ARCHIVÉ - Transcription - Yellowknife, NWT - 2000/06/14
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TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
NORTHWESTEL INC. - IMPLEMENTATION OF
TOLL COMPETITION AND REVIEW OF
REGULATORY FRAMEWORK, QUALITY OF SERVICE
AND RELATED MATTERS / NOROUESTEL INC.
- MISE EN OEUVRE DE LA CONCURRENCE
DANS L'INTERURBAIN ET EXAMEN
DU CADRE DE RÉGLEMENTATION,
DE LA QUALITÉ DU SERVICE
ET D'AUTRES QUESTIONS
HELD AT: TENUE À:
Town Hall Room Salle Town Hall
Best Western Gold Rush Inn Best Western Gold Rush Inn
411 Main Street 411, rue Main
Whitehorse, Yukon Whitehorse (Yukon)
June 14, 2000 le 14 juin 2000
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
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.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès-verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio-television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Public Hearing / L'audience publique
Northwestel Inc. - Implementation of toll competition and review of regulatory framework, quality of service and related matters / Norouestel Inc. - Mise en oeuvre de la concurrence dans l'interurbain et examen du cadre de réglementation, de la qualité du service et d'autres questions
BEFORE / DEVANT:
David Colville Chairperson / Président
Jean-Marc Demers Commissioner / Conseiller
Andrée Wylie Commissioner / Conseillère
David McKendry Commissioner / Conseiller
Andrée Noël Commissioner / Conseillère
Cindy Grauer Commissioner / Conseillère
Ron Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Geoff Batstone Legal Counsel /
Annie Paré Conseillers juridiques
Steve Delaney Hearing Manager/
Gérant de l'audience
Marguerite Vogel Secretary / Secrétaire
HELD AT: TENUE À:
Town Hall Room Salle Town Hall
Best Western Gold Rush Inn Best Western Gold Rush Inn
411 Main Street 411, rue Main
Whitehorse, Yukon Whitehorse (Yukon)
June 14, 2000 le 14 juin 2000
TABLE OF CONTENTS / TABLE DES MATIÈRES
AFFIRMED: RAY WELLS 12
AFFIRMED: MARK WALKER 12
AFFIRMED: CATHY HAMELIN 13
AFFIRMED: MURIEL M. CHALIFAUX 13
AFFIRMED: LESTER TAYLOR 52
Examination by Mr. Rogers 13
Examination by Ms Lawson 16
Examination by Mr. Rondeau 127
Whitehorse, Yukon / Whitehorse (Yukon)
--- Upon commencing on Wednesday, June 14, 2000
at 1304 / L'audience reprend le mercredi
14 juin 2000, à 1304
1 THE CHAIRPERSON: I am the Vice-Chair, Telecommunications, for the Canadian Radio Television and Telecommunications Commission and the Regional Commissioner for Atlantic Canada. I don't know how relevant that is where we are here now. I will be the Chair for this hearing.
2 With me on the panel are Andrée Wylie beside me who is the Commission's Vice-Chair, Broadcasting, Jean-Marc Demers and David McKendry. On this side we have Cindy Grauer who is the Regional Commissioner for British Columbia and the Yukon, Andrée Noël on the far end and Ron Williams, who is the Regional Commissioner for Alberta and the Northwest Territories.
3 We have a number of Commission staff here as well. Seated at that table is our Hearing Secretary from the Vancouver Regional Office, Marguerite Vogel, and other staff include our legal counsel, Geoff Batstone, Annie Paré as well as Steve Delaney. Where is Steve? Right here. I'm used to seeing you without a jacket on. Steve is the team leader for this proceeding.
4 As you know, the purpose of this proceeding is to consider a number of telecommunications issues which are relevant to people living in the north. Among other things, we will be discussing the implementation of toll competition in Northwestel's territory, the appropriate regulatory framework for Northwestel, Northwestel's quality of service and the appropriate return on equity for the company.
5 In February of 1998, the Commission issued Telecom Decision 98-1 in which it concluded that there should be competition and the provision of long distance service in Northwestel's operating territory. However, we also concluded that competition should not be introduced until the Commission had finished its deliberations in the high cost proceeding and had established the specific terms and conditions for long distance competition.
6 The Commission issued its decision in the high cost serving areas proceeding in October of 1999 and has initiated this proceeding to determine the terms and conditions of toll competition.
7 Some of the issues that we expect will be discussed over the course of the next two weeks include the following: The appropriate terms and conditions necessary for long distance competition in Northwestel's territory, the scope and timing of Northwestel's proposed service improvement plan, financial issues, including forecasts of revenues and expenses, the appropriate capital structure and rate of return on common equity and flowing out of all of that whether supplementary funding is necessary to achieve the basic service objective in Northwestel's operating territory and, if so, the amount.
8 As we have a full slate of issues to cover for the remainder of this week and next, we would ask for your co-operation in ensuring that all of us are able to use our time efficiently and effectively. We look forward to what promises to be a very interesting and informative hearing.
9 At this point I would like to deal with a few general matters. While we begin today's session at 1:00 p.m., as indicated in the organization and conduct letter issued on the 15th of May 2000, we propose to sit from 9:00 a.m. to 5:00 p.m. each day. We will take a lunch break as well as a 15 minute break for coffee at mid-morning and mid-afternoon.
10 The hearing will conclude no later than Friday, June 23. While we do not anticipate sitting into the evenings or on the weekend, it may be necessary to consider these options if it appears the hearing is running behind schedule. We will watch our progress and you will be advised of any changes to the schedule that become necessary.
11 In order to ensure that the court reporters are able to produce an accurate transcript when speaking, please ensure that your microphone is turned on. If not, I will remind you. Similarly, when you are finished, please remember to turn it off.
12 Anyone wishing to purchase a copy of the transcript should make the necessary arrangements with the court reporter.
13 As is our usual practice, rather than take oral appearances at the beginning of the hearing, we will do so in writing. Our Hearing Secretary has forms which when completed provide a written record of appearance. If you have not already done so, please ask for one and fill it out. The information in the form will allow us to contact you, if necessary.
14 Parties' witnesses will appear in the order set out in the organization and conduct letter sent out on the 15th of May.
15 We are going to begin with Northwestel's witnesses and we will hear from them in the order set out in the letter. However, in order to accommodate the scheduling concerns of some of the parties, we will hear the rate of return on equity witnesses some time on Thursday or Friday regardless of the order in the letter.
16 Consistent with our usual practice, traditional examination-in-chief by any party will not be permitted. Rather, a party calling a witness will generally be entitled only to examine its witness briefly regarding the preparation of the evidence, any errors or routine updates to the evidence and the witnesses' qualifications.
17 The order for cross-examination is also stated in the organization and conduct letter. Generally, Commission counsel questions and those of the Commissioners will come after the parties have completed their cross-examination of a particular representative or panel of representatives.
18 Parties should provide the Hearing Secretary with their best estimates of the time they require for cross-examination of each witness or panel of witnesses and also advise her as soon as possible of any changes to those estimates. Parties should also inform the Hearing Secretary as soon as possible if they do not intend or no longer intend to cross-examine a witness or panel. This will help us avoid the situation where a witness or witnesses are brought to the hearing only to find there are no parties with questions for them.
19 We rely on the co-operation of all parties with respect to their estimates to help in ensuring the orderly and timely conduct of the hearing.
20 The order in which parties conduct their cross-examination may be changed by agreement between the parties with advance notice to the party being examined and to the Hearing Secretary.
21 Our experience in past proceedings is that there is usually no need to engage in redirect examination, although we recognize there may be situations where redirect is necessary and appropriate.
22 After all cross-examination has been completed, we will move on to the final argument. Once again, as noted in the organization and conduct letter, the Commission intends to have oral final argument at the hearing.
23 Parties will be permitted to supplement their oral argument with written submissions filed and served on all parties at the time they present their argument. Any party who plans to make oral argument but who is not presenting witnesses or participating in cross-examination should advise the Hearing Secretary accordingly. Written reply argument may be filed by June 30, 2000, or seven days after the hearing ends, whichever is later.
24 It may not be the intention of all parties to be in attendance throughout the hearing. In this regard, I wish to stress that all parties are responsible for monitoring the progress and content of the hearing and for attending and having their witnesses available at the correct time.
25 Parties should also be aware of the progress and content of cross-examination which precedes their own in order to be ready with their cross-examination at the appropriate time and to ensure there is no unnecessary duplication of matters previously dealt with by other parties.
26 All parties should be aware that for each document to be filed at the hearing, 20 copies must be provided to the Hearing Secretary. In addition, a copy must be served on all other parties present in the room on the date the document is filed.
27 Now, this concludes the initial comments that I wish to make at this time. I will now call on Commission counsel to address some additional procedural matters.
28 MR. BATSTONE: Thank you, Mr. Chair.
29 As noted in the organization and conduct letter, oral opening statements or audiovisual presentations are not permitted. However, parties will be permitted to file written opening statements as an exhibit, serving a copy on all parties who are in the room today. In that regard, I would note that the Commission has received one opening statement from Northwestel which I would propose to give an exhibit number by the Secretary.
30 Just before we do that though, I would say if there are any additional -- if there are other parties out there who have oral written statements that they wish to file, please provide them to Marguerite and we will have them entered as exhibits at an appropriate break in the proceeding I guess. Marguerite, if you want to enter that exhibit.
31 MS VOGEL: Thank you, counsel. Mr. Chair, the exhibit entitled Northwestel Inc. Public Notice 99-21, Opening Statements, is being marked as Exhibit 1, Northwestel Exhibit 1.
32 MR. BATSTONE: There is a public examination room open to all parties and the public for the duration of the hearing. If you were here yesterday during the consultation, you would have noted that it was next door to this room. Commission staff have appropriated that room. It's now in the Parlour Room which, when you come into the lobby of the hotel, is up the ramp to the left. There is a complete copy of the record for the proceeding there.
33 In addition to that, I would note that as exhibits are filed and made part of the record, they will be made available on the tables at the back of the room for you to pick up.
34 On the subject of costs, if there are any intervenors who intend to apply for an awarded cost, I would suggest that they alert one of the Commission counsel and Northwestel to that fact so that parties are not surprised. Assuming there is time, applicants and potential respondents should be prepared to address these applications orally at the hearing.
35 Finally, Mr. Chairman, the Hearing Secretary and Commission counsel as well as Steve will be available throughout the hearing to assist any parties who may have questions regarding practices or procedures that we follow. It is often possible for Commission counsel and counsel for the parties to resolve procedural matters off line and this may save hearing time. On the other hand, if parties wish to make representations formally on the record, it would be best to alert Commission counsel or the Hearing Secretary of that possibility.
36 Thanks very much.
37 THE CHAIRPERSON: Thank you, counsel.
38 Before I turn to preliminary matters, we may want to make a few changes to the room at the end of the day. I don't know whether the panel is going to find it somewhat intimidating to have at least two of our Commissioners sort of sitting almost on top of them here, so...
--- Laughter / Rires
39 THE CHAIRPERSON: So you can sort of vote whether you want them on your side or not. So we might want to change the structure here a little bit at the end of the day but perhaps you can bear with us through at least the rest of the day.
40 I must say it's somewhat refreshing, for a telecom hearing, for us to see half of the panel women. I can recall most of the telecom hearings that we have had over the years we were presented with panels of suits which some of us are in -- and there's nothing wrong with suits but it's certainly nice to see women on the panel in front of us.
41 It's actually been some time now since we have had one of these rate of return hearings of the sort of old, classic telecom format. I think I said, a few years ago, that when we had finished, it was either the local competition or the price cap proceeding for the major provincial telephone companies in the south, that was probably going to be the last of these kinds of hearings that we had had -- in the AGT hearing, that's right, Andrée's referring to. So we all might be a little bit rusty on some of the issues, and myself in particular since it's probably been a few years since we have run one of these rate of return style hearings, so bear with us as we go through.
42 With that, now, we will turn to preliminary matters.
43 Does any party to the proceeding have any preliminary matters they wish to raise?
44 Mr. Rogers, I see you reaching for...
45 MR. ROGERS: Mr. Chairman, we have provided one other additional exhibit to the Hearing Secretary. I can just explain briefly what it is.
46 THE CHAIRPERSON: Sure.
47 MR. ROGERS: It's a consolidated list of the assignment of the interrogatories to each of the panels of Northwestel. They were assigned in three separate documents. For ease of reference, what we have done is consolidated that assignment list into one document. So, for the benefit of all parties, including Commission staff, it's easier to find out which interrogatories are to be assigned to which panel. The Secretary has that document.
48 THE CHAIRPERSON: Okay. Thank you.
49 So with that, then, I guess, Madam Secretary, we will call the first panel -- or we need an exhibit number for that, do we?
50 MS VOGEL: I have assigned it an exhibit number, and it would be Northwestel Exhibit Number 2.
51 THE CHAIRPERSON: Okay. Fine.
52 With that, then, will we call the first panel?
53 MS VOGEL: Mr. Chairman, you may be rusty because you haven't done this for a while -- I don't know whether I'm rusty or what but this is the first time I have done this, so, without further ado, I will call a panel of Northwestel and suggest we proceed with cross-examination of that panel.
54 MR. ROGERS: They should first be affirmed.
55 THE CHAIRPERSON: Counsel.
AFFIRMED: RAY WELLS
AFFIRMED: MARK WALKER
AFFIRMED: CATHY HAMELIN
AFFIRMED: MURIEL M. CHALIFAUX
56 THE CHAIRPERSON: I take it the front members are the panel and the back are support?
57 MR. ROGERS: That's right. I will introduce them, Mr. Chairman.
58 THE CHAIRPERSON: Thank you, Mr. Rogers.
59 MR. ROGERS: Mr. Wells will be the chairman of the panel.
60 MR. ROGERS: Mr. Wells, could you indicate your position with Northwestel.
61 MR. WELLS: I'm the Vice-President of Corporate.
62 MR. ROGERS: Do you have with you Section 3 of the company's evidence and the list of interrogatory assignments just given Exhibit 2?
63 MR. WELLS: Yes, I do.
64 MR. ROGERS: And was that section of the evidence and the interrogatories assigned to this panel prepared under your direction and control?
65 MR. WELLS: Yes, it was.
66 MR. ROGERS: And is that evidence and those responses true and accurate, to the best of your information and belief?
67 MR. WELLS: Yes.
68 MR. ROGERS: Do you have any additions to this evidence or the responses?
69 MR. WELLS: No, I don't.
70 MR. ROGERS: Mr. Walker, can you indicate your position with the company?
71 MR. WALKER: I am Assistant Vice-President of Carrier Services.
72 MR. ROGERS: Ms Chalifaux, can you indicate your position with the company?
73 MS CHALIFAUX: Yes. I'm Assistant Comptroller, Financial Analysis and Costing.
74 MR. ROGERS: Ms Hamelin, can your position with the company.
75 MS HAMELIN: I'm Portfolio Manager, Local and Long Distance Service.
76 MR. ROGERS: Did each of you assist in the preparation of the evidence and the responses assigned to this panel?
77 MR. WALKER: Yes.
78 MS CHALIFAUX: Yes.
79 MS HAMELIN: Yes.
80 MR. ROGERS: And to the best of your knowledge, are the evidence and responses accurate?
81 MR. WALKER: Yes.
82 MS CHALIFAUX: Yes.
83 MS HAMELIN: Yes.
84 MR. ROGERS: Mr. Chairman, as I indicated, Mr. Wells is chair of this panel.
85 The curriculum vitae of the witnesses has previously been filed with the Commission.
86 I would also note, in the second row, assisting and supporting the panel, are Ted Dean, Rhonda Kraus, Gina Moreau and Dr. Lester Taylor, from the University of Arizona, a well-known expert who has appeared before the Commission in the past.
87 The panel is ready for cross-examination.
88 THE CHAIRPERSON: Thank you, Mr. Rogers.
89 Welcome to the panel to our proceeding and to the support staff.
90 I take it the first party to cross-examine is going to Ms Lawson.
91 MS LAWSON: Thank you, Mr. Chairman, Members of the Panel.
92 Sorry. I'm just getting set up. I didn't print out a hard copy of my notes so I'm going to be relying on this laptop.
93 MS LAWSON: Good afternoon, members of the panel.
94 I would like to start by looking at your proposed rate increases.
95 I understand that you are proposing increases to your non-recurring service charges for residential line installation connections and, specifically, I think a $3.50, or 10 per cent, increase to the connection charge, bringing it to $37, and a $12.50, or 22 per cent, increase to the total charge for connections where a premise visit and premise work is required, bringing that charge to $70.50. Is that correct?
96 MR. WELLS: Yes, the $70.50 total is correct.
97 MS LAWSON: Okay. And I also understand that these proposed rates are reasonable in comparison with those of other telephone companies in Canada.
98 MS HAMELIN: Yes, that's correct.
99 MS LAWSON: In fact, they are at the low end of what other telephone companies charge for these services?
100 MS HAMELIN: Yes, they are.
101 MS LAWSON: Now, Telus asked you, in an interrogatory, why you were not proposing to raise these residential service charges by more, given that they are still not compensatory and that they are still lower than in most other telephone company territories, and you said because these rates were increased by 18 per cent in January of 1999. That was the reason why you didn't want to increase them by more this year.
102 MS HAMELIN: That's correct.
103 MS LAWSON: In other words, you feel it wouldn't be fair to your subscribers to subject them to higher rate increases than this, given that they already had to pay an 18 per cent increase in January of 1999?
104 MS HAMELIN: Well, we are kind of looking at these as a total package perspective. We are cognizant of moving these rates closer to cost but we are kind of looking at the whole package of costs that customers have to bear.
105 MS LAWSON: But the non-recurring rates are kind of a different issue from the recurring rates. Subscribers don't incur them on a monthly basis; only when they move. Right?
106 MS HAMELIN: That's true.
107 MS LAWSON: Okay. So, let's turn, now, to your proposal for the recurring basic local rate increases.
108 You are proposing a $5.00, or 19 per cent, increase to the existing single-line rate of $26.33, bringing it to $31.33 a month. Correct?
109 MR. WELLS: That's correct.
110 MS LAWSON: And this follows upon a $6.00 per month increase in August, 1999, which amounted to a 30 per cent rate increase for subscribers in Whitehorse and Yellowknife and -- together with the rate consolidation that you did earlier that year of 49 per cent basic rate increase for subscribers in the outlying communities. Right?
111 MR. WELLS: Yes, that's correct, but I think it's important to take into consideration this proposed $5.00 increase in the context of the reduction, in the proposed reduction in toll prices, as well as the investment that somebody made in the service improvement plan, so I think you need to take that in that context.
112 MS LAWSON: Sure. I will come back to the total bill impact in a second. But just looking at local rates, the basic local rate, it is important to note that these 1999 increases, substantial in and of themselves, followed upon a $4.00 per month company-wide increase in 1998 which amounted to a 25 to 29 per cent increase depending on where you lived; right?
113 MR. WELLS: That is correct.
114 MS LAWSON: And a $4.00 per month company-wide increase in 1997, which amounted to a 32 per cent or a 41 per cent increase, depending on where you lived; correct?
115 MR. WELLS: That's correct.
116 MS LAWSON: And a $3.00 per month company-wide increase in 1996, which amounted to a 32 per cent to 45 per cent increase, depending on where you lived.
117 MR. WELLS: That's correct.
118 MS LAWSON: So your proposed 19 per cent local rate increase for this coming January follows upon significant rate increases in each of the past four years, increases of over 200 per cent and even 300 per cent since 1996, depending on where live.
119 MR. WELLS: The statistics you have stated are correct. However, you have to remember that these were done with rate rebalancing. So there was offsetting through all of those years a reduction in the toll price.
120 MS LAWSON: Yes, for people who use toll service.
121 MR. WELLS: Correct.
122 MS LAWSON: Are you familiar with the notion of rate shock?
123 MR. WELLS: I know the term, yes.
124 MS LAWSON: It would mean unreasonably high or fast rate increases, increases that are say unfair to subscribers who might be on tight budgets and need time to adjust to significant rate increases?
125 MR. WELLS: Through definition of rate shock, yes.
126 MS LAWSON: You would agree with that?
127 MR. WELLS: Again, I think you need to look at this in the context of the impact on the total bill, not just on the impact of the local rate component.
128 MS CHALIFAUX: If I could just add to that, Ray is right in saying that these rate increases occurred along with corresponding toll rate decreases. As a company we are very concerned about our high toll rates, as are our customers, and we were starting to experience some bypass there. It is the customer's desire to see lower toll rates as well that prompted these.
129 MS LAWSON: I understand and I am going to come to that in a second.
130 Is it your view, then, that your subscribers have not been subjected to rate shock over the past few years in respect of the local rate increases?
131 MR. WELLS: Again, I think you have to take this in context of the total bill. The Commission has identified clearly that you have to look at this issue from a total bill perspective, not just from one component of the bill. There have been offsetting reductions in long distance.
132 MS LAWSON: Are you aware of any studies on how lower income households in particular manage to absorb increases in basic access rates, increases of this magnitude and speed?
133 MR. WELLS: No, I am not.
134 MS LAWSON: And you are, I am sure, aware of the CRTC's rule under the price cap régime which limits individual basic residential rate increases to no more than 10 per cent per year.
135 MR. WELLS: I am now.
136 MS LAWSON: But you think your subscribers can and should handle twice that level of increase, despite the fact that the local rates are already higher than any other basic access rate in Canada.
137 MR. WELLS: Again, you have to look at this from a total bill perspective. Our proposals that we put forward, that were approved by the Commission, were revenue-neutral and there were offsetting benefits of toll reductions.
138 So just to strictly look at this from an increase in local rates I think is unreasonable.
139 MS LAWSON: Okay. Let's look now, then, at the total bill impacts.
140 As you say, based on current calling patterns, a majority of your residential customers would end up paying less overall for telephone service under your proposal; correct?
141 MR. WELLS: Yes, that's correct.
142 MS LAWSON: And that is because of the enormous reductions in toll rates that you are proposing to offer across the board to all subscribers, regardless of how much toll calling they do.
143 MR. WELLS: Yes, that is correct. However, it is the subscribers who would select whether or not they wanted to take the packages offered obviously. But they are offered across the board, yes.
144 MS LAWSON: Just to get that straight, subscribers have to request the discount package in order to get the benefits of it?
145 MS HAMELIN: Yes, they will have to subscribe to the package. However, we do certainly propose to advertise it widely and make it available.
146 MS LAWSON: Okay. I will be coming back to that.
147 When you compare telephone bills before and after your proposed rate changes, the average customer -- by which I mean the customer that falls in the middle, with an equal number of customers above paying more and an equal number of customers paying less -- the median customer ends up, according to your calculations, saving approximately $1.50 on his total bill; right?
148 You actually provided that calculation in response to an interrogatory from us, CAC/NAPO-105.
149 MS HAMELIN: Yes, we did. As a point on a line, directly in the middle, that is true.
150 MS LAWSON: Whereas when you look at the simple average, which I believe you provided in your evidence, I think, or in another interrogatory response, the saving for the simple average bill is actually much larger. It is like $7.50 a month; correct?
151 MS HAMELIN: That's correct.
152 MS LAWSON: That average is just taking the total charges for the service and dividing it by the number of accounts.
153 MS HAMELIN: That is correct.
154 MS LAWSON: And that is because the simple average is biased upwards by a relatively few number of very high spenders; correct?
155 MS HAMELIN: It's true that there are in fact a number of low spenders in our customer base. We have to take into account some of the reasons why we have low spending.
156 One of the reasons is that we have seen a great deal of bypass occur in our operating area. By the very nature of bypass, those customers are no longer spending their toll dollars with us. Rather, those toll dollars are being spent in the south or they are being spent somewhere else.
157 So yes, it is.
158 MS LAWSON: I understand. Would you agree that some proportion of these low toll spenders are in fact low toll users as opposed to high toll users who are just getting people in the south to call them back?
159 MS HAMELIN: Yes, that's true.
160 MS LAWSON: Do you have any idea what proportion of this 47 per cent with higher bills under your proposal are in fact low toll users?
--- Pause / Pause
161 MS HAMELIN: No, we don't have figures on that. It is very difficult to tell which ones are bypassed and which ones are low toll spenders.
162 MS LAWSON: Would you agree that they are more likely to be low income than high income customers?
163 MS HAMELIN: That's only one factor. I think you could have high income customers who reside in the north who don't have very many people to call. They have lived their all their lives. That could be a factor.
164 There are quite a few northeners living here who haven't really moved outside or who have friends outside.
165 MS LAWSON: I passed around a couple of documents, and I would like to look at one of them right now.
166 It is a table from Statistics Canada. It is not the one that says Network Access Lines in Nunavut. It is the other one.
167 The title is "Survey of Household Spending in 1998". The title of the chart is "Detailed Average Household Expenditure by Household Income Quintile".
168 This is taken off an Excel table off the computer. These are the most recent data from Statistics Canada.
169 If you look about the sixth or so line down you will see Telephone. Under Telephone you have Purchase of telephone, Telephone services, and under Telephone services you have Telephone service, Installation and repairs, Cellular services and Internet.
170 So they are pulling out the total telephone services expenditure. They are separating out Internet expenditures, cellular expenditures and installation and repairs expenditures. Otherwise I think they are combining local, long distance and other enhanced features in line 2202. Would you agree? Do you see where I'm at?
171 MS HAMELIN: Yes, I see where you're at. It appears to be that.
172 MS LAWSON: Okay. Yes.
173 Now, would you notice, if you follow along that line 2202, you see the average under all classes of Canadian households the average expenditure on telephone service is $707 a year, but if you move over to the lowest quintile, which is the lowest 20 per cent of Canadian households by income, they are only spending $494 a year on telephone service.
174 So do you have any reason to suspect this trend is any different in the north than in Canada generally?
--- Pause / Pause
175 MS HAMELIN: Not at this moment I can't.
176 MS LAWSON: Okay, thanks.
177 Mr. Chairman, do we do the exhibit numbers at the end of my cross or as we go along?
178 THE CHAIRPERSON: You have to ask --
179 MS LAWSON: I'm sorry
180 MR. BATSTONE: Yes. I think in the past, most recent past proceedings, we have been doing them at the end.
181 THE CHAIRPERSON: I think in order to improve efficiency of the process we changed the process near the end to doing the numbers at the end or the conclusion.
182 MS LAWSON: Okay, great. Thanks.
183 Just to conclude this point, then, even when you take into account the callback phenomenon that you have been experiencing, you still have a minority of residential customers -- possibly a significant minority of residential customers, we don't know -- who will not benefit from the proposed rate rebalancing simply because they don't do enough long distance calling. Correct?
184 MR. WELLS: I think your statement of "We don't know" is correct.
185 MS LAWSON: We don't know what the proportion is, but we know you have some.
186 MR. WELLS: Yes.
187 MS LAWSON: And they are likely to be low income?
188 MR. WELLS: I think that is one conclusion. However, I would suggest as Cathy said earlier, that I don't think you can naturally draw a conclusion between income and use of telephone services.
189 MS LAWSON: It's not a necessary relation --
190 MR. WELLS: Right.
191 MS LAWSON: -- but proportionately you are probably going to see more low income people at the low spending end of the scale.
192 You agree? You're nodding.
193 MR. WELLS: Well, your statistics that you have here show that, yes.
194 MS LAWSON: Okay.
195 MR. WELLS: Now, I also understand that the penetration rate of telephone service in the north is significantly lower than in the rest of the country. Is that your understanding and experience?
--- Pause / Pause
196 MS LAWSON: You have actually provided an interrogatory response on this, which is Yukon Government 908, and I'm going to come to that, but I just wondered if you had a general answer.
197 MS HAMELIN: That's what I was looking for actually, because that particular one indicates that we are not doing too badly when we are looking at it from a regional point of view.
198 MS LAWSON: Okay, let's look at that right now, okay, that response, because it is quite strange, I would say, the numbers. I think there is a reason why the numbers look so strange and don't seem to reflect what we heard in the regional hearings yesterday.
199 First, though, I'm sure you would agree from the testimony we heard from people -- from your subscribers and people in the north, some of them not subscribers of yours in fact -- is that there are a number of households without telephone service in the north and many of them the reason is because they can't afford it. Correct?
200 MR. WELLS: I don't think you can draw that conclusion from the perhaps 50 or 60 people that -- you're talking about the consultation from the last couple of --
201 MS LAWSON: I just said there are a number of nonsubscribers in the north and some of them because they can't afford it. We heard that evidence yesterday. We don't know how many, but we know there are some.
202 MR. WELLS: Okay. Yes.
203 MS LAWSON: Okay.
204 Now, when we look at your interrogatory response here in which you were asked to provide all information that you have regarding penetration rates for residential service from 1997 to date, and we look at the total company penetration rate, in July 1997 it was 89.8 per cent, which is significantly less, or was significantly less than the Canadian average, correct, because it's the high 90s. A year later it had jumped up to 94.2 per cent by your measure and a year after that, by July 1999, you have 99 per cent of households in the north subscribing.
205 Can you explain that incredible increase in penetration at a time when your basic local rates were undergoing significant increases?
206 MS HAMELIN: The data that we are using for this is, of course, from the 1996 Census and what we have here is the proxy number of households which has decreased over time due to a decline in population which we think might have had a factor.
207 Ray, did you have something to add?
208 MR. WELLS: Well, the only other point that I would add to that is we have seen some growth in second lines as well in our operating territory, so I think a combination of those two issues.
209 MS LAWSON: Okay. In fact, over this period of time Internet use has really boomed, and I presume it has up here as well as in the south.
210 MR. WELLS: Yes.
211 MS LAWSON: So in fact you might have had a lot of second, even third lines being subscribed to during this period.
212 MR. WELLS: There is no question that second line requirements due to the Internet have increased, yes.
213 MS LAWSON: So is it possible that these two effects could in fact account for the entire increase shown by these statistics between 1997 and 1999?
214 MR. WELLS: No. I would think that there has been some growth in the north in the economy as well, so part of that would be due to perhaps an increase.
215 MS LAWSON: But you don't know?
216 MR. WELLS: No.
217 MS LAWSON: I mean, you don't know whether the number of households without phone service because they can't afford it has increased or decreased since 1997 and these statistics actually don't really help us very much in that respect?
218 MS HAMELIN: I don't know that specific point, but just I wanted to add regarding the second line.
219 We actually have seen over time, we have seen an increase in the number of network access in our rate group 1 -- what we used to call our rate group 1. That has been increasing. Those areas where we have our communities that are in that size or rate band haven't had significant access to the Internet and probably do not have the same kind of second line penetration or increase in second lines that would cause this.
220 So I think there is definitely still an increase going on in our network access that is not being driven by the second line phenomenon that goes on.
221 MS LAWSON: That, in your view, is an increase in subscribership among existing households or is it possibly new households and new subscriptions?
222 MS HAMELIN: I believe it's existing -- well, it could be new households or it could be taking on lines.
223 MS LAWSON: Okay.
224 I guess on this point, I passed around another document which is entitled "Network Access Lines in Nunavut Residential", which is based on older data because that is all that was available to the statisticians at the time, data obtained from you in 1998.
225 This chart shows a number of communities in the eastern Arctic with very low penetration rates. Are you suggesting, Ms Hamelin, that there has been a significant change in the statistics that we are seeing here over the past few years, that, for example, in Whale Cove the penetration rate has risen significantly?
226 MS HAMELIN: If I could just have one moment, please.
--- Pause / Pause
227 MR. WELLS: We don't have detail of that data at that level.
228 MS LAWSON: All right.
229 But would you agree with me that it is unlikely that non-subscribers are suddenly finding phone service to be more affordable than in the past when the rates for basic access have in fact doubled or tripled?
230 MR. WELLS: Again, I think you have to come back to the issue of the total bill and that this may have ended up being neutral in fact to a lot of customers who use toll. So to just look at this and say that people have dropped off the network because of local rate increases only I think is incorrect to make that conclusion.
231 MS LAWSON: I'm sorry, that's not what I was suggesting.
232 MR. WELLS: Okay.
233 MS LAWSON: I'm talking about non-subscribers, people who aren't on the network to begin with. We know that one barrier for them is the installation charge, but the next barrier is just the basic access charge. Correct?
234 MR. WELLS: Yes.
235 MS LAWSON: In fact, on that issue do you have statistics on the number of customers who subscribe to your toll denial service, your toll restriction service?
236 MS HAMELIN: Yes, we do.
237 MS LAWSON: Can you give that to me now?
238 MS HAMELIN: Yes, just one moment.
239 MS LAWSON: Thanks.
--- Pause / Pause
240 MS HAMELIN: We have approximately 8,000 subscribers, subscriptions to toll denial for residential customers.
241 MS LAWSON: Thank you.
242 So there we have got 8,000 people who are definitely not benefiting from the long distance rate decreases. Correct?
243 MS HAMELIN: They are not benefiting from the long distance rate decrease and the cause for that, though, I think is not necessarily because they can't -- I think it comes back again to the total bill.
244 It is quite possible that they have taken toll denial for various reasons, one of which could be they have found a form of bypass and they want to avoid accidentally placing a long distance call, or anybody coming in and using their phone to place a long distance call, but they are still obtaining long distance in other ways and benefiting from long distance.
245 It is also possible that because of our high toll charges they have found their total bill to be unaffordable and have hence had to subscribe to toll denial as a means of bill management.
246 So I think it is not appropriate necessarily to leap to the conclusion that it is the network access rate that has caused them to take this toll denial.
247 MS LAWSON: Can you explain how they could bypass the toll denial and still use long distance?
248 MS HAMELIN: These customers can utilize it if they get hold of 1-800 numbers. They can make long distance calls with toll denial using a 1-800 number. They could obtain prepaid cards or they could subscribe to 1-800 numbers down south. They could have, for example, competitive cards from down south, dial the 1-800 number and enter a pin, place their call and so forth.
249 MS LAWSON: Again, I take it you have no idea what proportion of the 8,000 would fall into that category?
250 MS HAMELIN: No, I don't.
251 MS LAWSON: Is it your view that the level of rates considered affordable has risen over the past few years?
252 MS HAMELIN: I'm sorry, could you repeat that, please?
253 MS LAWSON: Is it your view that in general the level of telephone rates considered affordable has risen, what people consider to be an affordable telephone rate has increased over time?
--- Pause / Pause
254 MR. WELLS: Could you restate that question, please?
255 MS LAWSON: Is it your view that the level of rates considered affordable has risen over time?
256 MR. WELLS: Rates for basic service -- are you talking telephone service in total because --
257 MS LAWSON: Rates for basic service.
258 MR. WELLS: I would say yes.
259 MS LAWSON: And so you surmise that, I take it, simply on the basis that people continue to subscribe even when you double and triple their telephone rate?
260 MR. WELLS: Again, you have got to come back and if you are talking about what is happening in our company, the rate rebalancing, it is back to the average bill issue again. I think that's very critical to consider that even though local rates have gone up, long distance rates have dropped and probably as important the points Cathy has been making is that bypass has been taking place.
261 So, in fact, we have got data that shows that while we have decreased rates in long distance and looked for stimulation, in fact our revenues have declined and there is no stimulation because, in fact, bypass has been taking place, so you could raise local rates.
262 In fact, given the timing of what has gone on with the flat rates in the south, people's bills have been declining overall.
263 MS LAWSON: Yes. I understand that. It's just that I am trying to get at the whole issue of affordability here because one of the mandates, the statutory mandates of this Commission is to ensure that telephone service is provided at affordable rates. That's what I am trying to get at right now.
264 I take it you haven't actually done any studies or surveys or analyses on the affordability impact of the basic local rate increase, such as those that you are proposing in this proceeding?
265 MR. WELLS: No. We haven't done detailed analysis of what the impact of the rates that we are proposing in this proceeding would have, no.
266 MS LAWSON: But you would agree with me, I am sure, that telephone service is so essential that even people who can't afford it really can't afford to do without it either, in many cases. They find some way of paying for it.
267 MR. WELLS: I am not sure. You are saying that people will find some way to pay for telephone service?
268 MS LAWSON: It's so essential --
269 MR. WELLS: Right.
270 MS LAWSON: -- that people can't afford to do without it? The concept of affordability is difficult to apply to an essential service. It's not like you can say "oh, this is too expensive. I'm not going to buy it." You need it, so you find some way of paying for it. You cut back on food if necessary.
271 MR. WELLS: Possibly.
272 MS LAWSON: Now, you serve a region with relatively high unemployment and high levels of poverty I understand. Am I correct?
273 MR. WELLS: Various parts of our operating territory have higher levels of unemployment than others, but I think if nationally you look at the country I don't think it's any different than you would find anywhere else across Canada. There are regions and areas within regions that have higher levels of unemployment and poverty than others.
274 MS LAWSON: Let's take Nunavut for example. Would you agree that that region has higher levels of unemployment and poverty than the national average?
275 MR. WELLS: I don't know that we have specific statistics on that, no.
276 MS LAWSON: You don't know?
277 MR. WELLS: No.
278 MS LAWSON: You are, nevertheless, concerned, I am sure, about these kinds of problems, about the areas that you serve with high unemployment and high poverty levels and about the number of low income households in your serving territory who don't have telephone service because they can't afford it? Is that a concern of yours?
279 MR. WELLS: I think the issue of affordability at the end of the day is an issue of judgment. I believe that when you take a look at the issue, and it comes back again and I am going to keep coming back to this point, to the issue of average bill.
280 If in fact there are pockets of citizens in the north, or for that matter anywhere I would suggest across the country, that have an affordability issue with telephone services that that should be addressed. I think the Commission has made its decision that that should be addressed with a specific targeted source of subsidies.
281 Quite frankly, I think that's more a role of government, the federal government, than it is of the telecommunications industry.
282 MS LAWSON: Would you support some kind of targeted subsidy such as the life line program in the United States to make it financially easier for low income households to afford basic phone service?
283 MR. WELLS: I'm not familiar with that service in the U.S., but I would -- again, if it was deemed that affordability was an issue, I would suggest that some sort of a targeted subsidy that was funded and managed, because I think that's a critical component here by government, would be reasonable.
284 MS LAWSON: Okay. I would just like to move on to another issue. I wasn't able to attend all of the regional hearings yesterday, so I am not sure if this was raised or not.
285 I understand -- I have been told from one of your subscribers at least that there have been instances of Northwestel failing to maintain pay phones in the Eastern Arctic, that the pay phone has an "Out of service" sticker on it, it just doesn't work and there doesn't seem to be much effort to repair the pay phone.
286 I'm just wondering how many of your pay phones are out of service.
287 MR. WELLS: I don't have that statistic. If you have got questions related to service, I would suggest that maybe the network panel might be better to deal with that.
288 MS LAWSON: Okay. Maybe these questions are better put to the network panel. I was going to ask what your policy regarding out of service pay phones is. Same thing, next panel?
289 MR. WELLS: I would suggest that that's the right panel.
290 MS LAWSON: Okay. I would like to move on now to the issue of long distance competition and market share loss. Now, I understand that you are expecting a significant loss of revenue due to three factors here. I think there are other factors as well.
291 One is the decline in long distance minutes due to loss of market share to competitors. Another one is a lower margin on the remaining volume of long distance that you sell due to reduced rates. A third one is the lower CAT revenue due to the reduced CAT rate. Is that fair?
292 MS HAMELIN: Yes. That's correct.
293 MR. WALKER: I would just like to add, we don't currently have a CAT rate.
294 MS LAWSON: Right. Lower CAT than it would have been the case if you were charging based on rates. Okay.
295 Let's start then with the loss of market share. Now, in your evidence at page 31, you provide us with your market share loss estimates. In the last paragraph there you say that you estimate average market share losses in terms of minutes to be approximately 13 per cent, 20 per cent and 22 per cent for the years 2001, 2002 and 2003 respectively. Correct?
296 MS HAMELIN: Yes, that's correct.
297 MS LAWSON: If you turn over the page, and again at the bottom of the page you say without the toll reductions, your losses are estimated to be much larger; 47 per cent, 67 per cent and 71 per cent in the same three years.
298 MS HAMELIN: That's correct.
299 MS LAWSON: Okay. Now, there seemed to be a number of factors affecting this assumed revenue loss. I would like to just run through some of them.
300 The first one I would like to look at is "bypass". Now, you estimated the amount of bypass currently -- by bypass I'm talking about this callback phenomenon to make sure we understand the correctly. Bypass means people who are now getting their friends, family, whomever, in the south to call them instead of making the calls themselves.
301 The interrog CRTC-411, you were asked about this, and you provided your bypass estimates there. We see that in, for example, this year, the year 2000 --
302 THE CHAIRPERSON: Sorry, Ms Lawson. What part of 411 are you at?
303 MS LAWSON: Page 1. There's a table there.
304 THE CHAIRPERSON: Okay.
305 MS LAWSON: So your estimates of the bypass there in minutes are 27.7 million minutes through the year 2000, 29.2 million minutes through the year 2001. Those figures are still your best estimates?
306 MS HAMELIN: Yes, they are.
307 MS LAWSON: Okay. Am I right that the method you used to estimate this bypass effect was to estimate the growth in total minutes since 1996, that is including bypass, and then subtract actual minutes?
308 You took your minutes in 1996, looked at your rate of growth, 1997 over 1996, 1998 over 1997, and assumed that that would have continued and then subtracted your actual minutes and assumed that that difference is the bypass.
309 MS HAMELIN: That's right. I used that as a proxy to attempt to estimate bypass.
310 MS LAWSON: Okay. Now, if we turn to attachment 1 of that same interrogatory, at page 1, at the top you list, your four assumptions, and the fourth one is that stimulation from each rate rebalancing is based on an elasticity of .2. Correct?
311 MS HAMELIN: Minus .2, that's correct.
312 MS LAWSON: And this reflects the stimulation -- the stimulation, as you said, from the rate rebalancing in 1997, 1998 and 1999.
313 MS HAMELIN: I wouldn't say it necessarily reflects. I took an assumption. I have stated all along that I don't feel I am getting any kind of proper stimulation from this. However, I wanted to put in a figure of reasonableness so that I used minus .2 and that was supported by Dr. Taylor in the work that he did for us.
314 MS LAWSON: If we look at -- if we jump to interrogatory CRTC-1704. I give you a moment to get hold of that.
315 THE CHAIRPERSON: It's not very often CAC is more high tech than the rest of us, Ms Lawson.
316 MS LAWSON: I don't actually have the interrog responses online. I probably shouldn't have said that.
317 MS HAMELIN: Okay. I do have 1704.
318 MS LAWSON: Okay. In 1704 you note that for projections of stimulation with proposed rate reductions, you used a price elasticity of negative .7 for the residential toll plans. Correct?
319 MS HAMELIN: Yes, that's correct.
320 MS LAWSON: And you noted that the traditional elasticity used as negative .4.
321 MS HAMELIN: That's right.
322 MS LAWSON: And that you used a negative .2 price elasticity of demand for the new business toll plans.
323 MS HAMELIN: I'm sorry, could you repeat that one?
324 MS LAWSON: You used a price elasticity of negative .2 for business plans.
325 MS HAMELIN: Yes, that's right. Okay.
326 MS LAWSON: Now, why did you not use the higher elasticity values, negative .7, for example, or even the traditional one of negative .4, for estimating bypass, at the present time, as well as for the future projections in traffic?
327 MS HAMELIN: I'm sorry. Are you asking my why I didn't choose minus .7 in the present time?
328 MS LAWSON: Yes. Before we looked at Interrogatory 1704, we were looking at 411 and your estimates of bypass and those were based an assumed elasticity of negative .2. I'm just wondering why you used negative .2 for the bypass assumptions in the past and at the present by you using negative .7.
329 MS HAMELIN: Negative .7 is based on this new toll plan that we are proposing to bring in and, certainly, I would think, with the kind of change in price that we are proposing on a residential toll plan, that we would see a more significant stimulation than we have in the past on the rate rebalancings and what I was doing, in the response to 411, was try to take out over time and use the rate rebalancings that I had in 1997, 1998 and 1999. I don't believe that I built into that the minute growth in 2001, per se. Like I kind of just was trending out. This is where my minutes would have been, had all else been equal and we hadn't had the kind of bypass that we had seen. So minus .7, I wouldn't even begin to think about using that in the estimate I was doing for 411
330 MS LAWSON: But you were estimating the amount of bypass -- right? -- in 411.
331 MS HAMELIN: That's right. Historic bypass.
332 MS LAWSON: Historic bypass. And bypass is generally people taking advantage of plans which are virtually identical to what you are proposing in this proceeding.
333 So why would the elasticity factor be so different?
334 MS HAMELIN: But it's not my elasticity; it would be the southern telcos that are making these -- they are making the additional calls. I wasn't trying to -- if those customers had stayed with us, they certainly would not have stimulated, based on southern plans. Naturally, the people who are calling them might be calling them for longer periods of time but that is not what I was attempting to estimate. I was attempting to estimate what minutes I would have had had those customers stayed with Northwestel.
335 MR. WALKER: There might be another factor, utility, that would cause the elasticity not to be so high. For example, if it's a little bit harder to make a call -- right? -- because, now, somehow, you have got to indicate to the southern party to make a call back up to you. Probably you are not going to see the same kind of high elasticity as you would if we had the plan here in the north. So that may be another cause of a lower elasticity factor.
336 MS LAWSON: But we are talking minutes. Right? I mean once the call is made. And if it's to be essentially a free call for the person from the south once you have made the call, it's not necessarily going to lessen the number of minutes. Correct?
337 I mean the utility factor you are talking about, Mr. Walker, applies to the making of the call, not the minutes.
338 MR. WALKER: Yes.
339 MS LAWSON: Okay. In any case, we might disagree on the elasticity measures but you would agree, would you not, that if higher elasticity values were used to estimate bypass there would be higher overall minutes and so, your bypass figures, the total minus actual figures, would be significantly higher. Correct? I mean if you used .7 or even .4, that would make a significant difference in your bypass estimates?
340 MS HAMELIN: Yes.
341 MS LAWSON: Okay. Now, since we are talking about price elasticity -- and you have mentioned that the figures are based, primarily, on judgment and that you have relied, to some extent, on Professor Taylor's judgments, or his view of your judgments, to validate your estimate?
342 MS HAMELIN: That's correct.
343 MS LAWSON: Okay. And Professor Taylor's evidence is provided as Attachment 6 to CRTC-706 and, just to quote from that, at page 3, Professor Taylor says that you are employing judgmental price elasticities -- in the first paragraph there.
344 MS HAMELIN: I think I'm going to let Dr. Taylor answer this.
345 MS LAWSON: Sure -- well, actually, I just have a couple of questions for you. Okay?
346 MS HAMELIN: All right.
347 MS LAWSON: Dr. Taylor just says, in the present proceeding, Northwestel is employing two judgmental price elasticities and his conclusion is that both of these elasticities, in his opinion, are plausible values for use in these circumstances.
348 MS HAMELIN: Yes, that's what he says.
349 MS LAWSON: So you paid him, as a consultant, just to use his judgment to verify your judgment as to what is a plausible elasticity factor to use. Is that fair?
350 MR. WELLS: I think the issue here is -- and perhaps Dr. Taylor should speak to this a little bit -- is the types of rate changes that we are talking about here have never been experienced before and I think that there would be some value in perhaps --
351 MS LAWSON: Sure. Okay. I will -- let me pose one question to Dr. Taylor, then.
352 MR. BATSTONE: Excuse me, Ms Lawson, before you do that.
353 If Dr. Taylor is going to answer, perhaps we should swear him in, as well.
354 Would you prefer to take an oath or an affirmation?
355 DR. TAYLOR: Yes.
AFFIRMED: LESTER TAYLOR
356 MS LAWSON: Thank you.
357 Dr. Taylor, I'm just wondering, given the level of judgments involved and the fact that we, as the witness just stated, we haven't experienced this kind of situation, these kind of circumstances, in the past, I'm just wondering what it would have taken for you to suggest that the proposed elasticity estimates were not plausible?
358 DR. TAYLOR: I believe they had used a value of zero, or, if they had used a -- suggested a value of -- in excess of one or minus one, I think you can -- I think it is pretty well accepted here in Canada, the south, that the toll price was -- is of the order of minus .4, and I think any really strong deviations from minus .4 would be implausible.
359 MS LAWSON: Okay. Thanks.
360 So even with the support of a well-noted expert such as Dr. Taylor on this issue, we have to conclude that the elasticities you are using may not be a particularly accurate indicator of the number of minutes that will be stimulated by the proposed rate reductions. It's just such a grey area.
361 MS HAMELIN: That's true, it's quite possible that they could be -- I mean it is possible that they could be somewhat lower, for example, on the residential toll because, you know, perhaps I won't -- we won't generate a minus .7, we will get a lot less minutes, but we felt that, judgmentally, that it seemed reasonable, given the increase that we are seeing in the south, that, you know, it was a reasonable figure.
362 It is a grey area, though, as Dr. Taylor has said.
363 MS LAWSON: It also appears that your estimate of bypass did not include the elasticity effect on traffic that would result from bypass customers taking advantage of lower rates in the south; that is, bypass minutes that would be stimulated by the lower rates once they bypassed the stimulation factor.
364 MS HAMELIN: No, I didn't take those into account.
365 MS LAWSON: Why not?
366 MS HAMELIN: Primarily -- well, first of all, if they were originating from here and utilizing say a 1-800 number to bypass, while those rates are low in the north, they are not as low as the southern plans.
367 I didn't feel necessarily that that would stimulate the minutes that much more.
368 Again, as I have pointed out, what I am trying to demonstrate with respect to the bypass aspect is not what other telcos or other southern competitors are getting in terms of stimulation, I am trying to isolate the minutes that I have lost, just the pure minutes that they would have made. They would not have been stimulated at our higher rates.
369 If those calls had stayed with us, which is what 411 was attempting to do -- just to illustrate, if those customers had made the calls using our network at our rates at those times, through that period of time from 1997, 1998, 1999, they would not have been stimulated by southern plans or stimulated by our rate rebalancings which are taken into account.
370 I feel that the stimulation factors that I have put in there are fair and reasonable as to what I am attempting to do with bypass.
371 I am only trying to estimate what we have lost, not what other people have gained.
372 MS LAWSON: Just a second, Mr. Chair.
--- Pause / Pause
373 MS LAWSON: Okay. Would you agree that many of your customers who are bypassing right now already have access to lower rates and therefore the stimulation has already occurred for them?
374 MS HAMELIN: To some degree, that could be true. I think, though, you have to keep in mind that -- just one moment.
--- Pause / Pause
375 MS HAMELIN: I would just like to point out that when we took into account the repatriation of these bypass minutes, we felt that what we were repatriating was already stimulated.
376 MS LAWSON: You did include a stimulation factor then? I thought you said you didn't.
377 MS HAMELIN: When we brought back the minutes in our model -- you are looking at the bypass that I did in 411, those numbers. We recognize that some of those numbers were stimulated.
378 When we brought them back in as repatriated minutes in our model, we assumed that they had already been stimulated to some degree. When we brought them in, we brought back far more of them than maybe even will come back to us, because we considered the stimulation. It wasn't a specific elasticity that was put on it, but we brought back quite a high degree of our minutes.
379 MS LAWSON: Where does that show in the repatriation calculation?
380 MS HAMELIN: It's just in the volume that I brought back. I have repatriated all of the bypass minutes by the second year.
381 MS CHALIFAUX: If I could just add to that, what we are saying in our model is that we recognize that the minutes that we lost due to bypass are driven by the price changes that occurred in the south, not by our price changes that occurred through our rate rebalancing. By virtue of responding to the price changes in the south, the flat rate calling, they were calling a little bit more, calling north a little bit more.
382 So as we brought those minutes back, as we introduced our toll plans, we then did not overlay additional stimulation that you might see for customers that remained with Northwestel over the last couple of years.
383 MS LAWSON: But you did include some kind of assumption that this traffic that you have lost to bypass has been stimulated.
384 MS CHALIFAUX: Due to price changes down south, not our price changes.
385 MS LAWSON: And again, there is no elasticity measure. There is nowhere you can point to in the evidence that shows that calculation or judgment that you made.
386 MS HAMELIN: No, there isn't. It is just in the volume of the minutes that we have brought back or that we considered that we would get back in repatriation.
387 MS LAWSON: Maybe we should look at that. That is in 706, the billed minutes, Attachment 5; right?
388 I think it is CRTC-706, Attachment 5, page 11.
--- Pause / Pause
389 MS LAWSON: At page 11, right at the top, there is a table. I understand that gives your estimate of total minutes and total revenues in 2000 and 2001.
390 MS HAMELIN: Yes, that is for our new plans.
391 MS LAWSON: And if we compare that with your bypass estimates in 411 -- let's take for the year 2000 -- you have 27.7 million minutes of bypass and 100.7 million minutes total. So that is about 22 per cent of total minutes of Northwestel customers that bypass. About 22 per cent?
392 MS HAMELIN: I am just trying to get my head to where you are.
393 MS LAWSON: I am just comparing your estimate of bypass minutes with your estimate of total minutes and getting a sense of what proportion of the total minutes of your customers is bypass.
--- Pause / Pause
394 MS HAMELIN: The minutes that you are seeing on page 11 of Attachment 5 is before the repatriation of the minutes but after the new planned minutes have been assumed.
395 MS LAWSON: Right. And then the next page over, on page 12, is after?
396 MS HAMELIN: Is after repatriation and market share loss.
397 MS LAWSON: Right. In both cases the bypass amounts to about 22 per cent?
398 MS HAMELIN: Actually, the bypass minutes that are shown in 411 are combined residential and business bypass minutes, and we only are assuming repatriation of residential minutes. Minutes that we have lost to bypass for business we have assumed will remain lost at this time.
399 MS LAWSON: Right.
400 MS HAMELIN: So you have to take less minutes than you were assuming as a percentage.
401 MS LAWSON: Actually, I am not following you because it looks to me like you have business and residential included in the 706 attachment as well. So why wouldn't you just apply the total?
402 MS HAMELIN: What I am saying is that the minutes that you are seeing in 411 are residential and business.
403 MS LAWSON: Right.
404 MS HAMELIN: We only repatriate residential minutes. You are taking bypass -- I guess I am not quite sure where you are headed with this.
405 MS LAWSON: On the face of it --
406 MS HAMELIN: As a straight percentage, you are probably correct. I would have to check the percentage.
407 MS LAWSON: I mean 27 over 100 --
408 MS HAMELIN: But I could not state that those are the minutes we are repatriating. That is all I am saying.
409 MS LAWSON: No. And I wasn't saying that.
410 MS HAMELIN: Okay. I misunderstood.
411 MS LAWSON: I just want to establish that -- okay, it is 22 per cent now.
412 If you used a higher elasticity measure for the past growth of minutes without bypass and/or if you took into account stimulation of bypass minutes due to lower rates for bypass minutes, the figure would be higher; correct?
413 MS HAMELIN: One moment, please.
--- Pause / Pause
414 MS HAMELIN: Yes to the first question.
415 Could you repeat the second part of your statement?
416 MS LAWSON: Yes. There were two elasticity effects that we have been discussing. The first one was what is the appropriate elasticity measure to use for past growth of minutes without bypass. We had that discussion and you were saying you stand by your negative .2. I would suggest that maybe you should have used a higher one, but we obviously differ on that.
417 Then, the second issue is the extent to which you have already taken into account stimulation of bypass minutes due to lower rates for bypass minutes. So maybe we should follow that second one on just to make sure that we understand each other because it is not clear to me that you have taken that into account.
418 MS CHALIFAUX: Perhaps before we go on we should clarify something here. In 411 when we are estimating bypass you have got to remember what brought this on.
419 I mean, we were lowering long distance rates and this was a totally unique phenomenon when our minutes were going down. We were lowering our rates, our minutes were going down. What's going on here?
420 So the analysis we did was trying to provide some sort of an estimate on recognizing that there was bypass occurring and that people were getting their families and friends down south to call up north because that's where the lower rates are. That's where flat rate calling was occurring.
421 But for us to sort of get a base of where our minutes should have been, I mean then you have to look at what type of toll rate reductions did we introduce and these are the mass market rate rebalancing toll reductions. We have yet to introduce these types of toll plans and, therefore, the minus .2 for that analysis was the most relevant one to use.
422 MS LAWSON: All right.
423 The second point, though, which I really want to get straight, is where in the evidence does it show that you have taken into account stimulation of bypass minutes due to the lower rate that those customers are now effectively experiencing?
424 MS HAMELIN: So if I understand then, to make sure that this time we get the question straight, in our repatriation of minutes have we stimulated those minutes? That's your question, basically?
425 MS LAWSON: Yes.
426 MS HAMELIN: All right.
427 We have not directly stimulated those minutes. We took an estimate of how many minutes we felt would be repatriated and we were very generous in our repatriation. We didn't sit down and try to figure out elasticities and that type of thing.
428 We said how many minutes will come back and we did that based on an assumption. In the percentage that we repatriated we brought back more than perhaps I would have if I was going to put an elasticity.
429 If I was going to put a stimulation factor, I would have brought back less, stimulated them with an elasticity factor of some kind and probably come to the same response, the same answer. I just did it a little differently for expediency sake.
430 MS LAWSON: For the sake of those of us trying to understand what you have done though, is there some way you could pull that out and provide it to us in the form of an elasticity number?
431 MS HAMELIN: Yes. We could do some work to try and back out with an elasticity factor.
432 MS LAWSON: That would be really helpful.
433 MS HAMELIN: We will take an undertaking on that.
434 MS LAWSON: So the undertaking is to provide the elasticity factor that you used to estimate the stimulation of bypass minutes due to the lower rates for --
435 MS HAMELIN: Just one moment, please.
--- Pause / Pause
436 MS HAMELIN: Yes, I think we could work something out. However, I want to make it clear that we did not for the repatriation actually utilize that elasticity. It was more we kind of went at it a different way to come up with the figure.
437 MS LAWSON: All right.
438 If you can provide us with whatever you can --
439 MS HAMELIN: What kind of --
440 MS LAWSON: -- that shows us --
441 MS HAMELIN: That demonstrates what --
442 MS LAWSON: The difference in repatriated --
443 MS HAMELIN: Repatriated minutes.
444 MS LAWSON: Exactly.
445 MS HAMELIN: That's right.
446 MS LAWSON: The stimulation effect inherent in the repatriation.
447 MS HAMELIN: In what we brought back in repatriation.
448 MS LAWSON: Right. Thanks.
449 THE CHAIRPERSON: So that I can understand, are you asking that they simply present the figure of the repatriated minutes?
450 MS LAWSON: No.
451 THE CHAIRPERSON: Or are you asking that the repatriated minutes be expressed in terms of an elasticity factor?
452 MS LAWSON: What I was looking for was the latter, Mr. Chairman, but if that's impossible then I am looking for some other kind of explanation, where you pull out of your total numbers to show us just the effect that you assumed on repatriated minutes, the stimulation effect on those bypass minutes that you will now experience when they are repatriated.
453 MS HAMELIN: I will come to the same number because I am going to be kind of working backwards really --
454 MS LAWSON: Right.
455 MS HAMELIN: -- to create what it would have worked out to if I had applied the elasticity factor to get --
456 MS LAWSON: There will be an elasticity factor that you provide.
457 MS HAMELIN: I mean it's just coming out from a different angle.
458 MS LAWSON: Good. Thanks.
459 When you lose customers to this form of bypass, you are still getting some revenue, aren't you, from settlement payments? Are you getting CAT payments from any companies?
460 MR. WELLS: We have settlement agreements that generate revenues.
461 MS LAWSON: Who do you have settlement agreements with?
462 MR. WALKER: Our primary settlement agreement was with BCTel and Telus, which are now, of course, just Telus. We refer to them as TCI and TCBC.
463 We do have a settlement agreement with Bell and we also have four 800 traffic settlement agreements with AT&T and Sprint.
464 MS LAWSON: But you don't receive CAT payments? It's all settlement -- you receive settlement payments?
465 MR. WALKER: That's right.
466 MS LAWSON: And is there any information you can give me on the rates of the settlements?
467 MR. WALKER: Yes. If you hang on a moment I will actually point you to an interrogatory.
468 MS LAWSON: Thank you.
--- Pause / Pause
469 MR. WALKER: Actually, the interrogatory is your own. It's 309.
470 MS LAWSON: Thank you.
471 I am sorry about that. I don't even have it with me.
472 Can you tell me is the same rate charged whether the call originates in the north or the south or are there different rates?
473 MR. WALKER: There are different rates.
474 MS LAWSON: All right.
475 Am I right that the primary effect of bypass then for you, you are getting the settlement, the terminating settlement rates on those bypassed minutes. So the primary impact of that is that because the calls are made at a lower rate to begin with the settlement is lower?
476 Let me ask, is the settlement rate tied to the rate of the call, the retail rate? It's not?
477 MR. WALKER: No, it's not.
478 MS LAWSON: So have you deducted those settlement revenues in your calculations of revenue loss?
479 MR. WALKER: I'm not sure that I understand what you mean, deducted them. Do you mean going forward?
480 MS LAWSON: Have you accounted for these settlement --
481 MR. WALKER: Absolutely. Going forward into 2001?
482 MS LAWSON: Yes.
483 MR. WALKER: Absolutely.
484 MS LAWSON: And you expect these settlement agreements with Telus and Bell at least to continue and then the 800 one with AT&T and Sprint as well?
485 MR. WALKER: Sure. They are open to negotiation. As a matter of fact, at the end of this year we -- or at the end of this year we will have to negotiate with Telus a new agreement, but they would be open to negotiation, yes.
486 MS LAWSON: Okay. I guess what I'm wondering is, in the 411 figures of bypass, that chart has billed revenue. Does that include settlement payments from other telcos for the termination of calls in your territory?
487 That's just billed revenue. It doesn't, right? It doesn't --
488 MS HAMELIN: It's just billed revenue.
489 MS LAWSON: So it doesn't deduce a settlement payment.
490 Could you provide the net revenue, having deducted the settlement revenues? Is that something you can do?
491 MR. WALKER: The net revenue received from Telus for example? I think we have provided that information in confidence to the Commission.
492 MS LAWSON: Oh. Well, I was thinking overall.
493 MR. WALKER: The net settlement revenue?
494 MS LAWSON: Yes.
495 MR. WALKER: I think we have also provided that in response to an interrogatory. I might be able to find that, if you give me a minute.
496 MS LAWSON: Sure. Thanks.
--- Pause / Pause
497 MR. WELLS: Excuse me. Could you clarify again for us what you are after here?
498 MS LAWSON: I'm trying to understand the net impact of --
499 MR. WELLS: Of bypass?
500 MS LAWSON: Yes.
501 MR. WELLS: So you are back to 411, and what you are trying to get is the net impact on the company's revenues considering the billed revenue impact and the impact of settlement?
502 MS LAWSON: Exactly.
--- Pause / Pause
503 MR. WALKER: If I understood what Ray was just mentioning to me is your request, we don't have that.
504 What we have provided in Telus 27 is our revenue on an aggregate basis that we received through settlement. It doesn't split it out by carrier, but it is total settlement --
505 MS LAWSON: Yes, that's all I'm looking for. So I can just make that deduction myself then.
506 Okay. Do you have it for the 2000 and 2001?
507 MR. WALKER: We have estimated it for 2001, yes.
508 MR. WELLS: I think you are going to get what you are not after. I need to understand what you want here.
509 Are you trying to determine -- we have on 411, page 1 of 2, a chart that shows the impact of bypass for 1999 and 2000 and 2001.
510 MS LAWSON: Correct.
511 MR. WELLS: And you are looking to see for all of those three years what the net impact of that is when you consider the revenue impact of settlement?
512 MS LAWSON: Yes. Could you just provide that to me in an undertaking?
--- Pause / Pause
513 MR. WELLS: I think it's going to be difficult to do anything other than some high level proxy, because not knowing where these calls are terminating we have different settlement rates, et cetera, so it would be pretty difficult to give anything that would have a level of accuracy to it.
514 MR. WALKER: Yes. Just to explain that a bit further, unless we knew exactly where each call was coming from it's hard to know what rate to apply, because with our settlement agreements with Telus, TCI and TCBC, there are probably 20 rates for each one of those. Maybe not quite, maybe 20. The same with Bell. So it would be hard to apply --
515 I mean, the only thing that maybe could be done is take the bypass minutes that Cathy has talked about and multiply it by some average settlement rate potentially.
516 MS LAWSON: I understand.
517 Would that kind of estimate -- could you provide that at maybe the same order of magnitude of judgment that your elasticity estimates are?
518 MR. WELLS: Are you asking about the repatriated minutes that you wanted an undertaking for a short while ago?
519 MS LAWSON: No. I'm just referring to the fact that you have been able to come up with elasticity estimates when it is a difficult --
520 MR. WELLS: Right.
521 MS LAWSON: -- thing to estimate, and here we have another difficult thing to estimate and I'm just wondering if you could provide me with some kind of estimate in the same order of accuracy?
522 MR. WELLS: Yes, we can do that and note the assumptions that were made under it.
523 So we can take an undertaking.
524 MS LAWSON: Okay. Thank you.
525 So, just for the record, the undertaking, then, is to provide an update, I guess, to page 1 of Interrog CRTC 411 that provides an estimate of billed revenues net of settlement payments, recognizing that it is a very rough estimate.
526 Okay, thanks.
527 Now, returning to the issue of market share loss estimates, and your evidence at page 31 of your estimated market share losses, I take it these represent the percentage of your total business that will be lost to competitors so they include the bypass minutes. Is that correct? Is that how you did it?
528 MS HAMELIN: It's after the repatriation has occurred.
529 MS LAWSON: Exactly, okay.
530 If the bypass, and therefore the repatriation, is actually higher than you have estimated, then the revenue loss due to competition will be lower since more of the market share to be gained by competitors will be conversion of bypass rather than shifting from Northwestel. Correct?
531 MS HAMELIN: Yes.
532 MS LAWSON: Now, can we just go back to 706 and those same pages that we were on that showed the net impact of various stimulation factors. That is 706, Attachment 5, pages 11 and 12.
533 I'm sorry, I should have told you to just keep those open.
--- Pause / Pause
534 MS LAWSON: Now, am I right that what this is showing, page 12 over page 11, those to tables, is the net impact of advertising stimulation, repatriation and market share loss. What you show there, if you look at the year 2001 and the number of minutes, from page 11 to page 12 we see a reduction in total minutes of about seven million minutes. Is that correct, in 2001?
535 MS HAMELIN: Yes, that's correct.
536 MS LAWSON: Okay. Now, just holding that there, going back to our earlier discussion about bypass constituting, you know, on these numbers, approximately 22 per cent of your total minutes. You agreed with that subject to check?
537 MS HAMELIN: M'hm.
538 MS LAWSON: Then at page 31 of your evidence you say that you are estimating market share loss of 13 per cent in the year 2001.
539 Right. So that implies a net repatriation of 9 per cent, does it not? Twenty-two per cent minus 13?
540 MS HAMELIN: Yes. Subject to check.
541 MS LAWSON: Okay. So you have got net repatriation there of 9 per cent, but then when we look at this table, we see a loss in toll minutes of $7 million. I'm just wondering how you can reconcile those two.
542 MS HAMELIN: I believe it was seven million minutes, not $7 million.
543 MS LAWSON: Oh, sorry. I meant minutes. I'm just wondering how you can reconcile seven million lost minutes with a net 9 per cent increase in market -- in repatriation, market share.
544 MS HAMELIN: Sorry. I'm just going to take a minute here to go over these figures one more time.
--- Pause / Pause
545 MS HAMELIN: I'm just going to have you walk me through this again, okay? So you are starting with page 11, the 129.
546 MS LAWSON: Yes.
547 MS HAMELIN: Okay.
548 MS LAWSON: Yes. The simple one, the obvious one, I think -- yes, page 11, 129 and then page 12, 122.
549 MS HAMELIN: Right.
550 MS LAWSON: You have got about seven million minutes lost.
551 MS HAMELIN: Right.
552 MS LAWSON: And you are taking into account -- when you estimate that, you are taking into account these three factors listed on page 11.
553 MS HAMELIN: Right, which is the repatriation, the advertising stimulation and the loss of market share.
554 MS LAWSON: Right. Okay. But then we were looking at it from the perspective of bypass where, as we discussed earlier, when you compare your bypass minutes estimate with these same numbers in 706, we come up with approximately 22 per cent bypass.
555 MS HAMELIN: As I have explained to you I believe earlier, those bypass minutes include bypass from business as well as residential and we assumed no repatriation, so the bypass minutes that you are looking at are much higher than what we are in fact repatriating in this assumption.
556 MS LAWSON: Okay. That may explain. I think it will be different. Okay. Thanks.
557 MS HAMELIN: You're welcome.
558 MS LAWSON: Okay. You also explain in your evidence at pages 32 to 33, you say:
"More than half of the market share lost would be from the four equal access locations, Whitehorse, Yellowknife, Fort Nelson and Iqaluit." (As read)
559 I'm just wondering if you have a sense of what proportion -- I guess you do -- the proportion of total long distance minutes that originate in these locations. Is that something you have provided on the record or in confidence?
560 MS HAMELIN: I don't recall if we have provided that on the record. I don't believe we have.
561 MS LAWSON: Is that something --
562 MS HAMELIN: Certainly it would be in confidence.
563 MS LAWSON: Okay. It would be in confidence. Well, would you then just confirm with me that your market share loss is going to be a lot higher in the locations where there is equal access?
564 MS HAMELIN: Yes. I could confirm that.
565 MS LAWSON: You have said here more than half of the market share loss would be from the four equal access locations. How much more than half were you thinking? Just a little over half?
566 MS HAMELIN: I believe it was just a bit over half.
567 MS LAWSON: You consider that a realistic estimate, that close to half of your market share loss would be outside these four equal access areas?
568 MS HAMELIN: Yes. I do believe that those assumptions are valid. What I think we are going to experience here is the pent up demand of our customers who have been waiting so long and who have had such exposure to the advertising. The print media from down south are so aware of what prices are -- the lower prices in the south -- and I believe that they will seek out a means of obtaining those low rates through whatever competition comes and is available in our area.
569 MS LAWSON: What proportion of your NAS are in these four equal access locations?
570 MS HAMELIN: It's about 50 per cent.
571 MS LAWSON: Okay. So you actually are not expecting to see any difference in market share loss as between equal access and non-equal access locations, any significant difference anyway.
572 MS HAMELIN: Just one moment, please.
Pause / Pause
573 MS HAMELIN: We would like to take an undertaking to just verify the half number that we have quoted here in the evidence. We don't have our backup to that detail.
574 MS LAWSON: That's fine. I would be happy to accept that. Thank you.
575 I take it the undertaking then is to confirm the statement at the bottom of page 32 of your evidence and maybe to elaborate on it, where it says "more than half of the market share losses would be in the four equal access locations".
576 MS HAMELIN: Yes.
577 MS LAWSON: That's fair.
578 MS HAMELIN: That's the expression.
579 MS LAWSON: Okay. It does seem to me that outside of these equal access locations where customers are going to have to dial, you know, a whole lot of digits in order to access the competitors, that's going to be a real inconvenience. It's actually about the same as the inconvenience that a lot of them are experiencing with the kind of bypass if they are using a 1-800 number presumably to bypass. Right? It would be a similar kind of thing.
580 MS HAMELIN: For some of them, yes, it would be a similar kind of thing as it is today. I mean some of our bypass, of course, is the reversal of calling. That's even more inconvenient.
581 MS LAWSON: There is going to be a real inconvenience there. Is it not possible that in those non-equal access centres competition is going to have actually a pretty minor impact relative to the bypass that already exists, even if long distance rates are not reduced by as much as you are proposing?
582 MS HAMELIN: I don't know that I would say it would be minor. As I pointed out before, I believe our customers are sitting back, they are very aware of rates. They want those low rates. They will seek them out. I don't think that if they have to dial a few extra digits it's going to phase them one bit.
583 MS LAWSON: Well, to the extent it's not phasing them now, I think we can agree, it's probably not going to phase them in the future either. To the extent that it is a barrier to them using bypass now, would you not agree that it would be a barrier to them using competitors in the future, particularly if your rates are lower.
584 MS HAMELIN: Well, certainly if our rates were lower, then I believe that this could be --
585 THE CHAIRPERSON: Ms Lawson, I want to take our afternoon break some time in the next few minutes, so when an appropriate time in your cross-examination --
586 MS LAWSON: Sure. Thanks. I will finish up this line.
587 MS HAMELIN: I would just like to back up a little bit on that last undertaking.
588 I just want to clarify something that I guess if I had taken a few more minutes to read what we had said -- the reference you have on page 32 of the evidence is the case of where we would have extensive market share loss and I must have missed that in your questioning. I'm sure you must have noted that when you were talking, but in the event that you didn't, the assumption where it's more than half the market share losses in the four equal access areas is in the "without rate" scenario, and in the "without rate" scenario, we would have very high -- our assumption was that our rates would not be down to the level of the competition and, as I pointed out before, our customers would very much seek out those cheaper means of getting lower rates if we had to keep our rates high. So I think it's fair to say that, in that case, you would have very high losses in the non-equal access areas because they would actively go after the competitive.
589 As I say, we can still check the numbers but I just wanted to put that on the record now.
590 MS LAWSON: Thanks. And I'm sorry for not clarifying that.
591 I guess, then, I should ask what your assumption, or estimation, is of the proportion of market share loss outside the equal access areas is in the situation, say, of long distance rates reductions. But -- first of all, under the situation of your proposed reductions but, secondly, maybe in a situation of reductions to the point where your rates are 15 per cent lower at a discount off your basic schedule, or something less than what you are proposing.
592 So what you are suggesting here is the distribution of the market share losses as between equal access areas and non-equal access areas. I'm wondering how that would change under the different scenarios that have been presented in this proceeding for long distance rate reductions.
593 MS HAMELIN: I understand that they do change but we have filed those numbers in confidence.
594 MS LAWSON: Oh. Okay. Just one final question, then, before the break, Mr. Chairman.
595 I mean whether you are looking at your proposed rate reductions or something less than that, in the way of long distance rate reductions, is it not the case that this inconvenience factor in non-equal access areas is going to have some effect on customers choosing to go with competitors and that, in fact, there will be customers outside the equal access areas who will be willing to pay a premium to Northwestel just to avoid this hassle?
596 MR. WELLS: I think it's important to understand what we are proposing. We are proposing to offer rates across our entire territory that are competitive and reasonably comparable to the rates that would be offered by companies from the south. I don't think it's reasonable to consider setting up some sort of a two-tiered structure here if that's what you are getting to. Okay? In fact, we have customers in our remote -- small remote communities that would pay higher rates than those in the larger centres in our territory.
597 MS LAWSON: Okay. Sorry. I didn't mean to go there, Mr. Chairman. I just want to finish this up and then we can break.
598 Let me ask the question a different way. Okay?
599 You have said here, in this sort of extreme situation where you don't reduce your toll rates at all, close to half of your market share losses would be outside the equal access areas.
600 I'm wondering, let's take a scenario where it's halfway in between what you are proposing and your existing rates. Major reductions but not all the way. Would you say the same thing applies; you would still expect close to half of your market share loss to be outside the equal access areas?
601 MR. WELLS: We have got evidence, through market research, that any perceived difference in rates between our rates and those of the competitors we will see a massive shift in our -- for customers from ourselves to our competitors, so this degree beyond rates we are at today and within 15, 20, 25, 30 per cent of rates that may be offered by competitors in the south is really irrelevant. We are going to see a major shift in market share if, in fact, our rates are not perceived as very comparable with competitors' rates.
602 MS LAWSON: Okay. So even if they are just a little bit above the competitors, you think people are going to shift --
603 MR. WELLS: Yes.
604 MS LAWSON: -- a little bit, a lot, but they are going to shift. And what I'm interested in now is just the non-equal access areas. Do you think that effect is going to be the same, regardless of how much higher your rates are over the competitors'?
605 MS HAMELIN: Yes, and we have made those assumptions. If the customers perceive whether they are in equal access areas or non-equal access areas our rates should be different, then we will see the high market share losses. And I think with the types of toll plans that exist today, it is very easy for our customers to make those comparisons. It's not like a few years ago when there was a lot of confusion in the marketplace about what rates are. You know. Today the rates have very much been replaced; it's flat rates and it's very easy for customers to make those differences.
606 MS CHALIFAUX: And if I could just add to that, I mean our customers have been demanding lower long distance rates for many years and there's been many that have been waiting, waiting patiently. These proceedings started in 1997. Yes, competition is coming and, yes, with that the low rates are coming and it's going to be up Northwestel to bring these comparable long distance rates to what you have down south to these remote villages in the north. Because competition is unlikely to go there. We are the ones that are going to be offering the benefits of a competitive framework to them.
607 MS LAWSON: Thank you.
608 MR. ROGERS: Mr. Chairman...?
609 THE CHAIRPERSON: Mr. Rogers.
610 MR. ROGERS: There was an undertaking given by the company about five minutes, at the bottom of page 32.
611 Do we have confirmation that the clarification given by Ms Hamelin eliminates the undertaking?
612 MS LAWSON: Yes.
613 I should have confirmed that, Mr. Chairman. We can strike out that undertaking.
614 THE CHAIRPERSON: So there's two undertakings.
615 I assume you still have more questions, Ms Lawson?
616 MS LAWSON: I do.
617 THE CHAIRPERSON: Yes. So we will take our afternoon break, then, and reconvene at 3:20.
--- Recess at 1306 / Suspension à 1306
--- Upon resuming a 1328 / L'audience reprend à 1328
618 THE CHAIRPERSON: Order, please, ladies and gentlemen. We will return to our proceeding, now, and the continuation of cross-examination of the Northwestel panel by counsel for CAC/NAPO.
619 Ms Lawson...?
620 MS LAWSON: Thank you very much, Mr. Chairman.
621 I am just going to ask one follow-up question to the little discussion we had about equal access before the break; and that is, just what proportion of market share loss do you expect to occur outside the equal access areas under your proposal?
622 MS HAMELIN: That was filed in confidence.
623 MS LAWSON: Okay. Can you just turn to page 33 of your evidence, right in the middle, the first sentence of the second paragraph there.
624 At page 33, the second paragraph, you say:
"If the proposed toll plans are not introduced, it is estimated that toll revenue for 2001 would be about $18.9 million, nearly $4 million lower than the estimated toll revenue of $22.5 million with the implementation of proposed toll plans."
625 Now, am I right that the $4 million estimate here is the estimated loss of gross toll revenue and does reflect additional CAT revenue from competitors?
626 MS HAMELIN: One moment, please.
--- Pause / Pause
627 MS HAMELIN: You said it's just toll, it's not with --
628 MS LAWSON: Right. That's what I thought. That's the way I read it. I just wanted to confirm that.
629 And it doesn't reflect any avoided costs that you might experience, for example, if you sold -- leased facilities to competitors or were able to reduce your leased capacity through the sale of facilities or something?
630 MR. WELLS: I'm sorry. Could you restate that question?
631 MS LAWSON: This $4 million, okay, we have already established it doesn't include -- it's not net of any carrier access tariff or settlement revenues from competitors, and I'm also asking that it's not net of any avoided costs that you might experience with competition, for example, through a reduction in your leased capacity.
--- Pause / Pause
632 MR. WELLS: I am a little confused by your question. You talk about costs and then you seem to talk a bit about revenues.
633 Are you asking that, given that there would be a reduction in our revenues and billed minutes, therefore some underlying costs in the company's network would be avoided because of that?
634 MS LAWSON: Yes, that is a suggestion.
635 MR. WELLS: No.
636 MS LAWSON: No what?
637 MS CHALIFAUX: In fact, in CRTC-2702 we were asked to run various scenarios. Essentially, it is very similar when you look at a "with rates" and a "without rates" scenario is what you are looking at here. Yes, our billed revenues go down. However, it is the total shift in minutes from Northwestel to competitors.
638 So from a network perspective it is just a shift in traffic from one to the other, and we still have to carry that traffic. So the variability of costs is essentially non existent for Northwestel in this time frame.
639 MS LAWSON: You are not expecting avoided costs as a result of competition.
640 MS CHALIFAUX: Correct.
641 MS LAWSON: But it is the case that when you lose minutes to a competitor you are still getting some revenue. We have already talked about that -- the carrier access tariff and competition and settlement right now.
642 To what extent do you think competitors will be relying on their own facilities versus leasing from you for resale?
643 MR. WELLS: In the initial opening of the market to competition, we would expect that there would be very limited reliance by competitors on their own network, given our geography and the territory that we serve.
644 MS CHALIFAUX: Perhaps I could add to that.
645 Through the introduction of a sustainable CAT, which is in effect a subsidized rate, again we expect competitors to take full advantage of that and use our facilities to originate and terminate traffic.
646 MS LAWSON: In that circumstance where the competitors are all engaging in resale, what per cent of revenue is actually lost to Northwestel?
--- Pause / Pause
647 MS HAMELIN: I'm sorry, could you clarify that relative to -- what scenario are you talking about?
648 MS LAWSON: Your proposal. Under your proposal, let's assume all the competitors provide service through resale. What proportion of revenue will you actually be losing to them, given that you are going to be receiving revenue from the competitors?
--- Pause / Pause
649 MS HAMELIN: I believe we responded to that in 2702.
650 MS LAWSON: Okay. Thanks. Maybe I should have just asked the general question: did you include additional resale revenue in your revenue calculations?
651 MS HAMELIN: Yes, we did.
652 MS LAWSON: But not in this $4 million total toll revenue number that we find at page 33?
653 MS HAMELIN: This revenue figure does not represent any additional CAT that anything with respect to settlement or CAT would be in the second line. It is not represented there, no. That is just a toll revenue.
654 MS LAWSON: Would you get any additional resale revenue above and beyond CAT and settlement if the competitors are reselling?
655 MS HAMELIN: If they were doing any kind of rebilling, there could be wholesale revenue.
656 MS LAWSON: So that is not incorporated in this revenue figure on page 33, but it is incorporated in the revenue figures where?
657 MS HAMELIN: Wholesale revenue is incorporated in the figures.
658 MS LAWSON: On page 33, in the $4 million?
659 MS HAMELIN: Yes.
660 MS LAWSON: I would like to move back to 706 and the Attachment 5 we were looking at before. This time, just looking at page 3 -- actually, you probably don't even need to turn it up.
661 What you are doing there is describing your plans.
662 MR. WELLS: Just a moment, please.
663 MS LAWSON: Sure.
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664 MR. WELLS: Okay.
665 MS LAWSON: At page 3 of Attachment 5 of CRTC-706 you describe your proposed rates for direct distance dial, off peak, $20 per month maximum, 10 cents a minute below $20 and above 600 minutes. And for on peak and calling card calls you are proposing a 15 per cent discount.
666 Then you give your assumed subscription rates.
667 Unfortunately, everything is abridged here. You have given them in expenditure category.
668 I am wondering if you could tell me in general what per cent of customers are assumed not to be on the plans at all?
669 MS HAMELIN: It is filed in confidence.
670 MS LAWSON: Even that general figure.
671 MS HAMELIN: Yes. I could say that we are anticipating significant penetration of our plans.
672 MS LAWSON: Okay. Would you agree with me that you do have some control over the number of customers that subscribe through your marketing in the success of your marketing?
673 MR. WELLS: I wouldn't say we have control over it. I say we can impact.
674 MS LAWSON: That's all I meant; that you can have some effect on the subscription rate through your advertising and marketing promotion efforts.
675 MR. WELLS: Yes, and assuming that the rates are comparable.
676 MS LAWSON: If the rates are attractive to customers, you are saying.
677 MR. WELLS: Yes, comparable relative to competitors.
678 MS LAWSON: Am I right that whatever you estimated here in terms of the proportion of customers that will subscribe to your plans is based partly on your elasticity estimate of negative .7?
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679 MS HAMELIN: Could you restate the question, please.
680 MS LAWSON: Your calculation or estimate of the proportion of customers who will subscribe to your plan rests on your elasticity assumption of negative .7.
681 MS HAMELIN: No, I would not say that.
682 MS LAWSON: No?
683 MS HAMELIN: This is a portion of customers' elasticity typically in five minutes.
684 MS LAWSON: What is the basis of this estimate that has been filed in confidence? How did you make that estimate of the significant number of customers who would subscribe?
685 MS HAMELIN: It was based on my best judgment and some discussion with respect to other telcos' anecdotal and with just what has been seen down south.
686 MR. WELLS: I think if I could just add a point here, we have had a huge shift in our calling patterns with people bypassing Northwestel's high rates and a lot of this is being done because of being impacted by the rates in the south.
687 We have also done, I mentioned earlier, a survey of a propensity of customers to shift given the rates, if Northwestel didn't have rates that were comparable to competitors. There was quite a high percentage, over 60 per cent of our customers said with a small differential in rates that they were going to shift.
688 So I think it's reasonable to conclude and I should point I guess to that 60 per cent, obviously you could infer that those would be higher-spending customers. There would be a reasonably high take of a plan that would drop from our current rates to the low rate.
689 I just wanted to add another point here, raising issues with respect to the validity of our forecasting I guess and I would suggest to you that this is in fact our best judgment as to what is going to happen. There has been no other judgment that I am aware of that has been put on the record by anyone.
690 We have used expertise where we needed to. I think it is an important point, if there is error here in this forecasting and you seem to be obviously pushing in the direction of you are forecasting low, easily there could be error in this forecasting on the other side.
691 I think it is important to understand the potential impact, if in fact coming out of these proceedings it is judged that, no, you have underestimated your revenues here and we are going to reduce perhaps the local rate or whatever other offsetting there, that the impact on a company of this size could be very significant if in fact we are forced into a position where our revenue forecast that we had put forward is believed to be overstated, when in fact the funding that we are looking at to help support everything from these lower rates to the sustainable CAT to our SIP Program is probably a better source of revenues initially to have that risk given to, than giving it to the toll forecast of the company.
692 So this is our best judgment. As I say, we have put a lot of expert support to get these numbers forward. That's our position.
693 MS LAWSON: I understand.
694 Generally then, am I right that you started with a plan, reasonably comparable rates, reasonably comparable service and really what it came down to is you have got to match what they are offering in the south in terms of long distance rates.
695 MR. WELLS: Correct.
696 MS LAWSON: Then you made assumptions about the impact on calling and subscriptions and so forth. You worked through the impacts based on the assumptions and then identified the resulting shortfall as a subsidy requirement. Obviously the local rates come into it too.
697 MR. WELLS: That's quite simplified. Obviously, there are impacts in the reduction of putting forward the sustainable CAT. The impact of the Service Improvement Program to come up to a total funding requirement, but I follow the logic of the steps that you put forward from a forecasting perspective.
698 MS LAWSON: I am wondering, did you test alternative plans for revenue differences to see how they would affect your shortfall? What other -- what alternative toll discount plans did you seriously consider and run through the numbers on? I know you have done the 15 per cent and 30 per cent scenarios for the CRTC in response to questions, but before you decided on essentially matching the south here what did you look at?
699 MR. WELLS: Back to an earlier comment about what the market research indicated to us was that a perceived difference in our rates was going to result in over 60 per cent of our customer base leaving Northwestel.
700 Once you understand that impact it doesn't make a lot of sense to go then and say, well, what if we were even 10 per cent higher or 20 per cent higher or 30 per cent higher because, obviously, you have lost a significant portion of your retail toll business. So we did not do any other analysis beyond reasonably comparable rates other than what was directed by the CRTC?
701 MS LAWSON: So you considered those surveys basically determinative in terms of customer response?
702 MR. WELLS: The survey in part, but also bypass again. The experience that we have had with residents in the north basically being willing to give up utility of the telephone as southerners know it, being able to pick up their phone whenever they want and make a phone call, going to efforts. Things like putting in a collect call and as soon as someone says no at the other end that's the signal to call back.
703 All of those efforts show us clearly that our customers are going to leave us in significant numbers.
704 MS LAWSON: Of course, the bypass and these tremendous efforts people are going to to avoid your toll rates are based on the existing situation in which toll rates are significantly higher than the south. What I am asking about is scenarios under which your toll rates are much less higher than those in the south?
705 MR. WELLS: Yes. I think your question though was: Was our conclusion just drawn on the evidence of that survey? I said, yes, that was a key part of it, but also the experience that we have had with our customers going to great lengths to bypass the rates that we have today also indicate to us that they are very, very price sensitive.
706 Given the simplicity now of flat-rate calling that you have, it is not difficult to figure out a differential in rates -- in other words, $20 versus $22 is pretty easy to figure out, that you are going to pay 10 per cent more for what today is perceived as a commodity.
707 So, I think we have got fairly strong evidence that any differential, perceived differential is going to create that kind of market share loss.
708 MS LAWSON: All right.
709 But you would agree that there are lots of different ways you can construct a plan, a discount plan and, in fact, that competitors have constructed their plans in the past in quite different ways, so that it can be very difficult for consumers to compare and determine under which plan they are going to save the most money.
710 So there are different options. You could just have the flat rate per minute option that a lot of people subscribe to, just 10 cents a minute period, without the cap, a certain discount off the DDD rates, whatever.
711 I am just wondering to what extent you explored those kinds of alternatives?
712 MS HAMELIN: As Ray has explained, we didn't go into a great deal of exploration of other alternatives, primarily because, and I believe I mentioned this before the break at one point, before the flat-rate plans were introduced down south there was a lot of confusion in the marketplace.
713 I think perhaps it was very deliberate. They were trying to confuse the customers and, you know, in an attempt to get market share, but the introduction of the flat-rate plans has taken away that confusion.
714 There may be the odd plan down south that is a little bit different. We are talking reasonable comparable and I think we have done a good job of doing a reasonably comparable plan to the south. I didn't see a great deal of point to doing a lot of different plans because our intent is not to confuse the customers, but to offer them the same or reasonably comparable plans as there are in the south.
715 They can see for themselves. They talk to their families. Their families are on these $20 unlimited plans and they are making the calls, so they are very aware.
716 We have advertising up here that comes straight from the south. We have very little northern television, so they see all of these plans and they know what they are. I didn't see a great deal of point in trying to offer plans that they might perceive as an attempt to confuse them.
717 MS LAWSON: All right.
718 I am wondering if there is anything that you can tell me about how your costs of providing long distance service, compared to the prices you are proposing, in the equal access areas versus elsewhere?
719 MS CHALIFAUX: Certainly I can tell you that we rely today on our very high toll rates and high toll margins in our major centres to cross-subsidize the uneconomic toll service throughout the rest of the north.
720 MS LAWSON: So if rates are the same as in the south if your proposal goes through, the costs are higher even in equal access locations presumably. Why would any competitor even attempt to gain customers in the north?
721 MR. WELLS: Part of this whole proceeding is dealing with the issue of sustainable CAT which is to in fact make it attractive for competitors to enter our market, so we put forward a CAT rate that is low cost to in fact accomplish that particular objective of the Commission.
722 MS LAWSON: So the costs are actually lower than they were estimated.
723 MR. WELLS: Yes. And maybe I should just re-emphasize the model. There's the three pieces to this funding issue here. One of them is to help make it attractive to subsidize competition, to help make it attractive for competition to come in and give choice to consumers in the territory.
724 The other piece is to enable Northwestel to reduce its toll rates. The third piece is to help ensure that we can deploy the service improvement program across our territory into areas that have no economic basis for that type of an investment.
725 Those are the three components. That's why competitors would in fact come to the market, because we are putting forward a rate that would be attractive to competition.
726 MS LAWSON: Because they would be subsidized.
727 MR. WELLS: Exactly.
728 MS LAWSON: So what we are talking about here today is a plan that subsidizes competition.
729 MR. WELLS: Yes.
730 MS LAWSON: Now, you are introducing or planning to introduce in your plan on January 1 -- am I right that equal access won't actually be available to any competitor who wants it until March 31?
731 MR. WELLS: Yes. Our plan is based on some assumptions. The first assumption is when the Commission renders the decision and, working from there, we have laid out a timetable. I think it's reasonable between the time that the market opens and by the time you actually set up with competitors to enable them to access your customers bases and, you know, 90 days is not an unreasonable length of time to have that happen.
732 MS LAWSON: Okay. And that's just in the four major centres. Then am I right that you are sort of leaving it open then whether you ever even bother to put equal access in place outside of the four major centres? You are waiting to see if there is any demand for it. Is that correct?
733 MR. WELLS: We have identified four additional locations and to your point, depending on the level of interest shown by competitors to enter that. I think it's important, just to repeat, that we are not -- Northwestel is proposing to put forward -- we are going to put in place rates across our territory, so regardless of whether or not competitors decide to enter, all of the customers in all of our areas will benefit by the reduction in toll rates, back to your earlier question about when we were talking about local rates, so there is going to be a significant reduction in long distance rates.
734 MS LAWSON: You could do that across your whole territory. You could still offer the rates and not have the competition.
735 MR. WELLS: Yes. We could offer rates comparable to the south, but that would not accomplish the objective of choice for our customers.
736 MS LAWSON: Right. How likely do you think it is that there is going to be demand for equal access outside, let's say, first the eight centres that you are considering now, the four for sure and the four possible?
737 MR. WELLS: We really have no idea. You are probably better to ask the competitors.
738 MS LAWSON: Okay, but in terms of your planning, you are not expecting over the three year plan, say, or the four -- yes, the three year plan up to 2003, say, you are not expecting any demand for equal access outside of those eight centres. That's all you have identified for the purpose of the three year plan.
739 MR. WELLS: That's correct.
740 MS LAWSON: Okay. Thank you. Now, doesn't this then provide you with a competitive advantage? First of all, you have got -- for the first three months of next year, you have got preferred service. There won't be any equal access even in Whitehorse or Yellowknife. That's a significant time period during which you can market, get customers on your plan, get them signed up.
741 If the competitors can't offer anything better than what you are already offering, there's not much incentive for those customers to switch?
742 MR. WELLS: I guess it's important to put Northwestel as a company into relative terms to the national competitors who are likely to come here. We do not, and Kathy mentioned it earlier -- there has been a lot of exposure to date to canvass on television and people know the rates.
743 We have had calls to our customers by competitors already. There's nothing going to stop competitors once they know this is going to be available to do preselling in this marketplace. They have got huge economies of scale.
744 They have got call centres that could basically blanket our entire operating territory probably in a weekend, so to suggest that Northwestel has some kind of competitive advantage over these large national competitors is not reasonable.
745 MS LAWSON: But you don't have any evidence that these competitors are actually interested in serving your market.
746 MR. WELLS: Well, we have got some evidence to date. We have had, as I said, customers that have been utilizing calling cards in the north. We have had call centres from some of the major carriers making calls up into this territory to customers.
747 If the CAT rate is attractive, I believe that competitors will enter this market.
748 MS CHALIFAUX: I think also, Ray, to add to that, it's important to remember what stopped this entire process in 1997. It was a request by CALLNET to compete in the north. It started with interest right there and, as Ray alluded, that interest hasn't stopped.
749 MS LAWSON: Competitors also haven't stopped losing money. Right? Okay. We will leave that one.
750 You are also aware that AT&T Canada, for example, doesn't offer residential toll service.
751 MR. WELLS: Yes, I'm aware of that, but when you use the term "competitors", you are speaking of --
752 MS LAWSON: Yes. My question now is just about AT&T Canada.
753 MR. WELLS: Okay. Sorry.
754 MS LAWSON: You are not expecting AT&T Canada to be targeting your residential customers.
755 MR. WELLS: I understand that portion of their business has been sold off to another --
756 MS LAWSON: Okay. I'm just wondering. If my hypothesis that you do have some oil between your customer base and you get them signed up with you right at the beginning and there is no price incentive for them to switch to Sprint or whomever it is who is offering service up here, at that point, isn't the sustainability of the CAT kind of redundant, like whether it's five cents, seven cents, ten cents, there is no opening for competitors to enter the market. You have already got your customers tied up.
757 MR. WELLS: Well, again, and I repeat what I said, our customers are already well aware of national carriers and what they offer. There have been numerous occasions where we have seen competitors phone up into our operating territory.
758 I have got no reason to believe that once the decision is rendered and there is a sustainable CAT put in place that competitors will in fact be aggressive in this marketplace.
759 MS LAWSON: Wouldn't you agree with me that what your customers want are low rates?
760 MR. WELLS: That's one part of what customers want. Yes.
761 MS LAWSON: I mean if you can deliver on the low rates, why would they bother switching?
762 MR. WELLS: Again, there's a number of factors in a decision process that consumers make. Excuse me.
763 MS CHALIFAUX: Maybe while Ray is reading that I can just, you know, point out that, you know, choice is always an important matter. It's an important element for the Commission. It's an important element expressed by our governments and it is one that Northwestel supports as well, and it is by introducing the sustainable CAT that we are hoping to encourage and promote that choice.
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764 MS LAWSON: Can I just ask quickly, your business plan here. It's at page 7 of CRTC 706, Attachment 5. You are proposing flat rate per minute 24 hours a day, 7 days a week, 13 cents a minute within Northwestel, 16 cents a minute across Canada and 19 cents a minute to the States. No volume discounts.
765 MR. WELLS: Just a moment, please.
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766 MR. WELLS: Okay, we have it. Yes?
767 MS LAWSON: I'm looking at the business plan, which I'm sure you are familiar with.
768 I'm just wondering how resellers would be able to beat your rates, I mean how they would be able to resell to residential customers and beat your $20 plan, unless most of the calling of their customers in on peak?
769 MS HAMELIN: That's not the wholesale offering.
770 MS LAWSON: Oh, you do have a wholesale offering. Where would I find that?
771 MS HAMELIN: I suspect the details were filed in confidence, but I can't recall.
772 MS LAWSON: Okay.
773 MR. WELLS: But you do raise a good point, just back on the issue of competitive entry.
774 Our territory is quite unique in that there are very few large customers in a couple of major centres that represent the majority of our revenues. When you were talking before about -- and I think you focused, perhaps, your question on the residential market -- I think the point about the vulnerability with businesses is a significant issue for us as well that I would make note of that we are very vulnerable from a revenue perspective to losing very few large customers and having a major impact on revenues of the company.
775 MS LAWSON: Okay. Just can you hold the 706 interrogatory -- and I'm sorry, I should have said that a long time ago.
776 Just one more question on this: Would you agree with me, though, that the north will be really an incidental part of the marketing plans of your national competitors?
777 MR. WELLS: Incidental in that, the mass market advertising? I'm not sure where --
778 MS LAWSON: They are not going to be putting a lot of effort into targeting your market compared to the rest of the country?
779 MR. WELLS: Well, it depends on the segments of the market I think, particularly. If you are looking at the residential market I would suggest again there is not a large amount of additional costs to competitors to get their call centres to blanket a residential market over a weekend. Some quick flights up from the south and around to a number of businesses in a few major centres has a major impact on our revenues. So I would not agree that our marketplace is not going to be addressed by competition.
780 MS LAWSON: Okay. Now, if you just go back to pages 11 and 12 of this attachment where we had those tables of minutes and revenues.
781 In 2001 on page 11 we have 129 million minutes and then after the effects of advertising, repatriation and market share loss it drops to 122 million minutes.
782 The three stimulation and other effects that you were taking into account, I just want to quickly run over them.
783 So looking first at the advertising stimulation. This is where you are saying your minutes will increase here due to your marketing and advertising. I'm just wondering how much this effect has on your assumed elasticity of negative .7.
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784 MS HAMELIN: This advertising stimulation is what we consider to be kind of the general market noise of having, you know, the lower rates and the toll plans and it is over and above our assumption of stimulation of our new plans.
785 MS LAWSON: So it's even higher then. If you are looking at the elasticity with this particular effect added on you have an even higher elasticity measure. Correct?
786 MS CHALIFAUX: Well, what Cathy is saying there is, we have an elasticity factor due to a change in price, so as we introduce our toll plans obviously there is a significant price savings and there will be some stimulation in the market.
787 However, we also recognized that as competitors come in there is just a general noise in the market -- this has been the experience down south -- and that in itself will also cause some increased calling.
788 MS LAWSON: It could be measured as an additional amount in that elasticity factor. I mean, that's what we are talking about is a change?
789 MS CHALIFAUX: Not as part of the minus .7, no, because it is important to isolate the impact due to change in price.
790 MS LAWSON: Right. No, I understand.
791 I'm just saying, if you were combining them both.
792 So it's more than a price elasticity of demand, it is a price plus marketing noise?
793 MS CHALIFAUX: That's exactly what we have done.
794 MS LAWSON: I'm just wondering what it would be. It would be something higher than negative .7, so it would be negative .8, negative .9.
795 MS CHALIFAUX: Well, the minus .7 is a factor related to change in price so, you know, you can't add it.
796 This is one that is due to change in just general market noise.
797 MS LAWSON: Okay. You are adding minutes due to repatriation. I think we have talked about that. It could be significant, that effect, particularly if you have underestimated your bypass minutes, that repatriation effect?
798 MS HAMELIN: I don't believe I have underestimated my bypass minutes.
799 MS CHALIFAUX: I think again it is important to point out, as Ray alluded to earlier, particularly when it comes to something like repatriation, it is our best estimate, no doubt, and it could be low, it could be high, but it is our best estimate.
800 MS LAWSON: Okay.
801 Finally, the deduction for market share loss. If competitors don't come at the rate you think they will, then obviously these losses would be lower. Right? Correct?
802 MS HAMELIN: Certainly, if they don't come.
803 MS LAWSON: Yes, okay.
804 MS HAMELIN: Again, it is our best judgment of what we expect to be the market share loss.
805 MS LAWSON: Okay.
806 Finally, you talked just a little while ago about the whole -- your desire to get reasonably comparable rates in place. It's clearly one of your goals. I noticed in your opening statement you say:
"Our guiding principle has been to develop a plan to deliver reasonably comparable services at reasonably comparable rates to all communities in the north, including even the smallest, most remote villages." (As read)
807 So obviously it is a key factor underlying the long distance rate proposal. Right?
808 MR. WELLS: Yes. I need to clarify here.
809 This is a principle that is supported by our governments. I believe it also supports the objectives that we have seen that have been laid out in various decisions in the past by the Commission. What we are talking about here is providing an opportunity to people in the north to have reasonably comparable rates to the rest of Canadians and also provide reasonable comparable services.
810 So to try to suggest that this is a Northwestel's principle in and of itself I think is not the case.
811 We are attempting to meet the objectives, I think, the objectives that have been put in place by both the federal government or being carried out by the Commission here and that is why we put forward the rates the way that we have put them forward because, in fact to your point, competitors do enter the large urban centres.
812 We want to ensure that all of our residents in the north benefit from competition. That is why we put forward that principle.
813 MS LAWSON: I didn't mean to suggest otherwise. I can reassure you, Mr. Wells, that my clients are in entire agreement with the principle.
814 I wanted to establish that that is in fact a key factor underlying the long distance rate proposal as part of the whole plan. It underlies the whole plan, and it underlies the long distance rate proposal as well.
815 Looking then at local rates where your existing basic access rate is already approximately 15 per cent above average basic access rates in the south -- do you agree with that?
816 MR. WELLS: I'm sorry.
817 MS LAWSON: Let's look then at the local rate comparison.
818 It is CRTC-1701, Attachment 1.
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819 MR. WELLS: Okay.
820 MS LAWSON: This is a very useful table, I find. It sets out the monthly access rates for every major local telephone company in Canada, and you have given the low and the high for basic access.
821 The one exception, I guess, was Telebec. The highest one includes extended area service.
822 But I take it for Bell and Telus the highest rate is just the highest basic access rate. It doesn't include equal access service.
823 MR. WELLS: In this table?
824 MS LAWSON: Yes, just in the table.
825 MR. WELLS: I was just going to note, to help you, since you are so keen on the evidence that is here, that there are proposed rates that have been put forward as well, I should note, by both Telus and Northern Telephone that would raise rates over $28 that put our proposed rates within less than 10 per cent of those rates that have been proposed.
826 MS LAWSON: What is the Telus proposal you are referring to?
827 MR. WELLS: Just a moment.
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828 MR. WELLS: I have been, I think, corrected here.
829 Northern Telephone rate I have as proposed at $28.28, as being put forward by Northern Telephone.
830 I am just trying to update the table somewhat. Obviously between the time we did this -- and maybe that shows some of the upward movements that we are seeing in the country with local rates.
831 Between the time we had put this forward, we have become aware of the fact that there have been other local rate increases proposed by other telephone companies.
832 MS LAWSON: But the only ones you mention here are for Northern, a small company.
833 MR. WELLS: Northern Telephone --
834 MS LAWSON: And I think maybe Telebec. Is that the other one you are thinking of?
835 MR. WELLS: Yes. Telebec has apparently gone up over 26 on their lowest rate, as well.
836 So if you put this in relative terms now, we are within about 10 per cent of higher rates that are seen in the other telephone companies.
837 MS LAWSON: If you did an average rate in Canada, would you agree with me that it is going to be probably lower than 23? The highest Bell rate is $23. It is probably going to be somewhere around there.
838 Telebec and Northern are small companies.
839 Your existing rate right now, at $26, is already 10 or 15 per cent above average.
840 MR. WELLS: Yes.
841 MS LAWSON: And your proposed local rate of $31.33 would be about 40 per cent higher than the southern average.
842 MR. WELLS: Yes. Again, it is back to the issue of the total bill. I think we have to take a look at what Northwestel is putting forward and how that will impact customers on average.
843 We have tried to strike a balance, and over the next few days I think you are going to hear about this a few times.
844 In trying to accomplish the objectives that the Commission has laid out in this proceeding, we felt it was necessary to try to find a balance between what northerners were going to pay for choice, for low rates, for service improvement plans, and we felt that to strike that balance we needed to put forward an increase in local rates.
845 You mentioned that you were not here for both of the days in the public consultation -- maybe you were here for yesterday.
846 We heard very clearly in the last two days from two Ministers from the Government of Nunavut that were in Pond Inlet, which is at the very tip of Baffin Island, and as far south as people in Fort Nelson, and their views on increasing local rates varied as much as that geography did.
847 We heard from people who said yes, we are willing to pay the extra $5.00 to get these kinds of benefits and some rationale of "we understand that we can't expect all of this to be totally subsidized by the south", right through to the other end of the spectrum, which is basically "no, there should be no local rate increases".
848 I am sure we will hear from our friends at Telus later on. I think they had proposed perhaps to go to $35.
849 There are going to be people in the south who say no, there should be higher rates, and there should be some people in the north who say the rates should be stabilized.
850 We try to strike a balance in this process. I believe that the $5.00 is our estimate of striking that balance.
851 MS LAWSON: I understand. I wanted to find out what your notion of reasonably comparable is, what kind of a range, a percentage price range within which you would consider rates are reasonably comparable.
852 If I am concerned as a subscriber about the basic access rate -- say I don't use a lot of toll, or whatever, and here I am looking at a rate that is 40 per cent above the Canadian average, would you say a 40 per cent difference is reasonably comparable?
853 MR. WELLS: Again, you are talking to the Canadian average?
854 MS LAWSON: Yes.
855 MR. WELLS: Yes. Again back to the issue of from the total bill perspective, I think that it is reasonable to look at it from that point of view.
856 Back to balance, we have selected the $5.00 rate as putting us within a 10 per cent range of rates that have been proposed in the south by other telephone companies.
857 I think it is important to note that between the time we had built this original evidence and now there has been upward pressure on local rates. I would expect that perhaps Northwestel could find itself in a year or two maybe not necessarily at the top end of those local rates.
858 We put this in the total perspective of what we are putting forward here: $75 million in capital investments to improve service in the north; reducing rates to rates that other southern Canadians enjoy; and putting forward a sustainable CAT rate that will enable competitors to come into our territory and give choice to our customers.
859 We felt that that was not an unreasonable increase.
860 MS LAWSON: I understand. It is clear that, at least from a local rate perspective, your definition of reasonably comparable incorporates 10, 15 per cent, maybe even 40 per cent, if you are looking at average difference.
861 You are willing to accept that there is a range within which prices are reasonably comparable. They don't have to be identical to be reasonably comparable; right?
862 MR. WELLS: It depends on whether cost logic exists any more.
863 If you take, for example, the local rates -- and today our rates are nowhere near the local residential rates. They are nowhere near compensatory levels.
864 Some of our highest costs in the provision of residential rates are upwards of $90 per month.
865 If you are getting to the conclusion of long distance rates, there is no cost basis left there. When you get to the issue of a sustainable CAT, that is gone. So the reasonableness from a costing point of view no longer exists and you are going to be in a competitive market.
866 The customers will tell you what's reasonably comparable. They will tell you by leaving if you are nowhere near. So, from the statistics and information we have, for us to be reasonably comparable, we have to be pretty close -- right? -- no perceived difference, customers in the LD market, and costs are still an issue in the local part of the equation --
867 MS LAWSON: And that's because there competition in long distance and there isn't competition in local?
868 MR. WELLS: What is?
869 MS LAWSON: What you just explained.
870 MR. WELLS: The model that's been put forward, again, to have sustainable competition, we have wiped the issue of costs out of the equation, we have gone to a sustainable CAT that is below cost to attract competitors into the marketplace. So, therefore, the rates that are going to be offered by competitors are going to be the national rates. And for us to be reasonably comparable -- and that's the judgment of the customer -- we believe that we have got to be very close to those rates.
871 MS LAWSON: And that's because of competition?
872 MR. WELLS: I don't... Sorry.
873 MS LAWSON: Your definition of "reasonably comparable" on the long distance side is virtually identical because of competition?
874 MR. WELLS: Because of the customer.
875 MS LAWSON: Because the customer has choice?
876 MR. WELLS: Because the customer has decided that they would leave Northwestel if our rates were perceived to be higher than that of the competitors.
877 MS LAWSON: Right. Whereas they can't leave Northwestel for local service?
878 MR. WELLS: There is no local competition in our marketplace today. There is no competition --
879 MS LAWSON: Thank you.
880 MR. WELLS: -- today.
881 MS LAWSON: Those are all my questions, Mr. Chairman.
882 THE CHAIRPERSON: Thank you, Ms Lawson.
883 So we will have exhibit numbers for the two exhibits.
884 Just to be clear, on the second one, Ms Lawson, network access lines in Nunavut, I assume that was a chart created by CAC/NAPO based on the sources listed at the bottom of the page?
885 MS LAWSON: Yes; it actually was not created by us, it was created by a statistician in Nunavut but, yes, it was created from the sources cited at the bottom.
886 THE CHAIRPERSON: Okay.
887 MS VOGEL: Mr. Chairman, we will enter that exhibit as CAC/NAPO Exhibit Number 2. And the chart entitled, "Survey of Household Spending in 1998" will be entered as CAC/NAPO Exhibit Number 1.
888 THE CHAIRPERSON: Thank you.
889 So, Madam Secretary, the next party to cross-examine?
890 MS VOGEL: The next party to cross-examine is UCG.
891 THE CHAIRPERSON: And that's Mr. Rondeau.
892 MS VOGEL: Mr. Rondeau, would you come forward to counsel table, please.
893 MR. RONDEAU: Good afternoon, Mr. Chair, ladies and gentlemen of the Committee, the staff from the CRTC. We welcome you to the Yukon. Our panel.
894 I will try not to repeat any more than what is necessary of what Ms Lawson examined; she has been very eloquent and knowledgeable in her questioning.
895 MR. RONDEAU: Northwestel, in their service improvement plan application, has proposed a $5.00 local increase. Yesterday, I spoke about other options. That's what I'm going to be speaking about right now.
896 First of all, I would like to ask the panel why Northwestel has not entertained other options to recoup money from northern customers other than the $5.00 increase in local rates.
897 MR. WELLS: As I mentioned earlier, we have put forward a plan and one of our objectives was to try to strike a balance in that plan and we saw the benefits that our proposal was going to bring to northern customers, the benefits of choice, lower long distance rates and a $75 million service improvement plan, and we felt that it was reasonable to put forward a $5.00 local rate increase and, as you heard -- perhaps you hear yesterday, Roger, that there are supporters, in fact, of that $5.00 increase and there are people that don't support that. But we try to strike a balance. That's why we put forward having northerners pay a portion for the benefits that were going to be gained here.
898 MR. RONDEAU: But you didn't entertain any other options?
899 MR. WELLS: No. Again, we felt that -- obviously, in our thinking, we would have gone through some different scenarios as we built this model over time to try to determine what other ways there were to ensure that there was a balance in this.
900 We have, of course, also, as you know offset some of the exchange line mileage rates, or actually gotten rid of them altogether, and we have also gone and done some rate increases in other areas, in some of the business areas, mega rates and installation rates; so we did address some other specific rate areas within our products. But, again, we did put forward something we believe brought balance to the benefits that are going to be brought to the north.
901 MR. RONDEAU: Okay. I will explore with you some other options that may be considered.
902 You spoke about the total package deal. If you consider the cost to the consumer for a total package to be $26 approximately for local and your package says to raise that to 31. You add the $20 on that, it's in the $50-range for the total package.
903 Why can't you look at having the same charge for the package only leaving the local rates at the same and raising the long distance package to $25?
904 MR. WELLS: I have been reminded I'm supposed to call you "Mr. Rondeau".
905 As I stated earlier, as competition comes into the marketplace it's going to be critical that Northwestel has the capability to offer comparable rates or the competitors will, in fact, take the vast majority of our customers and so, we have put forward a proposal, our $20 plan, that will match, or be perceived as matching the plans from the competitors. So we had to -- that's why we couldn't -- we can't increase our local rate or, sorry, our long distance rates at the risk of losing a lot of market share.
906 MS CHALIFAUX: I think to add to that, Ray, as well, it is also important to remember that competition is not going to go everywhere -- that's quite obvious when you look at some of our far remote northern villages -- and if we were to offer higher rates across the board, then only those customers who are in competitive areas or where competitors have chosen to enter will be able to benefit from those lower rates and the rest of the north will have to pay higher long distance rates. So, again, it was very important for us to ensure that the benefits of competition, either through choice or lower rates, was broadly distributed across the north, from Whitehorse, to Ross River, to Pond Inlet, to Griese Fjord.
907 MR. RONDEAU: Thank you.
908 I can understand that, and I agree with that.
909 Your president said yesterday, in his response, that raising the long distance package above the $20 for the 600 minutes would allow competition an unfair advantage.
910 I would like you to explain the rationale for that comment.
911 MR. WELLS: It's back to the issue of reasonably comparable rates. In the surveys that we have done of our customers in the marketplace, the vast majority of our customers clearly stated that if there is a perceived difference in your rates we will leave you and we will go to the competitors. So we have had to put in place a pricing model that we would expect or hope our customers to see as reasonably comparable to those of competitors.
912 MR. RONDEAU: Can you explain why they would have an advantage? I don't understand.
--- Pause / Pause
913 MR. WELLS: If I understand, your correction, Mark, sort of helps me out here, the rates that are offered in the south are the $20 rate. If we went in with a higher rate we would be put at a rate disadvantage. Customers would see that our rate was higher and they would leave to go to the competitors.
914 Maybe I don't understand your question, Mr. Rondeau.
915 MR. RONDEAU: I don't believe that when rates started in the south they started equally through the country. I think it was rolled in as competition came in.
916 I still don't understand how Northwestel will have an unfair advantage with a different package.
917 MR. WELLS: All right. I understand better now.
918 It is true, historically, I think when the market first opened back I think it was June in 1992 there were large incumbent dominant carriers and prices over time shifted and so originally there may have been price differentials in the marketplace, but it is now eight years later and prices have -- I don't want to use the word "stabilized" because I don't think they have, but prices have come to -- flat rate calling plans are well known. They are established. Our customers are well aware of them. They see them advertised on TV all the time. They talk to their relatives and friends about them, so it's different than it was eight years ago.
919 The market is mature relative to Northwestel. Many of these applicants and competitors are much larger and much more experienced in competition than we are. That's the reason why we need to ensure that our rates are comparable to competitors' rates.
920 MR. RONDEAU: Are you saying then that competitors, large companies down south, will subsidize their competition, their coming into the north with down south averaging out their numbers? Is this reasonable?
921 MR. WELLS: Yes. If I am not answering your question correct me.
922 If you are suggesting that competitors would come to the north and lose money at the rates that they charge in the south, why would they do that? Is that what you are asking?
923 MR. RONDEAU: Well, I am trying to find out the advantage that they are going to gain on you and if that's the way they are going to gain it, if that's the way you think they are going to gain the advantage?
924 MR. WALKER: I don't know, may I try another approach, Mr. Rondeau?
925 I just think of gas wars. Down south if one station is selling at 55 cents and another station is selling at 70 cents, you see a line-up of cars at the station that is selling at 55 cents.
926 So if Northwestel is put in a position where our rates are going to be higher than those of the competitor, then maybe the same kind of thing will happen and that's the disadvantage that we are speaking of.
927 MR. RONDEAU: Yes, I understand that.
928 I also know that Northwestel is a subsidiary of a very large company, so I think they can compete very actively.
929 Now, can you tell me approximately what this $5 increase will bring in, what revenues this will bring?
930 MR. WELLS: Approximately $4 million.
931 MR. RONDEAU: Would it be correct to assume that Northwestel chose this $5 increase path because it could be certain that there would be revenue coming in. If you offered other options, such as a higher long distance package rates or less than the number of minutes that you have offered, then your revenue would be uncertain?
932 MR. WELLS: Excuse me. No, as I explained to you before, Northwestel is attempting to strike a balance here between the benefits that are going to be brought to the residents of the north and how much residents in the north pay for those benefits.
933 It should be noted that on average upwards of $35 million to $40 million is being requested for funding, for subsidy to bring to the residents of the north the benefits of choice and lower rates and the investment of the $75 million to improve services. So that $4 million is roughly 10 per cent, if you want to put it in those terms.
934 So our rationale behind that was again the issue of costs, as I mentioned earlier, that the costs of providing local service is substantially higher than the rates that exist there or that are even being proposed, and we felt that it was necessary and reasonable to put forward a rate of $5 to have some of that paid by residents in the north.
935 MR. RONDEAU: All right.
936 Maybe I will ask it a different way. Would you say that it would be in Northwestel's best interest to choose this $5 increase rather than look at other options?
937 MR. WELLS: No. I wouldn't agree with that statement.
938 It's back to the issue of balance. We have put forward a reduction in long distance rates and the average customers are going to benefit from the plant that we put forward strictly from a rating point of view, not to include the issue of choice and the improved service levels.
939 So this is part of a total package that we are putting forward. I don't think I would prescribe to try and break out pieces that are an advantage to Northwestel or not an advantage to Northwestel.
940 MR. RONDEAU: All right. I will speak later on about the average that you talked about, the average savings.
941 I would like you now to look at the access rates across the country, I.R. response to the CRTC 1701, Attachment 1, page 1.
942 MR. WELLS: I have it.
943 MR. RONDEAU: It's the nice little chart that we looked at a little earlier. The first question I would like to ask you is according to this chart are Northwestel's customers currently paying more for local access than the other jurisdictions?
944 MR. WELLS: Yes. The chart shows that Northwestel's proposed rate -- yes, our current proposed rate would be higher than the rest of the rates.
945 MR. RONDEAU: Even the current rate of $26.33.
946 MR. WELLS: Well, with the exception of Telebec, $26 would be the highest rate. I should point out though, Mr. Rondeau, as I mentioned earlier, there are other proposed rates now that have been put forward by companies such as, and I have information here -- Bell Canada has proposed a $27.85 rate, Telus in Alberta has proposed a $27.90 rate and $28.30 in British Columbia.
947 Even these rates have changed since -- and these are proposed, mind you.
948 MR. RONDEAU: Yes. You are assuming that they will be accepted.
949 MR. WELLS: Well, our rates are proposed as well.
950 MR. RONDEAU: Yes. So you agree that our current rates are higher except for Telebec. Now, Telebec has rate groups obviously, so if you were to average what Telebec is paying, you would come to a very similar rate on what we are paying right now. Is that correct?
951 MS HAMELIN: I'm sorry. If they were to average?
952 MR. RONDEAU: If you were to average the rate groups costs per resident rate, would you get to a similar cost of $26?
953 MS HAMELIN: I believe that for Telebec their $26 at this point is their lowest rate.
954 MR. RONDEAU: They have the increase?
955 MS HAMELIN: It's for their lower rate bands perhaps. One second.
--- Pause / Pause
956 MS HAMELIN: I believe that Telebec's lowest rate is $25.03 without EAS. That's their lowest rate, without EAS.
957 MR. RONDEAU: Okay. I'm just interested to see if you averaged it what you would get. Perhaps we can look at the next attachment, RR-1701, attachment No. 2. It's another chart showing the increases that we have undergone in the past four to five years.
958 Now, you have broken them down into the rate groups that we had before they were amalgamated or put in the same group. In the larger centres, if you look at rate group 4 you will see that there is a $17 increase since 1996. That's not counting the applied for $5 increase.
959 This is approximately 200 per cent. Would you agree with that 200 per cent increase in four years?
960 MS HAMELIN: Approximately. I checked it, yes. That's right.
961 MR. RONDEAU: Okay. Now, in the smaller centres you go from $18.65 increase in rate group 2, $19.63 in rate group 1 and $23.33 in rate group 3. If my numbers are correct, I would say you are now in the ball park from 200 to 250 per cent increase in these areas. Would that be correct?
962 MS HAMELIN: Subject to check, I will take your word for it.
963 MR. RONDEAU: We heard about rate shock a little earlier. I would suggest is this not perhaps enough rate shock for the consumers?
964 MR. WELLS: I think it's important to note here that all of these increases were done through rate rebalancing, so they were offsetting reductions in long distance calls. Again, it's important to look at this from a total bill perspective. Therefore, I don't think it's reasonable to just look at this as strictly an incremental increase in local rates and cost to customers because they were offsetting reductions in toll rates.
965 MR. RONDEAU: Yes, I would agree and understand that. For the government worker or the person who works for Northwestel or one of the larger corporations, that increase didn't hurt them any. What I am looking at is rate shock for the little guy and there's lots of us here. I happen to be one of them.
966 I will look at that later on. I have some evidence that I will hand out when I look at affordability at the end. I will go on to the second option that I want you to look at.
967 This is the carrier access tariff option. Now, bear with me for a few minutes. If I can give my layman interpretation of what this carrier access, CAT proposal is. Now, I understand it to be the CAT rate is what you will charge your competitors to drive on your telecommunications highway. Is that a correct assumption?
968 MR. WELLS: That's one way I think you could look at it. The net rate does include a contribution to the cost of providing local service as well.
969 MR. RONDEAU: Okay. I understand that your proposal is for a five cents a minute sustainable CAT rate with a five cents a minute external subsidy. Is that correct?
970 MR. WELLS: Again, I think you can look at it that way. There is roughly a cost of ten cents and we are putting forward a sustainable rate that is five cents.
971 MR. RONDEAU: Okay. Now I would like to ask -- I may be interpreting this wrong, but I will ask the question anyway. How do you expect a long distance competitor to come in here if their CAT rate is five cents and your proposal for long distance is three cents a minute? If you have 600 minutes at $20, to me that means three cents a minute. How do you expect a competitor to come in here?
972 MR. WELLS: Well, I think you need to look at some averaging of rates and our CAT rate as we proposed the five cents is -- there are independent companies in Ontario and Quebec, I believe, that have five and a half, six, six and half cent CAT rates and our rate that we are putting forward is slightly below that.
973 They have seen some competitive entry.
974 So there is an issue of averaging rates for competitors. Not all of the minutes, from a revenue point of view, are as low as you might suggest, a 2 or 3-cent rate.
975 MR. RONDEAU: So you do expect competition to come in with this 5-cent CAT rate.
976 MR. WELLS: Yes, that is our expectation.
977 MR. RONDEAU: Could you look at IR Response, Yukon Government-501, page 1.
--- Pause / Pause
978 MR. WELLS: Maybe we pulled out the wrong interrogatory. Could you repeat that?
979 MR. RONDEAU: Sorry. It should read 510. My apologies.
980 THE CHAIRPERSON: Just to be clear, Mr. Rondeau, is this Northwestel's response to your interrogatory?
981 MR. RONDEAU: This is Northwestel's response to the Yukon Government interrogatory.
982 THE CHAIRPERSON: Sorry, the Yukon Government Interrogatory 510.
983 MR. RONDEAU: That is correct, 510.
--- Pause / Pause
984 MR. WELLS: We are there, Mr. Rondeau.
985 MR. RONDEAU: Have the Commission Members found this document?
986 It is the chart asking what would happen moving the CAT rate one cent in either direction. I am interested in the bottom chart. That is what I would like you to look at.
987 It states there that a one-cent increase in the CAT rate will raise from $2 million to $2.3 million in revenue. Is that correct?
--- Pause / Pause
988 MS CHALIFAUX: Could you clarify what you are asking there?
989 MR. RONDEAU: By raising the CAT rate from 5 cents to 6 cents, that will increase your revenue between $2 million to $2.3 million. Is that correct?
990 MS CHALIFAUX: Yes, that is correct.
991 MR. RONDEAU: Then I would like you to assume a second option. Again bear with me.
992 Let's say we were to place a surcharge of 1 cent or 2 cents per CAT rate. This surcharge was to go into the supplementary fund mechanism to make up for your $4 million that you were going to gain from the $5.00 increase.
993 Would you say that this would allow for a level playing field; in other words, competitors would be dinged with this increase as well as everyone else?
994 MS CHALIFAUX: Perhaps we need to clarify first: are you saying that we should just increase our CAT from 5 cents to one or two cents higher, so to 7 cents?
995 MR. RONDEAU: Exactly, and put that money into a supplementary fund.
996 MS CHALIFAUX: Again, the importance of introducing a sustainable CAT -- and this came out in Decision 99-16 -- is that it was important to encourage and promote competitive entry in the north.
997 Again, the Commission has always felt that choice is a reasonable element to expect as you evolve towards a competitive environment. We looked at higher CAT rates but felt that, given where the toll market has evolved to today, given where the margins are today, a CAT rate at that level would not promote or encourage competitive entry.
998 MR. RONDEAU: If Northwestel had to pay a one-cent surcharge on the CAT rate and AT&T or anyone else who wishes to come in here and compete has to pay a one-cent surcharge, why would that stop them from coming in?
999 MS CHALIFAUX: Well, it is a straight cost to entry. It is a straight cost of being in the business.
1000 Again it is a balancing issue. If the cost of entering becomes too high, you will get no entry. So we are trying to find that balance.
1001 We have looked at the market as it has evolved down south and also in the independent operating territories of Ontario and Quebec.
1002 As CAT rates have come down to the five-cent level is when you have started to see some form of competitive entry.
1003 Again, we wanted to put forward a model that would fulfil that Commission objective of some choice of long distance provider in the north.
1004 MR. RONDEAU: So you are then saying that if there was an equal surcharge across the board it would still retard competition from coming in to the market.
1005 MS CHALIFAUX: Yes. Call it what you want. What you are alluding to is a higher CAT, a higher cost for competitors to enter the north.
1006 MR. RONDEAU: But I am not asking for a higher CAT rate for them. I am asking for a surcharge that would be identical for you. That is for the competition.
1007 MS CHALIFAUX: Well, if it's another element, again it's still a cost that a competitor incurs and will bear in mind when they are making their choice of where and how they will enter the market.
1008 CAT is only one element. You also have elements to come to have a point of presence in the north. So then if you have this surcharge on top of that, eventually it is just going to reach a point where they are going to say: "No, I choose not to enter the north."
1009 MR. WALKER: Just to add, Mr. Rondeau, the margins between the costs down south in particular, the cost of doing business, the CAT rate which they pay, and the permanent rate that they receive, they are down to talking tenths of a penny. So when they make their decisions, a penny is a lot of money.
1010 When you talk about the surcharge, I think to Muriel's point a surcharge would be like an additional penny charge. So in theory they would be paying six cents.
1011 MR. RONDEAU: All right. I think we have gone around that field.
1012 The third option, have you looked at any tiered or stepped rates in your proposal?
1013 MR. WELLS: You are speaking of local rates now are you?
1014 MR. RONDEAU: I am speaking of local rates, yes.
1015 MR. WELLS: No. Our proposal is a $5 increase effective the 1st of 2001.
1016 MR. RONDEAU: Can I ask why you did not look at tiered rates or econo access for those low-income people who cannot afford to make long distance calls if they want a telephone in their house for a lifeline?
1017 MR. WELLS: On the issue of affordability, as we stated earlier, if it is deemed that there is an issue of affordability I believe that the Commission has stated that they would prefer some sort of a targeted subsidy. I would suggest that that would be best managed and delivered through a government subsidy.
1018 MR. RONDEAU: Are you aware if there are any tiered rates in any other jurisdictions in Canada?
1019 MR. WELLS: Not that I am aware of.
1020 MR. RONDEAU: Or any econo access packages?
1021 MR. WELLS: Not to the best of my knowledge.
1022 MR. RONDEAU: It's my understanding that AGT, Alberta Government Telephones, if they still exist, have a three-tier package that they allow their customers to choose from. Are you aware of this?
1023 MR. WELLS: No, I am not.
1024 MR. RONDEAU: I can read you what their package states. The first option is the full package costing approximately $20 per month.
1025 The second would cost $15 and allow unlimited calling, but at $1.50 for each long distance call.
1026 The third option would be $10 a month and allow unlimited calling, but levy a hefty $18 charge if any long distance calls are made.
1027 I am not sure if this is still on the books. Perhaps the Commission could look into this.
1028 THE CHAIRPERSON: Maybe you can cross-examine Mr. Lowe after.
1029 UNIDENTIFIED SPEAKER: Mr. Pratte I think.
1030 MR. RONDEAU: Let me go back to the CAT for a few minutes. Could you tell me, I guess you have stated some things on the carrier access rates in other jurisdictions. Can you give us some numbers on what they are throughout the country?
1031 MS CHALIFAUX: Actually, if you refer to Northwestel(GNWT)07 February 16, in that interrogatory we did provide a comparison. I can give you a few of them if you want.
1032 MR. RONDEAU: Yes, please.
1033 MS CHALIFAUX: Total CAT rates BCTel, 3.7 cents; Bell, 2 cents; TCI, 3.5; QuebecTel, 6.6; Telebec, 5.6; and then there is a whole series of OTA companies and examples where the rates range anywhere from 5 cents to 15 cents. You can refer to GNWT 16 for a complete list.
1034 MR. RONDEAU: Thank you.
1035 Now, in response to Interrogatory Northwestel(CRTC)407, page 2, the third paragraph, I am just going to read you a quote. I don't know if you need to -- the response to the CRTC No. 408, page 2, and I will read you just the short part of the final paragraph. It states:
"In the Company's response to NWTel(CRTC)01Nov99-406A), it is estimated that the annual revenue requirement to fund the Service Improvement Plan reaches $13.6 million in 2005 and continues for many years thereafter."
1036 Now, it's our understanding that the company itself will invest $25 million a year into the SIP. Is this correct?
1037 MR. WELLS: The company has an ongoing capital program that is somewhere between $25 million and $30 million range and the SIP investment is on top of that.
1038 MR. RONDEAU: What amount of supplementary funding is required for the SIP per year?
1039 MS CHALIFAUX: Perhaps to answer that question on a very high level, although the finance panel might be more equipped to handle it, but supplementary funding is proposed to be calculated on a total income statement basis for the total company, taking into account the Service Improvement Plan that we are doing, the lowering of our long distance rates and the introduction of the sustainable CAT to encourage choice of long distance competition.
1040 So what you are referring to there is an estimated impact of what the revenue requirement would be for a component, but we are not proposing to slice and dice the supplementary funding.
1041 MR. RONDEAU: Perhaps I can ask that this be done. I will show you where I am going with this, if you bear with me. Maybe I will move on to the next step and see if we need an undertaking for this.
1042 The way I see it, if there is a $13.6 million increase in the revenue requirement per year after 2005, this is to pay for the return on the investment. Is that correct?
1043 MR. WELLS: I might suggest, Mr. Rondeau, from an efficiency and effective point of view that you may want to ask this of the finance panel who will be up later on. This is really getting out of our area of expertise.
1044 MR. RONDEAU: All right. I will come back to this at that time then.
1045 THE CHAIRPERSON: Mr. Rondeau, I had indicated we would finish at 5:00, but I am quite prepared to have you continue and not interrupt your questioning until tomorrow if you have got 20 minutes or a half an hour.
1046 MR. RONDEAU: That's what I would say at the max.
1047 THE CHAIRPERSON: Okay. Then we will continue until you are finished.
1048 MR. RONDEAU: Thank you.
1049 Okay. We have talked about the CAT competition. I guess the next move is to go on to Internet competition. What are you presently charging your Internet providers per line? Now, maybe you are going to ask me to see the other panel again.
1050 MR. WELLS: We don't have the tariff here and I don't have that information at hand.
1051 MR ROGERS: Mr. Chairman --
1052 MR. WELLS: I'm sorry. Maybe I misunderstood your question. Are you asking whether what are we charging our customers or what are we charging --
1053 MR. RONDEAU: I'm asking what you are charging your independent providers.
1054 MR. ROGERS: I was going to suggest, Mr. Chairman, if it's not something that they have here, obviously the tariffs are available but not with the panel, it's something they could come back to and speak to in the morning, if that's acceptable to Mr. Rondeau.
1055 THE CHAIRPERSON: I assume you don't have it here.
1056 MR. WELLS: Right. I don't have it here, but if he carried on with his questioning, perhaps we could answer other questions.
1057 MR. RONDEAU: Well, I guess where I'm going is I am trying to see if there is any unfair advantage happening. The next question would be the types of lines that are available for your Internet -- the independent Internet providers. What do you charge Sympatico for their lines? What type of lines do they have?
1058 I can go on with this in the morning. It would be fine.
1059 THE CHAIRPERSON: It looks like the panel doesn't have any answers to these questions today in any event, Mr. Rondeau. Was this the --
1060 MR. RONDEAU: I have affordability left.
1061 THE CHAIRPERSON: Okay. Go ahead.
1062 MR. RONDEAU: I believe there are some documents that I wish filed as evidence. They are right on --
1063 THE CHAIRPERSON: Mr. Walker, would you like to become Hearing Secretary for a --
--- Pause / Pause
1064 MR. RONDEAU: From now on, I will get more than 30 copies made. Okay. We will look at this -- I guess it will have to be put in as --
1065 THE CHAIRPERSON: We will number it as an exhibit when you are finished.
1066 MR. RONDEAU: Okay. Fine. I will look at this later on. I have got a few things, preliminary things, to ask first.
1067 Yesterday the President of Northwestel stated that the average customer would save approximately $7 on their total bill. Would you agree with that?
1068 MR. WELLS: Yes. I think the number is $7.56.
1069 MR. RONDEAU: Okay. $7.56. Can you tell me what the median savings or loss is?
--- Pause / Pause
1070 MR. WELLS: It's $1.50.
1071 MR. RONDEAU: $1.50. Would you not consider it more appropriate to use this figure rather than the average?
1072 MS HAMELIN: No. Actually, I believe that the median bill just represents one point on a line. It's not representative of everybody spending. This is a spending, as is the average bill. The average bill is the mathematical calculation of the average spending of people. I think that it is more representative of the savings.
1073 MR. RONDEAU: So if it's 40 below outside and you have your head out the door and it's 40 above inside and you have your feet inside the door, what's the average?
1074 MS HAMELIN: I hope I'm dressed warmly enough on my head.
1075 MR. RONDEAU: That's how I feel about averages. Sorry. What percentage of your present customers are on toll denial -- sorry, that was answered. You said 8,000 customers are on toll denial right now.
1076 MS HAMELIN: Yes, I did.
1077 MR. RONDEAU: And can you tell me the total number of customers that you have?
1078 MS HAMELIN: Residential customers or total?
1079 MR. RONDEAU: Yes.
1080 MS HAMELIN: Just residential?
1081 MR. RONDEAU: I gather that's the only ones who would have toll denial. Yes.
1082 MS HAMELIN: Yes. About 36.
1083 MR. RONDEAU: Thirty-six thousand?
1084 MS HAMELIN: That's correct.
1085 MR. RONDEAU: Do you have the percentage?
1086 MS HAMELIN: Twenty-three per cent.
1087 MR. RONDEAU: Can you tell me why the company did not do any type of feasibility study on affordability?
1088 MR. RONDEAU: I'm not sure what you mean by the term "feasibility study", but I think that there was quite a long and thorough process that the Commission had gone through a couple of years ago on affordability. At the end of the day, our perspective is very much a judgment issue.
1089 What we put forward here is a -- again, it comes back to the issue of average bill on this. We did no studies on affordability. I don't think that we would have any detailed studies on affordability because we wouldn't have the skills and knowledge to do that.
1090 Again, it's something that has been considered at great length in past proceedings. It's not something that we would want to make an ultimate judgment on what is ultimately affordable or not affordable.
1091 MR. RONDEAU: Okay. In response to one of our interrogatories, No. 12, you state that there was no analysis made of how many families in your operating area are below the poverty line. Is that correct?
1092 MR. WELLS: Just a moment.
1093 MR. RONDEAU: UCG-12.
--- Pause / Pause
1094 MR. WELLS: We have it now.
1095 MR. RONDEAU: Okay. With the information that I have given you, perhaps I can help you with this.
1096 I apologize that it is 1992 statistics. It is the last statistics that I could find that actually breaks a table down by family and income groups and it went from 1986 to 1992. It's the last page, and that's where I have -- we got the numbers for the first two pages.
1097 There are new numbers but not in this particular type of format where it breaks down family, but I think this is very relevant. I believe that the times in the Yukon have not changed significantly since this was done.
1098 I say this because, as the Panel is aware, we lost our largest private sector employer, the Anvil Range Mining Company in Faro, and recent statistics show that unemployment is even lower than what we have written in our presentation. It is now in the 13 to 18 per cent range.
1099 Would you agree with that?
1100 MR. WELLS: You are suggesting unemployment in the 13 to 18 per cent range?
1101 MR. RONDEAU: Yes.
1102 MR. WELLS: I haven't heard the latest statistics.
1103 MR. RONDEAU: Well, the latest that I have is in that ball park.
1104 Now, let me read the last two paragraphs on page 2.
1105 This is basically an analysis of this chart, on the back page.
"When the statistical information on family income distribution is examined, the problems associated with using statistical averages becomes apparent. While the average Yukon family income in 1992 was estimated to be 63,000, almost $64,000 per year, there's notable peak at the income levels above 75,000 a year when compared to income distributions for Canada as a whole." (As read)
1106 Now, if you look further at this chart, you will see that, in reality, there are over 20 per cent of the families in the Yukon which incomes below the low income measured set by the federal government agencies. Poverty level. More than 35 per cent of the families have incomes less than $45,000. You look even closer at the impact of the 18.2 per cent of the Yukon families who earned more than $100,000 in this year. This adds to the average very quickly.
1107 The first paragraph on the next page, as well. When the statistical data on unattached individuals, single people, in the Yukon is examined, the disparities are even more extreme. Almost half of unattached individuals earned less than $20,000 in 1992, while 12.5 earned more.
1108 MR. ROGERS: Mr. Chairman...?
1109 THE CHAIRPERSON: Mr. Rogers.
1110 MR. ROGERS: Just an observation.
1111 Mr. Rondeau is reading from a document which the witnesses have just received a few minutes ago and reading through it and, of course, they are in no position to say that they have analyzed it or, in many cases, know the content in order to be able to respond to it. It strikes me as more of almost evidence in chief and I'm wondering where we are going with this.
1112 I'm not sure that there is a great deal to be gained by asking the witnesses their views on this document which relates to things that are not on the record and, in fact, which they have just seen a few minutes ago. There may be some validity to all of these issues but I'm not sure the value of trying to pursue it through cross-examination at this point.
1113 THE CHAIRPERSON: Mr. Rondeau...?
1114 MR. RONDEAU: What I am trying to show is that low and set income earners in the Yukon Territory will be negatively affected by a $5.00 increase.
1115 THE CHAIRPERSON: And I appreciate that, and it might be appropriate submission for argument phase of this, but I'm wondering, at this stage, do you have questions for this panel relevant to this document?
1116 MR. RONDEAU: My question was: Would this not suggest that low and set income customers would be more negatively affected by a $5.00 increase?
1117 MR. WELLS: I can't answer that question.
1118 MR. RONDEAU: Perhaps I can come back to that sometime later.
1119 I have just one more thing -- actually, two more short...
1120 In response to UCG 1-11, we asked the question, whether an analysis was done broken down by class, those making less than 600 minutes of long distance calls per month, and you came back with the answer that it would -- it could directly harm the company. But I'm wondering if you filed these numbers in confidence with the Commission?
1121 MS HAMELIN: No, we didn't.
1122 MR. RONDEAU: Perhaps I could ask for an undertaking that this be done?
1123 MR. ROGERS: Mr. Chairman, the normal process on this is if the Commission sees material which during the interrogatory process a company says is confidential and claims confidentiality and that claim is upheld during the months that follow, if the Commission staff feels that nevertheless that information should be in the possession of the Commission, the question is put and, of course, that question is answered and the same material is filed in confidence, and that interrogatory was filed back in February, so I would have thought that between February and now, if the Commission staff was interested, we would have heard. But I take it that no such question was put.
1124 THE CHAIRPERSON: I don't believe so, Mr. Rogers, but I would have to turn to staff to confirm that.
1125 MR. BATSTONE: I don't believe so. I don't think staff asked for it.
1126 THE CHAIRPERSON: Okay. Thank you.
1127 MR. RONDEAU: Okay. My last point for today.
1128 Again, turning to the three-page document that I handed you, I just want to read you the last paragraph on the third page, or the last -- the first line. It said:
"I would, however, like to bring the Commission's attention to the fact for many Yukoners their monthly telephone bills include a substantial mileage charge."
1129 I have been asked by various customers to get some assurances, guarantees, confirmation, that these mileage rates will be dropped.
1130 Can you give us that confirmation?
1131 MR. WELLS: It's our proposal that decision will be ultimately made by the Commission.
1132 MR. RONDEAU: Okay. Thank you very much, ladies and gentlemen.
1133 THE CHAIRPERSON: Thank you, Mr. Rondeau.
1134 But I presume you want to pursue the questions related to the ISPs tomorrow?
1135 MR. RONDEAU: Yes, please.
1136 THE CHAIRPERSON: And I wonder if we could, just so the panel does come back with the information that you are going to need to pursue your questions, whether we could be just a little more specific as to what information you are going to be expecting from them.
1137 MR. RONDEAU: You want me to ask them now or --
1138 THE CHAIRPERSON: -- the issues that you wanted to pursue so we won't have the situation where they are back here tomorrow and still don't have the information you are looking for.
1139 MR. RONDEAU: Okay. Basically what I'm after is the charge per line, or bundle, that they are charging competitors.
1140 THE CHAIRPERSON: To the ISPs.
1141 MR. RONDEAU: To the ISPs.
1142 The charge that they are charging Sympatico, their subsidiary. And the lines available to each. I believe --
1143 THE CHAIRPERSON: Mr. Wells, you are looking puzzled.
1144 MR. WELLS: Just some clarification.
1145 When you say that we are charging to Sympatico, you are meaning what? The internal charges for the service that we do to ourselves?
1146 MR. RONDEAU: Well, I gather that you have a charge, either a bundle charge, for Internet providers to buy.
1147 Are those charges the same to Sympatico?
1148 THE CHAIRPERSON: Okay? Thank you. That concludes our work for today, then. Mr. Rondeau will be back to pursue these questions with the panel. So we will be back at nine o'clock tomorrow morning.
1149 Thank you very much.
--- Whereupon the hearing adjourned at 1735,
to resume on Thursday, June 15, 2000 at 0900 /
L'audience est ajournée à 1735, pour reprendre
le jeudi 15 juin 2000 à 0900
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