ARCHIVED - Transcript, Hearing 2 December 2014
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Volume 7, 2 December 2014
TRANSCRIPTION OF PROCEEDINGS BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION
Review of wholesale service and associated policies
140 Promenade du Portage
2 December 2014
In order to meet the requirements of the Official Languages Act, transcripts of proceedings before the Commission will be bilingual as to their covers, the listing of the CRTC members and staff attending the public hearings, and the Table of Contents.
However, the aforementioned publication is the recorded verbatim transcript and, as such, is taped and transcribed in either of the official languages, depending on the language spoken by the participant at the public hearing.
Canadian Radio-television and Telecommunications Commission
Review of wholesale service and associated policies
Eric BowlesLegal Counsel
Lyne RenaudHearing Manager
140 Promenade du Portage
2 December 2014
- iv -
TABLE OF CONTENTS
PAGE / PARA
21. Rogers Communications Partnership1524 / 8690
22. Fiber to the Home Council Americas1655 / 9484
23. CANARIE Inc.1708 / 9812
- v -
PAGE / PARA
Undertaking1629 / 9325
--- Upon resuming on Tuesday, December 2, 2014 at 0901
8685 LE PRÉSIDENT : Alors, bonjour à tous. À l'ordre, s'il vous plaît.
8686 Madame la Secrétaire.
8687 THE SECRETARY: Good morning, everyone.
8688 We will start this morning with the presentation of Rogers Communications.
8689 Please identify your panel for the record first and then you have 20 minutes.
8690 MR. ENGELHART: Thank you, Mr. Chairman and Commissioners. My name is Ken Engelhart.
8691 To my right is Sylvain Roy, Senior Vice President, Wholesale Services; and to Sylvain's right is Tony Faccia, Senior Vice President, Engineering.
8692 To my left is Dave Watt, Vice President Regulatory Telecom; and to Dave's left is Scott Wallsten, Senior Fellow and Vice President for Research with the Technology Policy Institute and Senior Fellow with the Georgetown University Center for Business and Public Policy; and to his left Suzanne Blackwell, President, Giganomics Consulting.
8693 Rogers would like to begin by describing the changes that have taken place in the wholesale sector in the years since your 2010 hearing on wholesale Internet access issues. At that time, less than 1 percent of Rogers' end users in Ontario were with wholesale customers. Today, this has risen to almost 15 percent in only four years. Several more resellers have applied to resell our services, and the existing resellers are increasing their share.
8694 Wholesale customers pay us about 45 percent less than our retail rates, yet their usage is more than double that of our retail customers. That means that our annual costs to increase capacity are heavily driven by the wholesale customers.
8695 Because of the lower revenues and higher costs of wholesale, we do not earn a compensatory return on our network investments from these customers.
8696 There is no indication that the growth of wholesale will abate. Indeed, if resellers receive lower rates and other concessions as a result of this proceeding, the growth rate will increase.
8697 Even if wholesale only grows at the current rate, four years from now wholesale will constitute 30 percent of our Ontario customer base. The 70 percent of the retail customers that we serve will be subsidizing the wholesale customers that do not contribute a compensatory return on our investment. A smaller and smaller retail customer base subsidizing a larger and larger wholesale base is not sustainable.
8698 Why has Rogers experienced such huge growth in wholesale? A lot of the change is due to the way our wholesale rates have been set using the Commission's Phase II costing regime. Telephone companies' wholesale rates were set higher than the rates for cable companies.
8699 In particular, telephone companies were given an extra 10 percent markup and were forecast to improve productivity at 5 percent per year, while cable was forecast to improve productivity by 10 percent per year. This productivity factor plays a huge role in the Commission's Phase II costing model. In fact, this factor means that after 10 years cable companies will have costs which are 38 percent lower than the telephone companies. As a result, our wholesale rates are lower from day one.
8700 Telephone companies were not required to provide higher speeds to resellers and they did not. Resellers had the choice of getting a better network at a lower price from cable companies, so they switched from telephone companies to cable. Cogeco and Videotron experienced significant growth in resale. However, Rogers' rates were set far below the rates of Cogeco and Videotron, so we experienced even higher growth.
8701 We suggest that the events of the past four years indicate that the regulatory regime requires changes. We would submit that the following changes are required:
8702 First, the telephone companies should not be given higher prices than the cable companies for wholesale high-speed Internet access services. In particular, they should not be given higher markups and a lower productivity rate in their cost studies. They should also not be exempted from providing access to services which cable companies must provide access to. If these changes are not made, wholesale customers will continue to abandon Bell and increase their use of cable networks.
8703 Second, Phase II is too complicated to use as a costing tool and should be replaced. Cogeco, Videotron and Rogers have almost identical networks. Previous Phase II exercises gave them almost identical rates. The current Phase II cost model, which gives them far higher rates, shows that Phase II is not reliable enough to use for costing.
8704 Third, prices for wholesale services should more closely reflect costs so that wholesale does not impair Canada's high-speed networks. The huge margins the current system grants wholesale customers are excessive relative to the costs of the sales, marketing and backhaul services they provide. We submit that a retail minus formula would be more appropriate.
8705 Fourth, the wholesale regime is highly regulated by the Commission and this state of affairs will ultimately harm Canadian consumers. The Commission should migrate to a wholesale regime which is more market oriented and sustainable.
8707 MR. ROY: Thank you, Ken.
8708 Canada is the only country in the world that mandates wholesale access to the cable companies' facilities, except for countries where the telephone company also owns the cable company. No other country has wholesale regulation for two competing facilities-based carriers. The presence of two or more facilities-based competitors is a good reason to have less regulation, not more.
8709 The Commission has previously mandated Third Party Internet Access (TPIA) not because it meets the conditions of an essential service, rather, it expected regulated wholesale services to increase competition for high-speed services in the retail and wholesale markets. In particular, it expected that resellers would climb the so-called "ladder of investment" to become facilities-based competitors.
8710 The theory of the ladder of investment is that competitors enter on the lowest rung of the ladder as resellers of the incumbent carrier's last-mile facilities. The entrants could use these facilities to gain market share and experience; this, in turn, would enable them to invest in their own last-mile facilities.
8711 In the real world, no one has climbed that ladder. Regulators have had reasonable success getting resellers into the market by setting attractive wholesale rates, but rather than investing in their own facilities, entrants have simply responded rationally to wholesale rates that make it attractive to stay on the bottom rung.
8712 Since resellers are not investing in their own last-mile facilities, we need to rethink the why and how of regulating access to these facilities. An important part of this rethink is recognizing the power of competitive market forces in the supply of wholesale high-speed Internet services.
8713 Bell Canada and Cogeco have demonstrated that the wholesale market can be competitive. As a result of the previous proceeding, rates for wholesale high-speed Internet for Bell and Cogeco were set higher than for Rogers. In response, Bell and Cogeco offered lower rates to their wholesale high-speed customers. These off-tariff arrangements allow the market, rather than the Commission, to fine-tune wholesale rates. They also allow the parties to enter into more creative arrangements that benefit both sides, which also ultimately benefits consumers.
8715 MR. WATT: Before discussing our proposal, we would like to discuss some of the other parties' proposals for even more regulation.
8716 CNOC's "Equivalence of Inputs" proposal is wrong for Canada. EOI has only been applied where there is one incumbent carrier in a market, as was the case with BT in the United Kingdom. CNOC's plan would see EOI imposed on multiple carriers: in fact, eight carriers. This would significantly increase the complexity and costs of designing, implementing and managing wholesale in Canada. It is also hard to see why there is a problem with wholesale quality of service given the huge growth that Rogers has experienced in this service.
8717 Another proposal for more regulation is to add disaggregated TPIA to the suite of mandated wholesale services. Wholesale customers pressed the Commission in 2010 to mandate cable companies to provide aggregated TPIA over our objections. In response, the Commission ordered Rogers to introduce an aggregated service and phase out the disaggregated service. The ink was barely dry on the Commission's order before CNOC asked for both aggregated and disaggregated TPIA. This proceeding marks the third time that CNOC has asked for both. The Commission should reject this demand as it did last year.
8718 Disaggregated TPIA would be very costly for us, as noted in our confidential filings. We have already incurred significant costs to decommission the disaggregated service and to establish facilities for the aggregated service. It would also be costly for wholesale customers. They would continue to pay for capacity charges on our last-mile facilities. They would also pay another provider for, or build their own, interconnecting facilities from the head-ends to their Internet routers. None of our wholesale customers have asked us for disaggregated TPIA. Again, given the growth we have seen, it is hard to see a problem that needs solving.
8719 CNOC's proposals to mandate access to TPIA for our high-speed business Internet services and to our fibre-based Ethernet services must be rejected as well. In 2008, the Commission announced the deregulation of Ethernet and CDN services. In reliance on this, Rogers shut down our extensive operations using unbundled loops. We spent $800 million buying fibre networks from Atria and Blink. We spend another $50 to $100 million each year to expand our networks to business locations. Mandating access to our business Internet and Ethernet network facilities would impair these significant investments in fibre and other facilities that we are making to compete with the telephone companies. Competition would weaken as a result.
8720 Rogers acknowledges that for the foreseeable future there will be two competing facilities-based wireline high-speed Internet providers in most regions of Canada. These two providers will supply most of the wireline last-mile Internet facilities. No one else will invest significantly in last-mile facilities, particularly while the wholesale regime provides access to incumbents' facilities at non-compensatory rates. The Commission will continue to regulate the wholesale market for the foreseeable future.
8721 Accordingly, the Commission should not view the wholesale regime as a temporary regime until a third wire is built. Rather, they should view the regime as permanent and design it so as to further the interests of Canadian consumers.
8722 In broad terms, the Commission has an important choice in this proceeding. It needs to determine whether it should continue to design and manage the Internet market in Canada or whether it should leave the design and management to the marketplace, while maintaining appropriate regulatory oversight. We recommend the latter approach.
8723 Rogers believes that the best way to help consumers in the Canadian retail high-speed market is to migrate to a more competitive market-based wholesale regime.
8724 Under Rogers' proposal, TPIA and similar wholesale high-speed Internet services would remain mandated and subject to tariffs. These would be in place during a five-year transition period or perhaps longer.
8725 No new wholesale high-speed services would be mandated for the five-year period, although access could be negotiated.
8726 The Commission would be able to monitor the progress towards more market-driven outcomes during the transition period. The Commission could then decide to retain rate regulation beyond the end of five years in markets where circumstances warrant.
8728 MR. ENGELHART: The regulation of wholesale rates during the transition would be based on retail price minus avoidable costs.
8729 We believe that retail price minus avoidable costs would resolve many of the shortcomings of Phase II costing. Phase II costing is a complex and resource-intensive process involving many detailed inputs and forecasts that are not well understood and frequently contested.
8730 The rate-setting process we propose begins with the actual prices that incumbent carriers charge in the retail market. These are much easier to calculate than Phase II costs. From price, the Commission would subtract a percentage which reflects the costs that the incumbent carriers avoid in providing retail high-speed Internet service. These include, for example, the costs for sales, marketing, customer care, modems, bad debt and Internet transit facilities. The rates could be calculated annually and the avoidable cost percentage could be verified each year and adjusted if necessary. All of this would be much more transparent and timely than the current Phase II process. Because it is simpler, it would be less likely to lead to mistakes.
8731 Retail price minus avoidable costs provides incumbent carriers with incentives to serve wholesale and retail customers as equals since the financial reward is always the same. While wholesale rates will be higher, resellers will benefit from the improved incentives incumbents have to provide wholesale high-speed Internet services and so will consumers.
8732 Retail price minus avoidable costs promotes competition from resellers who are more efficient and innovative in retailing high-speed Internet services. Resellers have highlighted the innovations they have made in customer service, online service management tools and technical support. A retail price minus cost regime rewards those resellers who excel at such innovations.
8733 It also ensures that resellers will still be able to compete in the retail market based on price by providing a margin between our retail prices and wholesale rates. Furthermore, if any providers, including new entrants, do want to build new last-mile facilities, they will not be disincented from doing so by non-compensatory wholesale rates.
8734 Another element of Rogers' proposal for the transition period is a moratorium on any additional wholesale high-speed Internet services corresponding to new higher-speed retail services. Bell currently provides a maximum speed of 50 Mbps for its wholesale service, so 50 Mbps should be the maximum speed mandated for wholesale high-speed services of any incumbent carrier. Wholesale services at higher speeds would be grandfathered for existing end users.
8735 A moratorium on adding new mandated wholesale high-speed Internet services would address concerns raised by the incumbent telephone companies that their incentives to invest would be undermined by mandated access to FTTP-based services.
8736 If the Commission exempts FTTP but does not also exempt the cable companies' higher-speed services, it would perpetuate a serious regulatory asymmetry. The fact that cable companies can achieve higher speeds by building fibre closer to the home, but not all the way to the home, should not be a reason for unfair treatment. Of course, symmetry also dictates that if the telephone companies' FTTP services are exempt from wholesale regulation, the FTTP services of the cable companies should also be exempt.
8737 Regulatory exemptions based on the underlying technology of services are contrary to the Policy Direction's guidance that regulations be technologically and competitively neutral. Regulation should promote incentives to invest in all advanced infrastructure. The Commission should not be picking winners based on technology.
8738 Rogers believes the regulatory moratorium should be based on the functionality of services and not the technology underlying them.
8739 In conclusion, resellers have grown tremendously since 2010. The Commission should ensure that the regulatory regime going forward supports sustainable growth.
8740 By setting wholesale tariffs based on retail price minus avoidable cost, the Commission will ensure that Canadians can continue to have high-speed Internet service from a variety of different providers. At the same time, the use of price minus avoidable cost will ensure that the correct economic signals are sent to the Internet market. Cable and telephone companies will continue to have every incentive to invest in new facilities and technologies. Therefore, Canadian consumers will enjoy the best of all possible worlds: innovation in facilities and a wide variety of providers.
8741 Equally important, setting tariffs with this formula will allow a true wholesale market to develop. Parties will negotiate agreements that make sense for both parties. Wholesale will evolve and develop in a way that the regulatory process could not predict or plan for.
8742 After five years, the Commission can review the market. They could continue the tariffs under our proposed formula or change the formula. They could choose to apply the formula to all services or they could exempt some. You will have five years of experience in seeing the wholesale market develop and you will have all the data to ensure that Canadian consumers continue to have a world-class and affordable Internet service.
8743 Thank you for your time and we are ready to answer any questions you may have.
8744 THE CHAIRPERSON: Thank you very much.
8745 The Vice-Chair of Broadcasting will start us off.
8746 COMMISSIONER PENTEFOUNTAS: Thank you. Good morning.
8747 I will kind of go back and forth from your written intervention earlier this year and today's oral presentation.
8748 Let's start, first and foremost, again with essentiality, the debate over the last little while. The Commission has mandated various wholesale services despite being deemed non-essential in order obviously to meet certain policy objectives. Is there any way of improving the essentiality test?
8749 MR. ENGELHART: Well, I don't think so. As you just said, TPIA has never been classified as an essential service and it will always -- or it has always been subject to mandated wholesale. So I don't think the definition of essentiality matters that much. The Commission should in fact, I think, you know, stop thinking that something is going to happen in the future that will mean that you don't mandate wholesale anymore. You are going to keep mandating wholesale, so I don't know if it's worth fussing about the essentiality definition.
8750 COMMISSIONER PENTEFOUNTAS: And the debate on duplicability on the proposed changes on the third leg from CNOC, set all that aside, there's a public policy interest, we continue going forward with mandated Internet services?
8751 MR. ENGELHART: I mean what CNOC is really saying is keep regulating this forever because they're saying there has to be four facilities-based carriers and there never will be. So I'm sort of agreeing with them. I'm saying you're not going to stop mandating wholesale, so we need to come up with a permanent solution which is sustainable.
8752 COMMISSIONER PENTEFOUNTAS: And does not put the same emphasis on facilities being deployed by competitors?
8753 MR. ENGELHART: Yes. I mean --
8754 COMMISSIONER PENTEFOUNTAS: That's my understanding.
8755 MR. ENGELHART: Sorry, is your question that we don't think --
8756 COMMISSIONER PENTEFOUNTAS: That we go forward --
8757 MR. ENGELHART: Okay.
8758 COMMISSIONER PENTEFOUNTAS: It will be mandated going forward and there will be less emphasis on competitors' ability to invest in facilities and we'll place more emphasis on an arrangement whereby the market works well for incumbents, consumers and deployment and investment going forward?
8759 MR. ENGELHART: Yeah. I think it's worth you worrying about investment by cable companies and phone companies. As other parties have said to you, you don't want to sort of kill the goose that lays the golden networks. You want to keep that going.
8760 At the same time it's very hard for someone to build a third wire. It can happen and it has happened in different parts of the world but it's unlikely to be ubiquitous. And you also get into sort of a strange catch-22 because if the wholesale rates are too low you will never get anyone investing in a third wire because those sort of wholesale entrepreneurs crowds out the opportunity for a third facilities based. So I don't think we should be counting on a third wire anytime soon. I think that's your question.
8761 COMMISSIONER PENTEFOUNTAS: It is, thank you.
8762 Much has been discussed on the question of bundles and triple and quad plays. How should the Commission -- what regard and emphasis should the Commission put on triple and quad plays, the bundles generally, either as a wholesale or retail product market?
8763 MR. ENGELHART: I mean Rogers loves the quad play. We kind of invented the quad play and it's great to have a quad play. But in our wireless business we are a single product provider in everywhere other than Ontario, New Brunswick and Newfoundland. We just have wireless and we do very well.
8764 I mean we love it in Ontario where we have the quad play, but in Quebec we are competing against two quad plays with a single product and we have 1.2 million customers in Quebec. So I would rather be the quad play in Quebec, but it doesn't mean that it's a different market. It's still -- we don't say, wow, you know, this is a different product market. It is the same product market, but having the quad play is an advantage and so in Quebec or B.C. we have to come up with something else to drive those wireless sales.
8765 COMMISSIONER PENTEFOUNTAS: Okay.
8766 You mentioned in your written submissions -- not so much today. The focus was elsewhere in your document today -- but in your written submission you suggested that the Commission reject arguments to use wholesale access regulation as a means to lower retail pricing, but rather focused on reducing regulation to promote investment and infrastructure.
8767 Now, is it really one or the other? Are they mutually exclusive?
8768 MR. ENGELHART: I think there probably is sort of a Goldilocks middle-of-the-road which we have tried to sort of describe in our opening remarks today.
8769 So I think the most important thing is getting the signals right. If you get the economic signals right to wholesale and retail, you can have a healthy wholesale market and you can keep the incentives correct.
8770 So to fully answer your question, using wholesale costing as a sort of remote control retail price regulation is really tricky. You have to be a superhuman regulator because you have to figure out costs, not just now but into the future, and predict the Internet market and where it's going. So none of these things are very easy.
8771 So I think Canadians expect a wholesale market so you have to have one. I don't think we have -- I think we have passed that point, but I do think you should try and send the correct economic signals so that you don't impair the markets functioning.
8772 COMMISSIONER PENTEFOUNTAS: Are you questioning the Commission's superhuman qualities, Mr. Engelhart?
8773 MR. ENGELHART: I withdraw that comment.
8774 COMMISSIONER PENTEFOUNTAS: You know, again you raised it in passing today, but it took up a bigger bulk of your written submissions and I will preamble it by saying many people have lauded Canada's position in terms of networks, services and pricing. Is it your belief that the Commission's previous mandating decisions have harmed consumers?
8775 MR. ENGELHART: I think we are doing quite well in the Internet market.
8776 I think probably the U.S. is a good point of comparison because they are a lot like us, but they have not mandated wholesale. And if I look at the U.S. in broad terms, I would say that cable companies in Canada are behaving much like cable companies in the U.S. They are making similar types of investments and they have similar types of networks. I would say that the phone companies in Canada have been less aggressive than the Americans in driving fibre to the home and I would say that there is more activity by, you know, Google and others driving a third wire in some markets.
8777 So I would say if you believe that more aggressive fibre developments by telephone companies and more aggressive fibre developments by third parties are a good thing, then I think wholesale probably has slowed Canada down a bit.
8778 COMMISSIONER PENTEFOUNTAS: And on the consumers' front?
8779 MR. ENGELHART: I think consumers in --
8780 COMMISSIONER PENTEFOUNTAS: Have they been hurt by mandated?
8781 MR. ENGELHART: I think that the prices that Canadian consumers pay for their high-speed Internet service in Canada and the U.S. are quite similar and the level of quality and the service they get are quite similar, so I would say that -- I wouldn't say that wholesale has hurt Canadian consumers. I wouldn't say it has helped that much. I suppose for the, you know, 15 percent of the market in Canada or in Ontario, rather, that is getting service from a wholesale provider, they get a discount. So those people are better off.
8782 COMMISSIONER PENTEFOUNTAS: And setting the American example aside, very tough to compare markets, would you not agree that the level of investment since 2008 has been impressive in Canada, notwithstanding the presence of mandated Internet offerings?
8783 MR. ENGELHART: Yes.
8784 COMMISSIONER PENTEFOUNTAS: So in that sense the consumer on the long term has not been hurt because the investment has been -- the deployment has been present, ergo quality services will be offered on a longer-term and prices have been somewhat disciplined.
8785 MR. ENGELHART: I would agree with you that investment levels have been impressive to date. Now, does that mean they will stay impressive forever?
8786 You know, we have gone from point 8 percent of our end-users on wholesale to almost 15 percent and the fire hose is showing no sign of turning down. So, you know, that 15 will go to 30 and then it will go to 70 or 80. At some point we will have so much wholesale on our platform and those wholesale customers only pay 45 percent less then retail.
8787 So at some point we will stop, you know, trying to build the best networks. We are certainly -- you know, it's in our DNA at Rogers to try and build the best networks. That's what we do. Mr. Faccia has not been given any instructions to stop doing that. We are still trying to build the same networks, but once too many riders on the bus are paying the reduced fare, then we may have no choice but to slow down what we do.
8788 COMMISSIONER PENTEFOUNTAS: It's interesting that you mentioned that the wholesale customers are paying 45 percent less than your retail customers. Add to the 45 percent the fact that there is a markup of 30 percent, cost plus 30 for Rogers?
8789 MR. ENGELHART: Right.
8790 COMMISSIONER PENTEFOUNTAS: Yes. So there is a 75 sort of percent of discrepancy there and the wholesalers being able to offer that price are still profitable. Are you overpricing your product?
8791 MR. ENGELHART: Well, there's another factor going on, which is that a lot of perfectly legitimate Phase II costs that we -- or cost that we incur in the real world are simply being disallowed by the Phase II costing process. So we are just simply not recovering some of our costs from our wholesale rates.
8792 If you look at -- to answer your question, I don't think we are overpricing our products in the real world because you have to look at the enormous network investment that we have made and are continuing to make to support those services.
8793 So when you look at the price -- if you look at, you know, EBITDA margins you say, well, gee, those are huge margins. Yes, but part of the EBITDA's amortization -- and that amortization is reflecting the fact that we have spent a tonne on those networks. They didn't just sort of magically appear. And we are continuing to spend a tonne on them.
8794 COMMISSIONER PENTEFOUNTAS: Yes, I understand that. And you also compared yourselves with other cablecos. You didn't talk about Cogeco and Videotron and you even made mention of Bell. Are they offering their wholesale customers rates below some kind of reasonable compensatory level?
8795 MR. ENGELHART: I think what's happened is, you know, Bell and Cogeco got higher rates than we did and since the last hearing they have voluntarily lowered their rates, which they talked about here. We highlighted that in our opening remarks because I think it's a very, very interesting and unusual phenomenon. If you had asked me four years ago what I would be seeing today, I would have predicted a lot of things, but I probably wouldn't have predicted that.
8796 So it tells us something very interesting, which is that instead of you trying to get it right, instead if you trying to get the price perfect, it may be that if you raise wholesale prices a bit wholesale market will develop underneath that cap in a way that you wouldn't predict. But to answer your question, sometimes you would offer wholesale service lower than a compensatory rate because, as I mentioned before, part of a compensatory rate is this huge fixed cost that leads to a huge need for cost recovery, call it amortization, call it what you want. But if you have $50,000,000 worth of wholesale business that doesn't fully compensate you, but partly compensates you, and that service provider says I am going to Bell, you might compete for that business, even though it is not fully compensatory because something is better than nothing.
8797 So you get into a sort of an interesting game theory dynamic in the wholesale market. Mr. Roy manages our wholesale portfolio and so that is the kind of thinking he engages in.
8798 COMMISSIONER PENTEFOUNTAS: Would you have numbers as to where that 15 percent market share -- who is providing the wholesale services for them? Would they be Rogers customers or someone else's?
8799 MR. WATT: I may not understand the question, but the 15 percent, it is calculated simply by taking our TPIA customers, adding our retail customers in Ontario and the number falls out 15 percent.
8800 COMMISSIONER PENTEFOUNTAS: But were they formerly Rogers customers --
8801 MR. WATT: I will pass that question to Sylvain.
8802 COMMISSIONER PENTEFOUNTAS: -- or someone else's?
8803 MR. WATT: Sylvain...?
8804 MR. ROY: Yes, thanks. Well, it's hard to know because we don't -- some are previously Rogers customers, some would come with Bell, some are brand-new to the market. So it's a mix. But initially the majority of them were non-Rogers customers previously. Our view now is that more than 50 or 60 percent are actually Rogers customers.
8805 COMMISSIONER PENTEFOUNTAS: Right. Because if you're going to make that calculation, Machiavellian or other, you would have to have that information, would you not?
8806 MR. ROY: Well, we have some information. As you know, we don't --
8807 COMMISSIONER PENTEFOUNTAS: No, but to make the calculation that Mr. Engelhart put forward --
8808 MR. ROY: Yes.
8809 COMMISSIONER PENTEFOUNTAS: -- you need to have that information.
8810 MR. ROY: Sure. And we have to do it through assumption because we obviously don't have the end-user that is under the TPIA, right? We have an address. We don't have the --
8811 COMMISSIONER PENTEFOUNTAS: Well, then how you make that calculation?
8812 MR. ROY: Well, we will make it through polling the market. We will make it through the address delivery of service, cancellation --
8813 COMMISSIONER PENTEFOUNTAS: No, but how do you decide that you are willing to offer your product at below compensatory rates because they wouldn't be your clients anyways, if we were to follow Mr. Engelhart's logic?
8814 MR. ROY: Well, it's never an all or nothing or black and white, right. You -- ideally in a magic world from a wholesale perspective, I could deal with resellers that exclusively bring me new customers. But those customers are out there on the market, and they are attracting customers from us, from Bell, from other TPIA resellers, right? So it's about how do you pick the best effective reseller that brings some unique values to your marketing offering.
8815 COMMISSIONER PENTEFOUNTAS: And an interesting unique value would be new customers, customers you wouldn't have anyways.
8816 MR. ROY: Totally.
8817 COMMISSIONER PENTEFOUNTAS: That wholesale revenue is gravy.
8818 MR. ROY: Totally agree, but I mean we have -- Rogers has over -- around a 50 percent share. So all things equal, for every 10 customers that comes to me from a reseller, five of them were already Rogers customers.
8819 COMMISSIONER PENTEFOUNTAS: All right.
8820 MR. WATT: If I could just interject?
8821 COMMISSIONER PENTEFOUNTAS: Sure.
8822 MR. WATT: I mean the assumption you made is that the wholesale rates are compensatory to us when you say you will be interested in having --
8823 COMMISSIONER PENTEFOUNTAS: I'm going to get to the compensatory rate, but the first premise I put forward is that if we were to accept that your competitors, your incumbent competitors, your facilities-based competitors who invest as much as you do, more or less on a pro rata basis depending on the size of their market, they are potentially offering wholesale prices that are below a compensatory rate, right?
8824 MR. ENGELHART: I mean it's hard to know. We certainly have, as I said, this fire hose of business at rates that we consider to be too low. Videotron also complained that their rates were too low for wholesale. Bell and Cogeco have reduced them so they have made a decision that getting that wholesale business is better than not getting it.
8825 So I don't know. Because you gave Cogeco rates that were about 60 percent higher than ours for capacity and they reduced those by about 30, so they are still about 30 percent higher than us. So were they above compensatory and you brought them -- and they lowered them to compensatory? Were they compensatory and they lowered it to below compensatory? I'm not sure. I'm not them, but it's possible that they could have.
8826 COMMISSIONER PENTEFOUNTAS: But how do you get to a market that is below tariff? And following up something you said earlier, Mr. Engelhart, if you are already complaining that the rate is too low, how would that create a beneath tariff market?
8827 MR. ENGELHART: Yes. We are saying that if you move from Phase II to price minus avoidable cost, that will raise the tariff. So you will raise the tariff for the whole market as you did in this sort of real-world experiment involving Bell and Cogeco and that I believe that once we no longer have a line up of people around the block trying to acquire a wholesale service at below compensatory rates, then market forces will take over and the market will set a level.
8828 COMMISSIONER PENTEFOUNTAS: Right. Interesting. We are going to get to cost and your cost minus and some of the comments that we heard specifically yesterday morning.
8829 But I was curious to see that in your costing formula you would have, in the retail minus, you would subtract all of the non-retail costs and you mentioned them yourself; cost of sales, marketing, customer care, modems, bad debt, et cetera, et cetera. Did you put forward a similar position on the wireless hearing? Would we be excluding those costs?
8830 MR. ENGELHART: In the wireless proceeding; no, because resale and roaming are pretty different things. Resale is --
8831 COMMISSIONER PENTEFOUNTAS: The retail costs are the same things.
8832 MR. ENGELHART: Yes, but in a roaming scenario somebody takes your -- say 10 percent -- roams, say, for 10 percent of their minutes on you and takes 100 percent of your minutes away from you by taking the entire customer.
8833 Resale is a very, very different economic proposition because you are supplying 100 percent of the minutes to that wholesale customer. So you are not selling a little bit here and losing a lot over there. You are selling all the minutes. So retail minus works as a resale formula. It doesn't really work as a roaming formula. Although all of my competitors asked for it at the wireless hearing.
8834 COMMISSIONER PENTEFOUNTAS: Is it fair to say that cablecos are focusing more on upgrading their existing network rather than investing in FTTP?
8835 MR. ENGELHART: I have been a bit troubled by the narrative that the phone companies are portraying that they are doing something very different than what we are doing. I think they have done a better job of complaining than us, but I don't think it's that different than us. In other words, they build fibre-to-the-premises in greenfield developments --
8836 COMMISSIONER PENTEFOUNTAS: Right.
8837 MR. ENGELHART: -- we build fibre-to- the-premises in greenfield developments. They put fibre closer to the home to increase speeds. We put fibre closer to the home to increase speeds. It's not that different. They are just sort of -- they have done a pretty good job of making you worry about their network investment plans in a way that we haven't, but it's not really that different a network deployment strategy.
8838 COMMISSIONER PENTEFOUNTAS: Is your recommendation not to mandate access to FTTP a little self-serving since you have made a symmetrical argument for capping the speeds that are mandated for TPIA services?
8839 MR. ENGELHART: Well, let me put it this way. The most important thing is for you to get the prices right. The most important thing is for you to get the incentives correct.
8840 COMMISSIONER PENTEFOUNTAS: But on the question, Mr. Engelhart?
8841 MR. ENGELHART: Yes. We think that a moratorium is another way of letting a wholesale market develop. So if you are going to let a wholesale market develop you have absolutely got to have the same moratorium for everybody. If you mandate fibre-to-the-premises or higher-speed services for everybody, that's fair and you will letting market develop; if you don't mandate -- if you give a moratorium to everybody, that's fair and a different type of market will develop.
8842 But you can't -- I think the a symmetry gives you zero chance of having a properly functioning wholesale market and what we are saying is the moratorium gives you a better chance of getting to a wholesale market because people will have to make deals for those higher-speed services.
8843 COMMISSIONER PENTEFOUNTAS: But how does a moratorium help create a wholesale market when, by your own admission, you are sitting there with the fire hose --
8844 MR. ENGELHART: Oh, well, that --
8845 COMMISSIONER PENTEFOUNTAS: -- and you see that wholesale market as an inferno.
8846 MR. ENGELHART: Yes. That's why I'm saying the first thing you have to do is get the prices right. So we need to see the prices go up a bit so that we don't have an unending supply of wholesale customers at very low rates and then people can start to do what Bell did, which is say, well, let's do a deal that works for both of us.
8847 COMMISSIONER PENTEFOUNTAS: Okay.
8848 You keep referring to the competitors as resellers. I don't know if you have noticed, but they don't like that designation. Do you want to speak to that? I will leave it open-ended for you.
8849 MR. ENGELHART: We called them wholesalers for a while, but then my colleagues said that grammatically that is not really true, that we are the wholesaler, not them.
8850 You called them resellers in the --
8851 COMMISSIONER PENTEFOUNTAS: The whole buyers.
8852 MR. ENGELHART: Yes. So they are really -- you know, they are engaged in sales and marketing. They are not really providing network. So, I don't know, maybe we need to invent a new term.
8853 COMMISSIONER PENTEFOUNTAS: In your first intervention you mentioned that -- you argued that competitors simply offered variations in pricing and did not provide service innovation. They may consider themselves to be innovative, but that's a different issue.
8854 In your presentation today, you said in paragraph 32 that:
"...Resellers have highlighted the innovations they have made in customer service, online service, management tools and technical support."
8855 Do you consider that to be the case?
8856 MR. ENGELHART: I don't think they've done very much innovative. Their products look like ours. They're not doing anything too innovative, but when you questioned them they've said, "Look, our innovation is in customer care and service and..."
8857 COMMISSIONER PENTEFOUNTAS: Would you agree with that?
8858 MR. ENGELHART: Well, I honestly -- I don't know, but I can believe that someone with a small call centre could have a better customer experience than someone with a chain of big call centres, like it's conceivable.
8859 I don't -- they seem to have a higher churn rate than we do, which would indicate to me that their customer service isn't better than ours is, but I don't know.
8860 COMMISSIONER PENTEFOUNTAS: Online service management tools?
8861 MR. ENGELHART: Yeah, those are the kind of things where they can innovate. So what we're saying is, if you do price minus avoidable costs, then if they're more efficient than we are at those avoidable costs they'll prevail in the marketplace. That's how a competitive market is supposed to work.
8862 COMMISSIONER PENTEFOUNTAS: And technical support?
8863 MR. ENGELHART: Same thing. I mean, it's conceivable to me they could do better than us on that. Now, it's tricky with technical support because their technician at some point for some technical problems has to then contact our technician and --
8864 COMMISSIONER PENTEFOUNTAS: It's your technician basically?
8865 MR. ENGELHART: Yeah.
8866 COMMISSIONER PENTEFOUNTAS: I see.
8867 MR. ENGELHART: It ends up being sort of a three-way conversation sometimes.
8868 COMMISSIONER PENTEFOUNTAS: Would incumbent retail offerings have evolved to where they are today absent the pressure from competitors willing to offer unlimited data caps?
8869 MR. ENGELHART: I think so.
8870 COMMISSIONER PENTEFOUNTAS: How would that have happened?
8871 MR. ENGELHART: Well --
8872 COMMISSIONER PENTEFOUNTAS: I didn't see too many volunteers back in the day.
8873 MR. ENGELHART: Well, again, if you look at the U.S., there's some unlimited offers there.
8874 COMMISSIONER PENTEFOUNTAS: What about Canada?
8875 MR. ENGELHART: I think what you saw here is the wholesalers had an unlimited offer, we didn't. Bell brought in an unlimited offer, we did. So as soon as Bell made the move to unlimited, we had to do the same thing.
8876 So it's still true that Bell is, you know, our biggest competitor and once they went unlimited we had to do the same thing.
8877 COMMISSIONER PENTEFOUNTAS: And weren't wholesalers in sort of the attempt to sort of give Caesar his due, weren't they responsible for that?
8878 MR. ENGELHART: Analyzing the counterfactual about what would have happened if this hadn't happened is a pretty tricky thing to do, but temporally, did Bell go to unlimited because the third-party Internet providers had gone unlimited? It's possible. I think they went unlimited because we were beating them so badly in the market.
8879 COMMISSIONER PENTEFOUNTAS: And it would also not be fair to say that the vigorous competition that you claim today exists in the retail market is due, in large part if not exclusively, to the existence of the Commission's mandating decisions on wholesale, HSA?
8880 MR. ENGELHART: No, I think --
8881 COMMISSIONER PENTEFOUNTAS: You wouldn't agree with that either?
8882 MR. ENGELHART: -- I think the main competitive dynamic is between the facilities-based carriers.
8883 But make no mistake, all competition is important and absolutely, you know, our marketing people look at everyone in the marketplace, absolutely.
8884 COMMISSIONER PENTEFOUNTAS: And increased competition certainly helps discipline prices and offer better customer service?
8885 MR. ENGELHART: Well, of course, competition does that. I guess it's -- when it's facilities-based competition I really call it competition. If the Commission disallows certain of our costs to allow regulatory arbitrage, it's -- you could call it competition, but it's really kind of -- it's really kind of a remote control pricing mechanism more than anything.
8886 COMMISSIONER PENTEFOUNTAS: We're not going to go back to all the costing exercises we've seen over the past few years.
8887 So you would continue to offer TPIA on a negotiated basis if the Commission did not mandate it; is that your position?
8888 MR. ENGELHART: I mean, I think you're going to have to have some sort of backstop.
8889 COMMISSIONER PENTEFOUNTAS: Okay.
8890 MR. ENGELHART: I don't imagine you're going to just throw the whole thing open. If the backstop was retail minus, as we've suggested, or some higher level than the current level, absolutely, a competitive market will develop and we will not want to lose that hundred million dollars of revenue that we're getting today.
8891 But I would think that if the backstop is the current tariff, then we've got all the work we can do just to keep up with that demand. We wouldn't be -- you know, we wouldn't be lowering those prices.
8892 COMMISSIONER PENTEFOUNTAS: Would an alternative backstop be a process of dispute resolution?
8893 MR. ENGELHART: Yeah, I've heard a lot of people talk about that and, you know, conceptually I think it's going in the right direction. My concern is if you have dispute resolution you need a number or a benchmark or a framework that the parties can be aiming towards or else every single contract is going to come to you for resolution.
8894 So I would rather set a tariff as a backstop and then people just use the marketplace and wouldn't come to you for dispute resolution.
8895 COMMISSIONER PENTEFOUNTAS: And what -- don't you need leverage on both sides?
8896 MR. ENGELHART: Yeah.
8897 COMMISSIONER PENTEFOUNTAS: Some would argue that the competitors don't have that leverage.
8898 MR. ENGELHART: Well --
8899 COMMISSIONER PENTEFOUNTAS: Ergo, the need for some kind of backstop.
8900 MR. ENGELHART: -- then why did Bell and Cogeco -- why did Bell and Cogeco engage in price reductions, why did they do that? Just out of an uncharacteristic sense of altruism? They presumably did it because in the marketplace they thought they could make more money that way.
8901 COMMISSIONER PENTEFOUNTAS: As regards potential agreements, if we're going to be talking about negotiated agreements, in reading your document there seems to be an opposition -- or there seems to be a concern with increasing current disclosure requirements as to the details of these agreements.
8902 Some have asked for greater disclosure, competitors seem dissatisfied with the information that's out there, and generally I think most people are skeptical when people argue for less transparency rather than more.
8903 MR. ENGELHART: Do you mean with respect to the Phase 3 costing issues?
8904 COMMISSIONER PENTEFOUNTAS: The negotiated agreements --
8905 MR. ENGELHART: Or something else?
8906 COMMISSIONER PENTEFOUNTAS: -- the negotiated agreements that you may conclude with wholesalers -- with competitors, sorry.
8907 MR. ENGELHART: Well -- you mean with wholesale customers?
8908 COMMISSIONER PENTEFOUNTAS: Yes.
8909 MR. ENGELHART: Well, why would those agreements need to be disclosed, like what's the public policy reason to disclose them?
8910 COMMISSIONER PENTEFOUNTAS: The same reason hockey players put out their contracts, it allows everyone else to know what's out there and better compete. Cogeco even suggested having a ceiling tariff on their web page.
8911 MR. ENGELHART: Yeah, it doesn't make sense to me. If you've got a market, you've got a market. And so, you know, we've got people coming to us today to be third-party Internet access providers and we ask them to give a forecast of how many customers they expect and they say, we plan to add 10 every month for the first year.
8912 So these are really, you know, high school students or someone signing up their neighbours. That person's not going to get the same deal as TekSavvy or someone who can move a huge amount of volume.
8913 So in a market there's going to be -- under the current regime they get the same deal as TekSavvy, but if there's a marketplace developing, you know, people will get different deals. Maybe somebody will say, I can bring customers over from Bell, maybe somebody says, hey, I figured out a way to help you sell your wireless. I've done -- I've got an access to a marketplace that you don't know how to penetrate.
8914 So, yeah, there will be all sorts of different deals and I don't know why you would publish those results. It doesn't seem intuitive to me.
8915 COMMISSIONER PENTEFOUNTAS: Would the fact that they would be bringing competitors' customers your way, would that put -- that would certainly put downward pressure on the price you would charge them if they told you they were bringing Bell customers, as a example?
8916 MR. ENGELHART: Yes.
8917 COMMISSIONER PENTEFOUNTAS: Okay.
8918 Did you want to add something?
8919 MR. WATT: Well, I was just going to make a couple of points.
8920 COMMISSIONER PENTEFOUNTAS: Sure.
8921 MR. WATT: I think, as you know, you previously required companies to place on the public record their off-tariff deals and they would actually indicate what the parameters of the deals were, they would white out the actual name of the company that received the deal.
8922 So that I think was to give more information to the market. To change that policy in 2012, we think your decision to do so was correct in that instance.
8923 COMMISSIONER PENTEFOUNTAS: Okay.
8924 That could be an interesting approach.
8925 MR. WATT: To go back to the previous approach?
8926 COMMISSIONER PENTEFOUNTAS: In the cadre of greater transparency.
8927 MR. WATT: So that -- you're suggesting you would go back to what was done prior to that decision and put the parameters of the deal on the public record, but not --
8928 COMMISSIONER PENTEFOUNTAS: You would simply submit who would be the beneficiary of "x", "y", "z" deal.
8929 MR. WATT: M'hmm. No, I think that for the reasons that you decided to go away from that policy, I think those reasons are still valid.
8930 The other point I wanted to make to your observation that deals could be struck so that companies that were bringing new customers as opposed to transferred customers, say, from Rogers would --
8931 COMMISSIONER PENTEFOUNTAS: Or someone else's customers.
8932 MR. WATT: -- exactly, get a better deal and, in fact, I think that is what you saw in -- when we could see the details of the offers being made by Bell, you saw that type of thing, you would see -- they required maintenance of a certain volume and then you would get a lower rate for incremental volume above that, you could get differential rates for new customers as opposed to transfers from your own retail base.
8933 So there are lots of ways that these arrangements can be struck. But to Ken's point, not everybody can qualify for the same deal. It just doesn't make economic sense. Each deal should be specific to its circumstances.
8934 COMMISSIONER PENTEFOUNTAS: Right, or the circumstance could be made public as well, transparency with anonymity. In other words, if the details of the deal were to be put forth --
8935 MR. WATT: Well, the one point I would make, we think we have a pretty fair idea exactly who the recipients of Bell's off-tariff arrangements were. It is not that big of a marketplace. I don't think you should believe that by not disclosing the name of the customer that we don't know who that customer was who received that deal.
8936 COMMISSIONER PENTEFOUNTAS: Okay.
8937 Unless the high school student -- Mr. Engelhart makes it sounds like the new lemonade, sort of the wholesale regime.
8938 Go ahead, sorry.
8939 MR. ROY: No, if I may add actually. I think disclosing the terms of the deal would be to the detriment of the reseller. So as opposed to your hockey player analogy, which hockey players are a public company, right, all their stats are there, they can benchmark each other, know exactly...
8940 All of the resellers are private companies. I think it would de-incent them to be aggressively proposing benefits to Rogers in exchange for a lower rate if everybody knows about it the next day and can actually copy their strategy.
8941 MR. ENGELHART: You know I think, generally speaking, disclosure is an appropriate part of a regulated regime. If you are going to regulate, you have regulations about undue discrimination. And so you are going to set the terms and conditions, so let's find out what everyone else is doing.
8942 If it is a marketplace, disclosure is not a normal part of a marketplace regime. You have people doing deals and not telling their competitors about it.
8943 COMMISSIONER PENTEFOUNTAS: It could help one in the process of deregulating, it could setup a kind of backstop, it could setup a...
8944 MR. ENGELHART: I think you need a tariff as a backstop. I really think you need some sort of a rate that is there that gives protection to the wholesalers and that provides sort of a cap or a ceiling.
8945 Without a tariff I think it is going to be hard to deregulate.
8946 COMMISSIONER PENTEFOUNTAS: Okay.
8947 Regarding wholesale HCSA services, once again you are implying at paragraph 123, you refer to a small but growing number of fibre-based services as opposed to TELUS that told us there was sort of large-scale deployment of fibre.
8948 So small but growing number of fibre-based service providers, other than incumbent carriers that have entered your market, would you be able to tell us what companies you are referring to? Is it sort of small ILECs for the most part or...?
8949 MR. WATT: Well, no, these would be companies such as Cogeco Data Services.
8950 COMMISSIONER PENTEFOUNTAS: Okay.
8951 MR. WATT: A number of the municipalities still have telecom arms.
8952 Tony, you actually might be more familiar with the specific numbers.
8953 COMMISSIONER PENTEFOUNTAS: It would not be --
8954 MR. FACCIA: Yes. Another example would be beam-filled.
8955 COMMISSIONER PENTEFOUNTAS: Beam-filled would be an example, okay.
8956 MR. FACCIA: Yes.
8957 COMMISSIONER PENTEFOUNTAS: Would you have a list that you are referring to in paragraph 123 of your reply of who is entering your market?
8958 MR. WATT: I don't think we have a formal list, but we could certainly put one together.
8959 COMMISSIONER PENTEFOUNTAS: That would be great.
8960 MR. WATT: To the best of our knowledge, there may be people out there we are not quite sure what they are doing.
8961 COMMISSIONER PENTEFOUNTAS: To the best of your knowledge.
8962 MR. WATT: Yes.
8963 COMMISSIONER PENTEFOUNTAS: And what kind of coverage --
8964 MR. WATT: Yes, absolutely.
8965 COMMISSIONER PENTEFOUNTAS: And we are obviously not talking about incumbents, we are talking about --
8966 MR. WATT: No, exactly.
8967 COMMISSIONER PENTEFOUNTAS: Okay, great.
8968 MR. WATT: Another example would be Distributel. Mr. Stein indicated they were building fibre from 151 Front Street up to -- well, up to 855 York Mills, et cetera.
8969 COMMISSIONER PENTEFOUNTAS: Right, we heard that.
8970 MR. WATT: So we will put together the list that we know of.
8971 COMMISSIONER PENTEFOUNTAS: To the best of your ability. We would appreciate that, thank you very much.
8972 I want to briefly get back to the triple and quad-plays and then sort of ask you two questions.
8973 Don't capacity requirements and CBB rates make competitive provision of bundles difficult, if not impossible? We heard that last week. Especially if you want to make a video offering, the CBB rates are far too high. You are contending the opposite.
8974 But doesn't that make a triple-play impossible?
8975 MR. ENGELHART: Well, I guess first of all, VMedia has one and I think Distributel has one.
8976 I think, if I could be permitted to just sort of backup and put the regulatory question on the table.
8977 So if the Commission is going to unbundle networks or make wholesale changes to allow people to provide BDU services, I think that public policy requires that, first, there be a finding that BDU services are not competitive. If BDU services are competitive, why are we engaging in this debate?
8978 So I think you would need a proceeding of some sort to say, well, Bell, Rogers, you know, Shaw Direct, this is not a competitive market.
8979 I think it is a competitive market. I heard Mr. Burger describe why it wasn't, but I disagree with him. I think it is very competitive. And the fact that, you know, we are losing a lot of BDU subs every year is proof of that.
8980 So if you made that finding, then I suppose you would have to try and figure out what to do about it. Normally, in an essential facilities question you say because this entity is not operating in a competitive market, this entity has to give something in the wholesale market to enable competition.
8981 Here it would be a little bit weird that you would be saying because the BDU market isn't competitive, the ISP market has to make some changes.
8982 So that is all by way of background.
8983 The full answer to your question --
8984 COMMISSIONER PENTEFOUNTAS: But on the bundle, more specifically.
8985 MR. ENGELHART: Yes. It really is hard, not impossible, but hard to do a BDU service over an internet network. An internet network is carrying more and more video all the time. But it is still a BDU service, provides a ton of video, that is because people watch 30-40 hours of cable TV a week.
8986 So I would agree --
8987 COMMISSIONER PENTEFOUNTAS: And taping that comes with that recording?
8988 MR. ENGLEHART: I beg your pardon?
8989 COMMISSIONER PENTEFOUNTAS: On the BDU service there is a recording function that adds --
8990 MR. ENGELHART: Yes. So I would agree with you that the ISP network is not ideally suited for video service. I would disagree that the ISPs' ability to offer cable makes it impossible for them to compete.
8991 Even in Ontario, in Ontario where we have the ability for quad-play, 60 per cent of our customers are not on the bundle. That is Rogers.
8992 So we are able to sell to lots of customers who are not on the bundle, so the ISPs can do the same thing.
8993 COMMISSIONER PENTEFOUNTAS: That is interesting, we talked about sort of video and the CBB rates. You know, we seem to be in a catch-22 or Mexican standoff, or you name the analogy, but we heard last week that CBB rates, from CNOC members if I recall, are perhaps 10 times greater than they should be. Right?
8994 And you are telling us that they are not even close to being high enough. How does one go about reconciling that bit of a spread?
8995 MR. ENGELHART: Well, I thought that their explanations were a bit absurd.
8996 So they were saying, if you look at the prices we pay for inter-city facilities, they are a lot lower than the prices we are being charged here for last mile facilities.
8997 Well, no fooling. You know, inter-city facilities are wildly competitive and have been for decades. Last mile facilities are the expensive part to build, everybody knows that.
8998 So it is crazy for them to be comparing last mile with something else, it makes no sense.
8999 The second thing is, yes, the Commission's models subsidize those CBB rates in the early years. So the way it works, it is a 10-year forecast. The cable company is getting less than cost for the first five years, more than cost for the last five years.
9000 So as the volumes increase, as the model said they would, these guys go from paying less than cost to start paying their cost. And they go, whoa, we need this to stop, we are over paying.
9001 And then the Commission has another brand new costing proceeding. So we never get to those last five years. It is sort of like when you have a mortgage on your home; for the first 10 years you are just paying interest, and for the last 10 years you are paying your principal. We never get our principal paid because the Commission keeps doing a new costing study and we never get to those last five years.
9002 So it is very expensive for Mr. Faccia to put in the facilities to manage capacity.
9003 Our capacity at Rogers is growing at 60 per cent a year. He spends a fortune meeting that demand and those CBB rates do not fully reflect that, but they certainly don't -- we are certainly not over-charging them, as they have said.
9004 COMMISSIONER PENTEFOUNTAS: Is that 10-year period too long, given what you have seen over the past few years, Mr. Engelhart?
9005 MR. ENGELHART: Oh, yes. I mean, you know, frankly if the CRTC had the ability to predict what was going to happen for 10 years in the internet market, you would all be wealthy venture capitalists today and not working for the CRTC.
9006 Nobody knows what is going to happen in 10 years. And yet, that is exactly what your costing model does. Your costing model predicts productivity, it predicts traffic growth, it predicts all sorts of things. It is a superhuman task for anyone to make a 10-year forecast that is accurate in this market.
9007 And given what I said before about the fact that the full 10 years is never allowed to run, it should be a three or four-year study.
9008 COMMISSIONER PENTEFOUNTAS: You still haven't given us some way of reconciling the fact that CNOC members think the rate should be 10 per cent of what it is now. And you think it is too low where it is at now.
9009 MR. ENGELHART: I will let Mr. Watt try.
9010 MR. WATT: Yes, I will give it a shot.
9011 I am just going to pickup where Ken left off. When they come and speak of that factor, and the fellow from VMedia gave his example, I can buy a 5 or 10 GB for $5,000, so that is 0.50 cents a megabyte, so it should be about $5 for 100 MB. He is talking about inter-city transport.
9012 And so one example would be, say one high-capacity pipe from say Toronto to Buffalo might be his example to get into the worldwide web.
9013 And he is trying to compare the cost of that facility to the cost of Rogers in one headend area, where we will have on average say 200,000 homes. So we have a facility running from our headend to each of the 200,000 homes in that serving area. And the CBB recovers the usage sensitive costs of providing facilities to those 200,000 homes.
9014 So to compare the cost of one line between -- so you maybe have, I don't know, 100 miles to get from Toronto to Buffalo, and we have 200,000 homes, say they are on average just one mile and they are farther than one mile from that headend, you have not got, instead of 100 miles, you have 200,000 miles worth of costs of digging up the roads, laying fibre, et cetera.
9015 And so that is the difference between the costs that they are relying upon to get the factor of 10 applied to the CBB, and that is just simply not correct.
9016 COMMISSIONER PENTEFOUNTAS: I wanted one on the bundles, but you are raising another issue that has come to mind and it has come before the Commission from CNOC members and others, and that is BAS basically.
9017 Here is an attempt by the competitors to invest in facilities. I gather from your initial document and others that that would be impossible to implement, far too costly, and it is just going up the wrong track.
9018 Do you want to sort of expand on the whole BAS issue?
9019 MR. ENGELHART: So I always thought it should be disaggregated. That is how we set it up originally. It is a last mile service, you can have the last mile.
9020 The middle mile, if you will, is competitive, was declared competitive by the Commission 14 years ago or something, intra-city facilities is another word for the middle mile.
9021 So we set it up that way. And at the last hearing we were told, no no no, this is wrong, you have to have aggregated, Bell has aggregated, symmetry is important, we can't let you be asymmetrical. And so we had to put aggregated, and it cost us a lot of money.
9022 And now we have aggregated and, as we say, we seem to have a fire hose of customers.
9023 So I find it kind of perplexing or troubling that it appears that their goal all along was to get both. I think it was dishonest of them to say, well, we would like aggregated, and then almost immediately ask for both.
9024 If the Commission had known that the prospect on the table was going to be both it might have made a different decision, I don't know.
9025 So right now both is just going to cost us more money. It is not impossible. Of course, nothing is impossible, but it would be a huge pain. Even to set it up as disaggregated in the first place. I had Mr. Faccia quarrelling with me because, you know, he said, my headends aren't setup for this, Ken, this is not what I want to do. You know, but we set it up that way and how we have decommissioned it all and we have aggregated.
9026 Another part of your question is that this is a way for the resellers to invest. I think this is an improper use of the word "invest" in this context.
9027 When we talk about the ladder of investment, when we talk about the public policy issues, we are always talking about investments in last mile facilities. Investing in middle mile facilities is not a public policy issue and there is no public policy benefit if they invest in middle mile facilities.
9028 As I said, 14 years ago you said the middle mile was competitive, because there is lots of people who provide it. So whether they invest in middle mile or whether they invest in servers, this is not the issue. The issue is last mile facilities, that is the bottleneck facility, if there is one.
9029 COMMISSIONER PENTEFOUNTAS: I think that Mr. Watt spoke to the 200,000 homes. CBB rate is not last mile, it is first mile. When you talk about your 200,000 homes.
9030 MR. WATT: No. The CBB rate recovers usage -- costs that have been deemed to be usage sensitive for the last mile facility. So going from our headend out to each home.
9031 COMMISSIONER PENTEFOUNTAS: Okay.
9032 MR. ENGELHART: Let me just add a bit to what Mr. Watt said. And he will correct me if I am wrong.
9033 But for our network between the customer's home and the point of aggregation at 151 Front Street, I am going to say about 80 per cent of the CBB rate is the last mile and about 20 per cent is the intra-city network which gathers up the traffic from all those headends and brings it back to 151 Front.
9034 So the vast majority of the CBB rate is the last mile.
9035 COMMISSIONER PENTEFOUNTAS: I missed that. I was looking at something else.
9036 Mr. Watt, you wanted to expand on that?
9037 MR. WATT: No, Ken is absolutely right. Just pictorially, in Ontario we had say 31 headends; so London and Kitchener, five or six in Toronto.
9038 So in the CBB it is the transport cost to get traffic from that headend to the aggregation point at 855 York Mills. And that represents roughly 20 per cent of the cost in the CBB.
9039 And we provided back in the costing studies that lead to the determinations in 2011-703 numbers which actually have that breakdown. And I know that the Commission staff's model that lead, when they made the adjustments to our rates, they can see precisely what are the components, the cost components that go into the CBB.
9040 And again, it puts the lie to any idea that should the Commission decide to endorse BAS and go back to disaggregated TPIA, that the capacity charge for the resellers would drop dramatically. That is simply not the case.
9041 There had been some allusions last week that, well, if we go to BAS this will dramatically reduce CBB. And in some cases people have even inferred that it would eliminate it entirely. That is absolutely not the case with respect to our numbers --
9042 COMMISSIONER PENTEFOUNTAS: Well, the interference was it would be cheaper for us to build than to pay the CBB rates.
9043 MR. WATT: That is right. But our point is we have been making -- and I know we have repeated it several times now, they would, when they build, if they build, only replace a very small component of those costs. It would only be replacing the backhaul say from London to York Mills.
9044 They obviously would not be replacing the costs that are incurred getting from the headends out to each of the individual homes.
9045 COMMISSIONER PENTEFOUNTAS: Well, I will let someone else follow-up on that and I will take us back to bundles for a second.
9046 And I will put it in the following sense. If 60 per cent of your customers are paying for bundles, quad-plays preferably, I suppose if you add sort of home security that might give you another play. And if you enjoy market power in one element of the bundle, would you have market power over the whole?
9047 MR. ENGELHART: First of all, 60 per cent in Ontario are not on the bundle.
9048 COMMISSIONER PENTEFOUNTAS: Are not, so 40 per cent?
9049 MR. ENGELHART: Yes. I don't think it gives you market power. No question about it, you know, customers like the convenience of bundled offerings, it allows them to get some discounts. But it doesn't give us market power.
9050 As I said, in British Columbia we compete in wireless against TELUS who has a bundle. And, I mean, I wish I was them in B.C. and not the other way around, but we still compete very effectively in B.C.
9051 COMMISSIONER PENTEFOUNTAS: But amongst that 40 per cent of your clientele in Ontario, would you say that you enjoy market power?
9052 If we were to take CNOC's argument and say that on the video front they cannot compete, if you enjoy market power over one element of the bundle, would you agree that you enjoy market over the entirety of the bundle?
9053 MR. ENGELHART: I don't think that is right. But I also don't think we enjoy market power over any element of the bundle.
9054 I think that all these services are competitive and it makes sense for us to try and sell people the quad-play because we bring in all that revenue. And so we can afford to give them a discount, and that is what everyone does when they have bundling.
9055 And, look, we are looking for ways, don't get me wrong, we are looking for ways to increase bundling. We offer, for example, on our wireless network a home phone replacement service to try to get some of that going. But wouldn't call it market power. I wouldn't say that the thing that is driving bundles is market power.
9056 And perhaps I will let Dr. Wallsten add a bit.
9057 DR. WALLSTEN: Yes, thanks.
9058 I think when you are asking about market power you are also asking whether the services are tied to each other, you know, if they -- you can only get internet say if you buy the video service. And, you know, as far as I understand, that is not the case.
9059 Also, you know, the questions assume that there's only one way to do a bundle also, which is over the same platform, and that's not true. In principle, you could offer video by contracting with a satellite company -- not satellite, broadband satellite video distributor. And then, you know, you could take it even further, you could take it to sort of the absurd. If the resellers worry that they can't compete without offering a bundle, perhaps the pure video sellers, the satellite companies would worry that they can't compete without offering a bundle too and then you might say they have to have some way to offer that same bundle, which nobody has ever proposed.
9060 So I don't see how either there's market power here since there's no tying and also why it should be -- if they're thinking about a bundle, why it should be restricted to only one means of providing that bundle.
9061 COMMISSIONER PENTEFOUNTAS: Okay.
9062 Let's move to some business and residential issues. Your position is -- and it wasn't raised today but in your intervention, your written document from earlier this year -- that the business market should be treated differently from the residential market for the purposes of mandating HSA, or HSIA as you refer to it. You would agree with that?
9063 MR. ENGELHART: Yes.
9064 COMMISSIONER PENTEFOUNTAS: Okay.
9065 And if we get back to your November submission, in paragraph 8 you mention that, and I quote:
"Cable carriers are not the incumbents and have no market power in the market for business high-speed Internet access. There is no basis for requiring cable carriers to provide TPIA corresponding to the retail business high-speed Internet access service." (As read)
9066 If you look at the 2014 Monitoring Report, you look at Table 5.3.3, it's pretty clear that you're in the game as much as ILECs are if they are at sort of 500 million and you're at 300 million. Wouldn't that suggest to you that cablecos have a very strong market position, even incumbency?
9067 MR. ENGELHART: No, no. I agree with you if you had two ubiquitous networks in the business market, you know, you would probably treat them the same. But no, we're not ubiquitous. We're still entering the business market. We're spending a ton of money on it. We're doing better but we're still far from ubiquitous in the business market.
9068 And you also, you know, do need to think about why would a new entrant ever have to unbundle. It's something that the Commission has never done.
9069 COMMISSIONER PENTEFOUNTAS: It's your answer. I'm not going to convince you otherwise.
9070 Would you like to add something, Monsieur Roy?
9071 MR. ROY: No, no.
9072 COMMISSIONER PENTEFOUNTAS: Okay.
9073 Continuing along the same line, CNOC alleges -- and you heard it last week -- that cable companies have refused to provide competitors with some services on the wholesale basis because those services were developed specifically and exclusively for business as opposed to residential. They're quite troubled by that position. Would you care to respond to that, Mr. Engelhart?
9074 MR. ENGELHART: Well, they are allowed under Commission's rules to get the residential Internet service wherever it is, even in a business location. So there's no restriction there.
9075 But yeah, we -- our business services --
9076 COMMISSIONER PENTEFOUNTAS: You shut the door to some services, claiming that they're business services, not residential?
9077 MR. ENGELHART: Not claiming. There are some business services, right?
9079 COMMISSIONER PENTEFOUNTAS: On the basis of?
9080 MR. ENGELHART: Yeah. Carry on.
9081 MR. WATT: Well, basically --
9082 COMMISSIONER PENTEFOUNTAS: If you want, go ahead.
9083 MR. WATT: -- as Ken said, we provide the residential profile Internet service at a business location where we have a facility. The services that we do not provide would be static IP type business services.
9084 There was a Commission working group and a CISC activity that specified a couple of ways in which static IP addresses for business services might be provided to the resellers and that decision indicated that a reseller was to come forward and conduct a trial with one of the cable companies. No reseller has come and asked, to my knowledge, a cable company, certainly not Rogers and I'm pretty confident that none of the other cable companies has had a customer come forward to conduct that trial. So those services, static IP-based business services, are not available to the ISPs.
9085 COMMISSIONER PENTEFOUNTAS: You also mentioned in your response of March 2014 that -- I think it was CNOC that might have mentioned it, but you did indicate that you offer two business retail high-speed access services which include features that cannot be supported by TPIA for technical reasons. Are those the reasons you're referring to?
9086 MR. WATT: Yes, that's exact. Those are the exact two services that I'm referring to, yes.
9087 COMMISSIONER PENTEFOUNTAS: Okay.
9088 And have you done anything to overcome these technical limitations?
9089 MR. WATT: No. Again, as I said, we view the onus as being on the ISPs for one of them to come forward and contact one of the cable companies and conduct a trial to see what can be done.
9090 It's not a trivial matter. If you go back and look at those decisions, there actually is one approach that I think possibly can be performed completely by the ISPs on their own, but there I don't know the full technical details of that.
9091 The other requires work to be undertaken that never has been undertaken. We're the only country in the world that offers -- that has TPIA --
9092 COMMISSIONER PENTEFOUNTAS: The only country or the only company? Sorry.
9093 MR. WATT: Pardon me?
9094 COMMISSIONER PENTEFOUNTAS: The only country in the world or the only company?
9095 MR. WATT: Only country in the world that has TPIA implemented and so there's no precedent to follow. We use a managed router functionality to provide static IP addresses to our business customers and that managed router environment would have to undergo development and experiment to see if that can still apply in a third-party Internet access arena.
9096 COMMISSIONER PENTEFOUNTAS: How far off would that be?
9097 MR. WATT: I don't know, it's never been done.
9098 COMMISSIONER PENTEFOUNTAS: If it's even doable; is that it?
9099 MR. WATT: Correct.
9100 COMMISSIONER PENTEFOUNTAS: Okay.
9101 MR. ENGELHART: If I could just add, Vice-Chairman. You know, back to your point about isn't Rogers really ubiquitous in the business market. We're not. I mean for whatever reason cable companies built residential markets and cable companies all across North America have now realized we're stupid, we should be in the business market, there's lots of money to be made there and we're building aggressively.
9102 But as we mentioned in our opening remarks, we spent $800 million buying fibre networks from Blink and Atria. Why did we do that? Because we didn't have fibre going into those buildings and we had to pay them really a pretty penny to get those networks.
9103 And it's still a problem for our salesmen that, you know, this building is on the network, this building is not on the network, this building is, and people have to dig up the roads to get those networks put in.
9104 All of us -- well, certainly me -- you know, get calls from small business people that we know, saying, "Ken, I want to buy your Rogers service and your blankety-blank sales guy told me it was going to cost me $5,000." And then I contact Mr. Faccia and one of his colleagues. Because we're not in those buildings.
9105 So we're certainly investing a lot in business and we certainly want to do more but we don't have a ubiquitous business wireline network.
9106 COMMISSIONER PENTEFOUNTAS: If you look at the numbers, you're pretty close. I mean I don't know when --
9107 MR. WATT: Well --
9108 COMMISSIONER PENTEFOUNTAS: -- you will find yourselves as -- sorry, go ahead, Mr. Watt.
9109 MR. WATT: Sorry to interrupt. There was actually an interrogatory -- I can find the number maybe at the break -- but we indicated we're connected to about one-third of the business locations in our cable footprint.
9110 COMMISSIONER PENTEFOUNTAS: I understand that, but cablecos generally -- and I'm not restricting myself to Rogers and we could probably get the numbers for Rogers specifically -- your sales are so close to the ILECs' sales, and I'll refer you to Chart 5.3.3 of the Monitoring Report and maybe we can get back to that after the break --
9111 MR. ENGELHART: Okay.
9112 COMMISSIONER PENTEFOUNTAS: -- or you can take it as an undertaking if you wish to give you a chance to take a look at the table to which I'm referring.
9113 ULLs briefly. You used to be a customer for Bell in terms of unbundled local loops --
9114 MR. ENGELHART: Right.
9115 COMMISSIONER PENTEFOUNTAS: -- and you stopped making use of those loops. What service did that clientele migrate to?
9116 MR. ENGELHART: In some cases we just shut them down or sold them. So we just got out of that business and just realized we're not going to make any money on it, let's just decommission it. And we've told our salesmen to sell on our network and we sell services that use our cable and fibre.
9117 COMMISSIONER PENTEFOUNTAS: So any migration, you basically put them on your network. Is there any -- what retail services can ULLs support today?
9118 MR. ENGELHART: Well, it's interesting.
9119 COMMISSIONER PENTEFOUNTAS: Is there a future sort of in downstream services for ULLs?
9120 MR. ENGELHART: I mean in some countries there is. I mean the ladder of investment in some countries like in France has been -- resellers started with Bitstream, which is like GAS or TPIA. Then they moved up the ladder to ULLs, and Free in France is an example of that. And then, you know --
9121 In Canada people seem to be moving down the ladder. Everyone is moving away from ULL and on to Bitstream because it's easier and because the rates are so low.
9122 But yeah, with ULLs you can provide obviously voice and Internet and you can actually provide video as well.
9123 COMMISSIONER PENTEFOUNTAS: Okay.
9124 So there is a future for them?
9125 MR. ENGELHART: I don't think there's a future for it in Canada but there's a technology that lets you do that and some Europeans are doing it.
9126 COMMISSIONER PENTEFOUNTAS: Okay.
9127 Bell's proposal to stop mandating ULLs on Band A and B? We've asked everyone for their reaction to that.
9128 MR. ENGELHART: I mean from an essential facilities doctrine perspective, it should be forborne because, you know, cable and telephone provide this vigorous competition in voice. Voice is a declining market anyway and people are cutting the cord and going to wireless, and so the unbundled loops are no longer essential. But as I indicated before, that may not always be the determinative factor for you.
9129 COMMISSIONER PENTEFOUNTAS: Yeah. I had a question on Ethernet and high-speed CDN. You've kind of answered that today already. In 2008 the Commission's decision to phase out; as a result, you invested massively, as you mentioned, with Blink and Atria. You would rather these services not be mandated and certainly not have any conditions placed on cablecos as a consequence of that?
9130 MR. ENGELHART: Right. I think that the system is working. You hope that people would invest in facilities and they are.
9131 COMMISSIONER PENTEFOUNTAS: You are.
9132 MR. ENGELHART: Yes.
9133 COMMISSIONER PENTEFOUNTAS: Just to help us get a little more meat around that particular bone, would you be able to provide -- and you've already spoken to the issue and if you want to elaborate please do and if you want to take it as an undertaking, please do.
9134 If there's any evidence that you can provide that retail data business markets are sufficiently competitive, one -- and you've already stated that they are; and two, if the Commission does decide to re-regulate -- I understand your position notwithstanding -- and mandate Ethernet services, why shouldn't its decisions be applied symmetrically to both ILECs and cablecos?
9135 I understand you think you're green as grass getting in the game but if you can answer that question by taking into consideration the data under chart 5.3.3 of the Monitoring Report.
9136 And maybe we can do that after the break, Mr. Chairman --
9137 THE CHAIRPERSON: Well --
9138 COMMISSIONER PENTEFOUNTAS: -- if that's -- or we can keep going. I'll leave it up to you.
9139 THE CHAIRPERSON: No, we can take a break. But did you want to answer that question?
9140 MR. ENGELHART: Well, let me answer the first half first. You know, I think something that you can take into account is the fact that the business users don't seem to be knocking down your door saying we're getting ripped off here.
9141 You know, I started my career working for a business user association that -- I started my telecom career, not my career, and I appeared in this room before this Commission, saying that, you know, business users were paying too much and we needed more competition. That organization is now shut down. So business users, I think, are fairly happy with the marketplace they have.
9142 COMMISSIONER PENTEFOUNTAS: I won't even touch that as to when you started in this business, Mr. Engelhart, but I understand your answer.
9143 And on the symmetry, I gather your answer relates to the fact that you think you have no market power and that you're just getting in the game?
9144 MR. ENGELHART: Yeah. If you've got two ubiquitous networks, you have to treat them symmetrically, obviously. So I don't think we have a ubiquitous business network and I don't think that we should be regulated, but maybe I'm having trouble thinking about it clearly because I just don't know why you would be mandating wholesale in the business market anyway.
9145 COMMISSIONER PENTEFOUNTAS: Given your investment of late and your continued investment, when would we have this ubiquitous market?
9146 MR. ENGELHART: Well, I think, you know, as Dave said, we're up to about a third of the business locations where we have facilities. If you're up to 60 or 70 percent, that sounds like a fairly ubiquitous network to me.
9147 COMMISSIONER PENTEFOUNTAS: Okay.
9148 Thank you, Mr. Chairman.
9149 THE CHAIRPERSON: So let's take a 15-minute break till five minutes to 11:00 and we'll continue the questioning at that point.
9150 COMMISSIONER PENTEFOUNTAS: Thanks, Mr. Chairman.
--- Upon recessing at 1039
--- Upon resuming at 1058
9151 LE PRÉSIDENT : À l'ordre, s'il vous plaît. Order, please. We will continue with the questions.
9152 COMMISSIONER PENTEFOUNTAS: So we heard yesterday from Dr. Weisman that the retail minus approach was unprincipled. I think that's the best thing he said about it. I can't remember the rest of it, but troubled in all kinds of ways.
9153 We have also heard that it would be more difficult than the costing, Phase II costing that we are doing right now. How do you respond to that? No one seems to have jumped on board the retail minus Rogers bandwagon.
9154 MR. ENGELHART: I will agree with that last point.
9155 MR. ENGELHART: I will ask Dr. Wallsten to respond as well, but, no, it is absolutely not true that economists prefer long-run incremental costing to price minus. Economists hate all costing. They think all costing is inherently arbitrary, it doesn't work and they say there's no point even asking which costing methodology is better. You just have to study the incentives that those costing models create.
9156 When you think about it, what is Phase II doing? It's saying let's add up all the costs of the network so that we can charge the resellers for the network. Price minus is saying let's subtract all the costs of the things that aren't the network so we can charge the resellers for the network.
9157 So conceptually, I totally disagree with TELUS that one is totally right and one is totally wrong, they are the same objective. You know, Alfred Khan, the sort of father of regulatory economics hated Telerik in the U.S., which is the same as Phase II, so there is no way that economists particularly like one and don't like the other.
9158 The problem with Phase II is it is a 10-year forecast. It's a forecast. How hard is it to forecast anything? You can sort of forecast things that are happening right now, but forecasting things 10 years out is difficult.
9159 And the way those 10-year models work, you get the power of compound interest, you know. My father always explained to me the power of compound interest: If you start saving while you are young you will have a happy retirement.
9160 A 10-year model does the same thing. If you bury an incorrect productivity factor in year one, by the end of year 10 you are wildly out of skew. But the model takes the net present value back to today, so that power of compounding interest messes up the current rates in the market. That's why Phase II is so hard. It also requires people to understand the intricacies of a cable network, which they don't.
9161 Price minus is easier because you look at the prices in the market. It's kind of what the government did in the wireless preceding, right, where they said average revenue per minute.
9162 Here you would be looking at average revenue per user. It's an easier calculation and then you do a resource study, well, what are these guys spending on sales and marketing and Internet transit today, so you don't have to make the forecast.
9163 So I will pass it to Dr. Wallsten to talk about TELUS' argument that somehow it is economically invalid.
9164 MR. WALLSTEN: Yes, thanks, Ken.
9165 This isn't something I wrote about in my reports, but it's something I'm very happy to address. I was really surprised to hear Dr. Weisman call it unprincipled since -- because in the early 2000's that was the main focus of his research. I shouldn't say the main focus. He wrote several papers on it which was then also called the efficient component pricing rule. You know, in those papers he certainly didn't decide that it was unprincipled. He compared it to sort of other things and said it might be good in some cases and not so good in others. So I'm not sure why the big change.
9166 COMMISSIONER PENTEFOUNTAS: Well, I would rather not speak in his absence, but, yes, I don't know. Things change.
9167 MR. WALLSTEN: Right. I mean the real question is, what incentive does one system put in place relative to another system. You know, under a retail price minus system there would be other questions you would have to answer, questions that you started to get into earlier, you know, how would you account for such and such and would you include wireless. Those are exactly the kinds of --
9168 COMMISSIONER PENTEFOUNTAS: But there are as many variables in the retail minus as there are to the cost-plus.
9169 MR. WALLSTEN: See, I'm not sure about that. I think it's interesting because when people think about retail minus -- and there are disadvantages of course, but you begin to list out how you would -- you begin to list out the various components and think about how you might account for them.
9170 What's interesting about that is with retail minus, at least as it has been set up here, you can actually think of what those pieces are. It is a separate thing to think of how to allocate those costs, but with the cost models they are so complicated that nobody even knows what to ask. You can't ask very -- such specific questions because there are so many components of it. Here at least you can identify the components that you want to know about. That's at least something.
9171 So I'm not saying one is inherently better than the other --
9172 COMMISSIONER PENTEFOUNTAS: Well, you still have --
9173 MR. WALLSTEN: -- they are all incentives.
9174 COMMISSIONER PENTEFOUNTAS: You equally have to decide on what each of those components, what percentage of the equation they make up --
9175 MR. WALLSTEN: Yes.
9176 COMMISSIONER PENTEFOUNTAS: -- in deciding what the retail is and what services are you going to be withdrawing from --
9177 MR. WALLSTEN: Exactly.
9178 COMMISSIONER PENTEFOUNTAS: Forgive me, Professor, but I still don't see how it is simpler. That's not to say that it's not better, but an argument can be made that it's not necessarily simpler, it is not necessarily better.
9179 What is that missing link? I mean what is that great smoking gun that is going to push this Commission or any other learned body to adopt retail minus as opposed to Phase 2 costing?
9180 MR. WALLSTEN: I'm not going to argue that one is simpler than another.
9181 COMMISSIONER PENTEFOUNTAS: Okay.
9182 MR. WALLSTEN: They have different incentives and require different investigations.
9183 MR. ENGELHART: I'm going to argue that one is simpler than the other. So let me give you a practical example or an impractical example that we faced in the last costing round. So at Rogers we augment our facilities in a node when we get to 60 percent of capacity.
9184 COMMISSIONER PENTEFOUNTAS: Okay.
9185 MR. ENGELHART: All cable companies augment before they get to 100 percent because if you wait until you are at 100 percent then the traffic slows down.
9186 So what other cable companies do is they augment a 75 percent, so by the time that node gets to 100 percent they have augmented. We augment at 60 percent. So by the time that node gets to 90 percent we have augmented. We do that because sometimes things go wrong and we want our customers to have a beautiful experience and not get slowed down.
9187 So because we augment earlier -- well, when the Commission staff looked at that costing model they said, "Well, this isn't right, your model is augmenting at 60 percent. All the other cable companies augment at 75 percent. We are just not going to let you do that. You have to do your model like everybody else at 75 percent augmentation". So they disallowed a bunch of our costs.
9188 However, another part of the model has what's called the peak conversion factor so it ends up converting megabytes of traffic into a speed at peak. When you look at the Rogers network, it's not very clogged up at the peak. It's pretty unclogged.
9189 So that means that when you apply the Rogers conversion factor we end up with lower CBB rates than anyone else. So we sort of got whip side. We did get whip side because the costs that let us have a lower conversion factor were disallowed. So we end up with way lower rates than Videotron and Cogeco.
9190 I mean there is a road in Mississauga that separates Rogers from Cogeco and on one side of the road the network is 60 percent less costly than on the other side of the road. It's implausible. So you end up with a result that is simply implausible. It cannot be true that the Cogeco network is 60 percent more expensive than the Rogers network. We believe we know what happened.
9191 The Commission disallowed some costs and then took the actual number that those costs created for the conversion factor. So that's why we end up with way lower costs than Cogeco and Videotron, which seems to indicate that in the real world the costing model has messed up.
9192 That's pretty complicated. What I just described it to you is pretty complicated. It took me about an hour or two to learn it and now I have given it to you in two or three minutes. It's complicated stuff.
9193 When I look at the questions that the Commission asked us about the peakiness of our traffic at the different nodes at the different times and what they said in response to our review and vary. I don't think they were being anything other than honest. I think they made a mistake because this stuff is too complicated.
9194 So with price minus obviously there is going to be disputes about, well, how do you allocate this and how do you allocate that? You always have those disputes. But the complexity of Phase II, because it involves a forward-looking model where there is a bunch of different moving parts you can get into making a lot more mistakes. You also again are making forecasts about the future.
9195 Fifteen years ago the Commission staff said, "Well, we are going to give you 75 percent of your CMTS costs". CMTS stands for cable modem termination system. So there wasn't any dispute about the cost. They just said, "We are lopping off 25 percent". "Why are you lopping off 25 percent?" "Because you are going to use it for something other than intranet".
9196 Well, you can't use it for anything other than intranet because it just terminates the cable modems. So a few years later we said, "You were wrong. We didn't use it for anything else". They said, "All right, fair enough. We will knock it down to 10 percent".
9197 So still to this day we are only allowed to recover 90 percent of our costs. That doesn't make any sense, but that's the problems you get into with the complexity of the system. So it's very hard. This is why it is a model. It is a representation of something that might happen in the future.
9198 Price minus, for whatever reason, is not a model of the future. It is saying this is what is happening today and it tends to be kind of stable. Those avoidable costs tend to be kind of the same number for everybody. So you could pick a number. If one guy was at 18 and one guy was at 19 and one guy was at 21, you could say it's 20 percent for everybody. You calculate the ARPU. You subtract 20 percent. It is way simpler than doing Phase II.
9199 COMMISSIONER PENTEFOUNTAS: But you would have to exclude television offers and --
9200 MR. ENGELHART: What?
9201 COMMISSIONER PENTEFOUNTAS: -- iPad offers and everything else that goes into acquiring that client --
9202 MR. ENGELHART: Yes.
9203 COMMISSIONER PENTEFOUNTAS: -- on the retail side.
9204 MR. ENGELHART: Those are --
9205 COMMISSIONER PENTEFOUNTAS: And you could discourage those kinds of incentives on the retail front by adopting a retail minus model.
9206 MR. ENGELHART: No. I mean you give away a free iPad, that's the minus. That is your cost of acquisition. That's the thing that gets minused.
9207 COMMISSIONER PENTEFOUNTAS: Okay.
9208 So we are not going to go through costing again.
9209 There may have been some depreciation on that CMTS hold back but you don't think so when it was 75 percent as opposed to 90 percent and you could use that modem somewhere else?
9210 MR. ENGELHART: No.
9211 COMMISSIONER PENTEFOUNTAS: There was no --
9212 MR. ENGELHART: No.
9213 COMMISSIONER PENTEFOUNTAS: Okay.
9214 And we're not going to get there.
9215 So at the end of the day, it's complicated from Roger's perspective and you are even, in some instances, being punished for being prudent and that lowers your peak convergent formula because you are reinvesting at 60 percent as opposed to another competitor that may be reinvesting at 75?
9216 MR. ENGELHART: Yes.
9217 COMMISSIONER PENTEFOUNTAS: Right.
9218 MR. ENGELHART: You build a better network and you get a lower cost.
9219 I'm going to ask Dr. Wallsten if he wants to jump in again.
9220 COMMISSIONER PENTEFOUNTAS: Yes.
9221 MR. WALLSTEN: I'm sorry, just one more thing. In fact, I think you --
9222 COMMISSIONER PENTEFOUNTAS: Are you sure?
9223 Go ahead, Dr. Wallsten.
9224 MR. WALLSTEN: No, we are not going to disagree. In fact, I think you may have even said this.
9225 You know, another difference is the way the incentives are set up under our retail. Under efficient component price rule of retail price minus, you know, you create an incentive to become more efficient, whereas under a cost model you lose that you lose that incentive because if you lower your cost it just gets passed on to everyone else. So that's an obvious advantage in principle to this model than to what is currently used.
9226 COMMISSIONER PENTEFOUNTAS: Okay.
9227 Just briefly, you know, we talked about bundles earlier, you would also have to figure out a way of subtracting any advantage from a bundle in deciding what your retail minus is. I'm not sure, isn't that another layer that you don't find in --
9228 MR. ENGELHART: Yeah, but I mean we have that problem with -- we have that issue with 27(1) of the Telecommunications Act. So we are able to separate the price of our services in the bundle and the cost.
9229 It involves allocation. There is no question about it, an allocation is an approximation of the real world. But it works for our calculation of the roaming rate and I believe it is a much closer approximation of the real world than forward-looking costing models.
9230 COMMISSIONER PENTEFOUNTAS: Okay. I understand your position.
9231 Notwithstanding that, markups, should they strictly recover fixed and common costs or should something else be included in that?
9232 MR. ENGELHART: Right now markups recover fixed and common costs and a whole bunch of other little costs that the model doesn't bother with. So the way it was designed, well, we won't bother modelling this little amount and this little amount. We will lump it altogether and you get 30 percent.
9233 So yes, the markup is another cost element. It's not a profit element. The phone companies were given another 10 percent because of -- to incent them to build fibre-to-the-node.
9234 Yes, I am not sure why that incentive would have been necessarily added to the markup. It could have been added somewhere else and I sure don't understand why they would get that and we wouldn't.
9235 COMMISSIONER PENTEFOUNTAS: We are not going to rehash that debate either, but I think the justification was clearly put out in that decision. If you don't agree with it, you are entitled to not agree with it.
9236 We've also -- I've also asked the question of specifically the ILECs and others in terms of risky investments and how you value risky investments, and sort of open-ended if you can speak to us on that issue.
9237 I spoke to TELUS yesterday about the low risk investments and that hurdle rate and a high risk investment, the cost of capital, the cost of capital adjusted for the increased risk for riskier investments at Rogers internally, a 30,000 foot sort of level. How would you -- how do you evaluate risky investments internally?
9238 MR. ENGELHART: Yes. I would agree with a lot of what TELUS told you. So yes, you do a modelling exercise.
9239 For example, getting back to those business customers that we talked about before the break, there's a building, there are no Rogers customers in it, there is no Rogers wire into it. The salesman says, "Well, I have three customers or one customer who wants to come on board".
9240 So we do a calculation and we say, "Well, if those people come on board and if, you know, within 10 years we get the 25 percent of people in that building are on Rogers, does that make money for us"? And yes, you build a hurdle rate in there. So it's similar to what TELUS described to you.
9241 But I guess one of the things that may have been left out of that discussion, and I will ask my colleagues whether they want to add anything, but from a public policy perspective, those sort of -- that sort of thinking leaves out what economists call the option value of the investment. The option value of the investment has to do with the fact that they are not all winners.
9242 So you are looking ex post at the winners and saying, well, let's give this carrier their cost of capital and they should be happy with that.
9243 But what about all the projects that lose? What about the years and years and years of network investment that had negative returns?
9244 So if you have a portfolio of investments; some are mature and paying profits, some are immature and incurring losses, some are winners, some are losers, and on the winners when they are mature you get your cost of capital, well, you are not actually recovering your cost of capital because during the early years and all the losers you lost your cost of capital. So as a corporation overall you are losing.
9245 That's another attractiveness of price minus. It doesn't try to capture those returns. It assumes that in a competitive market those returns are compensatory.
9246 COMMISSIONER PENTEFOUNTAS: Yes, but don't you capture risk there, Mr. Engelhart?
9247 MR. ENGELHART: Price minus --
9248 COMMISSIONER PENTEFOUNTAS: That is going to be -- setting aside price minus in terms of the cost of capital, if you were to add the increased cost of the risk involved in any particular investment, and I appreciate you want to bring it back to retail minus, aren't you calculating that increased risk in the cost of capital? That is my question. How do we go about assessing that?
9249 MR. ENGELHART: Well, first of all you are not capturing the option value so you don't fully compensate the carrier for the risks they have incurred.
9250 Secondly, again, it puts you in this position of having superhuman powers that you can see what risks people incur. You can kind of read their minds and figure out what they wouldn't do, absent that risk premium. It also ends up really distorting the wholesale market, because you can give them an extra 10 percent in the wholesale market.
9251 But for all their retail customers, they don't get that extra 10 percent. So if it really is a risky investment, they are not going to do it. You really end up distorting the wholesale market and not really having much impact on the investment decision at all, in our view.
9252 I don't know if my colleagues want to add? No.
9253 COMMISSIONER PENTEFOUNTAS: Okay.
9254 MR. ENGELHART: I mean it's very, very hard for you to say what will these people do without this 10 percent? What will they do with the 10 percent? But in theory I get your point. It is to give people an incentive for something that's more risky. I just think it's too hard to calculate, distorts the wholesale market and doesn't end up solving the problem.
9255 COMMISSIONER PENTEFOUNTAS: Okay, that's fine. I won't go any further on that front.
9256 I asked this question yesterday in terms of out of territory investments. Does Rogers have any plans?
9257 MR. ENGELHART: We have more than plans. We have facilities. So we are building in Québec, we are building in Alberta, we are building wireline facilities in these other provinces.
9258 COMMISSIONER PENTEFOUNTAS: On the business side or on the residential side?
9259 MR. ENGELHART: On the business side.
9260 COMMISSIONER PENTEFOUNTAS: Okay. In the same way that TELUS is trying to capture segments of that market?
9261 MR. ENGELHART: Yes.
9262 COMMISSIONER PENTEFOUNTAS: Okay.
9263 MR. ENGELHART: And, as I said before, you know, somebody would take a shot at building residential out of market to try and be that the third, but the wholesale regime currently is sort of crowding out those third players. It's too hard if there is already a bunch of wholesalers there and too easy to become a wholesaler.
9264 COMMISSIONER PENTEFOUNTAS: Well, besides the wholesalers you already have the incumbents.
9265 MR. ENGELHART: Yes.
9266 COMMISSIONER PENTEFOUNTAS: Would there be a business case to be made for Rogers to invest in fibre-to-the-home out of market?
9267 And I will let you pick your city with the proper --
9268 MR. ENGELHART: Yes. I mean, I think if there was no wholesale regime people would take a shot at it.
9269 Don't get me wrong, I probably wouldn't be the one at Rogers advocating being the third wire. I have never been hugely supportive of that model, but people would take a shot at it, yes.
9270 COMMISSIONER PENTEFOUNTAS: Okay.
9271 Bell has proposed exemptions and I want to get your opinion on this, as we have asked it of others, from the exemptions to require cost studies, one for recently filed cost studies and two for services where the demand in revenue is very low. Your perspective on that proposal?
9272 MR. ENGELHART: I will let Dave take a shot at it.
9273 MR. WATT: We would agree with both proposals. Having said that, though, you know, I did speak with them to try and understand exactly what the proposal was, because at the end of the day you need a rate. So I think for the services that have very -- forecasts have really low demand and you have a rate, a speed rate; that is, another service that has a speed similar to the one you are now introducing and expect a low demand, you are going to possibly pick that rate, which has sometimes been done today on an interim basis.
9274 But I think their proposal is that it would be done on a final basis and there would be no requirement for a cost study. So I think that's fair enough that that's a very small demand service, it's --
9275 COMMISSIONER PENTEFOUNTAS: The second element of being that there has been a recent cost study that has already gone through.
9276 MR. WATT: Well, maybe that might not be a recent cost study. That existing rate that is similar and has a service characteristic that is similar to the new service might have been there for quite some time.
9277 So I think the point being simply that if it's very low demand you don't want to do a very expensive cost study. So you should pick something that there has to be some benchmark sort of, though, for that rate. But I totally agree with that.
9278 And then in terms of a recent cost study, I agree with that as well. For example, we would have -- in some cases we had, say, 30 Mb per second service rate and a 50 Mb per service rate and we introduced a 40 Mb per service rate and if you had two recent cost studies for the 30 and the 50, I would think you could reasonably prorate between those two speeds and not do a complete new cost study.
9279 COMMISSIONER PENTEFOUNTAS: That was my next question, to see if there were any other exemptions that you could foresee where it would be appropriate not to subject a tariff application and then the subsequent cost study.
9280 MR. WATT: Well, I think the --
9281 COMMISSIONER PENTEFOUNTAS: Besides the recent study or the low demand, low revenue service. Anywhere else we could --
9282 MR. WATT: Well, I think in that case -- so Bell posited the recent study. I have sort of extrapolated that to the services in between two speeds. I would think even if those were not recent cost studies for the 30 and the 50 that you could reasonably prorate the difference for a 40 Mb per second service.
9283 COMMISSIONER PENTEFOUNTAS: Okay.
9284 Anything else you can think of, feel free. I think, what are we, December 12th, whenever the closing is -- is at the 12th? Thank you.
9285 Benchmarking and resorting to other common costs for the purposes of comparison from your perspective.
9286 MR. ENGELHART: Well, as I described before having to do with the augmentation we do at 60 percent versus 75 percent, the Commission is benchmarking. So you are saying we are going to disallow this because other people don't do it.
9287 My point there was, if you are going to benchmark one thing you have to benchmark both sides of the equation, not just one side. So I think that there is something to be said for benchmarking.
9288 And, I mean, another way of doing the same thing is maybe you just average them all together. You know, like, Bell has a cost of 35 and Rogers has a cost of 37 and Cogeco has a cost of 38. Take the average.
9289 That way -- you know, we saw the Bell rate drop dramatically a couple of years ago because I guess of an arithmetic error that they found in their calculation. So if you averaged it between everybody, then at least those arithmetic errors wouldn't change the marketplace for a couple of years until they were discovered.
9290 I get why people say, "Oh, it should be my cost, not someone else's cost". So you would do the average within a province, not between provinces, so that you would have -- and maybe you would have to divide Ontario between northern Ontario and southern Ontario. But as long as the geography was similar I would think averaging might be appropriate, because otherwise the vagaries of the cost regime could give somebody higher costs or lower costs so they would attract less wholesale business or more wholesale business in a way that doesn't really reflect the reality of the real world.
9291 So if you averaged everybody together, the wholesale providers could choose, you know, whatever facilities space provider they wanted, but they would all have the same price in the same province.
9292 COMMISSIONER PENTEFOUNTAS: So you would average regional costs, not even provincial costs or --
9293 MR. ENGELHART: Yes.
9294 COMMISSIONER PENTEFOUNTAS: -- like, to get back to a point you made earlier, but would you not get into a discussion there as to what region -- how do we divide up a region? You know, do we look at the geography, topography, density?
9295 Aren't you getting into a whole bunch of other concerns and variables?
9296 MR. ENGELHART: You could. I think provincial would probably work.
9297 COMMISSIONER PENTEFOUNTAS: Okay. Final question, and I appreciate your patience.
9298 My colleague, Vice Chair Menzies, asked this originally I think last week and I have sort of given people a chance to respond to the same question a couple of times myself. If you had to prioritize, what is sort of the worst-case scenario, what is the worst thing that can come out of this hearing and what would be the easiest thing to live with?
9299 MR. ENGELHART: I think the most important thing is that you get the price signals right. If you get the price signals right, then you will get the retail market developing as it should and the wholesale market developing as it should. So to me that's the most important thing.
9300 So therefore, the most damaging thing are people that say, as some of the resellers have said, "Well, I just think those CPP rates are too high. I would like you to lower them". So I think that could have the most distortion area effect on the market.
9301 I think having a moratorium could be helpful if it allows a wholesale markets to develop that's not as prescriptive from a regulatory perspective. So that might be this thing that I'm hoping for, second.
9302 Did you want me to go through everything or just --
9303 COMMISSIONER PENTEFOUNTAS: Go ahead, if you want, a little bit further. I wanted to ask you another question --
9304 MR. ENGELHART: Sure.
9305 COMMISSIONER PENTEFOUNTAS: -- on speeds briefly. You talked about 25, you talked about 50. The majority of your clientele today is purchasing what range or what speed specifically?
9306 MR. ENGELHART: Yes, so Dave can correct me if I'm wrong, but I think our -- I think we have a 60, not a 50. And I think 10 percent or above 60, 20 percent are at 60 and 70 percent are below 60. And it has been -- it has proven to be a little more difficult than we thought to entice people out of those higher speeds.
9307 You know, we have -- I remember when 100 megabits per second was an exciting laboratory experiment and people were going, oh my goodness, the world has changed. And we offer 150 megs service, I think, for $85 and take up this, sort of lukewarm, yes.
9308 MR. WATT: Yeah. Actually, in one of the responses to the interrogatories with the July 31st, we answered September 16th. I think it's number 10A. We actually give our forecast of retail customers by speed.
9309 Ken was just a shade high, We have -- 20 percent of our customers are greater than 35 megabits per second, so 80 percent or below and by far our most popular --
9310 COMMISSIONER PENTEFOUNTAS: Eighty percent below 25 or 35?
9311 MR. WATT: Thirty-five. And by far our most popular services are our 25 and 30 megabit per second services.
9312 MR. ENGELHART: And if I could just editorialize, you know, we always think, well, more speed is better than less speed, you know, because like when I first got my Rogers high-speed service at 1 point 5 megabits per second we were all dazzled by how much better it was then that AOL thing that we had before. But there is nothing faster than video. Once you are at a 25 megabit per second service, those YouTube videos and that Netflix video is just fine.
9313 Now, where some people might need faster is when one family member is watching that video on the TV, another family member is watching a different video on the pad, another family member is watching it on the computer. So multiple video streams simultaneously can make you want faster speed, but 25 does a pretty good job.
9314 If you need Mr. Faccia, our video expert, he can give you more details.
9315 COMMISSIONER PENTEFOUNTAS: I don't need that. I have teenagers at home. I know when you need those big speeds.
9316 We also spoke to Cogeco about DOCSIS 3.1 and 3.0 and cable, and cable being able to offer somewhere down the road -- and again, it's hard to predict those much higher speeds, the two hundredths and the three hundredths, the five hundredths. Where is Rogers on that front in being able to provide those kinds of speeds?
9317 MR. ENGELHART: Tony...?
9318 MR. FACCIA: Okay. So today --
9319 COMMISSIONER PENTEFOUNTAS: And how easy would it be -- second part of the question -- to compete with fibre-to-the-premises?
9320 MR. FACCIA: Okay.
9321 So today we have DOCSIS 3.0 widely deployed and we have speeds utilizing DOCSIS up to 250 meg. We have a fibre-based service that is above that, but otherwise that is our highest available speed on DOCSIS 3.0. As far as DOCSIS 3.1 goes, we are looking at it at the current time and we will be deploying it at some point in time. It is technology that is really not ready for primetime yet. The DOCSIS 3.1 technology enables speeds of up to 1 Gb per second to the home.
9322 MR. WATT: I would just add, we actually gave a presentation to the Commission last June just on general technology issues and the issue of DOCSIS 3.1. We could provide that on the record if you would like in this proceeding.
9323 COMMISSIONER PENTEFOUNTAS: I see legal shaking their heads.
9324 THE CHAIRPERSON: Well, now that you have mentioned it, I think we better.
9325 MR. WATT: Okay.
9326 MR. WATT: Just it gives more details. Tony can provide a substantial amount of information in a few minutes, but this has a broader look at the --
9327 COMMISSIONER PENTEFOUNTAS: I don't think we received that invitation, Mr. Chairman, to that particular -- I think it was just staff, right?
9328 MR. WATT: I believe it was just staff.
9329 COMMISSIONER PENTEFOUNTAS: Yes, okay. Thank you once again for your time.
9330 THE CHAIRPERSON: All the more reason to probably put it on the record so that we know about it as well, as Commissioners. Okay? Thank you.
9331 COMMISSIONER PENTEFOUNTAS: Thank you once again.
9332 THE CHAIRPERSON: Commissioner Shoan...?
9333 COMMISSIONER SHOAN: Good morning, gentlemen, just a few quick questions. With respect to your proposal on retail price minus avoidable costs as opposed to avoided costs, don't you run into the same problem with respect to Phase II costing if you propose to use avoidable costs in the sense that you are still projecting costs down the line, five year, 10 years, that you would likely have to also take a look at in terms of Phase II costing or am I off base on that?
9334 MR. ENGELHART: No, you just look at it that year. What are the costs you are avoiding that year and then if your price is changed and your avoidable costs changed the next year, you would change it next year.
9335 COMMISSIONER SHOAN: Okay. Great, thanks for that clarification.
9336 You had a very detailed submission on equivalency of inputs and I appreciate the international comparisons, that was very useful information. I had a couple of quick questions on that. I understand that CNOC's submission was to have equivalency with respect to service offering and timescales in terms and conditions, and I understand Roger's position as to why that is not workable in addition to the costs associated with making some of those changes.
9337 Is there a way of making the concept a bit more workable if, instead of applying equivalency of inputs to all of the things that CNOC asked for, they focus on one thing, such as service offering or timescales, and then pass down the cost of implementing that process to whomever should take advantage of it on a wholesale mandated basis. Would that make it somewhat more workable?
9338 MR. ENGELHART: I think really what you are proposing is not equivalence of inputs but some sort of QLS measures.
9339 COMMISSIONER SHOAN: Sure.
9340 MR. ENGELHART: Because the idea behind equivalence of inputs is we have to redo all of our internal processes so that someone in Rogers, Mr. Roy actually, is interfacing with someone else at Rogers like Mr. Faccia. So Tony has to deal with Sylvain, kind of as a third party. That is sort of how equivalence of inputs works.
9341 You are saying could you instead have some sort of quality of service measures about timeliness or whatever? And of course you could, and the Commission has done that before, I guess, you know.
9342 Back to our opening remarks, we have seen a 2,000 percent growth in wholesale traffic. So if we had a equivalence of inputs, I guess it would have been 3,000 percent. In other words, as I said in our opening remarks, we don't think there is a problem that needs to be solved.
9343 COMMISSIONER SHOAN: Okay. Fair enough.
9344 Those are my questions, Mr. Chairman. Thank you very much.
9345 THE CHAIRPERSON: Thank you.
9346 Vice Chair Menzies...?
9347 COMMISSIONER MENZIES: Thanks.
9348 Quickly, I know you discussed the BAS issue with the Vice Chair, but just to be more specific, and you can do this by an undertaking if you want, it's just if it became mandated you would obviously be getting requests at different times from different competitors for different locations.
9349 We are just interested in some of the detail about the complexities of implementing that when it comes to like a location by, well, head-end by head-end basis if -- when you get a request.
9350 MR. ENGELHART: Yes. So because I'm an old dinosaur in this business, I remember how things were done with co-location when that was brought in for telephone competition and it was a similar sort of problem.
9351 he way the co-location rule worked, the phone company didn't have to do anything until it got a request and then if it got a request for that central office it would build the co-location cage. And all of the construction costs for that co-location cage were charged to the first person that wanted to access co-location
9352 Then if a second carrier came along that wanted to get co-location, it would pay the first carrier half the cost that it had paid the phone company for setting up co-location in the first place. So since it's a similar problem, I think you could do something similar here.
9353 COMMISSIONER MENZIES: Thanks.
9354 And going back a couple of hours when we were talking about offering your unlimited, you indicated that you did that in response to Bell. And Bill had talked about, you know, the growth of service based competitors, which you called resellers. We will find the right name eventually, but service based competitors in the Ontario and Quebec markets, primarily.
9355 I just wanted to clarify. Did they play no role at all in those decisions to offer unlimited or what influence do they have and, more broadly, what influence do they have in the marketplace in terms of your decisions?
9356 MR. ENGELHART: I'm going to let Sylvain take a shot at this, but the temporal trigger was clearly Bell offering unlimited to us. Did those guys -- did the resellers force Bell into unlimited? I don't think so, but they could certainly argue that they did.
9357 But I will let Sylvain take a shot at this.
9358 MR. ROY: Thank you.
9359 Yes, we always have been concerned with the fast-growing consumption, like we said, 65 percent year-over-year on data and continuously increase the size of the bucket -- well, we did shy away from unlimited. The real trigger -- and I was at that time a VP of Consumer Sales at Rogers so I was part of those discussions -- the real trigger was when Bell did introduce unlimited, is when we felt we had to respond in the market.
9360 COMMISSIONER MENZIES: Okay, thanks.
9361 And my other question is a bit more philosophical, I guess, from the broader base. I was struck early on, Mr. Engelhart, when you said, and I'm kind of paraphrasing, that the Commission will never really embrace markets and will continue to regulate on behalf of resellers, was your terminology. It came with such an air of resignation that it almost troubled me in that sense.
9362 But part of what concerns me is that it kind of indicated that what you think of as our eternal fondness for regulation, combined with relatively low based on international comparisons levels of public spending on broadband facilities in this country, runs the risk of, like you said, we would -- you know, it slows investment, you know, a little.
9363 Like I don't know whether it's a lot or a little, but there kind of seemed to be a sense in that resignation that between the regulation and the relatively lower levels of public spending that we were settling, that Canada would have to sort of settle into some sort of AA or AAA rather than major-league status when it came to telecommunications infrastructure.
9364 So if you are right, what's left? What is going to incent if the -- you know, regulating on behalf of service based competitors is one thing, but there is not much talk about facilities-based competitors.
9365 So in that scenario you created for me, what is going to incent people to build into the future so that Canada has a major-league rather than a AA or AAA communication system?
9366 MR. ENGELHART: Yes, thank you.
9367 So first of all, when you say my air of resignation, it's just that in years of observing the regulatory process it seems to me that -- and I mentioned this at the last hearing this fall that sunset never happens. When things are put in place they tend to stay in place forever because people become dependent on them and then it's very hard to remove them. So that's why I think forbearance is not seen that often.
9368 I do agree with you that over-reliance on a wholesale regime can have a detrimental impact on investment and that will happen to the cable industries, as I said, once, you know, too many of our end-users are wholesale rather than retail, which will happen.
9369 The solution that we see is you need a less intrusive, less prescriptive wholesale market and one that relies more on market forces. You are going to have wholesale and you have to be there as a backstop and you have to be there in an oversight role.
9370 But if you can stop trying to predict the exact right price and let the market work that out a bit, if you can stop prescribing exactly the nature of wholesale and let the market work that out a bit, I think we can have the best of both worlds.
9371 I think we can have a market where wholesale exists, but at the same time you are sending the right price signals to facilities builders and then consumers can do very well.
9372 COMMISSIONER MENZIES: Thank you. Those were my questions.
9373 MR. ENGELHART: Thank you.
9374 THE CHAIRPERSON: Commissioner Molnar...?
9375 COMMISSIONER MOLNAR: Thank you.
9376 Let me begin just by understanding a little bit more your activity in the business markets. You said you were building on the business side out of territory. Is that for enterprise customers or what type of customers are you building to obtain? All customers?
9377 MR. ENGELHART: Tony...?
9378 MR. FACCIA: Yes. We are building out of territory or fibre-based services for the business marketplace as well as for our own wireless network for cellular backhaul, not in the residential space.
9379 COMMISSIONER MOLNAR: Right. And I'm just trying to understand the business marketplace is very large. As you know, the characteristics of a small and medium business are quite different than an enterprise business. So are you building into industrial parks or are you building to major BDUs or are you building to serve distinct enterprise customers?
9380 MR. FACCIA: We are building on a success based basis into enterprise, large business locations that require a fibre-based service. So it's only once we have a customer that we build to it.
9381 COMMISSIONER MOLNAR: Okay. Thanks.
9382 MR. ROY: Let me add, obviously the first customer who convinces us to actually build an area or a building and after that we are trying to leverage the asset to sell to every surrounding customer in that building.
9383 COMMISSIONER MOLNAR: Is that your same strategy within your region?
9384 MR. ROY: I would say so.
9385 So we normally try to do it success based. We instruct ourselves first to sell what we call "on net" first. Normally, most of the time, the first customer won't pay for the full cost of building and this is where we are taking a chance or, I guess, the risk factor. We need one to trigger the first sale, but after that we need to sell just like real estate people will do for a building, right? They won't start building the tower until they have X percent sold. So it's kind of the same principle.
9386 COMMISSIONER MOLNAR: Yes, okay. Thanks.
9387 MR. FACCIA: If I could just add to that, that is definitely true for fibre-based services. We are, as Ken said earlier, trying to extend our coax, our HFC network into business parks, plazas, those types of smaller business locations where we have some customer leads. But we are not necessarily building just to those customers that we have as customers at that point in time, but looking at providing services in those locations generally and then trying to build up our clientele in those locations over time.
9388 COMMISSIONER MOLNAR: So you would be -- I use an industrial park just as an example of, you know, small, medium bus, so you would be more apt to put your fibre coax cable into there than all fibre?
9389 MR. FACCIA: We would put our HFC, our coax into, say, a local strip mall or a smaller commercial building and try to extend out that plant and serve customers utilizing that coax cable, and they generally would have lower speed requirements, so they're well served by that.
9390 Where we have an industrial building for a particular customer that may have requirements that go above and beyond that, we would be extending fibre into that specific location and then, as Sylvain mentioned, we would use that to try to attract customers that are along the build that we've done into that particular building.
9391 COMMISSIONER MOLNAR: And just so I understand, and this is really just for my understanding, where you would extend your fibre coax, you would do that to replace the ULLs today that you've been reliant on? No?
9392 MR. FACCIA: No. In those locations, we're generally going after Internet-type services that today we don't serve, they're customers that are sitting with Bell or other providers, so we're not replacing what we currently have on those unbundled loops, they'd be new customers.
9393 COMMISSIONER MOLNAR: But you have built to replace your reliance on unbundled local loops?
9394 MR. ENGELHART: Well, we kind of got rid of the unbundled local loops a few years ago, and so --
9395 COMMISSIONER MOLNAR: And you didn't replace the facilities to serve customers?
9396 MR. ENGELHART: We had some customers who said, where are you going?
9397 COMMISSIONER MOLNAR: So you just abandoned those customers?
9398 MR. ENGELHART: Ken...?
9399 MR. FACCIA: If I could just add to that. Out of cable footprint areas, we had abandoned or sold those customers; where we have our own cable infrastructure, we tried to migrate the customers over to our cable-based services for both residential and business for voice.
9400 MR. WATT: If I could just add. The term "abandonment", very pejorative term, what we did, we --
9401 COMMISSIONER MOLNAR: Well, it sounded like you stopped providing services.
9402 MR. WATT: No, I know. I know exactly why you said it, I agree. But just to comfort you, we -- this was obviously a business decision that was taken after a lot of thought, so we had a long time to implement this.
9403 So we made -- we informed customers six months to a year before we shut down the co-location sites and worked with them to find alternative suppliers so that they were not out of service when we decommissioned the co-los, but we have shut down all of our co-location sites across the country.
9404 COMMISSIONER MOLNAR: Okay.
9405 Well, thanks. It helps me understand because you had been, obviously, a very large user of the unbundled local loops and my sense is that you had replaced those facilities somehow.
9406 Is it possible that the new suppliers would have been reliant on the same unbundled local loops?
9407 MR. WATT: Yes.
9408 COMMISSIONER MOLNAR: Yeah.
9409 MR. WATT: I slightly misspoke. When I said, "we decommissioned our co-location sites", some of them we decommissioned, others we actually sold to other providers who are then servicing those customers.
9410 So those customers, many of them I believe still are on unbundled local loops, they're just not on Rogers' service.
9411 COMMISSIONER MOLNAR: Okay, thanks. I just have a collection of questions that don't link in any way, but my next question relates to defining the retail product market for Internet.
9412 Do you view it as a single market?
9413 MR. ENGELHART: Yes. And you mean with respect to low speed, high speed, medium speed, yes. People sort of say -- well, the test that an economist would use is, if you raise the price for one do people buy some of the other, so...
9414 And other people who have appeared before you have said it's a continuum and I think that's right.
9415 So we tend to talk about, just to use an analogy, the market for cars, you know, the car market. So is a Toyota Corolla in the same market as a Camry, of course; is a Camry in the same market as a Lexus, yes; is a Lexus in the same market as a Porsche; is a Porsche in the same market as a Mercedes?
9416 So the answer to all those questions is yes, but a Toyota Corolla might not really be in the same market as a Mercedes.
9417 So if you ask yourself, is a 1.5 megabit per second service in the same market as 150 megabit per second service, maybe not, but we still colloquially talk about the market for cars.
9418 So I see Scott wants to add --
9419 COMMISSIONER MOLNAR: You know, it seems every time we have one of these hearings we always end up with an analogy, lots of times it was highways and now we're talking cars.
9420 And one might say, well, maybe it's automobiles and there's a difference between a car and a truck; where with the truck you can carry video, you know.
9421 Like at some level of usage your service provides you a range of products that aren't available at different levels of usage.
9422 MR. ENGELHART: Yeah. And for some people if the price of cars got too expensive they would buy a truck, or vice versa.
9423 COMMISSIONER MOLNAR: Well, see, I come from Saskatchewan where trucks cost more than cars, so you mixed that up.
9424 MR. ENGELHART: And so on some level they are substitutes. It becomes kind of an empirical question and I think of broadband as a single market, but you could certainly make an argument that the very low speed services don't compete with the very high speed services, but because there's all this range of intermediates you can't really talk about two markets or three markets, it's a continuum.
9426 COMMISSIONER MOLNAR: So would you see any value in us seeking to differentiate the market?
9427 MR. ENGELHART: I would not, but I'll let Scott answer.
9428 MR. WALLSTEN: Yeah. I was going to say, Ken got it I think exactly right. This is a hard and empirical question and the question is, you know, how much are people willing to trade off price for other characteristics of broadband.
9429 We usually just think of speed, but of course, there are other things too, and we know that people trade those things off all the time and the degree to which one speed substitutes for another it will depend on the price and it's an empirical question and I think it would be an interesting one to undertake because it seems doable if you have the right data.
9430 MR. ENGELHART: You know, but to answer your question --
9431 COMMISSIONER MOLNAR: Nobody undertook to do it as part of this, all of the carriers came in arguing that retail is a vibrantly competitive market, but nobody looked at whether it was one market or more.
9432 MR. ENGELHART: Yeah. I mean, this idea that the market below 50 megabits per second is wildly different from the market above 50 megabits per second, no, I absolutely disagree with that.
9433 There is a continuum and people do make those trade-offs and if you make the faster speed a smaller price differential, people will move up and vice versa.
9434 COMMISSIONER MOLNAR: Okay. I heard where you are on this, so...
9435 My other questions relate to your proposal to use retail minus. Just so I understand your proposal, the rates that are charged in TPIA today, there's two -- I mean, you know, I don't need to tell you, but there are the two components to the rate, I mean there's more, but essentially the access and usage components.
9436 MR. ENGELHART: Yes.
9437 COMMISSIONER MOLNAR: How does that fit within your proposal?
9438 MR. ENGELHART: It wouldn't, so if you move to a retail minus methodology you'd presumably have a different price for each of the different speeds. So there'd be an ARPU for the 35, an ARPU for the 60, et cetera, you'd presumably have a retail minus price for the unlimited option and you'd presumably have a retail price minus rate for the additional gigabytes. So you would get away -- it would be closer to the way the tariff was before the move to capacity charge.
9439 COMMISSIONER MOLNAR: Is there any way that retail minus could be used and still provide the separation between the access and the usage, so that those who are, you know, subscribing to a TPIA service would have some ability to control their usage and, you know, define plans based on what they would consider to be appropriate usage plans versus essentially what you would consider to be appropriate usage plans?
9440 MR. ENGELHART: Yeah. One of the things that we talked about at the last hearing, which I would throw out again, is if you say that our, say, 60 megabits per second service comes with 200 gigabytes of data -- I'm not sure what the number is, so just hypothetically -- that price that we charge is really based on breakage. So we assume that the person won't use the whole 200 gigabytes, but we could, to be nice to the resellers, say well, you get the whole 200 for every one of those you buy and then if somebody else goes over you can borrow from the gigabytes of the person who went under.
9441 So they would, in effect, be buying a huge pool of gigabytes and they could allocate them as they saw fit so that they could, as you say, design the services with the usage levels that they see fit and not ours.
9442 COMMISSIONER MOLNAR: So volume-based pricing?
9443 MR. ENGELHART: I beg your pardon?
9444 COMMISSIONER MOLNAR: Volume-based pricing?
9445 MR. ENGELHART: Yes.
9446 COMMISSIONER MOLNAR: Okay.
9447 Well, that's a bit disappointing to me, I will say. I'd like as you began this saying, it takes away some of the complexity because you're not costing the network, you're costing essentially some of the services delivered on the network, the marketing and so on, and I can understand that as getting rid of some of the complexity of trying to find a price for this.
9448 And you may have heard me through this hearing wanting to find an alternative, so...
9449 MR. ENGELHART: But I think you should also be disappointed by the behaviour in the marketplace of the wholesalers or the resellers since the tariff change was made.
9450 So there hasn't been a great deal of innovation, we haven't seen their packages look very different than their packages were before the change was made, they don't look very different from ours and when we look at their usage patterns, their customers have the same peaks and troughs as our network. So they haven't shifted the peaks in any way, they're sort of using it like we use it.
9451 So the innovation that the Commission expected when they gave a separate fixed and capacity charge, I would say hasn't really happened.
9452 COMMISSIONER MOLNAR: Okay. Just your thoughts on one thing.
9453 You mentioned that getting the price right is really the most important thing, and this actually wasn't a pricing hearing, but I do understand and everybody's talking about the price, as I mentioned, through the last week or so, nobody likes it, some think it's too high, some think it's too low, but I haven't really heard anybody who likes it.
9454 So if we were to look at it again, what would be your thoughts on us taking sort of a multi-dimensional approach in doing a Phase 2 study, doing a retail minus study, doing benchmarking and using all of those inputs in order to set what we determine to be an appropriate price?
9455 MR. ENGELHART: Well, I think --
9456 COMMISSIONER MOLNAR: I know it's a lot of work, but --
9457 MR. ENGELHART: I think that sounds like you might get to a better result, but I still think that -- I mean, this price is really what drives or doesn't drive the success of this business for the resellers.
9458 Whatever their sales people do, whatever their marketing people do, whatever their IT people do doesn't matter, it's what their regulatory people do in this hearing, it's the rate that they get, that is the beginning and the end of the success or failure of their business plan.
9459 So as long as you are in this price business they will always be telling you that they're getting ripped off. It's just -- there's nothing else for them to do, that's what they do.
9460 So I guess what I would say is the things that you mentioned, the multi-dimensional approach sounds good, but if there's some way that you can get yourself away from that, if there's some way that you can let the market work it out by having, as I've said, a benchmark that protects the wholesalers and then letting a market develop underneath it, and that way people like the carriers will stop viewing wholesale as some sort of medicine they have to take and view it as a good thing and part of the marketplace, that will allow you to not worry so much about the costing models and for the market to develop in a more healthy direction.
9461 COMMISSIONER MOLNAR: Thank you. I understand. That would require us to have faith that the carriers would negotiate.
9462 MR. ENGELHART: Right. And it's a difficult problem because if you don't have a certain amount of faith it will never happen, but if you have too much faith and it doesn't happen you'll feel like you have failed yourself as regulators.
9463 So, I mean -- I'll do another analogy. When drug companies do a test, they let the test run because if you don't let the test run then you don't know if the placebo was as good as the real drug.
9464 But every once in a while, not very often, a drug company will say, we have to stop this trial right now, this drug is working so well it's immoral for us to not give it to everybody.
9465 So there might come a point in the moratorium where you say, these carriers are not doing it, these wholesalers are not working out, are not getting the deals they want, we're going to end this trial right now and go back to regulating.
9466 But I would urge you to try to not do that, because if you can let it run for a bit you can -- there's a good chance something better will happen and, as I said, the behaviour of Bell and Cogeco should give you some hope that it will.
9467 COMMISSIONER MOLNAR: Those are my questions. Thank you.
9468 THE CHAIRPERSON: Thank you very much. My colleagues have done a very good job of going around the various issues in front of us, so I don't have any questions.
9469 Just one quick one. Your panel, and you in particular, Mr. Engelhart, I always appreciate because you always take a very pragmatic approach in putting your position before the Commission and that's always refreshing.
9470 I just want to understand the interrelationship of your various proposals and I think I know the answer, but I just want to get it on the record.
9471 So, in essence, you're saying the Commission should continue to mandate, that we should go to retail minus and you've got this notion of a moratorium, whether it's at 50 or another number I guess that's debatable, but I take it those are not necessarily a package deal, that the Commission could choose some elements of that but not necessarily the rest, they're not interrelated from your perspective; is that correct?
9472 MR. ENGELHART: You could pick and choose, yes.
9473 So, for example, you could say, well, we don't like the moratorium on the different speeds, we're going to set a price level which is a little bit higher or higher than it currently is, we're going to let a market develop, but that benchmark tariff, if you will, is going to apply to all the speeds and then we think a marketplace will develop that way.
9474 Yes, you could pick and choose them.
9475 THE CHAIRPERSON: Okay. Thank you.
9476 Those are all our questions. So thank you very much, we've kept you up at the table for a long time, we appreciate it, for your patience, but this is important.
9477 So it's a little past 12:00, so why don't we adjourn until 1:15 and we'll hear from the last two presenters in this first phase of the hearing. Thank you.
9478 Thank you very much.
--- Upon recessing at 1207
--- Upon resuming at 1317
9479 LE SECRÉTAIRE: À l'ordre, s'il vous plait.
9480 LE PRÉSIDENT: Good afternoon, à l'ordre.
9481 Madame le secrétaire, s'il vous plait.
9482 THE SECRETARY: Good afternoon. We are now ready to hear the presentation from Fiber to the Home Council Americas.
9483 Please introduce yourselves for the record first. You have 20 minutes, go ahead.
9484 MS BURNETT GOLD: Good afternoon, I am Heather Burnett Gold, the President of the Fiber to the Home Council Americas. I am joined by our counsel, Tom Cohen, and our economist, Hal Singer, a principal at Economists Incorporated.
9485 The Council is pleased to appear before the Canadian Radio-television and Telecommunications Commission to discuss its views on the Notice of Consultation dealing with wholesale services and associated policies.
9486 The development of all-fibre networks, including FTTH and FTTP, is relatively new. Only some 15 years since the first networks were deployed in the U.S. And despite the enormous capabilities of these networks, no one should underestimate the challenges in building them. They are risky investments, not only because they require large capital expenditures, but because the communications market has become increasingly competitive.
9487 Despite these challenges all-fibre deployments in the U.S. have grown substantially. This stems, to a large extent, from the decision 10 years ago by the Federal Communications Commission to reverse course on its pro-unbundling regime and not mandate the unbundling of FTTH and similar fibre infrastructure.
9488 The FCC's actions provided the proper incentive for all providers, incumbents and competitors, to accelerate their investments in all-fibre networks in the U.S. It lead, for instance, to Verizon's immediate massive FiOS deployment.
9489 It has resulted in 80 per cent of the homes in the U.S. having access to networks with download speeds of at least 50 Mbps, and these speeds continue to increase as do the number of providers offering this capability.
9490 The level of high speed broadband availability in the U.S. is approximately 50 per cent greater than in Europe, which has largely embraced unbundling. In addition, according to a recent study, broadband investment in the U.S. is $562 per household, while it is $244 in Europe.
9491 As a result of the FCC's action along with other market developments, today the U.S. market has reached an inflection point where all-fibre networks are in great demand and their deployments are accelerating.
9492 Users want the bandwith such networks provide. Communities want their economic benefits. Providers want their service capabilities and lower operating costs.
9493 One Wall Street Journal analyst just estimated that if all the announced all-fibre deployments in the U.S. metro areas are executed, 50 per cent of the homes in those areas will be passed soon. And that if plans under exploration come to fruition, that could grow to 75 per cent.
9494 In addition, studies show that having all-fibre connectivity increases the value of a home in the range of $5,000 to $10,000 per home. And having an all-fibre network increases community GDP by approximately 1.1 per cent.
9495 In our testimony we focus on one question; what would be the effects on all-fibre deployment of mandatory fibre loop unbundling or similar wholesale policies at rates based on incremental cost pricing?
9496 As we will explain, the U.S. experience in this regard is a significant event, since it is a real-world economic experiment where the FCC moved from imposing unbundling obligations on incumbents to deciding that those obligations would not apply to FTTH or even FTTC or hybrid fibre copper facilities.
9497 The FCC's action demonstrated that the industry failed to invest in fibre facilities while a mandatory unbundling regime was in effect. And when that policy was reversed investment in fibre deployment grew substantially along with greater facilities-based competitive choice.
9498 The FTTH Council is a non-for-profit entity founded in 2001. Its mission is to accelerate deployment of all-fibre access networks. The Council has over 300 members throughout the Americas, North America and LATAM, including 10 Canadian member companies.
9499 Its members represent all parts of the all-fibre ecosystem, including incumbent, competitive and municipal service providers, manufacturers and vendors, systems integrators and engineers.
9500 Since its inception, the Council has been involved in the FCC's proceeding considering the unbundling of the fibre portions of the incumbent local exchange carriers' networks. The Council has produced empirical research and analysis demonstrating that mandatory unbundling of fibre stifles network investment by incumbents and new entrants alike and, as a result, serves to undermine robust competition and ultimate consumer choice and innovation.
9501 The Council work informed the decision of the FCC more than a decade ago not to mandate unbundling of fibre network facilities. Since then, in the face of continued efforts to undo the FCC's actions, the Council has advocated successfully to maintain that policy.
9502 As a consequence, we have witnessed dramatically increased deployment of all-fibre networks by incumbents and others and more robust facilities-based competition in advanced services for consumers.
9503 The Council has every reason to expect the same outcome in Canadian markets if the CRTC adopts a no fibre unbundling policy.
9504 In the U.S. the Telecommunications Act of 1996 provided the statutory roadmap to encourage and enable the development of local competition. It requires that ILECS provide requesting telecommunications carriers non-discriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms and conditions that are just, reasonable, and non-discriminatory.
9505 The U.S. has never required comparable network unbundling of facilities by cable operators. The legislative history of the 1996 Act explained that its market-opening provisions, including mandatory unbundling, were intended to accelerate private sector deployment of advanced information technologies and services by opening all telecommunications markets to competition.
9506 The U.S. Congress found that since competitors would need time to build capital intensive networks, in the interim they would likely need to obtain facilities and capabilities from the incumbents. In other words, Congress saw unbundling as a transitional mechanism until such time as competitors built their infrastructure.
9507 The FCC initially implemented the 1996 Act by taking an expansive approach to unbundling, including by mandating the unbundling of copper loops.
9508 But only a short time later the Commission began to shift course and it eventually developed an unbundling regime favouring facilities-based competition and providing incentives for both incumbents and competitors to invest and innovate.
9509 This policy evolution is captured in the Commission's 2003 Triennial Review Order in which it adopted a targeted approach to unbundling, one that identified with greater precision the impairment facing competitive providers and provided incentives for investment and innovation.
9510 As part of this circumscribed approach to unbundling the FCC decided not to mandate the unbundling of all fibre and similar facilities, a decision that rested on solid foundation. The Commission had before it a study by the Cambridge Strategic Management Group, a group of business consultants that examine the potential effects of mandated unbundling on FTTH deployments by incumbent and competitive providers.
9511 The study found that mandating unbundling deterred incumbents from investing since they would have to share the return. And since incumbents were not investing, there was no pressure for competitors to make their own investments.
9512 Accordingly, CMSG projected that if unbundling were required, all-fibre deployments would pass only 5 per cent of the U.S. house holds in a 10-year period. In contrast, if unbundling of fibre loops was not mandated, CSMG estimated that by 2013 FTTH could be economically deployed in 31 per cent of the households, a six-fold increase.
9513 In addition, CSMG estimated that the incumbents would invest $45 billion in FTTH builds by 2013, in comparison with only $5 billion if they were required to provide unbundled access to their fibre facilities.
9514 The FCC used CSMG's findings as a basis for its decision not to mandate unbundled access to FTTH loops, concluding: "We expect this decision to refrain from unbundling incumbent LEC next-generation will stimulate facilities-based deployment. Incumbent LECs will have the opportunity to expand their deployment of these networks, enter new lines of businesses and reap the rewards of delivering broadband services to mass market with the knowledge that incumbent LEC next-generation networks will not be available on an unbundled basis. Competitive LECs will need to continue to seek innovative network options to serve end users and to fully compete against incumbent LECs in the mass market."
9515 And 10 years after the Commission's action we see the CSMG projections were on target.
9516 According to data compiled by RVA, LLC, in March 2003, a few months prior to the Triennial Review Order, FTTH facilities passed less than 1 per cent of the homes in the U.S.
9517 Shortly after the FCC's decision not to unbundle FTTH, Verizon announced it would spend upwards of $23 billion to construct its all-fibre FiOS network. In just over three years FiOS was available to 12.7 million homes in 16 states. By May of 2013 the FiOS footprint covered 18 million homes. In combination with Verizon's build, other incumbent, competitive, and municipal providers also undertook FTTH deployments.
9518 According to RVA, LLC, by early 2014, 10 years after the FCC decision, almost 30 per cent of homes in the U.S. have access to FTTH and a great many more deployments are in progress or planned. In combination with FTTN deployments, the percentage of U.S. homes passed with very high-speed broadband exceeds 50 per cent.
9519 While Verizon was the only Regional Bell Company to make investment in all-fibre networks on the scale of its FiOS offering after the Triennial Review, more recently the other RBOCs have changed course and are making substantial capital investments in FTTH facilities as well.
9520 AT&T, which has relied on its U-verse fibre-to-the-node deployments, is deploying its GigaPower fibre network in Austin and intends to expand that to 22 metropolitan areas. As for CenturyLink, in August 2014 it announced that it would expand its gigabit-speed fibre network to 16 cities.
9521 Significantly, competitors have been reacting to FTTH builds by incumbents by making investment in all-fibre networks. Importantly, the chief competitors of incumbent telecommunications companies, the cable companies, accelerated the deployment of DOCSIS technology after the FCC decided to back off its extensive unbundling policy, averaging over $15 billion in investment in the three years after the decision and spending between $12.4 and $14.6 billion annually from 2006 to 2012.
9522 By 2012 almost all cable infrastructure had been upgraded to next-generation technology, DOCSIS 3.0, capable of offering download speeds of 100 Mbps or faster.
9523 Now these cable providers are taking the next step and deploying all-fibre networks. Cox Communications, for instance, announced this past May that it will deploy gigabit internet connections in Phoenix, Las Vegas, and Omaha before expanding to all of its markets by the end of 2016. Through these investments the cable industry is offering robust facilities-based competition to incumbent wireline and other facilities-based providers.
9524 And then there are the notable all-fibre deployments by competitors to the ILECs, including Google, EPB of Chattanooga, Lafayette Utilities in Louisiana, and CSpire Communications in Mississippi, and there are so many more. In other words, there is room in some markets for a third wireline entrant, even one pursuing a greenfield build.
9525 In short, the FCC's no fibre unbundling policy has proven a success. In the past 10 years all-fibre deployments have accelerated, facilities-based competition has developed, and concerns about the deleterious effect of unbundling have eliminated it as a serious policy option.
9527 MR. SINGER: U.S. policies to abstain from unbundling of FTTH facilities have a strong basis in both empirical evidence and in economics. The U.S. decision to pursue and then unwind unbundling policies for the cooper networks provides a natural experiment for economists to study its impact. The lesson learned is that entrants will respond to a menu of entry options by favouring those that are artificially supported by government regulations.
9528 Specifically, if a regulator favours one form of entry, for example, resale of a facilities-based provider's network elements or services over another, such as facilities-based investment, the regulator gets more of the former and less of the latter.
9529 Thus, despite U.S. policymakers' best intentions to promote facilities-based investment, the unbundling policies adopted by the FCC perversely discouraged competitive investment, as entrants who availed themselves of artificial resale opportunities were not able to wean themselves from their favoured treatment.
9530 Empirical evidence generated by the U.S. unbundling experience demonstrates clearly why unbundling in the telecommunications industry is unsound. The provisions of telecommunications is characterized by large upfront costs and de minimis marginal costs. Thus, platform providers must earn a margin over incremental costs to pay down the large upfront costs associated with building the network.
9531 U.S. regulators tried to peg unbundling prices to a marginal cost standard, which was inefficient and failed to compensate incumbents for investment risks in new facilities, such as fibre.
9532 The market response was predictable; rather than use unbundling as a transitioning vehicle to full facilities-based competition, competitors became addicted to an artificially low price of entry and investment by both incumbents and competitors stalled.
9533 In 2004 I conducted an empirical study of unbundling with Drs. Robert Crandall and Allan Ingraham. We used cross-state variation in the price of constructing local phone lines, adding capacity, relative to leasing unbundled loops to identify the sensitivity of CLEC investment in local lines to incremental cost rates mandated by the FCC.
9534 We showed that mandatory unbundling at prices based on these incremental costs encouraged a CLEC to delay facilities-based investment by altering its relative net present value of investment between time periods.
9535 We also found that facilities-based lines growth relative to unbundling growth was faster in states where regulated rates for loops were higher relative to the cost of facilities-based investment.
9536 In other words, the more generous the regulated access price, the less facilities-based CLEC investment.
9537 Other notable economists such as Tom Hazlett, former Chief Economist of the FCC, and Jerry Hausman of MIT, agree that contrary to the prediction of the stepping stone or ladder hypothesis, CLECs were increasingly relying on unbundling as their preferred mode of entry, which of course would be expected from a rational competitor, and that capital expenditures in the network actually declined dramatically for both incumbents and entrants.
9538 The disincentives for incumbents to make the capital investments to upgrade their networks for fear of being saddled with unremunerative access charges had a sobering result.
9539 Despite experiencing strong broadband and voice demand, cable companies were reluctant to invest in network upgrades in significant part because CLECs, using unbundled loops at marginal cost rates, kept margins for those services artificially low. Why invest in your own network when your rivals, DSL and voice resellers, can enter via a subsidized resale model?
9540 Even though the DOCSIS technology to make the upgrades to provide higher speed broadband and IP telephony was available for deployment as early as 1997, cable operators were slow to roll it out.
9541 It was only after a series of court orders and FCC actions beginning in 1999 which limited access to unbundled network elements that cable companies began to see the signal through the noise.
9542 As a result of these decisions and other factors, cable operators reversed course and greatly increased their investment in the DOCSIS technologies.
9543 The average annual capital expenditures for cable operators from 1996 to 1998 was $6 billion. In comparison, the average annual capital expenditures for cable operators from 2000 to 2002, as unbundling became increasingly disfavoured, was $15.1 billion, an increase of 149 per cent. In the absence of the unbundling experiment, it is reasonable that cable investment in DOCSIS would have occurred two or three years sooner.
9544 Similarly, the ILECs were reluctant to invest in fibre until they received assurances that fibre would not be subjected to mandatory sharing rules.
9545 After the FCC determined in the 2003 Triennial Review Order to not impose unbundling obligations on their fibre facilities, ILECs entered into a race with their cable counterparts to begin building the broadband networks that are transforming the communications landscape.
9546 In the span of just five years from the FCC's adoption of a policy of regulatory forbearance for fibre and IP networks in 2003, the annual miles of optical fibre deployed doubled from $5 to $10 million.
9547 The results of this competitive race are impressive. By 2000 cable infrastructure in the U.S. was largely upgraded to next generation DOCSIS 3.0 technology capable of download speeds of 100 Mbps or faster in almost 100 million households. And telecommunication carriers offering next generation fibre technology, FTTH or fibre-to-the-node, to more than 50 million households setting the stage for fierce competition, empowering new applications in a variety of other industries, including education and medicine.
9548 We understand that the residential broadband market will attract a limited number of facilities-based wireline providers because a significant penetration rate is required to cover the massive upfront costs and break even.
9549 Some may argue that two, or even three where possible, wireline providers are insufficient to characterize meaningful competition. But empirical literature shows that cable operators in the U.S. significantly reduce their broadband prices in response to a single overbuilder, suggesting that two providers are enough to provide competitive outcomes.
9550 This outcome is foreseeable since the cost of keeping a subscriber tends to be much lower than the cost of obtaining a new one.
9551 And for those who doubt two are enough, we are seeing a third wireline broadband provider, for example, Google Fiber or municipal utility deployment in many major U.S. markets, and continuous increases in throughput enjoyed by wireless broadband services make these alternative platforms increasingly competitive with their wired counterparts.
9552 MS BURNETT GOLD: The Council submits that this proceeding provides the CRTC with an important opportunity; by not mandating unbundling of FTTP by the incumbent local communications providers, it can both accelerate investment in FTTP and foster competition for the provision of ultra-high-speed broadband and other services.
9553 This conclusion is based on the experience in the U.S. where a decade-old decision of the FCC to not require unbundling has resulted in substantial FTTP investments by the incumbents and others, facilities-based broadband competition and very high-speed broadband service offerings for consumers.
9554 The U.S. experience in FTTP deployment and use also demonstrates that these networks are fundamental drivers of economic growth, social interaction and citizen engagement.
9555 There is little doubt that communities, residents, businesses and community anchor institutions in the U.S. see the tremendous value in having FTTP connectivity.
9556 The Council wants Canada to reap the same benefits.
9557 Thank you.
9558 THE CHAIRPERSON: Thank you very much.
9559 Commissioner Molnar will start us off. Thanks.
9560 COMMISSIONER MOLNAR: Thank you for your presentation.
9561 I want to begin just understanding a little more about your organization. I appreciate, I guess it is on page 3 of your remarks, that you mention that you are not-for-profit, a mission to accelerate deployment to all-fibre access networks.
9562 So what is it exactly your organization does?
9563 MS BURNETT GOLD: So I would imagine in Canada you have a similar organization, we are called a trade association. We represent manufacturers, vendors, engineers and what we call network operators, service providers, including incumbents, competitive overbuilders, and municipal utility systems that are involved in fibre-to-the-home.
9564 So we are involved in education, training, and public policy advocacy.
9565 COMMISSIONER MOLNAR: Okay. So education, training, as well as advocacy?
9566 MS BURNETT GOLD: Correct.
9567 COMMISSIONER MOLNAR: Training in what kind of elements?
9568 MS BURNETT GOLD: We sponsor training for installers --
9569 COMMISSIONER MOLNAR: Okay.
9570 MS BURNETT GOLD: -- we also do training for communities that are interested in improving the investment capabilities for obtaining fibre-to-the-home.
9571 COMMISSIONER MOLNAR: Okay, thank you.
9572 And, as you mentioned, you have 10 Canadian member companies?
9573 MS BURNETT GOLD: Yes.
9574 COMMISSIONER MOLNAR: I actually went through in your submission the list and noted that it was the ILECs that are appearing before us in this hearing, they are all --
9575 MS BURNETT GOLD: Some of the members, yes. And then we have some manufacturers and vendors as well.
9576 COMMISSIONER MOLNAR: Right. But all of the members appearing before us within the ILECs are parts of your -- members?
9577 MS BURNETT GOLD: Yes.
9578 COMMISSIONER MOLNAR: You mention that you do training. And I noticed in here -- I am going to try and find where it is referenced, if I can find this. I can't find the page, but you made a reference to operational cost savings --
9579 MS BURNETT GOLD: Yes.
9580 COMMISSIONER MOLNAR: -- with fibre and... Oh, here it is, on page 2 you mention that providers want the service capabilities and lower operating costs associated with...
9581 And that is fibre-to-the-prem you are speaking of there? An all-fibre network?
9582 MS BURNETT GOLD: Yes.
9583 COMMISSIONER MOLNAR: So just very very quickly, can you tell us the lower operating costs that you are referring to?
9584 MS BURNETT GOLD: So what our members and others -- Verizon is not a member, but they have shared some of their statistics with us -- have found as a result of deploying fibre-to-the-premises, is that they have been able to reduce their operating expenses for that portion of the network on average by 18 per cent.
9585 All-fibre networks require less active components in the field and they require less maintenance over time. So the reliability is far higher, and so your service calls go down and your operations expense goes down.
9586 COMMISSIONER MOLNAR: Thank you. I do want to get into the U.S. experience a little more fully. But just as an opening question, as we talk about reducing operating expenses and so on, would the copper plant, its nature, how old it is and so on affect when some of these people decided to do overbuilds?
9587 BURNETT GOLD: Yes, it would. Particularly, we have seen that in our what we call Tier 2 and 3 markets when it has been time to replace or upgrade they have decided to go all-fibre rather than doing an incremental approach.
9588 COMMISSIONER MOLNAR: Right. So some of these builds were really just -- I mean, were intended to replace the copper plant because of the integrity of the plant and the age of the plant and --
9589 MS BURNETT GOLD: Yes, some of them were.
9590 COMMISSIONER MOLNAR: -- its ability to carry new services?
9591 Okay, thank you.
9592 In page 6 at the end, when you are talking about the cablecos moving to DOCSIS 3.0. When I am reading this it appears that the cablecos were chasing the incumbent telephone companies in achieving speeds.
9593 Is that the experience in the U.S.? Who are the speed leaders?
9594 MR. SINGER: Technically, DSL was first, and so you could say that they were following DSL, but they overleapt, they leapt over the DSL speeds with their initial round of investments in DOCSIS.
9595 COMMISSIONER MOLNAR: Right. So essentially, like here, the ILECs are seeking to match the speeds of the cablecos that have been enabled by DOCSIS 3.0?
9596 MR. SINGER: I think it has gone back and forth. I mean, at one point you had DSL in the lead and then cable, and now fibre is arguably faster.
9597 COMMISSIONER MOLNAR: But as you are moving into the fibre-to-the-prem builds, the all-fibre builds, they will be catching up to, and surpassing I understand, and surpassing the speeds of cable. But right now, the ILECs are not able to achieve the speeds of the cablecos in the U.S.?
9598 MR. COHEN: Yes. I mean DSL is an inferior technology at the moment in competing with DOCSIS. It can't produce the speeds.
9599 AT&T with fibre-to-the-node has recently announced 50 Mb download speeds, and so they are enhancing their plant. But at some point when cable is rolling out, as they have over the past year or so, 100 Mb speeds in virtually all their markets, you need to take the next step.
9600 COMMISSIONER MOLNAR: Right.
9601 MR. COHEN: And that is why we talk about AT&T announcing the like.
9602 COMMISSIONER MOLNAR: Right. I understand. As I mentioned, I just had the sense in reading this that -- it says:
"Through these investments, the cable industry is offering robust facilities-based competition to incumbent wireline and other facilities-based providers."
9603 I mean in competition but they had the speeds first. They didn't --
9604 MS BURNETT GOLD: Yes.
9605 MR. COHEN: Yes.
9606 COMMISSIONER MOLNAR: Yes.
9607 MR. COHEN: Ten years ago and they are still out there leading and the telcos need to catch up.
9608 COMMISSIONER MOLNAR: Right. You're aware that our cable companies have also deployed this --
9609 MR. COHEN: Right.
9610 COMMISSIONER MOLNAR: -- despite unbundling, a mandatory unbundling requirement on their networks?
9611 MR. COHEN: There are other factors as, you know, we recognize. In all of this our contention is what you do is very important at the margin, though, in a risky business case.
9612 COMMISSIONER MOLNAR: And there are other factors?
9613 MR. COHEN: Yes, exactly.
9614 COMMISSIONER MOLNAR: Thank you.
9615 Can I ask -- as you mentioned, what we do is important at the margins and on page 8 you noted that:
"US regulators [previous to fibre-to-the-prem in their unbundling] had tried to peg unbundled prices to a marginal-cost standard, which was inefficient and failed to compensate incumbents for investment risks in new facilities..."
9616 Would you expect or agree that there is a price at which you could unbundle without significantly impacting the investment incentive?
9617 MR. SINGER: Sure, there probably is a price, thinking aloud. It's the price at which the incumbent would voluntarily unbundle, a voluntarily negotiated rate that would make the incumbent indifferent between serving as a wholesaler and serving as a vertically integrated retailer.
9618 COMMISSIONER MOLNAR: M'hmm. We had a company right before you suggest that retail minus, which would remove the incremental costs associated with the non-network components of the service, might be an appropriate way of pricing. It is not the negotiated rate but it is a rate which is not simply marginal cost. So there may be alternatives in which you can maintain their incentives?
9619 MR. SINGER: I'm not prepared to say that. I'm not prepared to say that I would prefer one flavour over the other. It's all toxic.
9620 COMMISSIONER MOLNAR: Oh, I'm not asking you to tell me how to price, I'm just asking whether you believe there is a price at which you can unbundle without eliminating the incentive.
9621 MR. SINGER: I'm comfortable saying my previous answer, which is that if you could peg the rate to the voluntary rate, but in that case you would need regulation.
9622 COMMISSIONER MOLNAR: Yeah. Okay.
9623 Just another question on your remarks here. You make -- and I saw this on page 10. So I'll just refer you to page 10. At the end of the second paragraph, you say:
"...telecommunications carriers offered next-generation fiber technology -- FTTH or fiber-to-the-node -- to more than 50 million households..."
9624 So do you consider fibre-to-the-node to be a next-generation technology?
9625 MR. COHEN: It's a transitional technology. At the end of the day, what we're seeing in the U.S. is people -- providers going fibre-to-the-home because they know once they put in that fibre they have this capacity to constantly upgrade it with minimal cost. In other words, going from 50 Meg to 200 Meg, whatever, that's easy at that point.
9626 And so what we're seeing is not only the ILECs go there, the cable companies over the past two years have started to go there as well because they understand in a sense we have to have this facility.
9627 COMMISSIONER MOLNAR: M'hmm. And what do you consider -- "ultra high-speed broadband" I think is the term you used in your --
9628 MR. SINGER: Yeah.
9629 MR. COHEN: In the current market it's what we would say is 50 Meg or more. The product sort of definition is dynamic. I mean the FCC, three years ago in a proceeding, found the comparable speeds in the U.S. all over was 4 and 1. They are about to adopt next week 10 and 1 and the Chairman wants to go even higher. I think we're into a market where these speeds double virtually every year or so and --
9630 COMMISSIONER MOLNAR: So when you said it within this submission --
9631 MR. COHEN: It was 50 Meg.
9632 COMMISSIONER MOLNAR: -- you were thinking 50 Meg?
9633 MR. COHEN: Right.
9634 COMMISSIONER MOLNAR: And if that's delivered over fibre-to-the-node or fibre-to-the-prem, you're achieving the needs of the communities at 50 Meg, that's ultra high speed?
9635 MR. COHEN: In the current market, yes.
9636 COMMISSIONER MOLNAR: Yes. Thank you. And is it your view when you define it as 50 Meg and include fibre-to-the-node that somehow the U.S. experience is better than the Canadian experience?
9637 MS BURNETT GOLD: I don't -- I think what we're saying in the U.S. is I don't think it's -- I think it's illustrative of what can happen when you no longer require unbundling in terms of the investment.
9638 COMMISSIONER MOLNAR: Right. But you must know our experience and our deployment and the extent to which 50 Meg is available to Canadians. So you've come here to say the U.S. has done it right because it's better than ours?
9639 MS BURNETT GOLD: What we have seen is a greater incentive for investment in those high-capacity networks we currently have.
9640 COMMISSIONER MOLNAR: Including fibre-to-the-node?
9641 MS BURNETT GOLD: Yes.
9642 COMMISSIONER MOLNAR: And ultra high speed at 50 Meg in the U.S. is greater than ours; that's your position?
9643 MS BURNETT GOLD: I cannot answer whether our 50 Meg is greater than yours.
9644 COMMISSIONER MOLNAR: Okay.
9645 MR. COHEN: Yeah. I don't know but if I --
9646 COMMISSIONER MOLNAR: I just have one more question. Fundamentally, what I took from your submission and your comments here -- oops, those aren't your comments here -- is the fundamental that unbundling stifles investment -- and I'm taking this from page 3:
"...and, as a result, serves to undermine robust competition and ultimately consumer choice and innovation."
9647 That's your key message. And your key message is they got it right in the U.S., so follow their example. And yet, I feel very certain that you folks would have read the remarks of Chairman Tom Wheeler on September 14th. Right. So I'll read you some of his remarks and give you the opportunity to sort of respond.
9648 He says:
"At 25 Mbps, there is simply no competitive choice for most Americans. Stop and let that sink in... three-quarters of American homes have no competitive choice for the essential infrastructure for 21st century economics and democracy. Included in that is almost 20 percent who have no service at all!
Things only get worse as you move to 50 Mbps where 82 percent of consumers lack a choice."
9649 So how would you say that that's the model we should be following?
9650 MR. SINGER: Sure. Can I take that one on?
9651 COMMISSIONER MOLNAR: Yes, of course.
9652 MR. SINGER: So the FCC puts out its own statistics on competition at different speed bands. It was interesting that in that speech Chairman Wheeler did not refer to his own statistics. Instead, he referred to the NTIA's statistics.
9653 If you go to the semi-annual reports that the FCC puts out, the highest speed band is 10 Mbps -- and I can tell you the stats because I know them there -- and those stats show that 93 percent of households in the U.S. enjoy two or more wireline broadband providers at speeds of 10 Mbps or higher. And that's already stale, that's about a year old. To say it differently, only 7 percent of U.S. households are dependent on a single provider of wireline service.
9654 Now, you might say that 10 Mbps, or even the Chairman might say that 10 Mbps isn't going to do it, but in another FCC report it's noted that most Americans cannot detect for the majority of applications a difference in the quality of service between 10 Mbps and 25 Mbps.
9655 My only point is that given the data that we have right now that I can assess, there is a very, very small minority -- the FCC's best estimate is around 7 percent -- who are dependent on a single wireline provider at very high speeds.
9656 COMMISSIONER MOLNAR: I just want to make sure I heard what you said. You said the FCC's estimate was --
9657 MR. SINGER: Ninety-three percent -- this is Figure 5A of the most recent Internet access --
9658 COMMISSIONER MOLNAR: Okay. So you said only 7 percent --
9659 MR. SINGER: Only 7 --
9660 COMMISSIONER MOLNAR: -- are dependent on a single provider --
9661 MR. SINGER: Correct.
9662 COMMISSIONER MOLNAR: -- at 10 Mbps or more?
9663 MR. SINGER: At the FCC's own data.
9664 COMMISSIONER MOLNAR: So when Chairman Wheeler said that 80 percent of consumers lack a choice, okay, that's over 50 Mbps --
9665 MR. SINGER: What's happening -- can I --
9666 COMMISSIONER MOLNAR: -- and you're talking 10 Mbps?
9667 MR. SINGER: Correct.
9668 COMMISSIONER MOLNAR: Okay.
9669 MR. SINGER: And so, unfortunately, the FCC's report doesn't allow me to give you the same stat at 15, but I do want to make this point, which is obvious at least to an economist.
9670 If you were to go into the country and find the fastest network, let's just say hypothetically it was 1000 Mbps or a Gig down, just hypothetically that was the fastest network and you asked yourself -- and there was only one city, by the way, that had this luxury -- and you asked yourself what fraction of Americans were beholden to a single provider at 1000 Mbps, the answer is 100 percent.
9671 I just want to use that example as a teaching tool that where you draw the line is going to influence the way in which competition will appear.
9672 COMMISSIONER MOLNAR: That's fair. We don't need to argue about those statistics, I mean the point being he didn't seem to be quite as satisfied as perhaps it appeared here.
9673 But I do want to ask you. I believe you mentioned that it is the FCC statistics that say 93 percent have --
9674 MR. SINGER: Two or more --
9675 COMMISSIONER MOLNAR: -- two or more --
9676 MR. SINGER: -- at 10 Mbps down.
9677 COMMISSIONER MOLNAR: Okay.
9678 MR. SINGER: Figure 5A, Internet Access Report.
9679 COMMISSIONER MOLNAR: Okay. So something else within this same speech where Chairman Wheeler says that:
"At the low end of throughput, 4 Mbps and 10 Mbps, the majority of Americans have a choice of only two providers. That is what economists call a "duopoly" a marketplace that is typically characterized by less than vibrant competition."
9680 Would you like to respond to that?
9681 MR. SINGER: Right. I think an economist would disagree with him. In certain industries when you have a high fixed cost, industries such as telecom or rail or a lot of network industries, if you can effectuate competitive outcomes with two, you're doing well.
9682 And the empirical evidence suggests that cable operators -- the paper actually Dr. Scott Wallsten, who's right here, was a co-author of when he was at the FCC, showed that a single entrant, a single wireline entrant in a cable territory caused the cable incumbent to drop its price and raise its speeds. Controlling for all other factors at work, he found that in a rigorous econometric model.
9683 So if you can get two or even three as we have in many circumstances, I would say that unbundling should be taken off the table. Now, if we were really looking at a monopoly, a natural monopoly market in which an industry could only support a single provider, I would have a different view, but when you can have two or more, I think unbundling should be taken off the table.
9684 COMMISSIONER MOLNAR: Okay. I just have one other question. I heard your position. It's just count the number of providers, if you get two, take off unbundling.
9685 The Competition Bureau up here had advised the Commission to look at indices or market concentration and the presence of above normal returns over an extended period of time as a means of determining whether there is market power and kind of doing market power tests versus just counting the number.
9686 MR. SINGER: I agree with that.
9687 COMMISSIONER MOLNAR: You agree.
9688 MR. SINGER: In fact, I mean I do a lot of work in the antitrust base and these, what are called structural models, are kind of losing traction in favour instead of performance metrics.
9689 And so I would say better than even returns, which are subjective and arbitrary as to how you measure them -- just look at the prices, are the prices competitive.
9690 And there is an EC study in 2012 that showed that U.S. prices for slower speeds, as below 10 Mbps, were less than the prices in Europe and in the range of 12 to 30 Mbps they were $5 more per month. This is the EC 2012. It's cited in a study at University of Pennsylvania by Chris Rioux.
9691 And the question I put to you is: Is $5 a month the right price to pay to preserve the incentives of both incumbents and entrants to continue investing and to continue this awesome dynamic experience? Is that too much to pay? And I think $5 compared to Europe as a benchmark is a pretty good deal.
9692 COMMISSIONER MOLNAR: Okay. Well, thank you. Those are actually my questions. I was going to ask if you had other recommendations and your recommendation is look at the price and ultimately make a policy determination as to what you want. Am I understanding you well?
9693 MR. SINGER: I think that in the areas that we can agree -- I hope there are a few -- that structural analysis is limited, that you could get the wrong signal if you focus just on a bean counting exercise --
9694 COMMISSIONER MOLNAR: Right.
9695 MR. SINGER: -- of how many providers are there.
9696 I don't want to take just because we have two we know that we're experiencing competitive outcomes. Let's look at the outcomes, let's look at penetration, let's look at access, let's look at prices, focus on performance, and if you're getting competitive outcomes without the need of regulatory intervention, then be very worried about interfering because there are going to be unintended consequences.
9697 COMMISSIONER MOLNAR: M'hmm. Thank you.
9698 Just one comment before you go because you began that with saying where we can agree and I think it's very important that everybody understand we're here asking questions, not defending positions we haven't yet created. So I'm not saying I agree or disagree with you, I'm simply asking questions. Thank you.
9699 THE CHAIRPERSON: Vice-Chair Menzies?
9700 COMMISSIONER MENZIES: Thanks.
9701 The context of this question is we hear from a lot of people who say things like why don't you do things more like Japan, why don't you do things more like Australia, why don't you do things more like Estonia or something, and the comparisons don't always work because I mean some countries that are suggested to us as a model I'm sure are wonderful countries but we have lakes that are bigger than them.
9702 So the population density that you deal with in the United States, for instance, is about 10 times -- the population itself is about 10 times greater and the population density is about 10 times greater. So I'm wondering whether it's a fair comparison in terms of the risk that American providers face when serving markets with a broad market that has a much higher population density than we typically deal with here and have you taken that into account in your advice to us?
9703 MS BURNETT GOLD: I'll start off and then I'll let Hal follow up.
9704 There was an interesting article that was just published on the American broadband is better than you think and one of the things it pointed out -- it did go through those various factors but one of the things it pointed out was how similar Canada and the United States are in many respects. We have large rural areas and our cities are not as dense as Japan or Europe in any way. So there is some similarity there.
9705 I was looking at the cities that we've seen where Google has entered, for example, and so they're going to have the choice of three providers. They include Austin, which only has 885,000 people. It is unique. It's a tech headquarters and so that can drive a lot of people there. But their first cities, Kansas City, Missouri and Kansas City, Kansas, in total have less than 700,000 people in the locations they decided to build in as a third wireline provider.
9706 So I think to argue about the fact that you could go into New York or LA, in fact, we're seeing a lot of robust build-outs and, as I said, our second and third tier markets. I mean Verizon right now is a unique experience among the R-BOX. So where we really see the growth is in these smaller cities and communities, you know, such as Lafayette, Louisiana or Knute, Kansas or even Austin is small. So I think in that way it's illustrative.
9707 Obviously, every country has its own culture and idiosyncrasies, good and bad, but I think if looking at the geography is one of them, I think we're more alike than dissimilar. Certainly, we're not like Europe or Japan.
9708 COMMISSIONER MENZIES: Okay. Thank you. That was my question.
9709 THE CHAIRPERSON: Vice-Chair Pentefountas.
9710 COMMISSIONER PENTEFOUNTAS: Thank you.
9711 Maybe you can help us with the following question. Most Americans are where in terms of their speeds? What are they purchasing?
9712 MS BURNETT GOLD: We often -- I would say, by and large, when people are buying they buy a bundle. We have found that as speeds increase, you really expect to have a video product with that.
9713 COMMISSIONER PENTEFOUNTAS: Yeah.
9714 MS BURNETT GOLD: So at a minimum, you're buying a two-bundle, you're buying video and the ISP, the broadband access.
9715 Now, the video comes with its own set of issues in our country. It's almost -- it's zero margin. It's a must have to make your service viable but it's not a profitable business at all because of the way our system is set up. But basically you -- because it's how you have to pay for video as a service provider.
9716 And I'll let Tom jump in on that.
9717 MR. COHEN: On speeds in the U.S. I was saying before the FCC set a benchmark in 2011 of 4 and 1. They're about to set a benchmark next week on the 11th of 10 and 1. You heard the Chairman talk about 25 and 50.
9718 I think where we are in the U.S. is those speeds are doubling roughly every year, what people are getting. What's happening is if you just as a consumer stand still, your speeds go up in that tier that you have. In other words, they just raise -- the price is the same, you're in the same tier, the speeds go up once again.
9719 I have been fortunate enough to have Verizon FiOS service. I started years ago with 35 and 35, about four years ago. I'm up to 75 and 75 now.
9720 COMMISSIONER PENTEFOUNTAS: But the majority of Americans are where?
9721 MR. SINGER: The majority of Americans, where the FCC said, are at 10 and 1 right now.
9722 COMMISSIONER PENTEFOUNTAS: Ten.
9723 MR. SINGER: And they expect that to, I think in a year or so, double to 20.
9724 COMMISSIONER PENTEFOUNTAS: Okay. You also mentioned video and you got into the bundle discussion. We've been having that discussion over the last few days. How would one consider the advent of bundles and triple and quad plays?
9725 I understand your position. Notwithstanding that, as economists and as learned observers, explain to us the importance of bundles. And more importantly, you mentioned video. I mean if you do have market power where video is concerned, does that not apply to the entirety of the bundle?
9726 MR. SINGER: I think that in the presence of bundles that standalone providers of a single component can have a rough go of it and I point to the video, the standalone video providers in the U.S., DIRECTV and Dish. I think that their inability to deliver broadband or to include broadband in their package has made it very difficult for consumers to try to break apart the bundle and the reason why is that the standalone price for cable broadband shoots through the roof if you try to break it apart and build your own. And so there's this fancy term called an "imputed price" for video which I can you through but sometimes it could be zero or below cost --
9727 COMMISSIONER PENTEFOUNTAS: No, I get it.
9728 MR. SINGER: -- which makes things very difficult for standalone providers of one component of the bundle.
9729 COMMISSIONER PENTEFOUNTAS: Okay.
9730 MR. COHEN: The situation in the U.S. right now with bundles is quite complicated because they're in transition. If you traditionally have looked where we have been for two decades or so, you absolutely had to have the video product as part of it. Fibre-to-the-home providers looked at that to see what margin they could get in order to make their case, in order to determine will they get a sufficient payback. So they needed that video margin. In the U.S. the video margin, as Heather Gold was saying is -- compressing may be the politest term for it. If you are a smaller provider it's going to virtually zero at this point and for others it will go there as well.
9731 You would think at some point the content providers would get together and say, well, we like this old model of per sub pricing and therefore stop. It's tough to tell sort of six big entities and others to stop. They all want the other to stop, but not them, and so the price keeps going and the margin drops.
9732 At the same time, with over-the-top on broadband their world is changing. We talked about -- Hal was talking about the satellite providers being weak, they have a video product, not a lot else, but DISH is about to launch an over-the-top service on its own. Will it be a bundle? Will it be a Netflix? I don't know. This is part of our sense of this market right now. It's incredibly dynamic.
9733 You asked about broadband speeds. They change along with the other attributes of broadband service; latency, data usage. That is changing real fast.
9734 The whole video world is changing fast, and so to assume sort of the bundles that we had or the bundles where we are going, I have to say all bets are off right now.
9735 COMMISSIONER PENTEFOUNTAS: You just simply have to incent incumbents to invest, that the capacity is there. That's your --
9736 MR. COHEN: That's it. I mean you want to build that capacity so that other innovators who want to go over the top have that ability to do so.
9737 COMMISSIONER PENTEFOUNTAS: Okay. You also spoke -- I think it was Professor Singer that in response to my colleague's question, as to finding a rate if you had to find the rate, if you were to mandate access to fibre, as an example, how close would that -- and you talked about a voluntary rate, but how close would that rate be to the incumbents' retail rate under a negotiated regime?
9738 MR. SINGER: Yes. So it's fairly easy to solve for. If I had a blackboard I could do it for you. But what you do is you set the -- you ask yourself, at what access price would I be indifferent between serving as a vertically-integrated wholesaler/reseller and just being a wholesaler. It's literally just trying the formula one you saw for the access price.
9739 And what it boils down to is that you basically have to be compensated for the foregone retail margin. The reason why these deals happen organically and voluntarily is that I can see two cases in the U.S. where this happens.
9740 One is that the retailer just does a better job at retailing than you. The retailer can do it at a lower cost and so there are gains in trade and a deal will happen naturally.
9741 The second --
9742 COMMISSIONER PENTEFOUNTAS: You can only do a better job -- his ability to do a better job is dependent on the rate?
9743 MR. SINGER: No. Where I was going is that his cost -- for some reason, either the cost or the quality of retail activities is better than that of the incumbent. I'm speaking hypothetically but, if that's the case, if a third party can achieve lower retail cost then there is an incentive for the incumbent to strike a deal voluntarily.
9744 The second type of -- if I can just finish?
9745 COMMISSIONER PENTEFOUNTAS: Sure.
9746 MR. SINGER: The second type of voluntary resale deals that we see occurring are in the wireless phase in the United States and here, what I think is going on, is that it's easier to establish a lower price point using a third-party's label, like Virgin, to go after the more price-sensitive segment of the marketplace then trying to establish a lower price point yourself.
9747 After all, if you do that, then your incumbent or your install base of customers are going to wonder why they are paying for the higher price. So it's a means of engaging in price discrimination. That could be another motivation for voluntary resale activity.
9748 COMMISSIONER PENTEFOUNTAS: Our incumbents have already occupied that segment of the market.
9749 But we digress. I'm still trying to get to how you arrive at a negotiated price point rate for wholesale of FTTP whereby the incumbent and/or the builder, the one deploying fibre would be properly compensated and I don't see, if I follow your formula, how that rate is south of the retail, of the incumbents' retail rate.
9750 MR. SINGER: Because all you need to compensate him for is the retail margin, so it would be the -- it's the forgone retail margin.
9751 COMMISSIONER PENTEFOUNTAS: Exactly.
9752 MR. SINGER: So it's not just the retail rate. It would be the retail rate minus the retail cost. If you can compensate --
9753 COMMISSIONER PENTEFOUNTAS: So how close would that be to the incumbents' retail rate, that's my question?
9754 MR. SINGER: Oh! You get the higher --
9755 COMMISSIONER PENTEFOUNTAS: And how reasonable is it for the wholesaler, if you want to use that terminology, to compete?
9756 MR. SINGER: Or for the -- did you mean for the reseller to compete?
9757 COMMISSIONER PENTEFOUNTAS: For the reseller to compete, yes.
9758 MR. SINGER: Yes. How feasible is it?
9759 COMMISSIONER PENTEFOUNTAS: If you have to -- yes, if you have to also include costs, the markup, the compensation for the foregone revenue as a retailer, how big a price with the reseller have to pay?
9760 MS BURNETT GOLD: Well, it depends on the cost of service, sales, overhead. For a nimble wholesaler those could be significantly less than it cost the network operator.
9761 COMMISSIONER PENTEFOUNTAS: Not if his negotiated rate is so high that he doesn't have that leeway. Under a market negotiated rate would it not be the case that that rate would be pretty close to the incumbents' retail rate?
9762 MR. SINGER: I think that's fair. I think that's fair. To the extent that the retail cost is very low then you would need to compensate the incumbent for the forgone margin.
9763 COMMISSIONER PENTEFOUNTAS: So it all depends on the rate. It doesn't matter how good a marketer you are or how good your service is, if you don't have the rate, you are not going to be a player in this game? You can get priced out by the incumbent, if there isn't a regulatory backstop?
9764 MR. SINGER: To the extent there -- I think that what you're getting at, and maybe if I can put it in economies, is that if there are large economies of scope in retail and wholesale activities then there might not be a place for third parties in this market.
9765 COMMISSIONER PENTEFOUNTAS: Okay, thank you.
9766 THE CHAIRPERSON: Thank you. Just a few more questions before we let you go.
9767 Do you appear before the regulators outside of the United States?
9768 MS BURNETT GOLD: Tom...?
9769 Yes. We have met with the -- met with LATAM regulators, particularly -- Latin America. It's my LATAM chapter, so that's why -- and Tom met with the folks in Columbia last year and we have met with the Uruguayan regulators, so yes.
9770 THE CHAIRPERSON: I meant in terms of a formal proceeding.
9771 MS BURNETT GOLD: Have you done that? No.
9772 THE CHAIRPERSON: As a trade association you do some outreach?
9773 MR. COHEN: We would if --
9774 MS BURNETT GOLD: We would if they had a proceeding.
9775 THE CHAIRPERSON: I see.
9776 MS BURNETT GOLD: There is no unbundling in Latin America.
9777 THE CHAIRPERSON: So we are the only jurisdiction you have actually appeared as a regulator outside of the United States; is that correct?
9778 MS BURNETT GOLD: Yes.
9779 THE CHAIRPERSON: And how did you come to be in this proceeding?
9780 MS BURNETT GOLD: We follow all of the regulatory proceedings. In Latin America I have a chapter that follows them and in the United States and Canada we watch for them.
9781 THE CHAIRPERSON: And your chapter is a subgroup of your members?
9782 MS BURNETT GOLD: Yes. Yes.
9783 THE CHAIRPERSON: Is that it?
9784 MS BURNETT GOLD: Yes.
9785 THE CHAIRPERSON: So would it be fair to say that you were encouraged or even asked by Canadian members to participate in this proceeding?
9786 MS BURNETT GOLD: I think we said to them we might be helpful in their arguments, but we make the same arguments in the United States.
9787 THE CHAIRPERSON: Right. You didn't answer my question. Were you asked or encouraged to participate by your Canadian members?
9788 MS BURNETT GOLD: No more so than --
9789 MR. COHEN: I think more the us going to them.
9790 MS BURNETT GOLD: To them.
9791 MR. COHEN: That is, we noticed a proceeding. We do this all the time with our members. We sort of troll for them all over and something comes up and we go to them. We are actually doing that in the U.S. with a new proceeding right now.
9792 THE CHAIRPERSON: And they certainly didn't discourage you from participating; is that correct?
9793 MS BURNETT GOLD: Correct.
9794 THE CHAIRPERSON: And as I understand you are very much a trade association. You are not like a think tank?
9795 MS BURNETT GOLD: Correct.
9796 THE CHAIRPERSON: And so I wouldn't be surprised if, as members of your council, I mean you do some thinking about issues in common. I'm not suggesting you don't think --
9797 THE CHAIRPERSON: -- but you are not a public interest group.
9798 MS BURNETT GOLD: No.
9799 THE CHAIRPERSON: You have very much private interests; is that correct?
9800 MR. COHEN: That's most certainly correct. We endeavour in our advocacy to do studies like we did in the U.S. and would do elsewhere in order to make our points. We find that sort of intellectual capital really invaluable in our work.
9801 THE CHAIRPERSON: Right. You know, we are learning -- we are getting to know you and so I am more curious, a bit like my colleague, Commissioner Molnar, of finding out about who you are and what your interests are. I take it therefore on your council you have -- you don't necessarily have citizens or consumers as part of your governance; is that correct?
9802 MS BURNETT GOLD: We would have communities who have chosen to join the council who are interested in fibre-to-the-home deployment.
9803 THE CHAIRPERSON: Like municipalities, municipal governments, that sort of thing?
9804 MS BURNETT GOLD: Yes. Yes.
9805 THE CHAIRPERSON: But not citizenship groups?
9806 MS BURNETT GOLD: No. Not -- not like a civic public interest group.
9807 THE CHAIRPERSON: Okay. Good. Well, thank you. That helps me situate you in the bigger picture. Thank you very much.
9808 Those are all our questions. Thank you very much.
9809 So, Madam Secretary, we will listen -- we will hear the final participant for today.
9810 THE SECRETARY: Yes. CANARIE, I would invite you to come to the presentation table and take your place.
9811 THE CHAIRPERSON: Welcome and please identify your panel. Go ahead when you're ready.
9812 MR. GHADBANE: Thank you very much.
9813 I want to start by thanking the Commission for giving us this opportunity today.
9814 I am Jim Ghadbane. I am President and CEO of CANARIE and you will hear a bit more about CANARIE in a second.
9815 To my left is Harry Sharma who is Manager of Strategic Policy.
9816 To my immediate right is Nancy Carter(ph), Chief Financial Officer with the organization;
9817 And to her right is Catherine Antonison(ph), and I believe, hopefully you have been given little maps of -- and we are seated according to the maps.
9818 THE CHAIRPERSON: We have those. Thank you.
9819 MR. CHADBANE: So our submission is a little bit -- is adjacent to the top-heavy discussion but we think it is actually directly relevant.
9820 CANARIE is a federally funded not-for-profit and has been a key element in Canada's digital economy, starting with the introduction of the Internet in Canada in the early 1990s. CANARIE's role is to enable and support innovation by advancing Canada's knowledge and innovation infrastructure. This includes:
9821 The national backbone of Canada's research and education network which is the ultra high-speed network supporting data-intensive research, education and innovation.
9822 It also includes software tools for researchers that help mine and interpret data.
9823 We also offer cloud technologies to enable small businesses to accelerate product development, so a broad set of services.
9824 What we have observed is there is a constant march of technology enhancement enabled by continual innovation in the digital realm. That brings with it new electronic devices, new ways to connect and new business tools. A notion that is well accepted is that digital technology grows on an exponential curve, meaning that technology can become twice as powerful at half the price or better over time.
9825 As an example, the march of technology enhancement means a Smartphone that you have today has twice the processing power roughly as it did in 2012 and costs less to build it additionally. If we extrapolate this phenomenon, the exponential trend points to a world where the rate of change could be difficult for us to absorb because, as you continue to double, the numbers become quite staggering.
9826 But, it is that march that drives CANARIE to continue its mission, which is to ensure that Canada leverages digital technology to participate and lead in the next era of innovation.
9827 You can still hear me here, right? I think I'm getting --
9828 THE CHAIRPERSON: -- you might want to --
9829 MR. GHADBANE: -- back up?
9830 THE CHAIRPERSON: -- move a little bit away from the microphone
9831 MR. GHADBANE: Yes. Yes, thank you.
9832 THE CHAIRPERSON: -- so we don't have the added sound.
9833 MR. GHADBANE: I just wanted to make sure I was being heard. Thank you for that.
9834 THE CHAIRPERSON: Thank you.
9835 MR. GHADBANE: So CANARIE, along with its partners, which includes Cybera, who has presented in front of the Commission on this topic, supports the adoption of transformative technologies in both the public and private sectors in order to spur innovation.
9836 CANARIE, in part, is driven by the same objective as the CRTC, which is to ensure that information and computer technology is used to:
"... facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions."
9837 Looking ahead, we believe that disruptive technologies, including the "Internet of Things", 3D printing, and quantum computing will need ongoing investments in broadband connectivity. For example, it is expected that one trillion "things" will be connected to the Internet in the coming decades.
9838 According to the McKinsey Global Initiative report on disruptive technologies, there will be two to three billion more people with access to the Internet in 2025, with a potential economic impact of between $5 and $7 trillion.
9839 Now, oddly enough, I believe the Vice Chairman already scooped the challenge here in Canada, but Canada does face a unique challenge to prepare for this future and today CANARIE is here to present its perspective on this challenge and recommendations from a relatively neutral point of view. That is to say, we are not infrastructure owners but demand aggregators from the research and innovation community who work with carriers to manage and evolve Canada's research and education network to meet the aggregated demand.
9840 We have been working with the carriers for over 20 years and, as a result, we have both the supply side and the demand side of the infrastructure that is currently under study and we believe that our perspective might be unique as a result.
9841 So I would like to just quickly cover the importance of digital infrastructure to the knowledge economy. In the research and innovation space we have witnessed the exponential increase of data as a result of, among other things, ubiquitous sensor networks, user-created data, and global collaboration among researchers. Over the past seven years, CANARIE has seen an average annual growth rate of 50 percent per annum in data traffic, reaching approximately 100 petabytes per year, this year. We expect the traffic growth to continue at this rate, if not higher, for the foreseeable future.
9842 It is evident that greater economic value can be created over the network as opposed to within the network itself. Every minute of every day, consumers are uploading 48 hours' worth of videos on YouTube, conducting over two million searches on Google, creating 571 websites, sharing roughly 700,000 links on Facebook, and the list goes on. I just want to recall that that is happening in the span of one minute.
9843 We see a future where citizens are even more engaged in not only consuming Internet-based services but also producing Internet content at the same time. So this combination of production and consumerism or "Pro-sumerism" will need to become the default service model of the future where interactive, customized and scalable businesses will be the norm.
9844 We know that an overwhelming majority of Canadian businesses are micro businesses with fewer than 10 employees. However, the Internet is the "great equalizer" and can bring the world market to any location with adequate connectivity. This enables a micro business to grow and compete with much larger companies.
9845 For example, locally here Shopify can totally disrupt the e-commerce market. Uber can take on an entrenched taxi service. It has been in the news quite heavily recently. And Google themselves continue to reshape the world we live in.
9846 But in order to exploit this "great equalizer" broadband connectivity in Canada needs to be widely available, affordable and of sufficient speed. This will engage or, rather, enable Canadian firms, regardless of location, to compete on the global stage.
9847 Of note is that municipalities, provinces, and the nation prosper through an exchange of goods and services that drive GDP growth. The digital age has enabled a breakdown of the physical barriers toward GDP growth. Remote or currently isolated areas have an equal opportunity to prosper as a result.
9848 Now, what is the fundamental challenge to building infrastructure in Canada? As I said, Commissioner Vice Chairman Menzies may have already scooped on this, but it's worth reiterating.
9849 To bring a global digital marketplace to Canadian companies starts with connecting communities which are comprised of cities, towns, villages, and the like. Businesses rely on a wide range of services provided by their community for their success. The first step to providing adequate access to a business, therefore, starts with connecting communities to each other and to the Internet as a whole.
9850 While there has been a continual drive to ensure local loop connectivity is competitive in Canada and much work has been in done that regard, the current approach for inter-community connectivity does not adequately address the fundamental challenge of building infrastructure in Canada.
9851 Connecting communities that span the roughly 8,000 kilometres from east to west has been a challenge for Canada since Confederation. But as a country we have connected Canadians and supported the transportation of goods from east to west using both the railroad and the Trans-Canada highway system. Historically it's evident that regulation and legislation have been needed to address these issues in the past. We believe that it will be required to address the evolution of our national digital infrastructure.
9852 Canada's population density is the lowest of the G8 countries. This comes as a result of having the second largest --
9853 MR. GHADBANE: -- bless you -- the second largest sovereign landmass, with a population less than that of California.
9854 To ensure ubiquitous availability of communications services therefore poses a unique challenge. And while we can learn from other jurisdictions, it's unlikely we can simply replicate the approach used by any specific country.
9855 Today's situation is that we are in a state where Canada's major telecommunications providers, while having made considerable investment into inter-community connectivity, have not yet emerged with an approach to provide low cost, high-speed connectivity to all Canadians. That comes right out of the CRTC data: 78 percent of Canadians are connected as of today. But this is not through lack of desire. It is simply a result of the economic implications of Canada's population and geography.
9856 Today's environment fosters competition in inter-community connectivity and, yet, service provider revenue is generated from within the community itself. This competition causes multiple service providers to lease long-term fibre from right-of-way holders along the same route. In general, they also lease all unused capacity on key corridors.
9857 Buying up all available unused capacity allows service providers to have future reserve capacity, in recognition of the fact that the Internet isn't going away any time soon. However, it greatly hinders the entry of competitive providers in the communities being served.
9858 Additionally, given that the service provider revenue stems from the community itself, smaller or remote communities may not generate enough revenue for a service provider to want to compete for that revenue. Hence, there may be little economic incentive for service providers to extend their networks to these areas. This leaves the fate of economic growth of these communities largely in the hands of service providers and risks creation of a digital divide which will only widen over time.
9859 There will always be a fine balance between short-term profits and long-term prosperity. Currently, 47 percent of independent businesses are dissatisfied with the availability of competitive options for wired Internet providers in their areas.
9860 We also believe that having parts of this country unconnected or underserved is unacceptable. No one in this country, including school-age children in remote communities, should be denied access to adequate Internet connectivity. This would suggest that our current balance between short-term profits and long-term prosperity is incorrectly skewed.
9861 So what's the need to act? The need to act comes from the facts that higher adoption of broadband services has demonstrable benefits for high-income countries such as Canada. A World Bank study concluded that high-income countries:
"... enjoyed a 1.2 percentage increase in per capita GDP growth for every 10 percent increase in broadband penetration..."
9862 Similarly, an OECD study concluded that higher adoption of broadband leads to productivity growth in the labour force. Raising broadband penetration five percent points has yielded an estimated 0.07 percent increase in labour productivity.
9863 While lowering the cost of connecting communities will lower Internet cost to subscribers for access to entertainment services, the benefits go beyond that. So the intent here is for us to talk about the business implications and not just the people that are downloading and watching videos. The flow of 'digital goods' to and from businesses residing in well served communities will be faster and cheaper, increasing profitability for them. Also, higher capacity and lower costs means that a community does not have to trade off which other services such as e-health, e-education, public safety and disaster recovery that it provides to its citizens.
9864 We understand that the study may not be looking directly at the issues of connecting underserved communities, but there is a relationship between the costs of inter-community or long haul connections and the price of service within the community itself. Regulation of the long-haul connections would lower the wholesale cost of services provided, enable more services, and increase profitability for companies.
9865 By way of an extreme example -- and we already talked about the challenges in the Canadian geography -- we could imagine that Canada was essentially a collection of islands all in the same geographic area that we occupy today. In that scenario, it would behoove us to find the lowest cost mechanism of connecting all populated islands in order to take advantage of the high margin digital economy.
9866 Service margins on the Internet are higher because the physical movement of goods is inherently more costly than exporting services over fibre optic cables. Higher margin revenue from the digital economy would support the costs of moving physical goods to and from the islands. Unfortunately, our current reality isn't that much different and in some respects it's actually a little bit worse given the diverse nature of Canada's terrain.
9867 We believe that other models do exist which would allow for communities to be well connected, wherever they are, over time giving all of them low-cost access to the global digital marketplace. While outside the scope of these hearings, we would be glad to provide you with more information on potential business models which would achieve greater connectivity to remote areas.
9868 As far as recommendations, we would recommend that the CRTC continue to regulate the inter-community routes so that there are no artificial barriers that impede access to them. And while we understand the six categories of wholesale services that are currently in place, we believe it would be easier for new entrants to compete if the regime is simplified and made transparent. We believe this will encourage competition among incumbent and new entrant service providers while increasing the leverage of existing communications infrastructure.
9869 Additionally, to ensure that a transparent and predictable system is implemented to set pricing on long-haul infrastructure routes, we encourage the CRTC to evolve the existing rate regulatory mechanism.
9870 Some key points for consideration:
9871 - Appropriate regulation of inter-community routes will enable more robust service competition among incumbents and new entrants that will provide Canadians with more choice and opportunity for broadband services. Greater utility of the infrastructure will, in the long term, offer higher revenues for carriers from value-added services delivered over the network;
9872 - Mechanisms should be developed that provide systematic and sustainable expansion of the inter-community network to connect more and more remote and rural communities;
9873 - Higher adoption of broadband, and other digital technologies, is critical for Canadians to participate and lead in the global knowledge economy;
9874 - We believe that if we don't address connectivity issues for all Canadians we run the risk of further widening the digital divide in Canada, weakening our competitive position in the global digital economy, and lagging on the benefits of the disruptive technologies;
9875 - Finally, we commend the CRTC in its role of "strengthening the social and economic fabric of Canada and its regions," and hope that our recommendations will be viewed as consistent with the objectives of the Commission.
9876 THE CHAIRPERSON: Thank you very much.
9877 Vice Chair Menzies will start us off, thanks.
9878 COMMISSIONER MENZIES: Thank you.
9879 Maybe to start off I'm just curious to know, get a little context of the questions. What inspired you to participate in this process? I mean you have -- last I checked you had about the second-fastest network in the world.
9880 MR. GHADBANE: Yes.
9881 COMMISSIONER MENZIES: And usually people show up -- I mean altruism is great, but usually there is something that has inspired them to attend or some need that they are seeing. If yours is generally the health of the country, that's great. If there is something else that made you decide to get involved in this at this time urgent, let me know.
9882 MR. GHADBANE: So it is -- it's a good question. It is a function of the role that we play.
9883 We are continually asked to, as an example, support research in very remote areas like the North. There is a big research station in the Arctic that has insufficient conductivity. We supported a project for example to connect fibre along the Mackenzie Valley just to get to Inuvik to support, you know, a low earth orbiting satellite application for research and the like.
9884 So we started to recognize that it is a very expensive proposition and the funding for this cannot just continue to come out of the public coffers, that ultimately the public -- if we consider the models that we used in the past for the telecommunication systems, like the phone system as an example, the long-distance tariffs allowed Bell Canada to expand into rural areas as an example.
9885 We don't have any similar models like that in broadband where there is any incentive for anyone to sort of reach out to communities that don't seem to have an economic value for an incumbent. That was the parallel that we drew in terms of the challenges we faced for connecting remote research areas.
9886 More closer to home if you inspect our network, to our second recommendation, we found when we go to tender ourselves to try to continue to enhance the network, we discovered that there is a wide range of prices that are being offered to us and the pricing models vary from, "Well, I'm going to give you cost plus" to "I'm going to do an NPV on all the profit I think I am ever going to make and I'm going to charge you that".
9887 So we are hindered in terms of continuing on our mission. It's manageable for us and that is definitely not the reason why we are here.
9888 We have been asked, for example, to support rural, not even rural, just Northern Ontario e-health and there is no -- we are not going to take the funding that we get from the federal government and apply it to one specific project. We need to come up to a solution.
9889 COMMISSIONER MENZIES: Okay. Thanks for that.
9890 Just referring to your oral presentation today at paragraph 15, I mean, you're right. You are more or less summarizing. I mean there is a system that's developed quite nicely without a heck of a lot of credit belonging to us over the years, but you say that it has not yet emerged with an approach to provide low-cost, high-speed connectivity to all Canadians.
9891 I'm just trying to get a sense of what sort of metrics you are looking at in terms of low-cost, high-speed, which you would consider low-cost. You know, what sort of --
9892 MR. GHADBANE: Well, affordable.
9893 COMMISSIONER MENZIES: -- I mean, these things are -- these terms are all relative. So I'm trying to get some sort of -- put me in the ballpark you are thinking about in terms of high-speed, first of all, and then low-cost.
9894 MR. GHADBANE: Well, I mean, we definitely think about speeds in sort of -- definitely a higher order of magnitude. But, you know, I would say that there are possible approaches where things you might be able to get in a dense urban centre like Toronto or Ottawa, you know, there is no reason why those prices couldn't be available nationwide.
9895 I mean the capital cost of laying fibre is a one-time charge and the point that the business model to actually pay for that fibre is what's really in question. Once the fibre is in there, then you know our sense is once you have a high-speed connection into a community, then while it is tedious to dig up the ground and lay the fibre you have this big hose that you are basically funnelling back to Toronto in an exchange or the Montreal exchange or the like.
9896 COMMISSIONER MENZIES: Right. But part of -- maybe you could address it because part of the arguments we have heard is that -- and we have seen this over the years, and that's part of Canada's dilemma, is that there are large parts of Canada that don't really constitute what you would call a market. That doesn't mean that they aren't of value because those are citizens, those are communities and conductivity is important for all kinds of reasons; sovereignty, security, public safety, government, education, health files, like as you indicated.
9897 But you know, as an example, the Mackenzie Valley fibre is being built because there are commercial clients in Inuvik which can, you know, at least give a start for it, right?
9898 MR. GHADBANE: Yes. Yes.
9899 COMMISSIONER MENZIES: But the pricing -- I don't understand, if I understood you correctly, why the price should be the same in Rankin Inlet as it is in Etobicoke, other than as a social goal.
9900 MR. GHADBANE: Well, the question would be what other target would we want to set.
9901 COMMISSIONER MENZIES: Well, I get to ask the questions. That just confuses it.
9902 MR. GHADBANE: I'm sorry, but you know we need --
9903 COMMISSIONER MENZIES: I mean as a social goal was what I was saying. That may be a goal, a public policy goal and a perfectly legitimate one that people might wish to lay out, but the economics don't work for defining the speed of your return on investment in infrastructure in Etobicoke as it does in Inuvik, right?
9904 MR. GHADBANE: I agree. I agree, and yet we build roads to get you in Inuvik. We build airports that you can fly into Inuvik, and the like.
9905 So the question is, is digital infrastructure -- you know, we have this perception or belief that digital infrastructure is in some respects an add-on to the rest of the infrastructure where we tend to think of it as an essential part of Canada's economy today and well into the future.
9906 Why we are here is we are advocating essentially that we need to start to think about strategies that would get us to a point where, irrespective of where you were in whatever community, that there is a strategy that is ultimately going to connect you.
9907 COMMISSIONER MENZIES: And I'm going to expect a good deal of that will be debated in a future proceeding as well.
9908 MR. GHADBANE: Yes.
9909 COMMISSIONER MENZIES: But in the meantime, that articulates the dilemma in terms of what we are looking at right now. So just help me understand your view on the relevant value of service-based competition and facilities-based competition, facilities-based having been the policy of the Government of Canada for some time.
9910 MR. GHADBANE: So not being an expert on this topic, I would comment from the perspective of where the revenue is being generated by the Internet today. I would say that the service revenue greatly outstrips any revenue that is being made by any Internet service provider.
9911 As a result, I would suggest that the facilities need to -- we might be better off to start to think about facilities as more commodity than are enabling services. As an example, a parallel example is we don't consider that we need to build parallel roads to enable FedEx or UPS or anyone else to compete. They compete over the exact same facility and somehow they manage to be quite successful in that respect.
9912 COMMISSIONER MENZIES: So how do we -- I mean your position is essentially that we don't need the categories of essential and mandated nonessential and that essentially everything is essential. I have said that word like six times now, but -- and access should be ubiquitous.
9913 I guess what I want to get at a little bit there is what about that incents people to build the infrastructure that you have done a good job of articulating is necessary for the country's economic development?
9914 MR. GHADBANE: So the ultimate incentive has to be GDP growth. It has to be a recognition. For Canada not to participate in the digital economy is almost a nonstarter. So then the question is as a country do we restrict that to a specific area in the country?
9915 COMMISSIONER MENZIES: And I guess part of our challenge with that is -- I mean that's a worthy goal, but what is it that we could put in structurally that would inspire Bell's shareholders to invest in GDP growth, all right? Because they're just looking for -- I mean, I should be careful. I'm sure they are fine people, but their primary motivation for investment is the return on that investment, not a national aspiration, per se.
9916 MR. GHADBANE: So without getting into the details of any specific models, we have studied the behaviours that exist today and we have come to the conclusion that as an example any carrier sitting in idle capacity, the capacity is fallow and they are not generating any revenue on that, so why do they have it?
9917 So you then say, well, there are other models where you could come to a strategy whereby -- and I don't really want to get into this detail here. I would be happy to -- as this is not directly related to this hearing, we would be happy to share with you the studies that we have done internally to CANARIE's to think through how other models that might be applicable which really says -- start with the notion that the intercommunity facilities are not necessarily a strategy for generating profitability and shareholder equity in any of the carrier providers. They are a means to the end. They are a means to getting in front of eyeballs.
9918 And so we believe that if you could come to a strategy that says there is an ability to get all the eyeballs in Canada, that would be appealing to the shareholders of Bell or Rogers or Shaw or TELUS.
9919 COMMISSIONER MENZIES: Okay. Thanks. I understand your perspective.
9920 In paragraph 14 of your original submission to us you mentioned that access to long backhaul will lead to greater competition. My question is really, access is one thing, but isn't what really defines it is the price of access, the cost of that access? At the end of the day it would be the price.
9921 So basically, what are your thoughts on how things should be costed out and priced in order to ensure that mandated access was actually effective?
9922 MR. GHADBANE: So that's a good question. That's actually covered in our second recommendation today, which is to suggest that the CRTC play a role in setting or regulating, rather, the price for intercommunity facilities. Without that, then, it's essentially various models that any incumbent or holder might have.
9923 It gets into a situation where it would be very difficult -- unless you form a partnership with the organization you are about to compete with, it would be very difficult to have a very cost-effective price or access to the broad Canadian market.
9924 COMMISSIONER MENZIES: Thank you.
9925 Also in paragraph 17 of that same document your suggestion is that there should be no categories and that everything becomes mandated, so I just want you to confirm that that means there wouldn't be any essentiality test at all. It would remove that from the process?
9926 MR. GHADBANE: I don't know that we -- I'm sorry. 'm looking at 17, response to question 4A?
9927 COMMISSIONER MENZIES: It's in your January 31st one, I think, I was referring to.
9928 COMMISSIONER MENZIES: Yes, in response to question 4A:
"As described in question 3, categorization of services hamper competition. The long-haul infrastructure itself should be fully open for competition so that competitors can compete to provide any service on top of the infrastructure." (As read)
9929 MR. GHADBANE: Yes. So the scope of our response here is into the long-haul section, so services that are offered to the consumer would -- are not -- or perhaps erroneously we quoted this to actually have it apply to services that are offered to consumers as opposed to services such as the health, public safety, research and education and the like in terms of what might be actually on the long-haul conductivity.
9930 COMMISSIONER MENZIES: Okay. Thanks for clarifying. And you go on then and in paragraph 19 you talk about public investment and that's -- you said:
"The latter could include physical or monetary incentives from national, provincial or municipal governments." (As read)
9931 I guess inferred is territorial as well.
9932 MR. GHADBANE: Yes.
9933 COMMISSIONER MENZIES: But do you have -- I am aware of the national program that is in place, but do you have any sense of the willingness or interest of municipalities and provinces to invest in that? Because at a certain point, especially when you are getting to non-economic return areas, public investment may be needed or some form of subsidy might be needed.
9934 But I have been back and forth across the country a couple of times in the last year and I haven't had a sense from the provinces, for instance, that they are making big plans for capital expenditures on broadband. Is there something you know that could help us?
9935 MR. GHADBANE: So what we have seen is generally at a municipal level. A great example is the town of Fredericton. You probably -- if you are not aware of it I can quickly summarize it.
9936 Essentially they took a strategy to provide fibre conductivity to the downtown core generating revenue based on that conductivity and then they immediately turned around and offered unused capacity to its citizens in terms of free Wi-Fi where we happen to be.
9937 So that's an initiative where a municipality recognizes that investments in digital infrastructure will ultimately lead to prosperity because their intention is obviously to become a dominant player in the ICT space and support start-ups. In recognition of that they have adopted a strategy where initial public funds were used to buildout the infrastructure, but that the costs are being recouped over time.
9938 COMMISSIONER MENZIES: Okay. Thank you. Those are my questions.
9939 COMMISSIONER PENTEFOUNTAS: Just briefly -- sorry, Mr. Chairman.
9940 THE CHAIRPERSON: Vice Chair Broadcasting. No, please go ahead.
9941 COMMISSIONER PENTEFOUNTAS: Just there are other municipalities that are doing something similar. There are all kinds of projects in Magog and elsewhere where municipalities are leveraging their ability to borrow at lower rates through their own sort of bond process and investing in intranet for the benefit of their citizenry and to try to attract more people to move into that territory because they are offering the service. Nothing prohibits municipalities coast-to-coast from offering similar services.
9942 MR. GHADBANE: Not really. In fact, there is a grassroots organization that you may have heard of called i-CANADA, which is really trying to promote that communities step up and do this and develop business, help them develop business cases in order to do that.
9943 We think that there is a lot of motivation in the communities to do that. obviously they recognize that in this digital infrastructure is essential.
9944 I just want to point out that we are not advocates -- we are supportive. We are very much supportive of that as we believe that's essential for knowledge economy. Our submission here is sort of complementary to that. We need to ensure that there are strategies that those communities are well connected once they have solved that problem.
9945 I don't know if I answered your question.
9946 COMMISSIONER PENTEFOUNTAS: No. What kind of strategies? What can the Commission due?
9947 MR. GHADBANE: So looking at the cost of intercommunity conductivity as an example.
9948 COMMISSIONER PENTEFOUNTAS: Okay.
9949 MR. GHADBANE: Because you can just -- connecting within a community, increasing the density and the core of Fredericton is kind of pointless if you have a low-speed modem that heads east towards Toronto. So you need -- you need to make sure that there is a strategy for all the communities along the way to be connected in a quilt.
9950 COMMISSIONER PENTEFOUNTAS: And the Commission should get involved in that or government should get involved in that? What's your --
9951 MR. GHADBANE: So our sense is that there needs to be -- the Commission, and I will say the Commission -- I think the Commission would benefit from understanding if there were strategies that would provide connection of communities wherever they happen to be in the country, which is what our recommendation is essentially.
9952 COMMISSIONER PENTEFOUNTAS: Something similar to sort of the north wholesale connect that's been put in place for the territories?
9953 MR. GHADBANE: But broader than that, because we think it has to cover even Northern Ontario or, you know, communities that are just slightly off of the highway, which is where all the fibre --
9954 COMMISSIONER PENTEFOUNTAS: That was my question. We should apply that kind of principle to other communities?
9955 MR. GHADBANE: Yeah. Well, I mean that's where people live, right?
9956 COMMISSIONER PENTEFOUNTAS: Right.
9957 MR. GHADBANE: People live in communities and if we have a -- if we adopt a strategy in the country that says we are only going to connect the large communities we will end up with a digital divide.
9958 So we believe that there is a role for the Commission to ensure that there is a strategy for the country through the activities that it undertakes in terms of analysing why these situations are the way they are and what's prohibiting them, and is there a role from regulation, which we would very much --
9959 COMMISSIONER PENTEFOUNTAS: And who would pay for that? Are you going leave that up to the Commission to decide who would pay for all that conductivity?
9960 MR. GHADBANE: As I said earlier, there is -- we have explored different funding models that we would be happy to share with you.
9961 COMMISSIONER PENTEFOUNTAS: Okay, great. We will take a look at that.
9962 Thank you, Mr. Chairman.
9963 THE CHAIRPERSON: Thank you very much. I will wonder tomorrow when I look at the transcript whether your "Bless you" followed a sneeze noise in the transcript. We will see how that worked out.
9964 MR. GHADBANE: Yes, I don't know if it picked it up or not.
9965 THE CHAIRPERSON: That's okay. In fact, the reason I just said that was to clear it up, just in case somebody misinterprets that.
9966 THE CHAIRPERSON: I believe those are all our questions in this phase.
9967 Now, the next phase is Phase II, which is reply. You are up first in reply, but you haven't indicated yet whether you intend to participate in the reply phase. So I invite you to talk to the Secretary right after this to confirm whether or not you intend to do so.
9968 So we are doing it in reverse order and I would heartily invite both OpenMedia and VMedia to indicate their intentions. We haven't heard from them yet, and they would be up at some point tomorrow. So if they could communicate with the Secretary in one way or another we would appreciate that.
9969 So we will be starting tomorrow morning in reverse order of the original appearance for the reply phase and we will be beginning -- be beginning, and listen to this, at 9:15, 9 h 15 à demain, not 9 o'clock which is our usual time -- 9:15 tomorrow morning, 9 h 15.
9970 We are adjourned until then. Thank you very much. À demain. Merci.
--- Whereupon the hearing adjourned at 1503, to resume on Wednesday, December 3, 2014 at 0915
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