital that you have to pay in the marketplace, in other words, what is your actual cost of debt, what is your cost of equity, and you can compute that and that includes the risk and the return that shareholders expect.

2053   So it's a transparent, observable thing as opposed to an arbitrary decision that hey, we'll add 5 or 10 percent because we think we're in the right neighbourhood. So it adds a degree of precision because it's based on their own network, it's based on their company, it's based on their debt structure, their shareholders' expectations. You don't have to guess at it.

2054   COMMISSIONER MENZIES: So mark-up only for fixed and common costs?

2055   MR. TACIT: Correct.

2056   COMMISSIONER MENZIES: Okay. Because Shaw, for instance, says that a single mark-up that applies to all the services wouldn't take into consideration what they termed a significant risk associated with investing in services and facilities that they needed --

2057   MR. TACIT: But that's where a risk premium can come into the cost of capital. Again, you can look at -- you can ask them, when you did your FTTN or FTTP study, what internal rate of return --

2058   COMMISSIONER MENZIES: What risks are captured in --

2059   MR. TACIT: Right.

2060   COMMISSIONER MENZIES: -- cost of capital right now?

2061   MR. TACIT: And you can apply that for that service if you deem it appropriate.

2062   MR. STEVENS: If I could add to that, one reason we're sort of pushing this so hard is that the more of these -- I'm not sure of the right term -- changes to the model that they keep added on in the wrong spot, it makes it even more and more confusing to people to understand.

2063   I mean Phase II is hard enough to understand at the best of times, but by making these changes and not doing the right inputs -- and rightfully so, they may well claim it's a new product, it's very risky, we should have a higher mark-up. Fine. Suggesting in their application they want to increase the cost of capital for that product and then it can be debated, the cost of capital for that product and why they've done it, rather than just sort of a mark-up on top of cost of capital. It just doesn't make sense.

2064   If you want Phase II to work real well and become simpler in the future, try to keep it clean, renew their commitment to it as we suggested and make sure the industry is educated so they use it properly and I think it will make everyone's job a lot easier and fairer.

2065   COMMISSIONER MENZIES: How can we make sure if there is a specific project like that that has a higher risk factor? For instance, how can we make sure that -- what is your suggestion to make sure that we have a fair process that can capture that and reflect it appropriately and where should it be reflected?

2066   MR. TACIT: Ask them what they used as their cost of capital for approving the project. They will have to answer the question.

2067   MR. STEVENS: In some ways it's the same --

2068   COMMISSIONER MENZIES: But that would be the model that we would use?

2069   MR. TACIT: Ones that they claim are riskier than the average, yes.

2070   MR. STEVENS: It's the same as any other cost input. They're going to say the cost of the equipment costs this, the labour costs this and our capital costs this. It's just another input into the formula. They're defending all those costs they're putting in when they do the application.

2071   COMMISSIONER MENZIES: Okay. I think I'll stop there on that one. Otherwise, we'll be talking for a very long time.

2072   Bell proposed a couple of exemptions from the requirement to file a new cost study. Those were for recently filed cost studies and for when the service demand and revenue of the services is low. What do you think about that?

2073   MR. TACIT: So I'm aware of one process where they said, you know, the cost differences between the various speeds end up in such small rate discrepancies that we just don't -- we can kind of have an average rate and not do a cost study.

2074   And we don't conceptually have a problem with that. I think our response in the particular circumstances was yes, but we need to do one cost study to determine how that average stuff works. And the reason for that is the same reason that we talked about for CBB and all these problems, is that in the last few years things have been declining more dramatically in terms of costs than other people have thought.

2075   So I think we should do that for that and then going forward I don't see a problem with maintaining that on a kind of an -- if they add new speeds for the next, you know, one, two, three years, we could use that average rate. Beyond that, you would still periodically need to do either a study or at least, as I said, review the inputs that drive costs the greatest.

2076   You want to follow kind of an 80-20 rule, like look at the few things, the 20 percent of things that drive 80 percent of the costs. If you can do that on a regular basis, you know, you'll be able to wrestle this thing to the ground without having to do cost study after cost study.

2077   And I think the first time that you are met with a request for something that has low demand you should do the same thing and after that don't require it for a while and see how it goes.

2078   For example, in unbundled local loops -- or, sorry, with regards to copper loops, we know that the price has been -- the costs have been falling dramatically. So of course they say, you know, well, demand is dropping and so on. But consumers will benefit if we pay lower rates and we're able to pass that on to the consumer and it's a more transparent system.

2079   At the end of the day what we're really striving for is maximum transparency. But I agree there is work that can be cut out by looking at the factors that drive costs the most more regularly and doing studies, total studies, less frequently.

2080   COMMISSIONER MENZIES: So, what costs do you think, if any, should be consistent no matter the other differences?

2081   MR. TACIT: I'm sorry?

2082   COMMISSIONER MENZIES: Do you think that there are certain costs that should be consistent regardless of the service, despite the other differences?

2083   MR. TACIT: Well, there are some costs --

2084   COMMISSIONER MENZIES: There's sort of a general expectation --

2085   MR. TACIT: For DSL --

2086   COMMISSIONER MENZIES: -- that similar products will have similar pricing.

2087   MR. TACIT: Yes. For DSL it's certainly true, you know, that the loop -- the costs that are attributed to the access portion are quite usage-insensitive, so they're pretty much the same regardless of speed. There are very minor differences to account for some little tweaks here and there, but generally speaking it's the same.

2088   That's not true on the cable side. Cable access rates are very usage-sensitive. So you can't take that approach to cable access rates that you might be able to take to the DSL. The technology is different in that regard.

2089   COMMISSIONER MENZIES: We hear quite a bit from interested individuals and other parties that the costs filed in Phase II cost studies are pretty much incomprehensible. So wouldn't we be better off to rely on simpler costing approaches even if they were maybe more imperfect? To a certain extent, wouldn't there be a benefit to simplicity and less contentious, less fighting? Wouldn't that outweigh any costs that might be incurred in terms of lost accuracy?

2090   MR. TACIT: Well, I'm going to say the same thing that I think we said in one of our submissions. You know, democracy is the worst form of government except for all the others. Phase II is the worst form of costing except for all the others.

2091   The reality is it's the one that lends itself, if done properly, to sending the most correct economic signals and allowing our members to pass on the benefits of properly set rates to consumers, and that's the objective.

2092   So I'd rather do the extra work and get it right than, you know, do a quick one that is going to send wrong economic signals to the marketplace. The risk of that is just too high to do that, in my view.

2093   COMMISSIONER MENZIES: Okay. So if we were to decide not to go down the equivalence of input path, I guess what I'm trying to get at here --because we're beginning to wrap up my portion a little bit, just as a heads-up to anybody else. What are your top priorities? If you could get, I mean, 3, 5, 1, 2, I don't really care about the number, but you've touched on -- I mean your submission has been thorough. There are no unturned stones. But what's your primary takeaway --

2094   MR. GAUDRAULT: Can I just add? So on EOI, so to me, if you want to unpack EOI it's sort of like service levels. Right now, we need better support from the incumbents on the things that we can sell. Right now, our customers are hurting for it. We've been known through the history of our company to be, you know, big proponents of treating our customers right and the customer experience and all that and right now we're faced with huge issues there and EOI goes straight to the heart of all of that.

2095   So it's really -- so you take the costing parts out of that but what we really need -- so to me, like that's a big part and I know we didn't focus much on it today, but I have to say in my heart that's the number one place where --

2096   COMMISSIONER MENZIES: It's early, right?

--- Laughter

2097   MR. GAUDRAULT: Okay. All right. So if that's the case.

2098   COMMISSIONER MENZIES: No. I mean what I'm trying to get -- I mean you like EOI, right, but what I'm trying to get really is why, I mean what is the primary --

2099   MR. GAUDRAULT: So I can treat my customers better as well so that the --

2100   COMMISSIONER MENZIES: But if we don't go with EOI --

2101   MR. GAUDRAULT: You get more of what you got now, which is --

2102   COMMISSIONER MENZIES: What is it that you would suggest that we do that would still allow you to achieve your primary?

2103   MR. TACIT: So the reason EOI is important is because it makes the ability of incumbents to discriminate on a non-price basis transparent and thereby disciplines it.

2104   Again, our central message is -- what's the one thing we want or the two things? We want services that allow us to provide better value to consumers, that means BAS FTTP, and we want a transparent regulatory system that disciplines the market power of incumbents. And to me, getting the costing right and getting EOI, which is the non-price aspects right, are two sides of the same coin.

2105   I think if the Commission fails to deal with either the costing or the non-price discrimination aspects, we're going to have a marketplace that isn't going to be optimal for consumers. So, you know, you're kind of putting me to a Sophie's Choice that I just don't think is appropriate.


2107   MR. STEIN: I was just going to say that -- forget the term for a second -- the value, what we're asking for with EOI, call it what you want, we want to be treated -- we want our businesses to be treated the same way that the incumbents are able to treat their own retail arms and that's it.

2108   Whether it's done through any one of various different ways, that's what we're trying to get to because right now we're not. We're treated as the worst-class citizen, and unfortunately that disadvantage gets passed along to the consumers. And that's what we're trying to get around and that's why we framed it in terms of EOI and so forth.

2109   COMMISSIONER MENZIES: Okay. I understand. Thank you.

2110   The market share, the numbers I have indicate that in recent years, for your companies, has grown from 6 percent to 8 percent, which I mean that's a small proportion of the overall market but some might argue that it's a sign that things -- there's a structure there that's working for you, right? I mean that is -- it's 2 percent but it's 33 percent growth over a few years. In other words, what's wrong with the way things are?

2111   MR. ROCCA: So I think the model has really enabled us to grow. The CBB model has allowed us to differentiate our services, to provide the higher speeds that customers now are demanding.

2112   The problem is that the component of cost that's growing the CBB is -- while it was, you know, possibly acceptable a couple of years ago, is the point that is growing people out of business, not being able to deploy the higher speeds because we can't do them for -- you know, our costs are double retail in some cases for some of these services.

2113   So while there's growth because of, you know, some of the decisions that have been made, it's the future that's at risk with --

2114   COMMISSIONER MENZIES: And that's due to changes in -- more recent changes or evolution in consumer behaviour?

2115   MR. ROCCA: Customer demand, absolutely.

2116   COMMISSIONER MENZIES: Customer demand.

2117   MR. GAUDRAULT: We're being priced out right now. Like the higher speeds, we can't compete, and the more people use, the more that will become more and more true. So the rate of growth, I think if you do nothing that is going to slow and probably decline if you do.

2118   COMMISSIONER MENZIES: So maybe one of you --

2119   MR. TACIT: Well, if I could just add to that.


2121   MR. TACIT: So, as I said earlier, through no fault of the Commissioner, either Commissioners or staff, we ended up with this strange situation of a policy and implementation with the whole framework changing at the same time. And so the usage sensitive rates, kind of, in our view, got out of whack significantly and need to be fixed.

2122   But those rates over time -- the discrepancy magnifies as well to the extent that the usage and the demand that are actually materializing also deviate from what was forecast. So all of these things are causing the model to not be sustainable over time, not to mention the fact that we can't do the differentiation that we could do if we had disaggregated services, and so on.

2123   So all of the things that we are asking for are needed in order for that sustainability and growth to continue, because we want to grow and serve the market.

2124   MR. ANDERSEN: And if I heard you're kind of a, "If it ain't broke, don't fix it", I think the EOI portion -- I would just like to stress it's very important because that, you know, has been a growing problem. But it's a problem that has been there for many years for ISPs, the ability to offer the level of service that you want, especially as reliance on access service, you know, people are using it more and more, for more things every day, especially on the business side, where now we are running voice and video and other applications.

2125   The ability to provide that high-level of services is really critical in being able to grow faster.

2126   COMMISSIONER MENZIES: Okay. So maybe -- no, go ahead.

2127   MR. GAUDRAULT: So treat our customers right, offer a good value, keep up with the latest technology and allow us to, you know, move on the value chain. So EOI, improve Phase II, FTTP and BAS.


2129   Anyone can answer this, but really what I'm looking -- this is a fairly broad question and it doesn't need an enormously long answer, but I'm trying to make sure that we place your arguments in context. I need to kind of understand the dynamics of your sector at this time.

2130   So in other words what I want to know, are there people going out of business? Are there new people coming into business? Is there consolidation taking place in certain areas?

2131   What sort of -- if somebody were to ask me sort of what's life like in the CNOC world, what's the business life like, can you give me a summary, Mr. Sandiford?

2132   MR. SANDIFORD: Yeah, I can. And in my personal case it might be a perfect example because the company that I owned and operated for the last 18 years was recently acquired by another player in the market. So there is consolidation occurring in the market.

2133   And in terms of some of the other aspects, I think that if we don't see some dramatic changes with regards to some of the things that are in our proposal, we might start to see more of a failure in the competitive side of the market. That wouldn't be good for consumers as a whole.

2134   MR. STEVENS: To answer your question are there new players --

2135   COMMISSIONER MENZIES: Are there new people coming into the business?

2136   MR. STEVENS: No, not very many and those that are, are only doing so in a very niche way that doesn't really encapsulate the market as a whole.


2138   The ladder of investment, Bell makes -- it's sort of in paragraph 37 of their initial intervention. I will just quote from what they say.

"The ladder of investment theory has clearly proven to be a fallacy as competitors relying extensively on wholesale services have not built significant facilities. Rather, competitor investment has been the greatest in forborne areas without reliance on wholesale services." (As read)

2139   Is that true?

2140   MR. ROCCA: I think there are a couple of rungs missing. We are asking for, one, BAS. BAS is certainly a rung that we would love to latch onto. But as it sits now we really don't have a choice. You are either aggregated or full facilities based. There is nothing in between.

2141   MR. GAUDRAULT: I think we are exactly in that scenario. Earlier I said to you guys -- I said, "Look, the message I have actually received is don't invest."

2142   So to me the way it's set up right now is not conducive to me to go up the so-called ladder. But I have to say also, though, that if the expectation is that, you know, this ladder will lead to this facilities bliss where everybody has got, you know, fibres laid, it doesn't make sense. It is not efficient and in the end it would just lead to higher consumer rates for no good reason.

2143   So what you want is those who are in the best position to invest in those areas, you know, you want to enable that. And this is where we come in.

2144   MR. ROCCA: I guess we just want to make sure that the ladder is leaning up against the right building. You don't want to be going up the wrong ladder.

2145   COMMISSIONER MENZIES: Just help me understand a bit, like, because if you get the BAS access that you are asking for and you get the fibre-to-the-home access that you are asking for, can we just forget about this ladder of investment thing? Because I'm not sure what you would need to invest in if you had all that access or what incentives there would be.

2146   MR. TACIT: Well, what --

2147   COMMISSIONER MENZIES: And I'm not saying -- I'm not trying to be judgmental about it, but maybe we should just stop talking about that being a path to go. Maybe this should just be a reseller market that we are looking at and we can worry about facilities-based someplace else.

2148   MR. TACIT: Well, first of all, I just want to say that the CNOC members are not resellers in the sense that they don't just buy a service from incumbents and sell that same service, so that's number one.

2149   COMMISSIONER MENZIES: I'm sorry, yes, I mischaracterized it.

2150   MR. TACIT: No, that's fine.

2151   But leaving that point aside, we want to take a very realistic view of what -- if you want to call it ladder of investment, just so we know what it means. We need to take a very realistic view and that realistic view is based on economic efficiency. It's the reason that we went there with the proposed change that we are suggesting to the essential services test. And that is that you want people to invest where it's economically efficient for the economy as a whole.

2152   The way you incent that is not through keeping some prices artificially high. Yeah, you may -- somebody may decide, you know, "I happen to have a pile of money and I'm going to put it there and build X, Y, and Z" but if all that manages to do is raise all of the industry costs, consumers at the end will have to pay for that.

2153   So the objective is not just to maximize the amount of fibre transport and access in Canada. The objective is to maximize consumer outcomes in terms of price, choice and other benefits. The way you do that is by giving people the incentive to do what makes sense for them in terms of the economic signals that they receive.

2154   So if they have both an aggregated and a disaggregated wholesale service then, in those areas where their density and customer base -- where it makes sense for them, they will invest facilities there. And that makes economic sense and it is efficient because there is a real economic signal giving them the incentive to do that.

2155   If you just keep the price so high that a whole bunch of players that would play are foreclosed and a few are willing to bet the farm and invest anyway and maybe they will last for a while, maybe they will even last for a long time, but all that happens is consumers pay more because it costs more to have two facilities than one running between points a and B, we haven't accomplished anything.

2156   COMMISSIONER MENZIES: So when we look through this we are trying to serve the public interest, right, and the public certainly gains a benefit from competition for retail rates and quality of service and some of the things you have mentioned as being key. And you know, the more the merrier I guess it is to a certain extent there.

2157   But the other aspect of it is, you know, service, right? I mean there are many parts of the country where some would argue that competition is not really the first thing on their priority list. Service is, right? Affordable -- getting quality service of a good quality at an affordable, as opposed to a slightly different definition than a competitive price, right?

2158   The incumbents and the cablecos argue very strongly that if we put too much emphasis on what's needed, some of the things you ask for in regard of retail rate and quality of service competition and that, that we handicap the ability to build in terms of that.

2159   So that's -- I'm trying to figure out how to put a question mark on this. Essentially, how do we balance that? Is your position just that the ILECs and cablecos will continue to build and continue to build in underserved areas where there is no market forces or insufficient market forces despite these rates? How do we incent them to continue building if we give you what you ask for?

2160   MR. TACIT: So, first of all, they have a natural incentive to build wherever there is a cable carrier because otherwise the cable carrier will eat their lunch. And FTTP, there is a reason they are sinking all that money into FTTP. It's because they have to keep up.

2161   Now, I don't believe for a minute that they are going to stop investing if they have to grant access or grant wholesale access to FTTP or anything else. We have heard this story before and it has proven not to be true. And if you look at information that we have given from their annual reports and so on, on the record, you will see that they have -- you know, there are record investments going on.

2162   To your point about underserved areas, though, if there is some -- if there are some marginal cases where, you know, there might be a delay of investment, and I think that's all it would be, it would not be that they would not invest -- then there may be some different regulatory measures that need to be applied there. I think, though, our core message is don't sacrifice the economy as a whole and consumer welfare as a whole to try and address those marginal cases if they exist.

2163   So I would say two things. First of all, be very sure that those cases actually exist and that they are not just saying that because they want to stop wholesale access.

2164   And number two, if you are convinced that those cases exist, then fashion a regulatory remedy to address those specific cases rather than compromising the regulatory regime as a whole which would benefit the bulk of Canadians and the Canadian economy as a whole.

2165   COMMISSIONER MENZIES: Thank you. Those are my questions.

2166   Oh, go ahead.

2167   MR. GAUDRAULT: Yeah. So this is a loaded thing.

2168   So what I'm saying, I want BAS, right? So if I can get into and leverage my existing customer base and all of a sudden I have a reason to lay fibre, let's say to "A" so I can access my customers there, well, all of a sudden I have something that I can leverage from "A" and go to "B", and "B" might be an underserved area or it might not.

2169   There may be -- you know, the fibre that I may have laid there, I can use points along the stretch there in order to leverage into something else. Then once I had that experience I'm in the business of laying fibre I can use that leverage. And maybe I can look at truly underserved areas completely detached. Maybe I can look at that. We bought a cableco in Ontario.

2170   I mean, so we are looking at all of this stuff and it's happening. So I don't think you can forget about it, but all this stuff is tied together.

2171   So I think, as well, if you are talking about their investment versus our investment, like fundamentally it's two different things. They are saying that within their investment, which is predicated on sort of all the services that end up getting loaded up on that, well, the truth is, we are 8 percent right now of that market.

2172   So like the difference -- and with Phase II we are paying. We are paying the right cost there. Like, to the degree that maybe instead of getting, you know, $.60 on every dollar, maybe they are getting $.55 -- I don't know, but whatever it is, the delta, their business case for doing the facility on their part doesn't really change by having us there, right?

2173   Then you convert that and you look at, you know, why should we invest, right? That's a whole separate thing. We are looking at it from, okay, well, we have retail services now with associated margins. We are not a vertically integrated company. They are taking all their costs, scrunching it up in retail and saying, oh, you should have -- you know, you are killing our business case.

2174   Well, the reality is that for us to invest, we have the margins and whatever on the retail front and we are trying to go the other way with it. So in order to do that I need to be able to get to "A", to "B" and "C".

2175   COMMISSIONER MENZIES: Right. But aren't you looking at being a bit of, not necessarily vertically integrated but a multidimensional company in terms of what you can offer? I mean, if you are competing against people with bundled offerings and that sort of stuff, aren't members in your sector looking at being able to deliver video services?

2176   MR. GAUDRAULT: Yes, I am. I mean I was at the Talk TV, you know, saying exactly that.

2177   We are looking at it. This is why we, you know, looked at the whole -- you know, the cable company we looked at and we bought.

2178   MR. STEVENS: If I can make a comment on your question on competition as you go forward and really -- and I'm going to be a philosopher for a couple of minutes.

2179   I mean, there is really two questions. Is it monopoly, regulated monopolies or is it competition?

2180   If a crystal ball 20 years from now -- I'm not sure there is going to be both cablecos and telcos left. I mean it's going to become that one, in most areas, fibre network. I am not sure they are both going to survive.

2181   If it's good for the economy, and I think it is, to have competition, that competition is going to come about by people using wholesale and not by everybody having the last mile.

2182   So you are going to have to -- if you want competition, the only way it's going to happen in the future -- it's going to become less and less and less unless you -- if you allow them to have areas that no one can come in and compete with them, give them monopolies. It will all become a monopoly in the future. I mean there's really -- I think it's a clear choice as you go forward.

2183   COMMISSIONER MENZIES: Thank you. Those are my questions.

2184   THE CHAIRPERSON: Commissioner Molnar...?

2185   COMMISSIONER MOLNAR: Thank you.

2186   I have a number of questions. So let me just preface all of it by saying you don't have to convince me of your service innovations or what you have contributed, but I still have questions.

--- Laughter

2187   COMMISSIONER MOLNAR: I'm going to start with Mr. Stevens because I am really interested in your fibre build. You said that there is a business case to build for the first entrant.

2188   MR. STEVENS: Correct, yes.

2189   COMMISSIONER MOLNAR: If I understand the position you folks have put forward here, did you not make the -- take the position that there should be no head-start and no sort of first mover advantage? So what is the advantage for being the first entrant?

2190   MR. STEVENS: Well, the advantage of being the first entrant is that they do become your -- you're going to -- there is a real advantage being there.

2191   I mean if you are investing in facilities -- and I think it's separate here. Investing in facilities and being a provider are two not totally separate, but two different things.

2192   You can invest in a facility and make money on the facility and whether that is from your customers or somebody else's wholesale customer, and then you can also provide services and you make money in providing services. The two are are both in parallel, but they aren't mutually exclusive.

2193   I mean you don't have to do both. You can make money in both ways. I think the advantage is when you decide to invest, you are deciding to become a facilities investor in facilities to do that for the long term.

2194   I mean, it is a very long term investment. It's not a four or five year window. It's a 15-year window to have that fibre and you are doing that investment because you are bullish that people are going to want to use fibre for the next 20 years. It's different than you don't -- so that's why it's different than necessarily providing the services that go on in that fibre.

2195   MR. TACIT: I think what I hear is the head-start we are talking about is at the service level, not that people can't build if they want to build first. I don't think we said that. I think what we said is don't use -- don't let the incumbents use what are essentially essential facilities to prefer their own operations and be able to launch their retail services first. We never said there is anything wrong with them building their fibre first or maybe only.

2196   COMMISSIONER MOLNAR: So if I understand, you are saying that the advantage for the first entrant is you capture the wholesale market, because there would be no advantage on the service side.

2197   MR. STEVENS: No. I'm not sure there is an advantage being the first in, I think you are going to be the only one in. When you go in to build fibre I think the natural choice when people build in, there is only a business case for one provider. So if you --

2198   COMMISSIONER MOLNAR: So actually on that, can you confirm, did you build for 100 percent of the population in your territory?

2199   MR. STEVENS: Yes. In the areas in the towns that we have done we passed every home in town and we would be happy to serve 100 percent of those houses.

2200   COMMISSIONER MOLNAR: So you do have -- you have built with the capacity to serve 100 percent of the market?

2201   MR. STEVENS: Absolutely. Absolutely, yes.


2203   MR. STEVENS: To do that, absolutely to do that. And the decision not to build is --

2204   COMMISSIONER MOLNAR: And the business case supported you, assuming 100 percent?

2205   MR. STEVENS: No, we are not assuming 100 percent. I would love it if we did. I'm sure we would be very happy.

2206   COMMISSIONER MOLNAR: But your business case supported you passing every home --

2207   MR. STEVENS: Yes.

2208   COMMISSIONER MOLNAR: -- and having facilities to serve every home --

2209   MR. STEVENS: Yes.

2210   COMMISSIONER MOLNAR: -- despite assuming some smaller percentage on the retail side?

2211   MR. STEVENS: Correct. Now, we did choose the towns we chose to have the density to do that. We haven't chosen to build down a rural road with one house every two miles. I couldn't make a business case for that today.

2212   COMMISSIONER MOLNAR: Do you believe -- you know, this is really stretching it, I understand. But you know, part of my concern is I'm not sure that everybody would choose to build to serve 100 percent of the communities, that the business case would be there for all the incumbents to assume that they can put in facilities to serve 100 percent.

2213   MR. STEVENS: Well, I think when they say 100 percent they will choose their area -- whether it's a town or a subdivision or a city, they will choose to serve that probably 100 percent or almost 100 percent of that community because just the density is pretty easy to do. When you start spreading outside that footprint it becomes a different business case.

2214   So I'm assuming most people put fibre into a town. If they are going after the residential market they are going to go by the most houses. I mean, maybe there is an empty street with one house down at the end and they may choose not to, but they are going to generally choose just to go by all the houses because they already have the other cost of getting fibre there, their head-end and all the other equipment is there. So they are going to try to get as many houses as they possibly can.

2215   MR. TACIT: Also, all new access technologies have a natural progression. I mean the cable carriers, when they develop their fibre coax systems, you know, they are pushing out the fibre closer and closer and node splitting. The ILECs are doing the same with FTTN and now they are going FTTP.

2216   You don't get 100 percent coverage overnight. You get it in a progressive way. What happens is that over time as people get used to the new speeds and people start making applications that can only be supported by the new speeds, you get a critical mass and you get to a point where the majority of the population will have access to that new technology. So I mean, you're right.

2217   COMMISSIONER MOLNAR: I understand that but, I mean, if we talk about fibre-to-the-node, it was not built to support 100 percent of the market, right? It was built understanding the market that was held. I mean, let's use Bell as an example. Many of you are in their territory. They did not build the fibre-to-the-node to support 100 percent of the markets.

2218   MR. STEVENS: But they have. And we have actually in our own satellite territory, we have gone fibre-to-the-node. We don't use that term, we simply put another remote out closer.

2219   But our design is -- and right now we are using DDSL and providing those higher speeds to those customers. Our plan is -- and it will happen in the next number of years -- we will put fibre from that node to all the customers in that area. So fibre-to-the-node may not be designed to provide all the customers high speed, but it is jumping off points where they can put fibre to all those customers in that area, that geographic area, that subdivision, so to speak. So it is -- and I don't know, their design and our design -- I think it's a standard design. When you do that you do plan on doing that so it becomes a jumping off point. And you will at that time rollout fibre and it will be to all the homes in that area.

2220   COMMISSIONER MOLNAR: Okay. I suppose I can ask them as well.

2221   I don't know if they are going to tell me here, but it would be concerning if somehow how we have designed the regulatory system would cause there to be any kind of limitation on fibre being extended to as many homes as possible.

2222   MR. STEVENS: There is a real limitation. There is a real -- it should be a real concern for Canadians. It's all based upon density and there is no business case on lower -- lower density areas to do. So I was real concerned for those. And I am one of those who lives on a gravel road. I mean there is no business case for anybody to come to that area right now.

2223   That will be a problem faced by Canada at some point in time. I mean, maybe not when it's only 3 percent Canadians have fibre. But when 70 or 80 percent do, the other 30 percent is going to be a challenge.

2224   COMMISSIONER MOLNAR: Yes. And you know I'm from Saskatchewan so I understand well the issues related to rural and remote. But the funny thing is actually within the communities of Saskatchewan there is no fibre-to-the-home.

2225   Within the communities you folks go -- are in -- outside of you, Mr. Stevens, I mean there's a big lag here within the Ontario-Quebec market.

2226   MR. TACIT: And there probably has been some government assistance in Saskatchewan and in other places, too, to do that, and that's -- you know, the issue of subsidies is a totally different one from regulation.

2227   But I guess what we are saying is (a) just looking on their past claims and what they've done, you know, I am pretty skeptical about the claims that all of their investment -- we are going to bring it to a halt with our market share when the cable companies are still there and they still want to be able to provide, you know, the symmetrical and high-speed services to support e-learning and e-healthcare and all of these things in order to keep up with the cable carriers and to better them.

2228   Because they have the ability to now with FTTP to provide symmetrical services that's harder for cable carriers. I don't think they are going to stop all that because we have to give them access. So I think --

2229   COMMISSIONER MOLNAR: I guess what I was trying to understand is why would they build for your market share, not their own. I mean everybody has -- you build assuming a certain market share.

2230   MR. TACIT: Well, we are not asking them go build in this town. We are just saying if you choose to build, you know, we are going to be there and we are going to help you fill that pipe, by the way, and put more users on that path and help you recover the costs of going out to that particular community because we are going to -- you know, we have got marketing savvy and innovative things to bring to the market and people are going to care enough that they are going to buy our bundle as well.

2231   MR. GAUDRAULT: The thing you are calling our market share is, like, we are paying them for that. Like, it's their market share as well.

2232   COMMISSIONER MOLNAR: Yeah, I understand. I mean essentially what you are speaking of, though, is moving from being an internet service provider to being the provider of the broadband home. It's quite a significant change in the amount of revenue that is at risk within each home.

2233   MR. GAUDRAULT: Well, so it's the delta. So it's the delta of the 8 percent.


2235   MR. GAUDRAULT: It's the difference between whatever we pay and whatever they might be able to get as a whole. The difference is what you are talking about, right?


2237   MR. GAUDRAULT: And of the 8 percent.

2238   COMMISSIONER MOLNAR: But you don't want to be 8 percent. You want to be 20 percent.

2239   MR. GAUDRAULT: Still, the business case --

2240   COMMISSIONER MOLNAR: I think yesterday, you know --

2241   MR. GAUDRAULT: -- the Phase II costing --

2242   COMMISSIONER MOLNAR: -- somebody said 45 percent.

2243   MR. GAUDRAULT: -- the Phase II costing takes into account all of that, right, and that's what it's supposed to do.

2244   COMMISSIONER MOLNAR: Right. It takes into account the cost.

2245   MR. GAUDRAULT: Yeah, the costs. Yeah.

2246   MR. TACIT: I think what we are forgetting, though, is that the pie gets bigger. I was here in 1991 when they were arguing vigourously against long-distance competition and, you know what, after we got it, the long-distance market increased tremendously.

2247   And that's the point, competition will actually spur investment and will make the market larger. You know, their margins may get smaller over time, but it will be a smaller margin of a much bigger market.

2248   MR. GAUDRAULT: And I hear there's big issues on those fronts.

2249   COMMISSIONER MOLNAR: Just to be clear, I'm not concerned about a particular company's margin, I am concerned to ensure that there continues to be investment and that fibre-to-the-prem reaches every home, if that is possible, as many homes as possible, and nothing is being done here that would --

2250   MR. GAUDRAULT: And our view is that we don't really affect that. They are -- like, at the end of the day they are competing, you know, for those services for those people. And at the end of the day there is a bit of a balance between that investment, right, and what consumers want. So it's really that they invest and it's three times more expensive for those same end-users, right? That's not good.

2251   So, like, what you want is the investment to turn it into really awesome, usable stuff for people, right, and that's where we play a role there, by saying, "Hey, this TV stuff, it kind of stinks right now, right".


2253   MR. GAUDRAULT: Right? Make some changes. And that's where we play a role.

2254   COMMISSIONER MOLNAR: Yes. Yeah, and I premised this by saying I accepted going in the notion that you folks bring service innovation as long as we can find some comfort here that it will not be at the expense of investment.

2255   MR. GAUDRAULT: This is the same story as FTTN. They invested and we are still here.


2257   MR. STEVENS: Maybe to get a bit more reassurance there, when we do the business model for going fibre-to-the-home, I mean, you look at all our revenues, our potential revenues and our potential costs. Yes, we can calculate that as a percent of homes perhaps you want to capture. But also, if there was required wholesale services you are going to build that into your factor. You are going to need a little less revenue from those customers and you are going to have less costs.

2258   So as long as the Phase II costing is done correctly, it gets built into the formula. And if the Phase II costing is done correctly it won't change really the -- it shouldn't change the decision to go into those communities.

2259   But I think it is a challenging getting the costing done correctly.

2260   MR. TACIT: I think Markus had something he wanted to add on the investment issue.

2261   MR. von WARTBURG: I think there is generally this trade-off between the investment incentives and on healthy retail competition. There is a little bit of a balance there and you have to ask yourself to what extent do service-based competitors do they affect these investment incentives? To what extent is investment harmed?

2262   And as you have heard here, I think it's a lot about at the margin there may be some projects that get slightly delayed, but in general the business case for developing into a certain area is mostly about densities and how many -- what is your cost of building out there and it has very little to do about the service-based competition that would then maybe take away some of your retail customers.

2263   MR. GAUDRAULT: The investment.

2264   COMMISSIONER MOLNAR: I would think and any business case is going to take into account for any decision to build into any neighbourhood, frankly. I mean this is likely going to be built by neighbourhood. You will look at the neighbourhood. You will look at the revenues you can generate and the costs you can -- you know, what it will cost and do you anticipate you will generate revenues enough to make that business case positive?

2265   MR. GAUDRAULT: I guess I would put it to you that the worst possible thing that could happen is if somebody came out of nowhere and just overbuilt, like didn't spend money on their network at all, whereas we are helping that investment, we are spending money on that investment. Like, if somebody came and overlaid a whole other network on top of Toronto right now, I'm pretty sure you would get an earful.

2266   COMMISSIONER MOLNAR: I would be happy, actually.

2267   MR. GAUDRAULT: Yeah, well, consumers would --

2268   COMMISSIONER MOLNAR: I'm going to ask the question, even though I know folks don't maybe like this, but --

2269   MR. GAUDRAULT: In fact, just to drive my point home, I don't know that consumers would actually be happy with that once they got the price, the bill for that. It's not efficient and as a result everybody's prices would go up and the guy coming in --

2270   COMMISSIONER MOLNAR: Well, if somebody built it that would have had to have been business case positive, don't you think?

2271   MR. GAUDRAULT: And nobody is doing it.

2272   MR. ROCCA: If you had that business case, though, for that first person, you know, and they made the business case and it was going to be profitable going to that neighbourhood, like Marc said, that's the worst thing that if somebody else said, "Well, we are going to deploy another network", well now you have doubled the costs for that neighbourhood and you have halved the revenues.

2273   MR. GAUDRAULT: With the same base, like there are only so many people in that area.

2274   MR. TACIT: It's not about -- their business case may well justify it in this theoretical scenario, but it doesn't mean that the economic costs to society don't increase because of that.

2275   In other words, you have deployed a second infrastructure, but everybody's costs have risen as a result of that; both suppliers' costs, and at the end of the day that gets translated into the prices that consumers will pay.

2276   MR. GAUDRAULT: And without necessarily any actual, like, observable benefit to those end-users, if all three are now struggling to make ends meet they don't have time to spend on making it more awesome and blah blah, right? So like it helps them to have everybody focusing in on making it better for the customer.

2277   COMMISSIONER MOLNAR: Okay. I`m going to move on. I understand what you have just said. I'm not sure that I necessarily agree with the notion that, you know, while there may be a business case it's economically more efficient for us to not have a second build. But I heard what you said.

2278   I want to make sure I'm understanding your position on essential facilities and forbearance. So you have said, if I understand correctly, that you support the general definition of an essential facility that exists today. Modify it a little bit as to, say, where it's economically efficient or where it's not economically efficient?

2279   MR. TACIT: Well, where -- we want to introduce the economic efficiency, which actually ties exactly into the conversation we have just been having.

2280   COMMISSIONER MOLNAR: So economically efficient for...?

2281   MR. TACIT: Society, for the economy as a whole. It's not -- this is not a -- you have to look at again whether entry is economically efficient, and Markus is going to explain this.

2282   COMMISSIONER MOLNAR: It's not for a firm.

2283   MR. TACIT: No.

2284   COMMISSIONER MOLNAR: It's for the economy as a whole?

2285   MR. TACIT: Markus can explain it much better than me.

2286   MR. von WARTBURG: So when you think about -- let's pick the fibre drop to the premise, if a consumer has a second fibre drop there is facility-based competition. There is two facilities into the consumer's home.

2287   The problem is, he is very likely only going to use one. So one of these lines is going to be fallow. Essentially the costs for both of these infrastructures have to be paid somehow. I mean, again, you only invest if you can recover it and so eventually this translates into higher consumer costs.

2288   If both facilities-based providers have to recover their cost and one of them is basically sitting on an empty line, this translates into higher costs for consumers.

2289   COMMISSIONER MOLNAR: Okay. I understand what you say.

2290   So as it regards forbearance, even though essentially your essential facility test would say one and done, I mean essentially because if you have any stranded investment anywhere along the way it's not economically efficient to society. But your test for forbearance is four competitors. Tell me again, and you may have discussed that -- tell me again how you have settled on four.

2291   MR. TACIT: Well, again, it was largely patterned after what we have observed predominantly, you know, in wireless markets and the discussions that we have had there. I don't want to get into that too much because I know the record is closed on that.

2292   But the reality is there you have three so-called facilities providers and it has been viewed as insufficient to bring the full benefits of competition to the economy. We don't think that wireline facilities-based competition is that much different from a facilities perspective and so you really need to have a minimum of four before that market as a whole starts becoming observably more competitive in its behaviour on a wholesale basis. It's one of the indicators, it's not the only one.

2293   COMMISSIONER MOLNAR: So this is an indicator for wholesale forbearance. You would not suggest that this is a required indicator for retail markets?

2294   MR. TACIT: No, we are talking wholesale markets only.

2295   So for example, the example that I gave was specifically if we had BAS for example. Let's say we had it in downtown Toronto and two additional independent service providers used it to start providing an aggregated high-speed wholesale service. Now, you have four. You have the cable, the ILEC and the two that are using BAS.

2296   It may be that if the other conditions in the forbearance test are met that that then becomes sufficient to forbear with respect to the aggregated wholesale service which lets the cable and the ILEC off the hook. As well, on the aggregated service on the basis that there is -- you know, that there are four service providers all competing vigourously.

2297   COMMISSIONER MOLNAR: So I heard that as well and I kind of wondered about that. So at the level of assuming that the BAS service was put in place and you gave that example, you would have four and therefore you could potentially forbear from aggregated, but BAS is --

2298   MR. TACIT: Right.

2299   COMMISSIONER MOLNAR: -- within a central office or wire centre. Aggregated is serving territory wide.

2300   MR. TACIT: Well, no, it would be in the same area. Look, when we --

2301   COMMISSIONER MOLNAR: Oh, you would --

2302   MR. TACIT: Yes.

2303   COMMISSIONER MOLNAR: -- forbear from the aggregated DSL within a wire centre?

2304   MR. TACIT: Local exchange, just like you did for voice. That's exactly how voice forbearance worked at the retail level. This would be very similar to that. It would be --

2305   COMMISSIONER MOLNAR: But the service -- you are suggesting that aggregated ADSL is somehow a service that the appropriate geographic market is a wire centre?

2306   MR. TACIT: A local exchange, not a wire centre.

2307   COMMISSIONER MOLNAR: A local exchange.

2308   MR. TACIT: Yes.

2309   COMMISSIONER MOLNAR: For even aggregated?

2310   MR. TACIT: That's correct. That's absolutely correct.

2311   If you want to look at forbearance you have to look at the -- because there is a lot of variability. Even within cities and towns there can be a lot of variability in the market characteristics.

2312   So we are saying the way that you measure this is you have got to look at the competitive conditions in a small enough area so that you don't leave large portions of the market uncontested. So let's say we do the reverse. Let's say we have got BAS only in downtown.

2313   COMMISSIONER MOLNAR: Yeah, but I guess I just -- I question it because that service by its nature is defined to be something much larger than a local exchange. You are going to redefine the service so you are going to have aggregated ADSL within each local exchange?

2314   MR. TACIT: Well, it's delivered on a -- it's delivered on a broader range, but that doesn't mean that the economic characteristics are the same as the technological characteristics for the purpose of forbearance.

2315   You have to look at the market, the specific product and geographic market and convince yourself that in that place there is enough competition. If you don't, let's say there is -- let's say, you know, 80 percent of the Toronto population is served within a 1 km radius of the downtown core. Let's just say that for argument sake.

2316   And let's say that you have BAS there, and let's say that you have all the conditions for forbearance in that area. And now you say, "Well, I am forbearing from all of Toronto". You know, everybody that is living on the outskirts will no longer have competitive alternatives because the ILECs and the cable carriers will be able to withdraw their aggregated service. But, really, it's only the downtown core that has...

2317   This is exactly what happened with Ethernet access and transport. we looked at national markets and yet there were a lot of places to which you couldn't deliver transport, or a lot of smaller places that didn't have Ethernet access capability. This is exactly the same situation. That's why it's essential to look at the geographic market in an appropriate site.

2318   MR. ROCCA: Just to clarify, we weren't looking at a mini aggregated. So we are not saying that, you know, there is a Toronto aggregated and that there is a London aggregated. There would still be the overall aggregated service and you would have to reach the certain conditions of forbearance for the entire exchange in order for that entire exchange then to be withdrawn from the existing aggregated service.

2319   MR. GAUDRAULT: But in the aggregate it would still be available presumably by those other players and potentially then the incumbents would feel compelled to offer their own to compete. So in the end this is exactly the kind of scenario, I think, that I think is desirable.

2320   MR. TACIT: The only difference is that in some portions it would be regulated, and others where the forbearance test is met it wouldn't be regulated. But it would still be available everywhere. Nobody is withdrawing it or changing it.

2321   COMMISSIONER MOLNAR: Speaking of BAS versus the aggregated, I was a bit surprised by the discussion actually that went on, Mr. Gaudrault, about the fact that you did not -- or you were unhappy when we moved to an aggregated TPIA service.

2322   And I want to ask you because I have Decision 2010-632 in front of me here where we made the determination that TPIA should be provided on an aggregated basis. It says:

"TekSavvy submitted that traffic should be aggregated to the greatest extent possible to enable competitors to reach critical mass and compete. TekSavvy also submitted that the ILECs should not be permitted to remove the current level of aggregation from their aggregated ADSL access services."

2323   So in 2010 it appears that you wanted the aggregation, the greater aggregation. I mean, I remember clearly Distributel for sure wanted greater aggregation of TPIA. You as well wanted greater aggregation. So what happened?

2324   MR. GAUDRAULT: Nothing. I still want aggregation. It's just there is a forbearance that we are suggesting, right, and so if you want me, though, to go to the next step and do more of what I think you want me to do, which is sort of invest, right, I'm saying how? What do I do? Here I am now, what do I do?

2325   If the disaggregated were still there I would be leveraging the aggregate and the disaggregate and I would be leveraging and, you know, doing the things I can do in order to better serve my customers. So I don't see a disjunction there.

2326   MR. ABRAMSON: If I just -- maybe I would also -- I'm just looking at that decision. I would also

2327   MR. GAUDRAULT: Microphone. Microphone.

2328   THE CHAIRPERSON: Your microphone -- the light is on, but we are not hearing you. So maybe you can pull another one over.

2329   MR. ABRAMSON: How about now?

2330   THE CHAIRPERSON: That's it.

2331   MR. ABRAMSON: I would direct you also to paragraphs 125 and 130 of that decision. Paragraph 125 talks about:

"Primus Telecommunications Canada Inc. (Primus) and TekSavvy showed strong interest for a CO-based ADSL access service..."

2332   Paragraph 138 notes that only TekSavvy forecasted specific demand for:

"... a local head-end-based cable access service, similar to TPIA but offered on a mandated basis at each local head-end..."

2333   So it's not an either/or thing. I think at that time we thought that the kind of ladder of investment that's being discussed required both an aggregated and the disaggregated model and we still take that position.

2334   MR. GAUDRAULT: And I think it's entirely consistent with everything we are suggesting now.

2335   COMMISSIONER MOLNAR: One of the other things I wanted to ask you about was when you are talking about disaggregated, the BAS service now, what was an ADSL-CO service then. As you know, it came before us and the determination was that, no, there wouldn't be a mandated requirement to unbundle at the CO and investments were made under that set of regulatory instruction.

2336   So you know, you made the comment, Mr. Tacit, that regulatory transparency is very important and regulatory predictability is also very important. So investments have been made under a set of regulatory instructions that you are asking us now to read aside.

2337   MR. GAUDRAULT: Yes. So if I could just directly -- so I will pass it to you in a second.


2339   MR. GAUDRAULT: But the same issue is true on the disaggregated TPIA. So that very thing -- I invested in disagg and basically I was forced to rip it out.

2340   Even today I'm still dealing with that because I had to convert all of that and put in long term agreements in order -- you know, so I don't really -- right now I still don't have a case for investment into the aggregated POI because I had to take the commitments I had from prior when I converted and sort of doubled down for a long period of time.

2341   So I am still dealing with that today. So that very case, I am part of that. And I think Matt has a similar --

2342   MR. STEIN: Yes.

2343   COMMISSIONER MOLNAR: And fair enough. I mean that is the problem when regulations change --

2344   MR. STEIN: That's right.

2345   MR. GAUDRAULT: And yet here I am asking for it.

2346   COMMISSIONER MOLNAR: -- and investment decisions have been made.

2347   MR. TACIT: Yeah, that's right. I was going to use an example in ADSL-CO. If I recall correctly, I would have to go back, but I think that it was approved and then it was made interim and then it went back the other way and it sort of went back and forth.

2348   I know that at a previous company I made a lot of investments with ADSL-CO in mind in the state that it was approved, before that switched. So the same is true.

2349   And there are so many other cases where we do make investments and, you know, that isn't necessarily the kinds of investments that we have been talking about today of digging up streets, and so forth, but other investments that are made towards that. And you are right, the uncertainty that comes from regulatory change creates issues and we deal with it.

2350   MR. STEIN: But we do have these reviews for a reason because sometimes we do need changes and otherwise, you know, we can't just sort of let the fact that something is and there might be a change required that would impose costs keep us from doing the right thing either, I think, is what we are saying.

2351   MR. GAUDRAULT: And I would go back to disagg.

2352   MR. ROCCA: I think it's -- in the case of the ILEC, it's actually more of a case of a non-investment. They always had the aggregated, so it was that they didn't invest in the ADSL CO, so I don't think there's a stranded investment there.

2353   COMMISSIONER MOLNAR: Fair enough. But I was thinking of the entire investment in fibre to the node that was made under a certain assumption of what was the regulatory framework.

2354   So to now provide access at a different level which provides you access to the customer at a very different level, could have had implications on that investment.

2355   Have you given any thought to whether or how there could be some compensation for that if BAS was approved?

2356   MR. TACIT: Have they even asked for that?

2357   COMMISSIONER MOLNAR: Have they asked for that?

2358   MR. TACIT: Yeah.

2359   COMMISSIONER MOLNAR: No, I think they've said, you should not approve it.

2360   MR. TACIT: Right. But the point is, normally in a regulatory forum if you think that -- you know, you sort of cover --

2361   COMMISSIONER MOLNAR: So should we just decide on yes or no?

2362   MR. TACIT: Yeah. You cover your flank. If you think that there's a risk, you -- like they did with FTTP, they said, we really don't think that you should, but if you dare to do that, then make sure you make them pay a lot because of the risk.

2363   They're not saying that if you implement BAS --

2364   COMMISSIONER MOLNAR: Well, they said it last time. I guess that's what I remember, no?

2365   MR. TACIT: But they're not saying it here that if you grant BAS --

2366   COMMISSIONER MOLNAR: And now you're asking us to change --

2367   MR. TACIT: Their FTTN investment is not going to change, it's driven by their need to compete with cable.

2368   COMMISSIONER MOLNAR: I know it's done.

2369   MR. TACIT: No, it's not done, it's still a work in progress, but it's being driven by cable competition not by anything we've done with BAS or without it.

2370   MR. GAUDRAULT: And, again, like we would still be paying into their facility. So, again, you're talking about sort of the delta.

2371   COMMISSIONER MOLNAR: M'hmm. I want to ask you about another potential regulatory change. You suggest that using national as the product market -- or, sorry, the geographic market was inappropriate and it should be by the local exchange.

2372   How would you see making that change going forward?

2373   MR. TACIT: Well, you just apply -- when somebody brings a forbearance application, they bring it on that basis. I mean, nothing happens --

2374   COMMISSIONER MOLNAR: So perspectively, not to the services --

2375   MR. TACIT: Perspectively, yeah.

2376   COMMISSIONER MOLNAR: -- that they --

2377   MR. TACIT: Well, I mean, yeah, that's right. So when new services are introduced you look at them that way in applying the essential services and we're only talking -- we're talking specifically presumably about high-speed services because other services may have different geographic characteristics, but if we're talking aggregated high-speed services, then those -- you would look at any forbearance application on a local exchange basis just like you did, you know, with retail voice in the past, it would be no different.

2378   COMMISSIONER MOLNAR: So we would not address the regulatory -- let's use, Ethernet is an obvious example here, so Ethernet, there was a determination to forbear.

2379   MR. TACIT: Well, that one because it's been -- so I guess here's where -- so you're right, for Ethernet I think you'd have to look at the new market definitions that we're proposing, if you accept our arguments of course, and say, you know, should this be re-regulated because it's already been forborne.

2380   On the other side, though, there may be some arguments that if you start looking at the, you know, aggregated high-speed services market some forbearance applications may come out of the woodwork from incumbents and you'd have to deal with those.

2381   So I think you have to do both, you have to be prepared to look at forbearance applications on the basis of a new test, which doesn't exist right now, for example, for aggregated high-speed services, and you'd have to look at, okay, if we agree that the markets for Ethernet and transporting access aren't national, then we need to re-regulate and let them persuade us that it should be forborne on an area-by-area basis after that.

2382   COMMISSIONER MOLNAR: So you would see us simply doing a follow-up?

2383   MR. TACIT: Well, I'd say if you're convinced that Ethernet access and transport should be re-regulated, take that step first and then deal with where it might be forborne, you know, later.

2384   That's an implementation detail, I guess.

2385   COMMISSIONER MOLNAR: Okay. Those are my questions.

2386   THE CHAIRPERSON: Vice-Chair Broadcasting, please.

2387   COMMISSIONER PENTEFOUNTAS: Thank you, Mr. Chairman.

2388   I appreciate your patience and your time and effort, it's imperative to understanding the issues.

2389   Mr. Stevens, you spoke about the fact that you want to sort of separate the facilities-based investment from the provider of service.

2390   MR. STEVENS: M'hmm, correct.

2391   COMMISSIONER PENTEFOUNTAS: So under that model you would have an accelerated ROI if you provided both ends of that equation as opposed to simply being a facilities investor. Would you agree with that?

2392   MR. STEVENS: Well, maybe I should rephrase that. There are two types of investing you're doing, you're investing in the facilities and you want to get a return on that, you're also investing in the product, whatever it's called, and you want to get a return on that.

2393   They do, of course, add together to each one, but you really invest for -- if we're doing a 20-year investment on facilities to last that long, you can't count on a product today to carry you through 20 years. I'm not sure that 20 meg DSL is going to be around 20 years from now. So you have to look at both of those, you know, together to get the right product.

2394   COMMISSIONER PENTEFOUNTAS: The FTTP will be around.

2395   MR. STEVENS: Yes, it will, exactly, yes. But you know, 20 meg, you know, DSL will not be -- or service may not be, they want 20 gig maybe --

2396   COMMISSIONER PENTEFOUNTAS: Right, but in the FTTP world in the future --

2397   MR. STEVENS: Right, exactly.

2398   COMMISSIONER PENTEFOUNTAS: -- if you had the dual revenue stream, if you will, or margins on the provider side of the equation and the facilities investor side of the equation, that would change your calculus; would it not?

2399   MR. STEVENS: Of course, yes.


2401   And if you had competitors in those neighbourhoods where you decided to invest --

2402   MR. STEVENS: M'hmm.

2403   COMMISSIONER PENTEFOUNTAS: -- as of day one under your no head-start rule --

2404   MR. STEVENS: Right.

2405   COMMISSIONER PENTEFOUNTAS: -- that would change your calculus as well; would it not?

2406   MR. STEVENS: Well, it would change the calculation.


2408   MR. STEVENS: It may not change the result though. It may not change the result because, again, if you do Phase 2 costing correctly it doesn't mean you're going to get less -- a lot lower margin on providing the wholesale service than you would on the retail. It may not be.

2409   COMMISSIONER PENTEFOUNTAS: But that would impact your decision to invest?

2410   MR. STEVENS: It would be part of the calculation to invest, certainly.

2411   COMMISSIONER PENTEFOUNTAS: It certainly would?

2412   MR. STEVENS: Yeah.

2413   COMMISSIONER PENTEFOUNTAS: And certainly not having the margins on the provider's end of the equation, or of the ledger, sorry, would certainly impact your decision to invest?

2414   MR. STEVENS: Right.


2416   MR. STEVENS: And one thing, what has happened in industry, wholesale providers on a market usually tend to make the market larger. I mean, we may get "x" per cent penetration, with our penetration plus our wholesale customers it may be "x" plus 10 per cent more.

2417   So yes, you can have more customers, though maybe lower revenue.


2419   MR. STEVENS: So you may be better off. It's hard to know that.

2420   COMMISSIONER PENTEFOUNTAS: That was also brought up, the idea of growing the market --

2421   MR. STEVENS: Right.

2422   COMMISSIONER PENTEFOUNTAS: -- and growing the pie.

2423   MR. STEVENS: Right.

2424   COMMISSIONER PENTEFOUNTAS: But on the other end of the equation we talked about, the biggest -- the most important denominator in investing is the density.

2425   MR. STEVENS: Right.

2426   COMMISSIONER PENTEFOUNTAS: So I mean, density's not -- we're not importing, to quote Mr. Mezei yesterday, sort of 300 million martians --

2427   MR. STEVENS: No.

2428   COMMISSIONER PENTEFOUNTAS: -- into the Canadian market, we've got to live with the numbers we have in place today.

2429   MR. STEVENS: Exactly, yeah. And density is extremely important.

2430   COMMISSIONER PENTEFOUNTAS: Density's not changing.

2431   MR. STEVENS: No.

2432   COMMISSIONER PENTEFOUNTAS: So how does the pie grow without the number of bodies actually growing?

2433   MR. STEVENS: Well, the pie grows -- if you use another revenue source. If I'm out there marketing to the customers and I have a competitor who's also using our services marketing to customers, together we may get more.

2434   Now maybe, maybe it's the ILEC or the Cable company loses because maybe, you know, but also hopefully they're going to take more service, do a better job and they may sign up taking, you know, 50 meg rather than 20 meg service and those things. They may have a really good quality TV product, they may take your TV rather than using Netflix.

2435   I mean, there's other -- how your pie grows and also the overall pie grows, they both work together in those areas.

2436   COMMISSIONER PENTEFOUNTAS: And that's the formula for growing the overall pie?

2437   MR. STEVENS: Yes, yes.

2438   COMMISSIONER PENTEFOUNTAS: Okay. And finally, if you've got your six per cent market share, you may be somewhere around eight or nine per cent market share today, and Mr. Mezei yesterday spoke of a 30 per cent market share.

2439   Now, the impact may not be felt at eight per cent, Mr. Gaudrault, but at what point in time is there an impact that can potentially have an effect on investment? If it's not eight per cent; is it 15, is it 20, is it 30?

2440   MR. GAUDRAULT: We can have a follow-up proceeding.

2441   MR. TACIT: Well, again, I want to go back to the long-distance competition case, because I remember so clearly them saying, you know, here's our reference case and here's how the market's going to shrink if we have to do this.

2442   And what happened was an explosion; as prices came down, the market grew. And yes, their market share declined to 70 per cent within a few years, but it was a 70 per cent of a much bigger market.

2443   So again, I come back to, I think the primary focus should be on outcome for consumers based on sound economic principles of efficiency. If you do that, I don't think you can go wrong. I don't think you'll do the companies harm or the incumbents harms.

2444   COMMISSIONER PENTEFOUNTAS: Even at a -- I mean, if you can state clearly that at eight per cent we're not having an impact, you must be able to give us a number at which you are having an impact.

2445   MR. TACIT: Well, we will have an impact, it's called competition, and that's what we want. I mean, yes --

2446   MR. GAUDRAULT: The impact would be that customers are getting a lot of what they want.

2447   COMMISSIONER PENTEFOUNTAS: And the impact on investment...?

2448   MR. GAUDRAULT: At this point I think it's not a whole lot. So at some point in time, what's after fibre? I think we can all agree that if we can get fibre we're doing pretty good and then if there's, I don't know, diamond fibre, I don't know, right, what's next, right?

2449   So we can deal -- like down the road -- we're far away from 30 per cent right now and so if there's new technologies we'll have to re-evaluate.

2450   MR. STEIN: I just add that it's not a binary thing. It's not like the tap of investment stops. The business case inputs change, the outputs change. That happens over a long gradient.

2451   I mean, we're talking about some big numbers. At eight per cent maybe the number's small, when you double that -- these just change. It's not that, ah, okay, we stopped; it's not as bad as that, it never is in any business case.

2452   COMMISSIONER PENTEFOUNTAS: I appreciate your answer.

2453   Thank you, Mr. Chairman.

2454   THE CHAIRPERSON: My colleagues have done a very good job going around all these issues above and beyond the written record, so I just have two very small follow-ups.

2455   The first one, Mr. Rocca, when you were discussing unbundled local loops with the Vice-Chair a little before 11 o'clock --

--- Laughter

2456   THE CHAIRPERSON: -- so I'm bringing you back a little bit, you referred to stranded investments and you said you would have stranded investments were we to change the mandated access in that area.

2457   Were you referring to your company, or everyone in your association?

2458   MR. ROCCA: I was referring to myself personally, but I know that there's other members here that have invested in co-located facilities and as soon as you -- as soon as unbundled local loops, which is the primary driver for being in a co-located facility, is removed then there's very little reason to invest in facilities in those central offices.

2459   THE CHAIRPERSON: So I would be wrong in assuming that when you were saying you had a hundred per cent stranded investment, it was because you were assuming that the ILECs would not be ready to negotiate with you? It's got nothing to do with their position, you would just restructure differently; is that what you're saying?

2460   Because even if we were to forbear from that, you still could come up with negotiated agreements, arrangements.

2461   MR. ROCCA: We haven't had a lot of success with that.

2462   THE CHAIRPERSON: I know, but when you say you would have hundred per cent stranded, you are saying that you think you would have no ability to negotiate?

2463   MR. ROCCA: If the purpose of the ILEC was to remove the copper, our investment, or our potential revenues for them would be relatively insignificant and I wouldn't see why they would have any desire to negotiate a commercial agreement with us.

2464   THE CHAIRPERSON: So if it was based on that, a section 24 condition would be of no comfort to you because they would be making, arguably, a business decision to pull out of the copper; is that correct?

2465   MR. ROCCA: Sorry, I'm not familiar with the section 24.

2466   THE CHAIRPERSON: Oh, sorry. Perhaps Mr. Tacit could help.

2467   MR. TACIT: Sorry, could you repeat that.

2468   THE CHAIRPERSON: Well, if we were -- I mean, the problem with saying you'd have a hundred per cent stranded investment is suggesting that there'd be almost a refusal to deal.

2469   MR. TACIT: There might be, or there might be price gouging like there is on the Ethernet side.

2470   THE CHAIRPERSON: Right.

2471   MR. TACIT: Neither is economically a great idea.

2472   THE CHAIRPERSON: Right. But my point is, section 24 conditions about unjust discrimination would still be there?

2473   MR. TACIT: Well, we have those and, you know, the reason we want EOI is because a broad principle like that, unless it's brought down to earth in terms of a specific tariff or non-discrimination requirement, is way too broad to discipline the market power of the incumbents.

2474   MR. STEIN: I just --


2476   MR. STEIN: I'm sorry, if I may?

2477   THE CHAIRPERSON: No, please.

2478   MR. STEIN: A great number of our members have made investments in co-locations and getting access to unbundled local loops, they're all -- well, I can't say they're all, but I would say that many of them are looking forward to using that and leveraging it when and if BAS comes around, being able to take advantage of that environment that they built, the assets that they built, the investment across the middle-mile and so forth.

2479   If you think about those co-locations and building into them to get access to the last-mile, it's very similar to what we're suggesting with BAS, being able to build to that point and then leverage the last-mile there, that unbundled local loop or, in this case, whatever it is with fibre to the premises, fibre to the node, et cetera.

2480   I find it interesting, though, that we talk about the lack of investment of competitors and yet we somehow found our way back around to talking about potentially stranding investments that competitors have made. They may not be as big, but they are there.

2481   THE CHAIRPERSON: Okay. I understand your point, but I think it would be useful for us if we develop a better record on the amount of stranded investment potentially there is there.

2482   Is that something you could perhaps through an undertaking help us through your member --

2483   MR. TACIT: Well, I think one of your interrogatories that you posed yesterday, and I just want to understand if this may cover it.

2484   THE CHAIRPERSON: I looked at it and I don't think it did.

2485   MR. TACIT: Well, if you look at the -- sorry, you're looking for dollar value as opposed to number of ULLs that may be stranded?


2487   MR. TACIT: We can try. I can tell you that, you know, unlike the incumbents, our members don't have big regulatory departments to crunch these numbers and come up with models and forecasts and projections.

2488   So both in terms of answering these interrogs and the follow-up question, these are difficult exercises for our members.

2489   THE CHAIRPERSON: I understand that, but it's not me that just testified that there's going to be significant stranded investments.

2490   MR. TACIT: Yeah, fair enough.

2491   THE CHAIRPERSON: So if that's the case, you may want to provide evidence on that.

2492   MR. TACIT: Okay. We'll do our best, we'll take that -- I guess we'll undertake to do our best with that.


2493   THE CHAIRPERSON: Okay. My second and last follow-up is with Mr. Stevens.

2494   Correct me if I'm wrong, but I understood that as a small ILEC you're taking the position that you should not provide access to FTTP?

2495   MR. STEVENS: I'm not sure that's quite the position we took. I think the position was that the issues need to be resolved by this proceeding and what happens and at some future date how that rolls out to smaller providers should be dealt with at that time and maybe much like they use for local competition, you know, wait until there's a bona fide application for a very small area and then deal with it at that time.

2496   THE CHAIRPERSON: Right. Would your position be different or identical as in that potential future application if you were a competitor as opposed to a small ILEC?

2497   MR. STEVENS: I don't think it would be changed very much, I don't think so. I mean, again, it's -- the costing has to be right. I mean, the whole secret there and I've come back to it a number of times, you get the costing right, it won't do harm to either party.

2498   THE CHAIRPERSON: Okay. I think I understand your position.

2499   Yes, Commissioner Shoan...?

2500   COMMISSIONER SHOAN: Thank you, gentlemen.

2501   I imagine most of us are running out of steam, so I'll keep my questions brief.

2502   I just want to close the loop on a few previous discussions. With respect to the head-start issue on the provision of new retail services, can you provide an example of a service or services that were deployed by ILECs or Cablecos prior to competitors being in a position to offer those services?

2503   MR. SANDIFORD: One of the ones that I can think of recently and it came up just this week was, there was a -- one of the cable carriers had offered a variety of services in speeds.

2504   They launched a number of new speeds on the retail level to their subscribers a considerable amount of time ago and only this past week have we seen a tariff filing to allow those services to be available to the TPIA customers.

2505   MR. TACIT: Recently.

2506   MR. SANDIFORD: It was last week.

2507   MR. TACIT: It was recently.

2508   MR. SANDIFORD: Yeah.

2509   MR. TACIT: The other thing is too, there are some for which they -- you know, so one of the things that we've seen especially from the cable carriers is they'll say, well, TPIA was originally a residential service so, you know, we happen to be offering some high-speed business services, but you're not entitled to those, those aren't really TPIA. So they don't even file TPIA tariffs at all.

2510   So talk about a head start, it's an infinite head start because we've been foreclosed from those markets, period.

2511   So it ranges all the way from, you know, they'll file an application at the same time as they're launching or within a very short period, knowing that the Commission needs time to react and so on and that even if there's a cost study, if there's an interim rate set and they're already launching, the signals that that interim rate may be giving aren't the correct signals, you know, it may have an adjustment and there have been lots of rates that have been sitting around, by the way, for one or two years on an interim basis.

2512   So talk about regulatory risk. From our members' perspective, there's a huge regulatory risk right there. So there are a lot of problems with the head start issue.

2513   COMMISSIONER SHOAN: Okay. Thank you for that clarification.

2514   You discuss the need for multi-casting to efficiently deliver services. Would you require multi-casting capability for BAS?

2515   MR. STEIN: Yes.

2516   COMMISSIONER SHOAN: Great. Thanks. In response to an earlier question from Commissioner Menzies, or Vice-Chair Menzies, you stated that you consider bundles to cost due to a distinct product market.

2517   Can you expand on that, explain the basis of that?

2518   MR. TACIT: Well, the basis is that when you look -- people who want a bundle, who want the bundle whether it's two or three or four services, are going to compare the price of that to some other -- to an equivalent bundle of services whether they're being offered individually or another bundle by another provider.


2520   MR. TACIT: That's their market, that's their basis of comparison. So even if you look at the classical, you know, economic test, well, a five per cent increase in the price caused them to migrate someplace else --


2522   MR. TACIT: -- and that sort of thing, it may well do that as between like the Rogers bundle and the Bell bundle if they're perceived to be similar.

2523   So, you know, the distinction where that might not be the case is where the bundles themselves have some differences. So for example, the Rogers cable offer may be very different from the Bell Fibe offer in some ways, and so now you're talking about some non-price factors, but people are still comparing the bundle. I want to talk, I want to surf and I want to watch, right.


2525   MR. TACIT: That's what they're trying to get all at once and they either buy three of them or they buy the one.

2526   COMMISSIONER SHOAN: Okay, great. Thanks for that clarification.

2527   My last question is, in terms of ensuring a measure of facilities-based investment, be it last-mile, middle-mile, first-mile, what have you, or some other sort of investment, in the event that a service was mandated, is there a way we can monitor that going forward; would an annual reporting requirement be appropriate and maybe that's something that can inform our next review of this policy?

2528   MR. TACIT: Well, sure. I think one of the aspects that, you know, the Commission -- I would encourage the Commission to look at very carefully coming out of this regulatory framework, and that's even whether or not you adopt our sort of EOI framework or whatever, is we need service-specific measures that are better than what we have and we need global measures that are better than what we have.

2529   We need to fill in those gaps to get a better picture of the industry.


2531   MR. TACIT: And I think we have to do more as Canadians in terms of sound international comparison work because, frankly, that's an area that's missing too and I think we need, as Canadians, to put more resources into that to have meaningful international comparisons on investment, on speed, on adoption, on all of these things so people stop arguing about whether OECD numbers are right or wrong and this and that.

2532   Let's try and really do that work. As Canadians, I think we could bring a lot of benefit to doing that and seeing a more accurate picture.

2533   Not to say that what we have isn't helpful, because I think to the extent it points in certain directions it's still valid, but we could take a lot of that argument off the table if, you know, for example, the Commission could come up with some methodologies, with some input -- I think it would be worth getting input from the industry on how that should be done --


2535   MR. TACIT: -- to come to those.

2536   COMMISSIONER SHOAN: Great. Those are my questions. Thank you very much.

2537   THE CHAIRPERSON: Thank you very much. I apologize for keeping you so long on the stand for this period of time, but I think it's better to keep going than break and have lunch.

2538   So thank you very much. So we'll adjourn until two o'clock.

2539   Thank you.

--- Upon recessing at 1248

--- Upon resuming at 1401

2540   THE CHAIRPERSON: À l'ordre, s'il vous plait.

2541   Madame le secrétaire.

2542   THE SECRETARY: We will now hear the presentation from Primus Telecommunications.

2543   Please introduce yourselves for the record. You have 20 minutes.


2544   MR. NOWLAN: Thank you. Good afternoon, Mr. Chairman, Mr. Vice-Chairman, and Commissioners.

2545   My name is Michael Nowlan, Chief Executive Officer of Primus. With me today are Brad Fisher, our Senior Vice-President, Marketing and Product; Sheldon Pepin, Senior Manager, New Services Introduction; and, Ben Rovet, Regulatory Counsel.

2546   I wish to thank the Commission for the opportunity to appear here today in this very important proceeding. The correct regulatory framework for wholesale services will increase Canadian innovation and productivity and is crucial for Primus, the competitive marketplace, and consumers of communications services.

2547   I wish to cover four topics in my presentation today. First, I will provide an overview of Primus and describe our significant investments in facilities.

2548   Second, I will address a key theme to this proceeding; namely that a properly operating wholesale market is essential to achieve consumer benefits from a strong competitive retail market in communications services.

2549   Next, I will comment on the current wholesale framework and discuss improvements that we recommend for your consideration.

2550   And, finally, I will discuss our position on the regulatory treatment of certain wholesale services, both current and proposed.

2551   All of our points are addressed in more detail in our various interventions and interrogatory responses in this proceeding.

2552   Primus is a Canadian success story. From its beginnings in 1997 as a long distance provider, Primus has grown and evolved. Today, we offer a full suite of services; internet, long distance and local voice, data access and transport, VOIP and hosted PBX, in both residential and business markets.

2553   Primus is one of the largest non-incumbent telecommunications providers in Canada. We currently serve some 300,000 residential and business customers in all provinces. We employ over 600 Canadians in five regional offices. For many Canadians, particularly in residential markets, Primus is the major alternative to the ILECs and cable companies.

2554   Primus has built a strong public brand and loyal customer following. We have achieved this by providing excellent service at attractive prices. We also invest to develop innovative services for Canadians.

2555   For example, Primus was first to offer VoIP commercially; developed and introduced patented Telemarketing Guard; pioneered hosted PBX for small and medium-sized businesses; and was the first national carrier to achieve Carrier Ethernet 2.0 certification.

2556   As the CEO of Primus, I must take strong exception to those incumbents that have criticized competitors for not making adequate facilities investments. I would like to spend a moment explaining why these criticisms are particularly wrong in Primus' case.

2557   Attachments 1 and 2 that we handed out show the network that we have built. It consists of 83 co-locations in ILEC Central Offices in five provinces; 25 points of presence across Canada; a national backhaul network; Class 4/5 IP switches in six cities; and peering facilities at six major internet exchanges.

2558   Since ownership requirements were liberalized in July 2012, Primus has constructed and deployed last mile fibre rings in downtown Vancouver and Ottawa and we have plans to make further fibre deployments. As you have seen in our submissions, Primus has committed substantial funds to these activities.

2559   In order to put Primus and its network investment in perspective, I ask you to look at Attachment 3. It illustrates the wide range of providers, from a white-label entity that utilizes the underlying carrier for all services and facilities, to a hybrid facilities-based operator like Primus that has made substantial investments to establish its own facilities.

2560   There is just not one approach to competing in the telecommunications market. While many telecom providers invest in infrastructure to offer their services, it is important to appreciate that even the largest participants in the marketplace share facilities in many circumstances. They deploy their capital in the manner most appropriate to their business activities and strategies.

2561   I also want to draw attention to the segment of the diagram labelled software; this is to highlight that innovation at the software level can be undertaken by all types of market participants, and that innovation does not just happen at the network level.

2562   The incumbents make the simplistic argument that they are the only ones that invest in facilities. This is plainly wrong, and Primus is a clear example of a company that has indeed climbed the ladder of investment that the Commission has enabled by allowing access to wholesale services. We look forward to continuing and expanding our investment activities.

2563   As the Commission considers the issues in this proceeding, it should bear in mind that the future shape of competition in retail telecommunications is very much at issue. The incumbents want to deregulate many existing wholesale services and they want to prohibit competitors from accessing facilities required to serve the evolving needs of consumers. If the incumbents are successful, the retail market will become a duopoly of the ILECs and the cable companies.

2564   When one reflects on the regulatory developments over the past 35 years, it is staggering to realize that the thinking of the incumbents has progressed so little; from defending monopoly, they have moved to defending duopoly.

2565   We do not believe that a marketplace of two incumbents is good enough for Canadian consumers. We do not believe that the Commission can be satisfied that, after 35 years of pro-competition initiatives, all that Canadian consumers would see is a change from one supplier to two.

2566   A Canadian duopoly would have unique characteristics that are particularly worrisome, and that means that continued regulation is critical. Compared to any other country that I am aware of, Canadian incumbents are more vertically integrated with offerings in broadband, video distribution, TV and radio broadcasting, content creation, and wireless.

2567   One could argue that there is an incentive here to inhibit a competitive internet market to support incumbent BDU and media creation businesses. Hence, the need for alternative suppliers to disrupt the broadband duopoly is greater in Canada than elsewhere. That disruption will come through the wholesale environment resulting from this proceeding.

2568   The fact is a duopoly cannot and will not serve the interests of consumers. As FCC Chairman Wheeler explained in a speech a few weeks ago when lamenting the fact that the majority of Americans only had a choice of two broadband suppliers:

"That is what economists call a 'duopoly', a marketplace that is typically characterized by less than vibrant competition." (As Read)

2569   In the mobile wireless sector, the federal government has recognized that the triopoly of Rogers, Bell and TELUS has failed to bring about the full benefits of competition to Canadians.

2570   If a wireless triopoly is found wanting, a wireline duopoly can only be worse, especially when it is the same operators that dominate the wireless and wireline markets.

2571   To its credit, the Commission has repeatedly taken steps to bring about competitive markets in telecommunications. It has designed a wholesale framework that enables competitive entry into all wireline markets. In doing so, the Commission has recognized that the resulting competitor entry and competitive choice will clearly benefit Canadian consumers.

2572   Today, there are over 800 service providers in the telecommunications industry, the vast majority of which utilize mandated wholesale services to some extent. The weakening of the wholesale framework sought by the incumbents will inevitably lead to many of these providers exiting the market, resulting in thousands of job losses and vastly reduced choice for Canadian consumers.

2573   Accordingly, Primus urges the Commission to evolve the wholesale framework that it developed in 2008, and to reject calls by the incumbents to curtail it. We believe the current framework, including the six categories of wholesale services and the current definition of essential services, generally strikes an appropriate balance between enhancing competition and providing incentives for investments in facilities.

2574   Primus does, however, believe that the 2008 framework can be improved, and I would like to spend a few moments describing our most important recommendations for improvement.

2575   First, we propose that the services in the non-essential subject to phase out basket should be subject to final offer arbitration where negotiations between an incumbent and a competitor have been unsuccessful. In our view, final offer arbitration would help address the inequality of bargaining power and encourage the incumbents to negotiate in good faith.

2576   Secondly, the Commission should make it clear that wholesale services and facilities should be unbundled to the greatest extent possible. Many of the services and facilities classified as conditional essential and conditional mandated non-essential can be provided on either an unbundled or bundled basis. This distinction has important consequences on the level of cost control, differentiation and innovation potential for Primus and other competitors.

2577   Third, Primus recommends that the Commission employ a more granular approach to market definition when assessing competitiveness of particular wholesale markets. The Commission has adopted a national market approach, which it explained at the time would be minimally intrusive, administratively simple and would enhance regulatory certainty.

2578   While these may have been laudatory and appropriate objectives in 2008, our experience since then strongly suggests that a more studied approach to geographic market definition will be needed in particular cases.

2579   At this point, I will address the regulatory treatment of specific wholesale services.

2580   We maintain that unbundled local loops should continue to be classified as conditional essential in both urban and rural markets. Primus and other competitors use unbundled local loops to compete with incumbent telephone and cable companies. Unbundled local loops continue to represent the sole remaining means to provide traditional residential and business wireline telephone service, business-grade ethernet over copper and business DSL.

2581   In fact, the availability of unbundled local loops allows us to offer a package of local voice and high-speed internet service, which is very popular with our customers. If the Commission pursues forbearance, those customers will face a duopoly in the supply of such services, which cannot be in their interest.

2582   We also believe that the wholesale elements underlying long distance voice competition should be maintained and not eliminated, as some ILECs have argued. This wholesale market works well and Canadian consumers of long distance services are the beneficiaries.

2583   With respect to CDN and ethernet, our experience has been that a national market definition was not appropriate for determining competitiveness and thus forbearance.

2584   The fact that competitive supply is available in larger urban centres does not necessarily mean that competitive supply is available in all communities. Forbearance, accordingly, enabled the incumbents to drastically increase the wholesale prices charged to Primus and other rivals where they face limited or no competitive alternatives, especially in smaller communities, thereby undermining competition at the retail level.

2585   This problematic situation can be avoided if the Commission adopts a more granular market definition, such as census metropolitan areas and only applies forbearance to those markets that are truly competitive.

2586   Now, with respect to FTTN and TPIA high-speed access. Primus requests that the Commission extend the current well-established principle of unbundling access and transport at lower speeds to these higher contemporary speeds.

2587   In past decisions, the Commission has required the incumbents to offer wholesale high-speed access service to Primus and other competitors. But currently, incumbents provide wholesale high-speed access services in a bundle that includes both access and transport components. This prevents Primus from being able to use alternative transport solutions to backhaul our customers' internet traffic from the ILEC and cable company interconnection points to our gateway.

2588   The consequence of this bundling is that competitors face much higher wholesale costs than necessary. This arises because the competitors are forced to use the bundled back-haul facilities of the access provider at uncompetitive CBB rates.

2589   Our capacity needs are dictated by customer demand, and the reality is customers keep increasing their internet usage. Customers are using ever greater amounts of data each month as internet content and applications become more bandwidth intensive. This bandwidth consumption becomes further exacerbated due to the growing ubiquity of HDTV and devices connecting to household Wi-Fi networks.

2590   Our average capacity required by customers has more than tripled during the period beginning July 2011 to October 2014 and, consequently, our capacity cost per customer has also more than tripled.

2591   With disaggregated high-speed access we would be better able to manage and control our transport costs by investing in alternative supply, as we are today with lower internet access through unbundled local loops. Primus could also leverage our substantial capital investments in our existing 83 colocations and our fibre deployment in Ottawa and Vancouver to backhaul this traffic, again reducing our capacity costs.

2592   Disaggregated high-speed access will also help us to continue our approach of including unlimited data usage with Primus' retail internet products, a feature that consumers particularly value. Needless to say, today's ever increasing CBB charges make this unlimited usage feature an increasingly difficult proposition.

2593   Moreover, Primus will be able to develop new and more attractively priced internet products and services. One example is video distribution. With markedly reduced transport costs, Primus would work with video providers, including competitive BDU operators, to expand choice for consumers.

2594   As we mentioned earlier, the vertically integrated incumbent duopolists will have a strong incentive to keep wholesale broadband prices high in order to preserve their BDU businesses from video competition.

2595   Disaggregated access will help Primus and other competitors counter this incentive with price competitive, unlimited broadband offerings that enable consumers to see the video content that they want.

2596   Not only would a competitive BDU market be directly beneficial to consumers, but its advent will allow Primus to offer customers a triple-play package of telephone, internet and video. As such, competition in the supply of such offers would also be enhanced.

2597   My final topic today is crucial for the future competitive landscape, Fibre to the Premises or FTTP. In this proceeding, we have argued that the Commission should mandate wholesale access to FTTP so that consumers can continue to benefit from competition and choice as bandwidth demands continue to increase.

2598   The Globe and Mail discussed the important future of FTTP in a recent editorial:

"The future is fibre-optic internet in every home that is magnitudes faster than the current coaxial standard and which will become the backbone of the digital economy as it develops exciting new online technologies; in-home medical monitoring, remote education, glitch-free telecommuting, high-definition video-sharing and more." (As Read)

2599   Without the continued ability to access the equivalent speeds as the incumbents, competitors risk becoming irrelevant in the retail internet market. Our competitive position will become further jeopardized because ILECs are deemphasizing FTTN in favour of FTTP.

2600   The incumbents will tell you that mandating access to FTTP will jeopardize their continued investment in these facilities. Primus strongly urges the Commission to reject such fear mongering. The ILECs have made similar arguments in previous regulatory proceedings, yet they have continued to make substantial capital investments.

2601   The ILECs have no choice but to invest in fibre because they need to catch up to the bandwidth speeds of cable company last-mile coax facilities. Otherwise their internet and video services will become increasingly inferior to what the cable companies can provide.

2602   Indeed, the ILECs and the cable companies will keep investing in their networks in order to support the rapidly growing bandwidth requirements of their vertically integrated media assets. The presence of competitors like Primus will only enhance retail competition, without impeding that investment.

2603   To sum up, we urge the Commission to render a decision that benefits consumers. This means making a decision that supports competition and increases end-user choice. In our view, this means largely continuing the existing wholesale services framework, but also implementing the important improvements that we have put forward in this proceeding.

2604   We are pleased to take your questions.

2605   THE CHAIRPERSON: Thank you very much, gentlemen.

2606   Commissioner Molnar will start us off.

2607   COMMISSIONER MOLNAR: Good afternoon. Thank you for this.

2608   I wonder if you could tell me, I went through your submissions and this, and one of the things I wasn't sure of is do you rely at all on the facilities of the cable companies?

2609   MR. NOWLAN: Yes, we do. We do offer a TPIA service.

2610   COMMISSIONER MOLNAR: Okay. And can you give me some sense as to what extent your network is reliant on the telco infrastructure versus the cable infrastructure?

2611   MR. NOWLAN: We are more reliant on the telco infrastructure than we are on the cableco infrastructure, absolutely. So it would be heavily weighted towards the telco at this point in time.

2612   COMMISSIONER MOLNAR: And looking forward, is that still how you would see going forward?

2613   MR. NOWLAN: No, we see the growth in our offering of the TPIA services as a very strong growth opportunity for us as well. So we are looking for growth in both areas; continued growth on the telco side, but also with our TPIA.

2614   COMMISSIONER MOLNAR: Okay. And you mentioned some of the services you provide to small and medium business such as the hosted PBX.

2615   Roughly what percentage of your operation are customers or business customers?

2616   MR. NOWLAN: We currently get approximately 40 per cent of our revenue is commercial from commercial customers. And the majority of our commercial revenue are small to medium-sized businesses.

2617   COMMISSIONER MOLNAR: Okay. So it is a significant part of your business?

2618   MR. NOWLAN: It is a significant part of our business.

2619   COMMISSIONER MOLNAR: Okay, thanks.

2620   Yes, I just wanted to get a better sense of your business. So you have provided a lot of information in this proceeding, much of it quite similar to that of the CNOC folks who have come right before you. Are you a member of CNOC?

2621   MR. NOWLAN: Yes, we are.

2622   COMMISSIONER MOLNAR: Okay. I expect -- were you in the audience this morning listening?

2623   MR. NOWLAN: Yes, we were.

2624   COMMISSIONER MOLNAR: To make this maybe a little quicker, and I do have some questions about your particular experience. But was there anything you heard this morning where your position would be different than that of CNOC's?

2625   MR. NOWLAN: Our positions are very aligned with the majority of CNOC's positions. We had a couple of positions that where we have a slightly different angle on a few areas, but not the major overriding themes that they were addressing in their position.

2626   COMMISSIONER MOLNAR: Okay. I think of one of those might have been the geographic market, if I am right. You had proposed census metropolitan areas --

2627   MR. NOWLAN: Yes.

2628   COMMISSIONER MOLNAR: -- and they proposed local exchange. Anything else? What is the other one?

2629   MR. NOWLAN: We proposed a final offer arbitration, which was not included as part of their submissions.


2631   Well, I'm glad you brought that up because I did want to ask you about that. Maybe you could just unpack that for me. You're saying for non-essential services subject to phase out. Those are the services that exist today subject to phase out that you're suggesting there be final offer arbitration for?

2632   MR. NOWLAN: Yes. What we're suggesting is that where it's into a -- where it's no longer being regulated, where it has been forborne, that there be a fallback on the final offer arbitration. So after the regulation comes to an end, there would be a fallback when we try to negotiate with the incumbents, that to ensure that the negotiation is going on in good faith that there be this backstop. It's essentially a backstop proposal.

2633   COMMISSIONER MOLNAR: And your concern as to why you need a backstop is what?

2634   MR. NOWLAN: Negotiation is all about what sort of leverage one has and so we talk about a level playing field and it's a very sloped playing field.


2636   MR. NOWLAN: And so it's a matter of -- negotiation comes down to what leverage do you have in that negotiation. And as I said in my initial comments, I think Primus is one of the largest of the alternative carriers and comparatively speaking we don't have any leverage in such a -- we have very little leverage when negotiating with the incumbents. So this is a backstop in those circumstances.

2637   COMMISSIONER MOLNAR: In theory, if it's subject to phase out, your leverage is going to a different competitive supplier?

2638   MR. NOWLAN: If you truly have. But there's all sorts of circumstances where -- particularly we've seen it in the -- and we used that example with the Ethernet services that were -- they were phased out and we go in to negotiate. Some areas you don't a competitive supply. Even though it was phased out, the market definition didn't work exactly as envisaged and you don't have a competitive supply and you have no leverage to negotiate.

2639   COMMISSIONER MOLNAR: M'hmm. That was actually one of the areas where I did want to ask you about your own experience with the Ethernet --

2640   MR. NOWLAN: M'hmm.

2641   COMMISSIONER MOLNAR: -- given that you supply -- I think you even supply to others Ethernet.

2642   MR. NOWLAN: M'hmm.

2643   COMMISSIONER MOLNAR: Do you depend at all on the wholesale services -- what were the wholesale services to do that?

2644   MR. NOWLAN: Yes. At this point, yes, but we also have our small fibre rings as well, which in theory one could utilize. We're not currently in that way. But yes, we do rely upon the wholesale environment for that or the previous wholesale environment.

2645   COMMISSIONER MOLNAR: Okay. Given that Ethernet is now forborne, given that you've had some experience and I think perhaps are not the only one who has experienced areas where there may have been a sole supplier in a particular area, would you say putting in place something like final offer arbitration would be an adequate safeguard where the market is today?

2646   MR. NOWLAN: Well, part of our request in these hearings is also for that one that was forborne, where we believe the market definitions aren't appropriate, that we look at re-regulating in that situation. But that's the proposal for circumstances where it is forborne, that FOA is -- it's a proposal as to what could be that safeguard to overcome the imbalance in negotiating positions between the two parties, an incumbent and ourselves. Is it perfect? I don't know if we're dealing with a perfect world but that's the proposal.

2647   COMMISSIONER MOLNAR: Right. So you're wanting both?

2648   MR. NOWLAN: Well, the FOA would be a construct that would stand regardless of -- the one that we're asking for the re-regulation on is specific and we feel that for the business sector, for us to be competitive in the business sector, we need to have a properly defined market for such services as the Ethernet services.

2649   And truly, we have customers that are in multi-locations where we are ending up -- and we acknowledge in certain geographies there is competitive supply, so you have a negotiating ability. So you're able to find that competitive supply and the market is working as it should and we're perfectly happy with that.

2650   But when you have a customer that has five locations and two of those locations are in communities, and quite often small or urban communities, and there is not a competitive supply and you have nothing to negotiate, you have to use one choice of supply and that's not a negotiation, that's a price dictation at that point.

2651   COMMISSIONER MOLNAR: M'hmm. So you would see us going -- you had a census metropolitan area or a local exchange, going through exchange by exchange and determining whether there was competitive supply?

2652   MR. NOWLAN: We were a census metropolitan area more, which generally is a larger geographic region. Falling back on, it was more practical. In our opinion, it was a solution that was more manageable in balancing the need for regulatory efficiency but also the outcomes being significant.

2653   So a national market was too broad. A census metropolitan area isn't as small as an exchange and so it's that middle ground that we felt kind of balanced the competing needs that were there.

2654   COMMISSIONER MOLNAR: So, how many competitors do you believe there needs to be? If you have an alternative to go to, do you think that's sufficient?

2655   MR. NOWLAN: No, I don't think, as a general rule, two is not sufficient. If we look at -- and so I don't think a duopoly serves the interest of consumers, and in this case what we were trying to negotiate were the consumer for the benefit of our customers. And two quite often isn't a sufficient supply.

2656   So when we look at some of these areas where we're looking at the major metropolitan areas, you will have more than two suppliers. So you can have three, four, five suppliers that you're able to negotiate for alternate supply within, a downtown Toronto area for instance.

2657   COMMISSIONER MOLNAR: I think it's great if you have four or five suppliers --

2658   MR. NOWLAN: Yeah.

2659   COMMISSIONER MOLNAR: -- but if you have one alternative, you don't believe that's sufficient?

2660   MR. NOWLAN: It's better than having only one that you can -- you're forced into one only, but it's not as good as the three or four or five is the ideal. So part of our whole position is we don't believe it's in the interest -- it's not a very competitive marketplace when you have a duopoly. And by only having a choice of two, by definition that's a duopoly and we don't believe that's a truly competitive choice but it's better than one and it's not as good as four.

2661   COMMISSIONER MOLNAR: M'hmm. I just struggle sometimes -- I mean Ethernet was an obligation on the telephone companies and we would say that their obligation to deliver at a tariffed rate remains until there are three, four or five alternative providers. You're only regulating one of five providers. How is that -- I'm not sure how that makes sense.

2662   MR. NOWLAN: Well, in that scenario you're --

2663   COMMISSIONER MOLNAR: I mean I understand you have a better approach when you go into negotiations when you have four or five options and one of them is a regulated backstop, but --

2664   MR. NOWLAN: No, but if you're in that sort of situation where you do have the four or five competitors, then that would be an area that you would be saying that's a competitive marketplace.

2665   COMMISSIONER MOLNAR: Right. And where you have two --

2666   MR. NOWLAN: One isn't, two isn't. Yeah.

2667   COMMISSIONER MOLNAR: Only one of them would be regulated.

2668   MR. NOWLAN: Well, usually it's going to end up being an incumbent that would be in that environment. Did you --

2669   MR. PEPIN: Yeah. I think the interesting thing is with Ethernet oftentimes it's the one alternative that you have. So we're really looking at it as -- in the CMA regions, in very specific CMA regions, we find there's lots of competition often. It's in the outskirts where there really is only one. It's not even dealing with two or three, it's one and in that case we find they really have price control and it's the only option in town.

2670   COMMISSIONER MOLNAR: M'hmm. I understand that's what started it, I'm just a bit confused. I heard it by CNOC and I've heard it by you that where somebody holds a monopoly they have pricing power. That's true. However, going from a monopoly to forbearance requires the entry of three others and that seems to be kind of a stretch for me. I understand perhaps why you would want it, I'm just not sure I heard why it's necessary.

2671   If I can go on, unless you have something else you want to say on that.

2672   MR. NOWLAN: Well, it's -- we feel it's necessary to be able to bring the choice, particularly, as I say, in our core market where we're looking at the growth bringing -- for the small to medium size businesses that's the sector that ends up making us uncompetitive, in those markets where we do have only a choice of one, in those other areas.

2673   So it is a critical issue for us in those sectors and it boils down to -- the market definition being on a national basis hurts the ability to offer. And the fact is when you are competing on that you're not competitive because two out of five or three out of six locations could be uncompetitive and that just puts you out of the game. And that at the end of the day doesn't bring the -- ultimately is not a competitive choice for those small businesses.

2674   COMMISSIONER MOLNAR: Okay. Thanks.

2675   I would like to talk to you a little bit about the unbundled local loops. If I understand correctly, you are one of the larger users of unbundled local loops?

2676   MR. NOWLAN: I would assume given our CO investments that we've made that we would be a large user of -- we are a large user. I would assume we're one of the larger ones, yes.

2677   COMMISSIONER MOLNAR: M'hmm. And you have submitted that it is still necessary, it supplies the voice within your bundle; is that right?

2678   MR. NOWLAN: In many circumstances, absolutely. So we have a traditional bundle and a VoIP bundle. So we have a digital and a traditional bundle. But yes.

2679   COMMISSIONER MOLNAR: M'hmm. Would you see a time -- as you know, in this proceeding some folks have already -- some parties, not folks -- some parties have submitted that they should be forborne.

2680   MR. NOWLAN: M'hmm.

2681   COMMISSIONER MOLNAR: Obviously, you don't agree with that. Would you see a time or some conditions moving forward when it would be possible to forbear from unbundled local loops?

2682   MR. NOWLAN: Yeah. We're not saying that we shouldn't ever forbear on unbundled local loops. We know it's not a rapidly growing market segment where people are making use of it but we still have a high proportion of the country and our customers that are making use of services. There are local lines making use of that service. We also have a number of our commercial customers that are small businesses that are making use of that business grade Ethernet over copper service that we provide through those unbundled local loops. These are critical services that the public is valuing.

2683   And so as they move into other services, yes, there will come a point where it comes down. But today isn't that day and we go through these processes regularly to assess that. But this is still premature. We still have a very high proportion of the public on those, that are making use of those traditional phone lines, and it would make it -- a competitive force would be removed on that if we forbear on it today.

2684   COMMISSIONER MOLNAR: Okay. You've commented about the requirement to unbundle --

2685   MR. NOWLAN: M'hmm.

2686   COMMISSIONER MOLNAR: -- both for the BAS and the fibre-to-the-premises.

2687   MR. NOWLAN: M'hmm. Yes.

2688   COMMISSIONER MOLNAR: One of the reasons that you bring forward is the cost element of being able to supply your own transport --

2689   MR. NOWLAN: M'hmm.

2690   COMMISSIONER MOLNAR: -- the middle mile, I think, as some people are talking about it. Can you tell me for you what you think are the other most important reasons to unbundle that?

2691   MR. NOWLAN: Yeah. I think for us, that component and those bandwidth components that we talked about become so much more significant, and I'm going to ask Brad to actually take it and run through some of the benefits from our perspective as to why that's so significant.

2692   MR. FISHER: Yes. Thanks.

2693   In addition to the cost side which has been well discussed today, having control of that transport component of the end-to-end product allows us to also have increased control of the quality and reliability of that service as we would be self-dependent on an increasingly large section of the end-to-end product.

2694   I think also, as discussed this morning, the investments that we would make to support that transport are fungible investments that could be used as foundational springboard investments to continue building more access deeper into the network and particularly so in the case of Primus, you know, where we do serve business customers as well. Many of the routes that we would invest in would give us proximity and near-Net access to an increasing number of business customers which we would pursue as we build out further into the network.

2695   COMMISSIONER MOLNAR: I want to make sure I understand what you just said. As you get further into the network, you could pursue more businesses. Are you suggesting you would invest to that business customer's premise?

2696   MR. FISHER: Yes. That's something we've undertaken in a couple of cases already. We have built in Ottawa a fibre ring as well as just this year Vancouver as well, and these are investments that we would leverage for both purposes, both the transport of Internet bandwidth but also as a means to reach out further and cover more businesses in those areas where the transport exists.

2697   COMMISSIONER MOLNAR: Right. A lot of discussion has gone on about the ladder of investment. Would you ever see -- do you foresee a time when you would be looking to invest in the last mile?

2698   MR. FISHER: Well, I think, first, in the case of the business customers we're investing in that last mile, you know, today in the form of fibre rings. We're bringing fibre facilities into a number of buildings along that route and as customers demand we'll continue to pull fibre to additional near-Net buildings and increase the footprint, the on-Net footprint of those facilities.

2699   COMMISSIONER MOLNAR: And the residential side of things?

2700   MR. PEPIN: That's interesting. We've leveraged our Ottawa ring as well to connect a couple of MDUs, to get our feet wet in that situation, to deliver services and then all the way to the MDU and to the customers within those MDUs. So we find that is important as well.

2701   We feel that disaggregated in a sense provides you that commitment level that you're saying you're looking at growing in that particular area and as you get to scale you'll uncover opportunities where it makes sense to no longer have to rely on the last-mile facility as well and continue that building into the -- whether it be residential or commercial space.

2702   COMMISSIONER MOLNAR: Whether it is residential or commercial, what do you perceive to be the benefits of investing right to the last mile?

2703   MR. PEPIN: I think there's a few benefits there.

2704   Number one, you're able to control the experience much more. That control is important. We heard today CNOC talking about EOI and the fact that oftentimes we feel there's a disadvantage in terms of the systems and processes and installation timelines that are made to the competitors as opposed to the incumbents. So when you build that last mile, you have that competitive advantage and so that certainly is an advantage.

2705   There's also the fact that you can increase the margin. So when you're in a wholesale environment, you certainly don't have access to that entirety of the margin, and so if you can control that margin better, that's an assistance.

2706   COMMISSIONER MOLNAR: Issues about quality?

2707   MR. PEPIN: Certainly, there are issues around quality. You know, we talk about EOI but oftentimes there are quality concerns that can arise in the incumbents' networks, and that's not to say they don't arise in our network as well but they're our responsibility then and we have access to do something about it and fix it in the timeline that's predicated by us.

2708   COMMISSIONER MOLNAR: Thank you.

2709   I just have one more question. You spoke in your remarks here, and I know in your submission as well, about the ability to offer customers a triple play package and to move into video. To what extent do you see the absence of video as impacting your business today and going forward?

2710   MR. NOWLAN: It's a very significant impact on growth in the residential sector. The bundle has taken on ever-increasing significance in the marketplace and so being able to have an environment that allows us to offer that triple play bundle is a significant component, and that's why our disaggregated model, getting more control of those cost elements, is all part of that to facilitate that ability to bring that triple play, to bring that video component.

2711   Brad, did you want to add anything from a product perspective?

2712   MR. FISHER: Yeah. Well, I think we see very high rates of attachment, having numbers where video customers, 85 percent of them will buy broadband from usually the same provider and this is in part the power of the bundle, and I think this is a part of the market we've really had trouble addressing, you know.

2713   In spite of the fact we differentiate on a number of fronts with respect to the broadband offering itself, we're very value conscious with respect to unlimited services both for business and consumers, but the video piece, it's a gap in terms of breaking into that segment of the market that has already moved to a bundle. It's very difficult to disrupt that and to bring that separate piece by itself to a home without the triple play.

2714   COMMISSIONER MOLNAR: Okay, thank you. I just --

2715   MR. NOWLAN: It just really hits on part of the philosophy that our company has been so focused on, and really, it's bringing that choice for the customers and it just gives them -- we have the scale in the marketplace with our presence to bring this competitive choice from a competitive video offering. So it's just giving more choice in that marketplace, away from that duopoly play that they currently have in the market.

2716   COMMISSIONER MOLNAR: Right. And I just want to make sure I understand before I pass you on to my colleagues here.

2717   So the ability to deliver video would open up a new customer segment to you; is that what it is? It opens up the market further versus your market is being squeezed?

2718   MR. FISHER: I think it gives us the ability to address the full market.

2719   COMMISSIONER MOLNAR: A new market.

2720   MR. FISHER: The full market.


2722   MR. FISHER: That's right.

2723   COMMISSIONER MOLNAR: Okay. Thank you very much. Those are my questions.

2724   THE CHAIRPERSON: Thank you.

2725   Vice-Chair Telecom, please.

2726   COMMISSIONER MENZIES: I am going to help clear something up. I've had a lot of conversations and I'm getting confused about forbearance and shape of market and that sort of stuff that we're looking at because it's not given context.

2727   We sort of come into it looking at a framework that wishes to encourage facilities-based competitors and then we get presentations saying we should have a cooperative single model and you hear talk that duplication of facilities is actually inefficient and that sort of stuff.

2728   There seems to be a movement growing for less facilities-based and at the same time an argument that forbearance should only take place where there are four competitors, and I'm beginning to think -- and you can dispossess me of this notion -- that there will never be four if current streams of thought are followed, which sort of makes it kind of an impossibility, right? So the bar has been set at four as, say, opposed to three, as, say, opposed to two, because you spoke quite a bit about duopoly.

2729   Should we just kind of forget about the facilities-based? Is that the message I'm getting here?

2730   MR. NOWLAN: No, I don't think that's -- that's certainly not the message we are trying to send. What we are saying is, as Primus is, we have been making those investments in facilities.

2731   And when we turn around and say that there is not -- today is not a time where there is really anybody except for two very strong incumbents, a cableco and the incumbent telephone company that have the market strength and the market power to truly compete without some sort of the regulatory environment. So it's not that we are saying there would never be such a case and we have been showing and demonstrating as an organization that we are making those investments.

2732   We have heard it yesterday. We have heard it going on. I mean, telecommunications obviously is a game of scale and you need to be able to have an environment where organizations can grow in scale to make those investments and it just takes time. So that's what we are moving along.

2733   And we haven't had the impact in the market overall. When we are still under 8 percent, that's not much power in the marketplace.

2734   MR. PEPIN: I do want to add something there. It's interesting to note that we are still very early in the game to decide how many facilities players ultimately there will be.

2735   I know as we have these hearings every five years it seems to build on each other and after time, but relatively speaking we are not very far along. When you look at the deployment of FTTP today we are in the neighbourhood of 15 to 16-17 percent of homes that are being passed. It's still very early stages of that.

2736   And ultimately when we look at the four players that are being proposed, that was one of the forbearance frameworks put forward by CNOC, but it was a very specific scenario. We were talking about the forbearance of aggregated versus disaggregated and what would need to take place for aggregated to be forborne in a particular area.

2737   I think it's very difficult to say what the number of facilities-based providers would have to be in order to forbear services, but it's the last mile that is the most difficult to reach. it's the last mile that it's the most difficult to overbuild and it's the last mile that the business case is the most difficult for, as we have heard from the incumbent state.

2738   So to expect that there is going to be many overbuilds of that to take place, it's very difficult to say if that will ever be the case.

2739   COMMISSIONER MENZIES: Okay. Is there anything other than the ability to maintain and build mass that is appropriate in the regulatory framework that would encourage more facilities so that we don't end up with lots of competitors and not very many facilities? I mean, that's not necessarily a bad thing, but we do need redundancy at some point.

2740   MR. NOWLAN: Yes. I mean I do believe -- I don't want to downplay the significance of scale and I think organizations, as I say, like ours that have moved along and made those investments and continue to do so as we continue to scale, so we -- the aim of having for all the benefits that we talked about from ourselves, but also from the customer's perspective bringing that choice, it is in our interest. It is certainly our business model.

2741   And our strategy is to continue that investment in facilities and to continue growing out our actual investment in facilities, but it's not something that this is a game that takes a lot of capital and a lot of scale to do it.

2742   COMMISSIONER MENZIES: And would you be -- TekSavvy mentioned that they were -- I don't want to use the word discouraged, but they were not being encouraged to invest the way the framework is now. What --

2743   MR. NOWLAN: Yes, I mean, look, we --

2744   COMMISSIONER MENZIES: -- is the framework open for you to invest the way it is now?

2745   MR. NOWLAN: We are. As we said, we just completed a second fibre ring in the Vancouver marketplace. We have not invested in expanding our CO footprint in the last number of years because, no, the environment isn't conducive to that right now.

2746   With a disaggregated model and what we have asked for, or BAS as CNOC refers to it, then all of a sudden that picture changes because now you have a new incentive to continue out that investment scenario because you can see the pathway as to what that brings. That continues to allow us to take more control of our own destiny, ensure that we can deliver the quality of service that our customers expect from us.

2747   So it's a double answer there.

2748   COMMISSIONER MENZIES: Okay, thanks very much. I more fully understand your position now, thanks.

2749   THE CHAIRPERSON: Thank you. I think legal has some questions for you.

2750   MS DIONNE: Thank you, Mr. Chair.

2751   I only have a few questions with respect to unbundled local loops. What other options then ULLs, if any, you employ to provide comparable retail services as those provided with ULLs?

2752   MR. PEPIN: I think it's -- when we are talking about a traditional voice line, when we are talking about a wire that is over copper that goes into the home, there are no comparables.

2753   We do not consider VoIP to be a comparable. We may -- let me rephrase that. We may consider it in some cases to be, but the consumers have shown that they do not consider it to be comparable. The market shows that there is still a large percentage of customers that have a traditional home phone line and we believe that will continue to be the case for quite some time.

2754   MS DIONNE: Thank you.

2755   What would be the impact on your business operations if the Commission decided to stop mandating ULLs in Band A and B, as suggested by Bell?

2756   MR. PEPIN: I will start with this one.

2757   So Bell has proposed Band A and B. 78 of our 83 COs are considered Band A and B. So it would have a massive impact.

2758   Ninety-four (94) or 95 percent of our customers would be serviced via the Band A and B. So from an investment standpoint where we have invested, it would be significant.

2759   MS DIONNE: Can you --

2760   MR. NOWLAN: Sorry, I will just add one little bit to that.

2761   So that would mean that the investments that we have made, which are sizable investments over the last number of years, in those COs and the assets that are within them are -- I think the phrase is are stranded at that point because they no longer, in the current regime without the disaggregated, they don't have value for us.

2762   MS DIONNE: Can you undertake to provide the amount of the stranded investment?

2763   MR. NOWLAN: Yes, we will. Yes.


2764   MS DIONNE: Thank you.

2765   THE CHAIRPERSON: Thank you. It's not dissimilar to the question we asked of CNOC earlier, so that would be good.

2766   Days are long and maybe I misunderstood, but did I understand you to say that there wasn't much of a difference between co-location and BAS?

2767   MR. NOWLAN: No. No, I think I was referring to our disaggregated -- what we refer to in our filings were disaggregated and our disaggregated access versus the BAS.


2769   MR. NOWLAN: So we just used a different name for it. It's the same concept.

2770   THE CHAIRPERSON: Okay. Okay, understood. Okay, that clears that up. Thank you. I did misunderstand. So that's good, thank you.

2771   I believe those are our questions, thank you very much. Thanks.

2772   So we will take a short break until about 3:10, just to set up the next intervener, thanks.

--- Upon recessing at 1456

--- Upon resuming at 1510

2773   LA SECRÉTAIRE : À l'ordre, s'il vous plaît. Order, please.

2774   Mr. Chairman, we will now hear British Columbia Broadband Association who are appearing by videoconference. We have Mr. Bob Allen and Mr. Chris Allen.

2775   Good afternoon. Can you hear us well?

2776   MR. B. ALLEN: Yes.

2777   THE CHAIRPERSON: Okay, welcome gentlemen. Please go ahead.

2778   MR. B. ALLEN: Can you hear us?

2779   THE SECRETARY: Yes, we can.

2780   THE CHAIRPERSON: Yes, we can hear you very well.


2781   MR. B. ALLEN: Great. Thank you.

2782   I will start off. I am Bob Allen, the President and founder of the B.C. Broadband Association and we would like to thank the Commission for finding time on their agenda to listen to the voice of the smaller competitors in the B.C. market.

2783   Our membership is made up of 36 Internet providers and telecom equipment providers that operate in British Columbia and Alberta. The majority are rural wireless providers. However, many of our members operate in the urban markets as well, typically reselling most of the ADSL and in some cases cable TPIA.

2784   The current market conditions here in British Columbia are quite a bit different than the market conditions in central Canada due to the differences in actually the regulatory regime and the application of access to wholesale ADSL products. Here in British Columbia our transport across the TELUS network for ADSL is included in our port price, which is a good model going forward into the future because we are only required to pay for our Internet transit costs as we reach our connection point to TELUS and we can reach TELUS' entire network from a single connection point.

2785   We are in a position to offer video traffic that we can access and applied to the network at our connection point. That allows us to serve IPTV- type products which are very traffic intensive. So we have less of a desire for a BAS-style of service here in British Columbia because there is no advantage to us to try to access other competitors at the various central offices. Indeed, there are a few local companies here on the West Coast that have deployed DSLAMs in the few central offices where that would make a business case.

2786   We have been an industry that's in decline. I was very pleased to hear Commissioner Blais' comment that he would like to be a doctor to the industry rather than a coroner. I would like to point out that we think we are in palliative care here on the West Coast, but we could be saved.

2787   But we are a very, very small minor portion of the market and it is typically served by Shaw and TELUS, the incumbents who have the massive cable plants that are necessary to compete in this marketplace.

2788   We have had a very good relationship with TELUS over the years as a partner of TELUS in our telecommunication business plan. We have been able to maintain our ability to supply our rural wireless networks, which is very important to us because that is our largest source of revenue and profit and it's our largest source of investment actually using rural broadband telecom facilities because that is a facility that we can invest in and recapture an investment from.

2789   We are not in a good position to deploy fibre-to-the-home or even fibre to the office tower, ourselves within the B.C. marketplace. There is some activity by some of our members to work with municipalities such as the City of Coquitlam to reach MDUs, but there is no reasonable plan before us to reach the average residential home by building our own fibre infrastructure. If we were to maintain viability in that market it would be through access over the incumbent's facilities.

2790   The rural markets have done better than the urban markets which is why most of our members are in fact rural operators. We have deployed LTE in some of these markets with good success and we have invested very heavily in those markets. Most of our investment in the urban area would be switching routing core facilities, data centre work and that type of infrastructure.

2791   Now, we have a bit of a section in our presentation and I'm going to let Chris go through on how fibre-to-the-premise is going to impact our industry here in B.C., as we see it going forward.

2792   MR. C. ALLEN: Thanks, Bob.

2793   Yes, Chris Allen. I am one of the Directors at the B.C. Broadband Association.

2794   So of course our industry is completely technology-based and as such we are in a constant state of flux in this industry. So it is a really important time in the development cycle that we are looking at all the wholesale services.

2795   We are quite encouraged that the discussion about fibre and access to fibre has come around at this time and specifically fibre-to-the-premise which is the flavour that ultimately is where everything is heading, you know. And there is a strong argument by the incumbent providers that they have made -- continually that wholesale acts as a deterrent to investment from their point of view and that mandating access to it would hinder that.

2796   You know, that is something that we see in BC as it's already happening. The investment is already out there. A number of smaller communities in B.C. right now are having a fibre-to-the-home rollout and community-wide rollouts for communities of sort of the 10,000 people communities with older copper facilities that you are not going to go and reinvest in that copper. Fibre is the future. So that investment is already taking place regardless of whether it goes wholesale or is kept in the incumbent's hands.

2797   So we would argue strongly that, you know, there should be a push ahead to tariff the services and mandate that access for smaller players like ourselves. As Bob said, you know, the opportunity for us to go out and build our own fibre networks based on the size of our companies and our customer footprints is just not there and the duplicable nature of these facilities isn't really there as well.

2798   So we believe that the outcome of moderate regulation in that will increase the amount of investment as we start to invest in some of the routing and switching gear that's necessary to do some of this and, you know, basically invest in our company's growth.

2799   So you know -- where was I here?

2800   So we think that another point that gets missed a lot of times in that argument by the incumbents is that there is actually a good revenue stream that comes out of wholesale that seems to get ignored in that argument. You know, in B.C. we have TELUS and we have Shaw and they make up more than 95 percent of the marketplace.

2801   In the case of wholesale where a wholesale service is being offered by TELUS, for example, by selling through a channel where our members would be able to purchase these services, TELUS is able to recapture some revenue that maybe would have gone to Shaw, for example, and vice versa if Shaw were offering the same TPIA service. You know, they can avoid all the billing costs, all the customer handling costs and still recapture a good chunk of the market for the end user. So we believe strongly strongly that wholesale is a good financial model for the incumbents and will not de-incentivize investment.

2802   In terms of the wholesale services framework, you know, we do think there are some issues around the costing mess tricks that the incumbents are asked to sort of provide when you are looking at a cost-based -- you know, when you are trying to determine the cost based on the pricing model submitted by the incumbents. A lot of the facilities are being used to service retail and wholesale so it's very difficult to separate out the wholesale components of an incumbent network when you are building in the full costing. So we feel there are some challenges there when looking at it from a -- just looking at the wholesale costing side of things to produce the end pricing for ISPs like ourselves to purchase.

2803   So better third-party reviewing of what the end pricing ends up being would be very important, as well as looking at some of the retail pricing that's out there in the marketplace to make sure that there is a bit of a sanity check on what the ISPs are being made to pay.

2804   We think, you know, in the last go around with ADSL in particular when that was looked at that, you know, after we were returned to not splitting business and residential and coming up with one price for one product, the pricing per port is actually quite healthy and B.C. now, with the exception of the unbundled local loops.

2805   As everybody gets into cord, more and more and more now it has become the standard that when you service a customer there is a very good chance that the customer is not going to have a local line to put this on. So in that case we do need to buy these dry copper loops to service the ADSL customer and that, as a tariff product, is rate banded. We see situations now where somebody is in a rate band, like a "D" or an "E". You can get to a situation where you are paying for that dry copper piece and that piece is more than the actual ADSL port price. You put them together and you are way over any kind of retail pricing for your wholesale raw cost. So that is an issue that we think really needs to be looked at.

2806   And on the retail side, in the case of TELUS, there is no -- there is no dry loop cost to a retail customer in the residential marketplace. So this is the only part of the ADSL framework that we think really needs another look is that costing, because it certainly makes it competitive in trying to attract new growth there.

2807   We see positive signs in terms of negotiated agreements. That is something that I think has also come around more in terms of being able to work directly with the incumbents to create off-tariff agreements. That is seeing more growth amongst our members and amongst some of the B.C. ISPs in negotiating directly, but we feel that that only exists because of the mandated wholesale services and the tariffs that are there. Without those, the incentive to come and negotiate off-tariff agreements wouldn't really exist. So while we are encouraged to see that going in that direction, going in the other direction and not having tariffs wouldn't serve that to grow either.

2808   There is a question out there of services that should be taken away from being tariffed and being made forborne. Back to that last argument I kind of made, we don't really see that there is enough competition here to make things forborne and that by adding more for born services you de-incentivize the need to negotiate directly for off-tariff agreements.

2809   And while it is not really in the scope of this hearing, the idea of Internet moving to becoming an essential service or Ethernet that provides Internet becoming an essential service, is something I think that will gain traction down the road.

2810   And video services, as Primus was kind of talking about there and was in the questions there, was brought up, and that is quite a big issue I think in terms of bundling and video being provided to the end user with the Internet. That is an area where we are a bit challenged to reach into, but we are starting to see some independent companies in B.C. trying to work on wholesale IPTV products that could be delivered and that is an important area of growth.

2811   Whether we will get some of the IPTV offerings of the incumbents is something that could be looked at down the road as something that they could be encouraged to provide us access to. Obviously, the more we could do in that direction, the better our chance for increased market share.

2812   Bob, I will let you just take over the closing remarks there.

2813   MR. B. ALLEN: Okay.

2814   Well, let me just speak a little bit on approaches to wholesale rate setting, assuming that we are going to have wholesale rate setting, which is our positive outlook.

2815   You know, we think that wholesale rate setting in its current model is a bit of a cumbersome process. We are not in favour of trying to do retail minus kind of price setting. We think that what the Commission has done with its various investigations into price setting has produced some good results, as we say in the case of ADSL, with the exception of the unbundled local loop component.

2816   We did hit a viable market price for both residential and business markets and created a business opportunity which stopped the erosion of our ADSL customer base. But, you know, if we were to -- assuming the Commission was prepared to mandate access to the fibre plants that are being constructed now, we have no idea -- we have no inputs for a business model that we would use to try to decide, you know, whether we should try to attract capital and become a player in that opportunity, were it to arrive.

2817   One of the things that we are very aware of as a telecom provider in today's market, which is somewhat saturated and it's not a greenfield opportunity, so heavy marketing takes place between Shaw and TELUS here as they struggle back and forth to basically trade customers. A great deal of incentives are put out in the form of computers, laptops, TVs, add-ons, things that very large players with deep pockets can use to finance customer acquisition.

2818   So there is a good deal more to acquiring a customer today then just running a fibre to their house. You have to mount a marketing campaign which could cost as much as the fibre in order to try to pry that player off of another provider.

2819   If we are to -- if small companies like ourselves and our members are able to succeed to grow their market share from its dwindling proportion here in B.C., you know, we would need a healthy business model. We would need something that would allow us to attract investment and be able to fund the marketing initiatives necessary to get out in a space where there was a great deal of advertising for two brands only and not much is heard of -- any of the other providers.

2820   So I think that, you know, the cost of growing your business which is heavily linked to marketing, has to be taken into these business models in consideration by the Commission as we look towards where they would go. I think we've stated numerous times that if we are not given access to these fibre plants which are springing up all across the B.C., you know, then we would be closing up shop in that category.

2821   But, you know, we are a residential provider. Residential and small business is our key markets. Rural markets are okay but they are very small and, you know, you have to be able to provide a competitive urban product if you are going to reach some kind of scale. And we are sadly lacking on scale here in British Columbia in the size of our companies.

2822   Another minor comment on rate setting is it would be nice if we had some reviews on a couple of years basis rather than going so many years without a review. And not that they have to be as elaborate a review as what we are seeing before the Commission today but, you know, a short, small review, a price check and a bit of feedback from the competitors on how they are doing with the prices that are out there in the marketplace, how is their market share going.

2823   I know the Commission does look at the results of people's business activities and their number of lines and these type of details on a regular basis. I think that, you know, when you are sliding slowly downhill but you are not going out of business but you are losing 10 percent of your customers a year, you might be able to hang on for five or six years, but at the end of that cycle you are not a very strong company, you know, and you are not in a position to turn around and get back on your feet very easily. You may have incurred some unhappy investors along the way who thought that you could return the same amount as a TELUS dividend, for example, on their investments.

2824   So, you know, we think that the rate setting affects the investment marketplace and affects the health of the competitors and that perhaps, you know, the Commission would consider setting some goals within a wholesale activity for the incumbents and find ways to encourage them to reach those goals either through negotiated agreements, partnerships or those kinds of things to avoid ending up with -- well, it's not a monoculture. I guess it's a dual culture. But it does stifle innovation in our industry and it does shoot smaller regional companies like ourselves out of it. Perhaps we should just exit the business and give up and certainly there are no new entrants who are thinking that it's a rosy situation.

2825   So we strongly encourage the Commission to make sure that there is a way forward for these small companies within Western Canada who have not done as well actually as the companies in Eastern Canada and there are no companies in Western Canada that even approach the size of Primus, Distributel or TekSavvy.

2826   So I think that pretty well wraps up our comments on this and we are eagerly awaiting your determinations. Thanks very much for taking the time to listen to us.

2827   THE CHAIRPERSON: Before you run away we have a few questions for you. Commissioner Shoan will start us off.

2828   COMMISSIONER SHOAN: Good afternoon. Thank you for appearing today.

2829   You have raised a costing metrics issue in your presentation today that wasn't in your initial submission and I would like to ask you some questions about that. Before I get into that, however, I wanted to ask you a bit of background about your association.

2830   So you have noted that your membership is comprised of 36 entities which includes telecom service providers, equipment suppliers and infrastructure contractors. Of those 36 how many of them are actual telecom service providers?

2831   MR. B. ALLEN: I would say about 25 of them are. We don't have too many infrastructure contractors in our group, there are some suppliers who join our association because it brings them closer to their customers. But I would say about 25 of our members are active wireless Internet service providers as their core business.

2832   COMMISSIONER SHOAN: Okay. And so of those 25, do they offer joint Internet and wireless mobility or are they strictly Internet service providers or wireless service providers?

2833   MR. B. ALLEN: We basically -- in rural markets we use wireless to deliver fixed Internet solutions, right, so it's really just an equivalent to the wired product.


2835   MR. B. ALLEN: It's just, you know, once you get out into the urban markets that is the business opportunity, is to use wireless to reach them because the copper won't -- is inadequate to do that.


2837   MR. B. ALLEN: So really both of our members are in this wired business. Even though they are using wireless technology they are not in the mobile handset business in any way.

2838   COMMISSIONER SHOAN: Okay. Great. Thank you for that clarification.

2839   MR. C. ALLEN: A number of our members are also hybrid. They are hybrid. Like ourselves, our own company, B.C. Communications, we have a large wireless rural network. Then in the urban space we do wholesale ADSL.

2840   COMMISSIONER SHOAN: Okay, great. Thank you.

2841   Now, with respect to the costing issue you raised, I wanted to be clear on the argument that you are making. Overall, you are fine with Phase II costing. You are not proposing a new type of costing methodology, are you?

2842   MR. B. ALLEN: No, because I really can't conceive of one. It's only when the Phase II costing mechanism produces a price that doesn't encourage successful business, then we need to look at that, even though we reached it by asking the incumbent, you know, for his costs and then applying a fair markup and then we have what the price should be.


2844   MR. B. ALLEN: But, again, you get situations where the price is correct except for the unbundled local loop which totally destroys the business model and the incumbent is not charging for that particular local loop. So therefore, really, they are not using -- you know, somehow they are able to deliver their product below their own cost, it would appear, but we all know that's not really the case.

2845   So that's why it's a good methodology and it's something that we can all work with, but that's why we suggested that perhaps a third-party review of some of that costing, you know, should resource to the Commission that you can take a look at these conundrums that tell us it would appear to be selling its retail products below cost, which is probably not the case, you know.

2846   But, you know, how does the Commission move beyond looking at a price that was prepared and a markup that was accepted and therefore that's the number, but unfortunately the number doesn't work? So that's where I think there should be some mechanism to circle back and say, "Well, despite that in this particular case we are going to override that". And the Commission has done that on occasion. They have come up with a price that, you know, moves more towards a market reality than what the Phase II costing model has produced.

2847   COMMISSIONER SHOAN: Right. So let's talk about this independent third-party process. Who do you envision would be conducting this third-party analysis? What sort of entity?

2848   MR. B. ALLEN: Well, there are a number of -- I would pick a name like Nordicity or one of the organizations that work in telecom consulting within Canada. There are organizations that CNOC engages --


2850   MR. B. ALLEN: -- to do consulting work for them. This is where I think this third-party benefit to the Commission would be that it's not the ISPs, who of course want the price to be as low as possible; not the incumbents who want it to be as high as possible and it's difficult for the Commission to research these things as individual members. I'm sure you don't have the time and resources to get at that.

2851   But you could take something like this disparity that we have grown up in Canada where we don't have the same regulatory regime in the East and the West. That's an awkward situation. At the moment we feel that we are at an advantage after years of being at a disadvantage by the methodology because we had to apply -- we had to pay for our own traffic and inject it into the network whereas the Eastern model included traffic.

2852   COMMISSIONER SHOAN: Okay. So let's --

2853   MR. B. ALLEN: Now, that the traffic is charged across the network. I'm sorry.

2854   COMMISSIONER SHOAN: I would just like to get back to the issue of third-party analysis. How do you -- presumably there would be a cost associated with that third-party analysis. How would you propose that cost be recouped in your model?

2855   MR. B. ALLEN: Well, I think that there would be ways of assigning a cost. The Commission, you know, would have to have a bit of a budget and a cost established and at that point all players would be interested in paying into that cost based on their market share. So most of the cost would have to be borne by the incumbents, but they are the ones with the billion-dollar balance sheets, not us guys with our little hundred thousand dollar balance sheets.

2856   COMMISSIONER SHOAN: Okay, fair enough.

2857   MR. B. ALLEN: So I would expect that there would be a difference in pricing, but I don't believe that we should be completely, you know, free of any cost.

2858   COMMISSIONER SHOAN: Okay. And at paragraph 22 of the oral presentation you mentioned the giveaways such as televisions, laptops and tablets, which is of course giveaways associated with the retail service so I was hoping you could answer for me what you see the relationship between a retail service offering and a mandated wholesale rate, unless your argument is, to go back to your previous point, that somehow the costs associated with those giveaways is being tied into the wholesale costing? Can you clarify that for me?

2859   MR. B. ALLEN: I think we brought those to your attention to try to identify the marketing cost of the business models of the ISP today, so those are elements and techniques that the incumbents have developed. You know, it became very common in the mobile phone era to buy the customer the phone in order to win his business for three years. That was a successful business model in North America.

2860   Now, we have a model where if you are trying to convince -- if TELUS wants to convince a customer to leave Shaw's video service and move to their Optik TV and bundled package, you know, the offerings are pretty similar and the prices are pretty similar. So how do they incent that customer? So they are willing to spend $300 or $400 in customer acquisition costs on top of the marketing that it takes to convince the customer of that.

2861   We are just trying to show the Commission that if there is to be growth or improvement in the health of the industry, the marketing costs in this situation are a serious factor. Now, if we are given access to fibre-to-the-premise at a time when it has some greenfield characteristic to it, then we have a chance to acquire some market share as these technologies are rolled out.

2862   So, you know, we are rolling them out in British Columbia now. The ISPs have no access. When one of our ADSL customers is offered a fibre package, he is likely to take it and we lose the customer and we can't keep them.

2863   So we are being left behind in this game at the moment and if we don't get on the train fairly soon, then we will be faced with trying to buy our way into the market and that will take laptops, TVs and other things that further drain the small margins that we have in a wholesale setting. So again, we would like the Commission to be aware of what is going on in the marketplace and the difficulty for an ISP to acquire customers from the incumbents.

2864   COMMISSIONER SHOAN: Okay. That's fair enough.

2865   MR. B. ALLEN: It's not easy. You know, customers are a bit spoiled.

--- Laughter

2866   COMMISSIONER SHOAN: Okay. Well, you have noted in your submission that in British Columbia independent ISPs serve approximately 3 percent of the population. If FTTP access was mandated, how much would you expect this to increase in the short term, long term, the market share of the independent ISPs?

2867   MR. B. ALLEN: I would like -- I would like to see our market share, you know, maybe rise towards 7 or 8 percent of the market. You know, we don't think that that is -- you know, that's a big challenge, that is doubling of our current size of the companies operating. So, you know, that is pretty ambitious over say, a three or four year period to try to improve that metric for competition and improve, you know, our ability to operate and invest.

2868   I would like to say that if you want to be a telecom service provider today, you do need a lot of infrastructure. You know, there are a few rural ISPs with a few hundred customers that are a bit of a captive market and they are able to function effectively, but if you are going to operate within the urban areas of British Columbia you need scale. I think that has been mentioned before here --


2870   MR. B. ALLEN: -- and scale means thousands of customers and the ability to pay for your relationships with the government, with the CRTC, with you know insurance liability, all of the overheads as well as marketing of being a viable business and you need to attract investment.

2871   For the Commission to decide to set a bit of a target for itself to improve the market share of the competitors in Western Canada, then they might use their cost to phasing mechanism. But they might drop the price by 10 percent to improve the metrics and then wait a year and see if the metrics actually improved, because that's the real test of whether or not these mechanisms are working.

2872   At the moment there is no real need to forbear anything because, you know, we are in palliative care. They will be carrying us out pretty soon and there will be nobody left who cares about forbearance.


2874   Well, some parties such as the Competition Bureau which appeared on the first day have proposed that a moratorium be placed -- be applied to FTTP with the Commission re-examining it at some future date after further study. Do you have your views on the potential timing or the impacts of such a moratorium?

2875   MR. B. ALLEN: Well, again, if we are barred from access to the marketplace while it is being turned up -- I mean, people are being turned up as we speak in cities the size of Kelowna. So Kelowna is the third largest city in British Columbia and it is actively being fibred, as we speak.

2876   So if the Competition Bureau -- you know, I know they are an august body, but they are not much interested in competition if they are going to make us wait three years to then enter that market. We will be having to buy houses to get customers at that point.

2877   If we were given an opportunity into the market now, you know, then we have a chance to have that greenfields lift and to keep our existing customers. If we waited three years, then our ADSL base would have dropped to the point where we would probably walk away from the urban markets and try to just focus on the rural markets.

2878   But I don't see a strong future for any kind of significantly sized company that's only going to operate in little pockets of unserved rural customers.


2880   MR. B. ALLEN: So I really have to strongly disagree with the Competition Bureau that this is something that can be addressed later. The rollouts are taking place now --


2882   MR. B. ALLEN: -- and we need to be in that market early in the new year.

2883   COMMISSIONER SHOAN: Okay. Thank you.

2884   I was going to ask you if you had to choose between aggregated wholesale HSA service and no BAS, between that or BAS with the phasing out of aggregated HSA services over a specified period, which would you choose. But you indicated in your presentation today that you actually have -- the BAS isn't actually that big of an ask for you? You are fine with the aggregated HSA?

2885   MR. B. ALLEN: Well, that's right. We wouldn't need to access alternate providers at nearby COs because we are not paying any transit costs at all. Why would we bother?


2887   MR. B. ALLEN: You know, we are not interested in laying that type of fibre infrastructure ourselves, you know.

2888   Our smaller members are working mostly in the residential marketplaces and small business marketplaces. So they are not doing the downtown CO and a few towers, you know, which has been one of the areas, strong areas of competition in Canada, is those markets you can get enough customers with your short piece of fibre to make it pay.


2890   MR. B. ALLEN: Whereas running down into the suburbs, that's a tougher deal.

2891   COMMISSIONER SHOAN: Fair enough.

2892   I just have one further question, Mr. Chairman.

2893   What would be the impact on the business operations of your membership if the Commission decided to stop mandating access to unbundled local loops and Bands A and B, as proposed by Bell Canada?

2894   MR. B. ALLEN: Well, I assume we would exit the business and go into real estate or construction or something. There would be no future left for us.

2895   COMMISSIONER SHOAN: That's a very clear. Thank you very much for your time.

2896   THE CHAIRPERSON: I believe Vice Chair of Telecom has a few questions for you as well.

2897   COMMISSIONER MENZIES: Hi. Thank you for that.

2898   I think you have made -- you've articulated your argument very well. I'm just curious a little bit about when you talk about the number of mergers and acquisitions that have taken place and at the same time the need for mass in order to be competitive. To a certain extent some people would argue that, you know, mergers and acquisitions are sort of natural activity in a marketplace and sometimes are required. Companies always make acquisitions because they have to compete. We have heard that argument many times, albeit from people on a different scale. Then you are functioning on that they need to make buys in order to be able to compete.

2899   So is it necessarily a sign of an unhealthy market or is it a sign of a healthy market and, if so, what is particular about it in B.C.?

2900   MR. C. ALLEN: I can jump in on this one.

2901   I mean, I think mergers and acquisitions by themselves aren't indicative of a healthy or unhealthy market. There is always going to be a desire by an entity to add customers, add size by purchasing other competitors. I think what makes the difference is in a healthy marketplace you would be seeing new entrants entering the market as well as some consolidation happening, whereas in the ISP industry what you are seeing is just consolidation, no new entrants and a declining amount of competitors year after year.

2902   And a lot of the purchasing that's going on is in distressed companies that are seeing their market share drop to the point where they are not really viable and then someone who has the volumes to be able to make it work comes in and gets them for less than they were hoping to sell for and buys that distressed company. So I think, yeah, on its own it's not an indicative in unhealthy marketplace, but what we are seeing in terms of acquisitions here is failing companies being bought by other ones and no new entrants.

2903   COMMISSIONER MENZIES: Okay, thanks. Yes, it makes a considerable difference whether people are anxious to buy or people are anxious to sell and you have major situation clear.

2904   I'm curious about the two year review that you propose for rate setting. That's a much tighter schedule than we normally have worked on, particularly in some areas. How would you suggest we set that up given -- how would that be efficient, because usually -- often if we go through the process and then there is follow-up processes and review and varies and reviewing varies of review and varies, under the current structure I foresee a scenario whereby the time we finished the 2014 review and varies we are already well into the 2016 process.

2905   So what -- this does not mean that you don't have a good idea. It means -- does mean that maybe we have something we need to learn from you in terms of suggestions regarding an efficient and yet still fair process for rate setting. Do you have any suggestions?

2906   MR. C. ALLEN: Well, I think you bring up a good point in that, yes, it does take a long time for everyone to get their opening submissions in, to do all the interrogatories back and forth, maybe ultimately end up in an oral hearing like this. It's hard to do that really in an expedient way.

2907   I guess the problem is that the market is shifting so quickly, you know, that companies that would benefit from the result of one of these proceedings are maybe no longer there by the time the three or four years rolls around or longer in some cases. You know, I guess we would have to simplify the process in some sort of a way or be looking at the market share on a regular basis and possibly having more power to impact it without going through the whole proceeding as it sits today. But then, I mean, a fair process whereby everybody had their say is going to take time. So I don't have a quick answer for you.

2908   Do you have any ideas on how it could --

2909   MR. B. ALLEN: Well, I mean I think that back to my comment on how our formal process with the CRTC is a good process and everybody gets a chance to make their statement and then, you know, I would assume there would be review and varies if the incumbents are unhappy with the results of this proceeding and then they take a certain amount of time. But everyone deserves a chance for an appeal.

2910   But at that rate, you know, the investors, the telecom investors will lose interest in investing in these smaller players because there is no meat to their offering. We still lack -- you know, our competitors, in this case TELUS, are already deploying fibre-to-the-home and knocking on people's doors, whereas we are waiting for the inputs on our business plan.

2911   So you know, it's like being in a horse race, your gate doesn't open for quite a while and everybody else is way down the track before the gate opens. So you are probably not going to be a winner based on that arrangement and then if people say, "Well, hey, that wasn't fair", and then we would have a hearing at which point, you know, the horses could have gone around the track three or four more times. The guy at a disadvantage remains at a disadvantage.

2912   So if we were to look at a process that said, well, the proof of success in encouraging a healthy telecom environment, you know -- and not a dual culture where there are only two very large companies and really nobody to even vaguely consider taking them on -- so we have some small players in the market now that could grow and their market results are the proof of the pudding here that things are a bit lopsided in terms of the economic opportunity.

2913   If these metrics are not met, then the Commission should simply reduce prices and should have the power to do so. And if the incumbents have lost another 2 percent market share, well, then we can do something about that.

2914   But as long as the market shares which are easy to calculate and are right in everybody's face -- as long as those market shares are out of balance than the rates are incorrect. And if you leave them out of balance too long, then you have to really adjust the rate to attract investment.

2915   So it doesn't -- you know, the point of what you would have to -- what you would have to achieve as a win out of this proceeding to be a viable player in the fibre-to-the-premise market is really, really, really low prices compared to what the incumbents are selling to their retail customers. At that point you could catch up. But if we are just all going to try to go down together, then we have to know that the Commission is backing us.

2916   So the Commission should in fact have a procedure whereby they just make a ruling based on the market share and they adjust the prices until they get the market share where they want it to be and that will encourage the incumbents to get out there and negotiate viable business agreements with their key business partners so that those partners can succeed.

2917   Our company is one of the examples of a company that has worked for 20 years with TELUS on a fairly friendly basis, despite the environment in which we set pricing, and we feel that that is one of the reasons that we are a survivor, is because we had a working business relationship.

2918   So I think those business arrangements which have been referred to both by ourselves and by the incumbents are really key, that if we were to have a mechanism whereby a Commissioner sat with the incumbent and its customers and they all discussed their market share and what to do about it and then the Commission went away and made a ruling, and that ruling would be in place for a certain period of time and it would only be -- there would only be an opportunity for the incumbent to interject in the process, you know, if they could demonstrate that they had lost significant market share over this process.

2919   And we are only talking a few points in market share here. So I really don't think that the incumbents would be able to use the excuse that their prices are too low --


2921   MR. B. ALLEN: -- because we should really be trying to encourage a healthy competitive environment and healthy competitors and --

2922   COMMISSIONER MENZIES: Okay, I understand. I understand that. I don't want to --

2923   MR. B. ALLEN: -- not to the point where there is no competitors and then try to come up with a regulatory process.

2924   COMMISSIONER MENZIES: I don't want to really belabour the point, but it strikes me that if we were to be market share managers, if you got what I thought was too big a market share, I would be making your price go up. Wouldn't that be a --

2925   MR. B. ALLEN: That would seem fair.

2926   COMMISSIONER MENZIES: That's a very interesting argument, thank you.

2927   THE CHAIRPERSON: Thank you, gentlemen, those are our questions. Thank you for participating in the hearing from our Vancouver office.

2928   That does it for you and for us as well. So we are adjourned until 9:00 a.m. tomorrow morning.

2929   Jusqu'à 9 h 00 demain matin.

--- Whereupon the hearing adjourned at 1552, to resume on Wednesday, November 26, 2014 at 0900

Kristin Johansson
Jean Desaulniers
Jennifer Cheslock
Monique Mahoney
Karen Paré

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