TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
CONTRIBUTION COLLECTION MECHANISM
AND RELATED ISSUES
TELECOM PUBLIC NOTICE CRTC 99-6 /
MÉCANISME DE PERCEPTION DE LA CONTRIBUTION
ET QUESTIONS CONNEXES
AVIS PUBLIC TÉLÉCOM CRTC 99-6
HELD AT: TENUE À:
Conference Centre Centre de Conférences
Outaouais Room Salle Outaouais
Hull, Quebec Hull (Québec)
July 5, 2000 le 5 juillet 2000
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bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
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Canadian Radio-television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Public Hearing / Audience publique
Contribution Collection Mechanism
and Related Issues
Telecom Public Notice CRTC 99-6 /
Mécanisme de perception de la contribution
et questions connexes
Avis public Télécom CRTC 99-6
BEFORE / DEVANT:
David Colville Chairperson / Président
Jean-Marc Demers Commissioner / Conseiller
Barbara Cram Commissioner / Conseillère
David McKendry Commissioner / Conseiller
Stewart Langford Commissioner / Conseiller
Andrée Noël Commissioner / Conseillère
Ron Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Geoff Batstone Legal Counsel /
Leah Ackerman Hearing Coordinator /
Scott Hutton Team Leader / Chef d'équipe
Shirley Soehn CRTC Staff / Personnel du
HELD AT: TENUE À:
Conference Centre Centre de Conférences
Outaouais Room Salle Outaouais
Hull, Quebec Hull (Québec)
July 5, 2000 le 5 juillet 2000
TABLE OF CONTENTS / TABLE DES MATIÈRES
ARGUMENTS / PLAIDOIRIES
Clearnet Communications Inc. 298
Microcell Telecommunications Inc. 329
Rogers Wireless Inc. 353
Vidéotron Communications Inc. 447
GT Group Telecom Services Corp. 473
Multi-Sync Communications 495
François D. Ménard 509
44 6 "BOB FARMER:" should read "MR. FARMER:
46 1 "BOB FARMER:" should read "MR. FARMER:"
73 9 "ARGUMENT / PLAIDOIRIE
MR. MELDRUM" should read
"ARGUMENT / PLAIDOIRIE
THE CHAIRPERSON: We will return now to our
proceeding. Our next party is SaskTel,
represented by Mr. John Meldrum.
MR. MELDRUM: Good morning. My name is ..."
93 4 "MEMBER LANGFORD" should read
188 6 "THE CHAIRPERSON: If one takes that argument,
does one extend --
MR. JANIGAN: -- in terms of looking at, on a
system-wide basis ..." should read
"THE CHAIRPERSON: If one takes that argument,
does one extend that to the level of the rates
MR. JANIGAN: Well, I think that that has to be
separately addressed and in terms of looking
at, on a system-wide basis ..."
217 12 Insert the following question and answer. "COMMISSIONER McKENDRY: You
say that consumers
have had too much benefit. I guess I have a
little trouble understanding that comment
because any benefits consumers have got have
been as a result of actions taken by Call-Net
and the other providers of the service. It
wasn't something that consumers extracted in
any way from the industry. It seems to me the
industry came to consumers with these
Are you saying that there were some
misjudgments on the part of the companies as
MR. BOWLES: I mean it's a vigorously
competitive market and, I guess, companies like
us were doing everything we could do to gain
market share and revenues. Did we go too far?
Yes. But that's history and that is something
we have to live with."
243 4 Hard page return to be deleted. Nothing
missing in the text of the transcript.
273 8 "MR. CHAIRPERSON:" should read
Hull, Quebec / Hull (Québec)
--- Upon resuming on Wednesday, July 5, 2000 at 0900 /
L'audience reprend le mercredi 5 juillet 2000
THE CHAIRPERSON: Order, please.
Welcome back to our proceeding. We will continue on then with oral arguments
and we will turn to the next party which is Clearnet, Mr. Davis.
ARGUMENT / PLAIDOIRIE
MR. SALZMAN: Thank you, Mr. Chairman.
My name is Lorne Salzman and I'm counsel to Clearnet Communications. With me
is Parke Davis, Clearnet's Director of Inter-Carrier Relations.
On behalf of Clearnet, we wish to thank you for the opportunity to appear
before you today.
We are going to begin this presentation by giving you some background on
Clearnet. We will then discuss the threat to wireless operators of a poorly
designed contribution regime. We will describe Industry Canada's requirements
for universality that were imposed on the mobile wireless operators even before
the Commission decided that those operators should pay contribution. We will
explain the importance of eliminating mandated subsidies. If, however, there is
to be a subsidy regime that is funded by the industry, we will explain
Clearnet's position that the amount of the subsidy be minimized and the
collection mechanism remain unchanged pending its elimination.
Clearnet is a national mobile wireless operator. It offers low priced, high
quality digital services under the Clearnet PCS and Mike names. Clearnet first
began to offer its services in 1996. Since then, its digital subscriber base has
grown to more than 600,000 at the end of March of this year. We have grown from
350 employees in 1996 to more than 2,000 at the beginning of this year. That is
a sevenfold increase in four years.
All of this growth has come at a price. Clearnet has raised more than $3.2
billion in capital to fund its growth. Yet, as is typical for a new mobile
wireless operator making heavy investments in infrastructure, Clearnet's
statement of operations shows substantial net losses: indeed, $582 million of
net losses in 1999, $544 million of net losses in 1998 and $289 million of net
losses in 1997. To put these figures in some perspective, Call-Net's net loss in
1999 came to $399 million and its corresponding loss in 1998 was $237 million,
less than half of Clearnet's 1998 figure.
Although some participants in this proceeding assume that wireless operators
have the capacity to bear all manner of additional taxes, these loss figures
should inject a needed dose of reality to that thinking.
Now, Clearnet certainly expects that its losses will diminish. A key
determinant will be the demand for its services. Anything that reduces demand
will obviously have a negative impact on Clearnet, its growth and the reduction
in its net losses. More to the point, an increase in contribution charge will
increase the cost to consumers of wireless service and, by the laws of
economics, reduce the demand for those same wireless services. I note in this
regard that wireless access is relatively price elastic, as compared to wireline
access which is relatively price inelastic.
Reduced demand is indeed a significant worry for Clearnet as it considers
some of the proposals that have been advanced in this proceeding. This is so
even if the contribution charge can be passed through to consumers, although
Clearnet's concern will obviously be heightened if the contribution charges
cannot be fully recovered.
Clearnet's access to capital is dependent on its continued growth and the
market's acceptance that Clearnet will eventually improve its financial
You might question if growth can really be an issue to any Canadian wireless
company given the healthy increases in Clearnet's subscriber base that I
mentioned earlier. In response, we can tell you that Canada is at the bottom end
of OECD countries when it comes to wireless penetration and, although overall
penetration rate is growing, we are falling behind our peers every year.
An OECD study released May of this year showed that Canada's wireless
penetration in June 1999 was 24th out of 29 OECD countries surveyed. We ranked
just above Hungary, the Czech Republic, Turkey, Poland and Mexico. Moreover, our
ranking has declined in recent years. What this signifies is that, despite some
of the lowest wireless prices in the world, Canadians are taking up wireless
services much more slowly than the rest of the OECD countries. A contribution
regime that taxes wireless services can only contribute to our falling further
Let me give you a more concrete example of the potential negative impact of
contribution charges on the demand for wireless services.
Prepaid wireless is an attractive option for many consumers. They buy
vouchers or use other means to load up their account in fixed dollar amounts,
which then can be consumed over a predetermined time period. For instance, one
of the wireless operators offers a plan price at $10 for 28 minutes and that is
valid for two months. This type of low-cost plan appears to, among others, the
infrequent user, perhaps someone who wishes a wireless phone for safety
One of the participants in this proceeding has proposed a subscriber line
charge for wireless users that comes to $4.56 per month, or a $9.12 charge for
two months. Think of the impact on the user that buys a $10 voucher. Suddenly,
his overall cost has increased by 91 per cent to $19.12. When GST and provincial
sales taxes are added on top of that, he will be paying more for taxes of all
sorts than for the underlying service. You may well ask yourself how many of
these infrequent users will continue to use wireless services when faced with
such substantial increases in price.
There is another reason why wireless companies such as Clearnet are very
concerned about this proceeding. Simply put, we have our own universality
commitments that we must pay out of our own resources. Paying contribution on
top of this means, in effect, that we are paying twice to achieve universality
objectives. Let me explain.
When Industry Canada announced in 1995 the competitive process for licensing
of PCS, it told applicants that one of the evaluation criteria would be the
"impact on the competitive provision of local service and universal access". All
applicants would have appreciated the importance of those words and all
applicants would have made strong commitments to universality in their
applications, commitments that were later enshrined as conditions of
PSC operators such as Clearnet are working hard to fulfil those commitments,
even though it means we must install digital infrastructure in locations which
are not economically justifiable on their own in view of current costs in
Recognizing that we have our own universality obligations mandated by
Industry Canada, it simply does not seem right to us that we must pay for the
universality obligations of others which are mandated by the Commission.
The solution, in our view, is that the Commission's contribution regime
should give some credits to wireless operators for their universality
obligations that have been imposed for similar social policy purposes by another
Let me turn to two other topics of concern to Clearnet. The first concerns
the need to minimize the overall amount of the subsidy to be funded through
contribution charges. The second concerns the design of the contribution
In Clearnet's view, mandated subsidies should be avoided if at all possible.
Subsidies lead to economic distortions and they can be complex and costly to
administer. They lead to a sense of entitlement that can become increasingly
difficult to counter as time passes, even as the need for subsidies diminishes.
They can also lead, as we have heard, to competitive imbalances if the design of
the subsidy program favours certain operators and penalizes others.
You might wonder why we, Clearnet, are opposed to a subsidy program, given
that Clearnet as a future CLEC may well benefit from the program in those areas
where we are eligible for portable subsidies. The answer is that although there
may indeed be some areas where we might be able to partake of the subsidy, this
will be more by accident than by design.
Given the many questions marks about the design and tenure of the subsidies
program, Clearnet would not design a business plan that was built on continuing
access to subsidies to ensure its viability. This comes from Clearnet, a company
that has applied to become a CLEC and is entirely serious about convincing
residential consumers to replace their home wireline phone with a wireless
Now, in Decision 99-16, the high-cost service area decision, the Commission
referred to the need to maintain subsidies to achieve a basic service objective
in high-cost areas, that is to ensure that telephone service is available at an
The evidence in this proceeding suggests that $30 or higher should be an
affordable level for base residential basic local rates. Whether $30 or some
other figure is chosen, the Commission should require the ILECs to rebalance
rates in high cost areas to that level as quickly as possible. There is simply
no need, in our view, to tax some consumers so that other consumers can enjoy
lower rates, where the subsidized consumers really do not need it.
To the extent that any group must be subsidized, the preferred approach, as
others have said, is that government be the one to foot the bill not industry.
Government is best equipped to administer social policy programs drawing on the
taxation system currently in place.
Although we recognize that the Commission cannot direct the federal
government to subsidize telephone service, Clearnet believes that the
Commission's voice on this issue will nonetheless carry important moral
authority that may well be influential on government thinking in the future.
If, however, industry funding must continue it is essential that the ILECs,
the carriers that will largely provide service to subsidized consumers, not be
overcompensated. Otherwise, the competitive balance will be upset as the ILECs
will have access to funds in excess of their needs, funds that can be used to
unfairly target competitors in more contestable markets.
Under the Decision 99-16 approach, the total subsidy requirement will become
the amount of money needed to fund carriers to subsidize service to consumers in
high cost areas and it will be based on ILEC cost and revenue figures.
As the Commission well knows, accounting exercises are always controversial,
and there are clear incentives for the ILECs to inflate costs and diminish
revenues if doing so will increase the subsidy to be paid.
With careful scrutiny of ILEC figures, Clearnet submits that costs can be
reduced and revenues can be increased. With these changes to the ILEC figures,
and a determined program of rate rebalancing, the Commission should be able to
substantially diminish the total subsidy requirement and even eliminate it in
some territories today.
For those areas where a subsidy requirement remains there is every reason to
believe that advances in technology, which are reducing costs throughout the
telecommunications system, will similarly impact the costs of serving high costs
areas. As this occurs, mandated subsidies in the remaining territories can be
Now the TSR is composed of many sub-components, and we discuss a number of
them in our written comments which were filed yesterday. For today's discussion
I am going to focus on one in particular, namely the benefit that incumbent
local exchange carrier receives from its role as the carrier with the continuing
obligation to serve high cost areas.
In determining how much subsidy must be paid in a high cost area, the
Commission must ask the question of how much money the ILEC really needs to
provide the service. In the absence of a subsidy payment, the ILEC would
calculate the entire package of costs and benefits and not just simply perform a
narrow calculation of the costs and benefits of the unadorned local service.
For example, most participants in this proceeding, including the ILECs,
accept that optional local services such as call display and the like should be
taken into account in the subsidy calculation. Views differ when we get to other
services such as call answering. And the views widen even further when one looks
at various intangible benefits such as those that arise from the ILEC's ability
to jointly market the services of its affiliates, for example, DTH satellite
services or wireless services.
Clearnet urges the Commission to take into account all benefits that the ILEC
can reasonable be expected to enjoy from serving consumers in high cost areas.
Some of the calculations require a degree of effort, but other countries, such
as the United Kingdom and Australia, have undertaken the required analyses and
have developed numbers. Other countries, such as Peru, Chile and Colombia, have
ascertained the value of these benefits through auctions. They auction the
commitment to serve consumers in high cost areas. They have found that the bid
prices are substantially lower than one would expect by looking at just raw
subsidy numbers. Operators would only bid low amounts if they had confidence
that they would be able to recover the losses from other benefits.
Let me turn to the contribution collection mechanism. Clearnet submits that
such a mechanism should be competitively equitable, sustainable and efficient,
efficient both administratively and economically. Changes to it should be a
proportionate response to the problems being encountered.
When examined against these criteria it becomes clear that no contribution
mechanism is ideal. They all suffer from flaws, many of which we heard about
yesterday. However, Clearnet believes that the current mechanism, which collects
contribution as a per minute charge on long distance traffic, as flawed as it
is, is not overly problematic and it should therefore be maintained pending its
elimination all together.
Let me explain. First, by targeting one category of traffic, that is long
distance traffic, the current mechanism does achieve a degree of competitive
equity among various carriers. The most pressing concern of long distance
operators, namely that the ILECs use the subsidy funds to selectively target
their services, can and should be addressed by diminishing the TSR so that the
ILECs are not overcompensated by their competitors.
Second, the current regime is sustainable over at least the medium term
during which the contribution should diminish and hopefully be eliminated. The
chief threat to sustainability comes from the possible advent of voice over the
Internet, but the evidence suggests that this is not in any way imminent and
will face some formidable difficulties before becoming commonplace.
Third, the current mechanism does force carriers to incur administrative
costs and efficiencies but, as we heard yesterday, so too will any replacement
mechanism. The current mechanism also contributes to marketing efficiencies and
that long distance calling is priced higher than it should, but these
distortions have been declining as contribution rates have declined and they
will decline further if the TSR is reduced. Other mechanisms also have their own
Fourth, given that the current mechanism reasonably satisfies these
evaluation criteria, it would not, in our view, be a proportionate response to
abandon the current mechanism in favour of an alternative, especially given the
inevitable problems of switching to a whole new approach.
The percentage of revenue mechanism, which we have heard about, suffers from
serious flaws and, in Clearnet's view, should not be adopted. It will be
complicated to set up and to operate, requiring unachievably precise
distinctions between classes of service to avoid prejudicing competing
suppliers. Bundles of taxed and untaxed services will pose particularly serious
problems and will lead to endless wrangling. Changing to a revenue based system
would not, in our view, be a proportionate response to the problems of the
Similarly, the per line mechanism has its own flaws. A key problem is that
there is own universally accepted definition of a line. Deeming and counting
lines where none exist will lead to arbitrary distinctions and regulatory
squabbles. A per line mechanism can be particularly burdensome to wireless
services. Some users employ more than three numbers for a single telephone for
use with voice, data and fax calls, each of which may be deemed to be a line. A
per line charge for prepaid wireless services may lead to the perverse result
that low usage wireless subscribers will have to give up safety in other
services they want and need so that cottage-owners and other perhaps non-needy
individuals in high cost areas can be subsidized.
To sum up, Clearnet urges the Commission to bear in mind the following
points. First, participants in this proceeding ignore the financial realities of
the wireless industry when they assume that all mobile wireless operators can
bear substantially increased contribution charges.
Second, mobile operators have other universality obligations, and we urge the
Commission to take those into account.
Third, and most important, mandated subsidies should be kept to the minimum
level possible pending the objective of complete elimination. The TSR should be
reduced by rebalancing to affordable rates, by reducing ILEC cost estimates and
increasing ILEC revenue estimates.
Fourth, pending the elimination of the contribution mechanism all together,
the current collection mechanism should be maintained as the least bad of
Those are our comments, and we thank you.
THE CHAIRPERSON: Thank you, Mr. Salzman.
COMMISSIONER CRAM: Thank you.
Yesterday we heard -- and I'm quoting from Call-Net's oral comments at page
13 -- referring to Minister Manley, to use the Minister's words,
"...or he recognized it may no longer be possible for the long distance
industry alone to support the explicit subsidy to local
Is that what you are proposing continue, that the long distance industry
alone support the explicit subsidy?
MR. SALZMAN: Let me start by saying that it's not the long distance industry
alone that supports it. For instance, right now wireless operators also make
contribution payments based on their long distance traffic. So, wireless
industry is paying some contribution at this point.
Going forward, our preference would be to see that all mandated subsidies are
What we are proposing is that the current mechanism, which has a number of
flaws which have been well articulated, should be maintained as the goal is
sought to eliminate subsidies all together. That means that we shouldn't go
through the trouble and anguish at this stage of changing to a different
mechanism while we pursue what is, in our view, the greater goal of trying to
eliminate subsidies all together.
During this interim period, indeed, long distance services from all suppliers
would end up supporting the subsidy system.
COMMISSIONER CRAM: I just want to move to another issue.
If there were an SLC introduced, wouldn't that mean -- and if I understand
you correctly, your position is that your wireless should replace wire line.
Your competition would have an equal burden. If each had an SLC cost, how would
that provide you with a competitive problem if each wire line and wireless had
MR. SALZMAN: Let me answer by saying a lot depends on what is the level of
the SLC. If we looked at an SLC that was of the order of, in your discussion
yesterday with AT&T, as low as 10 cents per line, I don't think we would be
having nearly the debate and the worry that we have on these issues.
On the other hand, if an SLC is priced at something like $4 or $5, as some
have proposed in this proceeding, it has a much bigger impact.
In the case of wireless customers or wireless companies, it has an impact in
terms of the overall cost, the bottom line that you referred to yesterday,
Commissioner Cram. That will have an impact on demand, as I have tried to
explain in our comments.
The other issue is that the SLC itself is used to fund operators to provide
service in certain remote areas. Again, as I hope I explained, wireless has its
own obligation to fund its own service in areas where it may not otherwise
If you are asking the question about wireless paying this amount of money and
its impact on wireless, it really has those two effects to consider.
COMMISSIONER CRAM: My issue was what is the competitive inequity if everybody
has an equal SLC? If I hear you, what you are saying is the size of the SLC is a
problem, not necessarily an SLC in terms of creating competitive inequity. Have
I got that right?
MR. SALZMAN: Certainly, yes, as far as it has gone.
Let me elaborate because maybe I haven't explained it very well.
If an SLC is imposed on wireless companies, then we are going to be
subsidizing the provision of service into high-cost areas. We also have to
subsidize the provision of our own service into high-cost areas, and that has
been mandated by Industry Canada. In other words, wireless pays twice. It pays
for its own mandated service into areas, and it pays for somebody else's. That
is the inequity that we would point to.
COMMISSIONER CRAM: If we only worried about CRTC world, then there would be
no competitive inequity if there were SLCs imposed?
MR. SALZMAN: I hope that you would take a broader view of the issue of
companies having to fund universality obligations.
COMMISSIONER CRAM: I hear you. Thank you.
THE CHAIRPERSON: Commissioner McKendry.
COMMISSIONER McKENDRY: Thank you, Mr. Chair.
A couple of times in your presentation this morning you referred to prepaid
wireless service, using that as an example of problems that could arise, the
mere perspective with respect to contribution. What portion of your customers
are prepaid customers?
MR. SALZMAN: Excuse me a moment.
--- Pause / Pause
MR. SALZMAN: In the case of Clearnet, its base of prepaid subscribers, at
this point, is quite small, although Clearnet does have plans to launch new
types of prepaid services in the not distant future.
In the case of other operators, they have a much greater base of prepaid
services. Mr. Davis informs me that the number of subscribers viewed overall
might be as high as 40 per cent.
COMMISSIONER McKENDRY: But in your case it is significantly less than that, I
MR. SALZMAN: Oh yes. At this point it is for Clearnet, significantly
COMMISSIONER McKENDRY: You mentioned in your discussion with Commissioner
Cram and in your presentation that you had universal service obligations, you
were extending service into high-cost areas. Expand on that a little bit. Where
are these high-cost areas that you are extending your service into?
MR. SALZMAN: Excuse me.
--- Pause / Pause
MR. DAVIS: Commissioner, I guess as an example, there are a number of
different centres in our application that we listed. I believe there were 66 at
the time back in 1995.
Just for example, Jonquière-Chicoutimi was on that list. It is not so
much the downtown centre of Jonquière-Chicoutimi because really coverage of the
centre core of any town is not the difficulty. It's that when you are covering
an area, people expect coverage beyond the downtown core. So you start to cover
suburban areas and rural areas around that, and you obviously do cover areas
which are classed, I guess, in Band C in those areas.
That's one example.
COMMISSIONER McKENDRY: Do you have any other examples?
MR. DAVIS: There is the whole list of 66. I don't have them here in front of
me, but I can provide those to you later.
COMMISSIONER McKENDRY: But essentially the high-cost area you are referring
to is, in effect, the suburbs around urban areas. Is that correct?
MR. SALZMAN: Perhaps I can respond. It is a bit more than that.
There are certain cities and certain areas of the country where Clearnet
would not invest to put up infrastructure at this point but for those particular
commitments that were made and that Clearnet is working hard to
Other wireless operators would have their own commitments to various places,
and we can't speak for them. As Mr. Davis has pointed out, the individual
examples unfortunately we don't have at our fingertips, but they do exist. It is
more than just the suburbs or the rural areas around cities. There are certain
cities that, in terms of timing or in terms of going at all, would be places
that would not justify making the investment.
COMMISSIONER McKENDRY: Thanks.
THE CHAIRPERSON: I noted when you were reading the text at the bottom of page
4, you said:
"You said the solution, in our view, is that the Commission's contribution
And your written text says "give credit to wireless operators for their
universality obligations." When you read it you actually said, "give some
Putting together the answers that you had to Commissioner Cram and
Commissioner McKendry, some of the comments that you made, do I take it that
your view would be that if the Commission were to look at the cost, the
magnitude of the subsidy requirement, taking your point about the $30.00
threshold perhaps looking at Phase II costing and if we came up with a number
that, in your view, was relatively small, then Clearnet might not have a problem
with sharing some of the burden to provide the subsidy to rural areas? Is it
really just a question of the magnitude more than the principle?
MR. SALZMAN: The magnitude is clearly a fundamental problem. Again you can
look at the examples that have been discussed in the past day. If the 10-cent
SLC that was discussed yesterday was really the number, then it probably
wouldn't be a concern to Clearnet.
On the other hand, the numbers are not looking at 10 cents. They are looking
at $4.00 or $5.00. When you have a wireless bill that might be $20.00 or a
prepaid bill that might be $10.00 for two months, suddenly a $4.00, $3.00,
$6.00, whatever SLC becomes extremely serious.
As to sharing in the burden of the contribution regime, we do today.
Obviously, like anyone, we would prefer to keep that down to a minimum level,
but we do today and if the Commission decides that it is merited, we will
continue to do so going forward.
We hope, though, to come back to the beginning of your point, sir, that you
will recognize that the wireless industry does bear its own universality
obligation and as you consider what you might impose on wireless players through
this proceeding you will take into account and provide some credit for the fact
that we do in fact have our own obligations imposed on us by Industry Canada,
obligations which are an expense for us to bear.
THE CHAIRPERSON: Mr. Davis?
MR. DAVIS: Thank you, Commissioner.
I was going to mention that yesterday we spoke of a different phase of
universality and that was universality with respect to the accessibility by all
people for telecommunications products. Depending on the level of a line charge
that you might contemplate, what we have discussed here, $3.00 or $4.00 a month,
might make what is currently today a prepaid service of $10.00, covering basic
needs to those individuals that have it, unobtainable.
Something like this which is much cheaper at a prepaid level becomes taken
away from them. So you would lose universality, at least that phase of
universality; not the universality aspects of distance and remoteness, but
universality to a person.
THE CHAIRPERSON: I take your point on that.
Assuming the Commission were to, following the analysis of all the data, come
up with a figure that may be considered reasonable, if I can use that term,
would you have a preference as to which option would be the one to go with, the
subscriber-line charge or the revenue charge, and whether or not that should
flow through to the consumer and show up as a separate line item on their
MR. SALZMAN: Our preference would be that we stay with the current system
pending its elimination.
THE CHAIRPERSON: I am asking you assuming the current system is not an
MR. SALZMAN: If the current system is not an option, our preference would be
for the revenue-based system as opposed to the subscriber-line system and our
preference would be to have the amount of the tax shown on the subscriber bill
and be explicitly mandated to be shown on the subscriber bill as a tax, whether
it's referred to as the YAC or not; still to be decided.
THE CHAIRPERSON: Do you have a view as to the issue about whether this amount
should be calculated on a company-specific or regional or national basis?
MR. SALZMAN: Our preference would be that it be calculated on a regional, as
opposed to a national, basis.
THE CHAIRPERSON: By "regional", you mean region, not company-specific?
MR. SALZMAN: Using the same type of company-oriented regions that have been
developed for the existing contribution regime would be our preference.
THE CHAIRPERSON: Which is company-specific then, not regional?
MR. SALZMAN: Yes. Well, in the case --
THE CHAIRPERSON: So, for example, by region within Bell territory, you would
calculate it for Bell and not include all of the telephone companies that happen
to be in Ontario or Ontario and Quebec?
MR. SALZMAN: Within Ontario and Quebec, we could contemplate one plan that
would encompass that region. It would primarily relate to Bell Canada.
THE CHAIRPERSON: The reason I am asking that specific question is the issue
is whether or not it includes the independents.
MR. SALZMAN: It would probably make sense to include the independents.
THE CHAIRPERSON: Thank you.
COMMISSIONER NOËL: Just one question, In paragraph 9 of your presentation
this morning you made the hypothesis of a $4.56 per month subscriber-line charge
that you have derived from some other presentation and you say that the overall
cost increase over two months on a $10.00 voucher would be 91 per cent. Do you
take into consideration in your overall cost the basic cost of the monthly fees
for the use of the wireless telephone or is it only the voucher? If you have a
plan for $10.00 for two months, I am going to sign right now.
MR. SALZMAN: Indeed, there are suppliers that do offer those types of plans,
but it's only for a very limited amount of usage. You would be getting with that
voucher 28 minutes' worth of usage to be used over a two-month period. So those
types of plans do exist.
COMMISSIONER NOËL: Ten dollars a month and no other charges than that?
MR. SALZMAN: Other than having acquired the phone in the first place, those
are the charges.
COMMISSIONER NOËL: Including the licence fee?
MR. SALZMAN: Maybe Mr. Davis can respond.
MR. DAVIS: That's all included. You have to come up with --
COMMISSIONER NOËL: I am going to switch right now!
MR. DAVIS: See me afterwards.
THE CHAIRPERSON: Trained operators are standing by, Andrée.
COMMISSIONER NOËL: How much do you envisage your loss will be next year?
THE CHAIRPERSON: Commissioner Demers?
COMMISSIONER DEMERS: Thank you, Mr. Chairman.
I am interested in paragraph 22 where you covered the five countries in just
one paragraph. I imagine you have more to say on that. When you indicate that it
would be reasonable that the ILECs -- it's the first time that I hear that an
ILEC has an interest and enjoys the role of serving customers in high-cost
Getting to your comment on the U.K. and Australia in which you indicate that
they have undertaken analysis and have found numbers, could you relate it more
closely to our discussion today? It's in paragraph 22, page 8. It may be
something that you covered in the high-cost hearings. I was not part of the
Panel and I don't want you to repeat it only for me.
MR. SALZMAN: Let me try to respond.
The purpose of this paragraph is to summarize something that appears in
greater detail in our written comments which were filed yesterday. I hope this
responds to your question.
The point is that when a telephone company serves a high-cost area, there is
a number of benefits that it derives from performing that service that are above
and beyond just the mere collection of money from the subscriber for his
services. For instance, the fact that a telephone company serves a customer, it
gives that telephone company the billing system, it gives him the knowledge of
the credit status of the customer.
It allows the telephone company to advance other services that might be sold
to that customer and which might be valuable. For instance, a wireless service,
or perhaps a direct-to-home telephone service could be marketed to a customer in
a high-cost area. That is a benefit that, as a telephone company is evaluating
whether they would go in and service customers in an area, they would take into
Other countries, when they have looked at this particular category of
benefits, they sometimes refer to it as intangible benefits. Efforts have been
made to quantify the value of these. Two countries have done it through cost
studies and other estimation mechanisms and those are Australia and the United
Kingdom. Again, we provide further information. They evaluate things such as
brand enhancement and corporate reputation, network effects, ubiquity effects.
They attempt to value those.
Other countries have done it a bit differently, but they come to a similar
conclusion. What they do is they go to a variety of telephone companies and say,
we have to provide service in a high-cost area. We have calculated in our own
mind what we think the subsidy needed to, in fact, serve in that area. We now
invite bids from potential suppliers to do that.
Lo and behold, they find that the amount bid is less than the subsidy that
the mathematics of it would dictate. What that suggests is that the bidders
realize there is value in those customers above and beyond just straight serving
them to provide local service.
We give some numbers as to how those formulas have unfolded.
It's hard to take those exact numbers from other countries and translate them
into the Canadian context. I recognize that. Our point is that these intangible
benefits though are real. They are recognized as such. They are valued as such
and the evidence from around the world is that they have significant value and
we hope the Commission takes those into account in this proceeding.
COMMISSIONER DEMERS: Thank you. I will read what you put in writing.
Thank you, Mr. Chairman.
THE CHAIRPERSON: Thank you very much. Thank you, gentlemen.
MR. SALZMAN: Thank you, sir.
THE CHAIRPERSON: The next party is Microcell.
Good morning, Ms. McDonald.
ARGUMENT / PLAIDOIRIE
MS. MacDONALD: Good morning, Mr. Chairman. Good morning, Commissioners.
I am Mairi MacDonald. I'm external counsel to Microcell and with me this
morning is Bernie Lefebvre of Wall Communications Inc. who is an economist who
also provides Microcell with a great deal of very helpful advice on regulatory
Microcell appreciates the opportunity to appear before the Commission this
morning to provide these oral comments on the issues raised in 99-6.
In summary, on the basis of the record developed in this proceeding,
Microcell agrees with most parties that the current long distance per minute
collection mechanism is not sustainable in the long run and, therefore, must
ultimately be either eliminated or replaced.
Microcell also agrees with the majority of parties that government funding is
preferable to any industry-funded contribution collection mechanism. Microcell
believes that government funding is a feasible option once the subsidy
requirement has been reduced through further rate rebalancing and other
Whether it's funded by the government or by the industry, however, we believe
that the Commission's overriding objective with respect to the subsidy should be
to reduce the explicit local service subsidy to the greatest degree possible
and, preferably, to eliminate it.
However, should the Commission conclude that the existing mechanism must be
replaced by an intra-industry funding mechanism, Microcell submits that a
revenue-based contribution tax is the best available alternative to fund any
remaining subsidy requirement. To avoid inequity and undue hardship to any
sector of the Canadian telecommunications industry, the introduction of such a
mechanism should follow a transition plan. The need for a transition plan can be
avoided, of course, if the subsidy requirement is sufficiently reduced prior to
the introduction of the new regime.
Microcell is strongly opposed to the replacement of the current contribution
collection mechanism with a per line mechanism or subscriber line charge. In
Microcell's view, a per line contribution mechanism offers no advantages in
terms of any of the five evaluation criteria which we urge the Commission to use
in dealing with the difficult issues before it in this case.
When the Commission considers the merits of alternative intra-industry
contribution collection mechanisms, we urge you to look at the following
attributes of each proposal: first, its effectiveness; second, its economic
efficiency concerns that it may raise; third, sustainability; fourth, its effect
on the fundamental principles of technology and competitive neutrality; and,
fifth, obviously, its administrative costs and complexity.
Looking at the first of these criteria, effectiveness, before the Commission
considers any measures to reform or replace the current contribution collection
mechanism, we believe that it's of primary importance that the Commission first
carefully assess the current and longer term objectives of the subsidy regime.
The amount of subsidy required under the regime should be well defined,
accurately quantified and verifiable.
A long-term target for the subsidy requirement should also be established.
Eliminating or reducing the subsidy will ensure that economic inefficiencies
created by the subsidy are themselves reduced, allowing for an increased
reliance on competition to provide Canadians with a choice of communications
services that best meet their needs at competitive price levels.
Turning to the second criteria of economic efficiency, we would note that all
intra-industry contribution collection mechanisms are inherently inefficient and
It is widely acknowledged that the existing mechanism creates significant
economic inefficiencies in the industry by distorting service prices relative to
their underlying costs. Per minute contribution rates artificially inflate the
price of toll services and, as a result, suppress demand for these services. The
opposite pricing effect applies in the residential wireline line local access
service market. Microcell believes that it is important that any new
contribution collection mechanism further reduce rather than exacerbate the
economic inefficiencies brought about by the current regime.
In our view, neither of the two alternative collection mechanisms being
considered in this proceeding -- that is, the revenue-based tax or a subscriber
line charge -- offers a distinct improvement over the existing mechanism in
terms of economic efficiency. Importantly, there is no empirical evidence on the
record of this proceeding demonstrating that either one of these mechanisms, as
proposed, achieves this fundamental objective.
A revenue-based contribution tax shifts the contribution burden from one
sector of the telecom industry to a broader base. However, the new revenue-based
contribution tax simply ends up spreading the existing inefficiencies into new
segments of the industry. The net efficiency effect is likely negative or
ambiguous at best. The same is true of the subscriber line charge if it is
applied to a broad range of access services.
If introduced and extended to the wireless sector, either one of the two
alternative collection mechanisms could result in significant economic on
inefficiencies. Raising contribution costs and, consequently, rates in this
sector will dampen demand for and penetration of wireless services. It will
reduce capital investment, slow expansion of network coverage, including into
high-cost serving areas and it will slow the deployment of technologies,
including third-generation wireless technology. This will result in significant
technical, allocative and, eventually, dynamic efficiency losses in the wireless
To illustrate, Microcell notes that wireless carriers paid roughly $12
million in contribution in 1998, accounting for approximately 1.5 per cent of
the total contribution paid throughout the industry in that year. At the same
time, wireless carriers accounted for about 15 per cent of industry revenues. So
this is all wireless carriers.
Based on total operating revenues as a bench mark and, assuming the subsidy
requirement was maintained at its 1998 level -- that is the overall requirement
-- it is possible that the wireless sector could face up to a tenfold increase
in their contribution payments under some parties' revenue-based mechanism
proposals and even much higher increases under some parties' subscriber line
charge proposals. Increased taxes in the wireless industry of this magnitude
will have extremely damaging efficiency as well as other effects.
In Microcell's view, and that of many other parties to this proceeding,
government funding is clearly the best method to subsidize local access service
on a long term basis. It not only best meets the objective of economic
efficiency but also best satisfies the four other evaluation criteria, we
suggest. Moreover, if the magnitude of the subsidy requirement can be
significantly reduced from current levels, government funding is feasible as a
long term option. Indeed, if the subsidy requirement were significantly reduced
it could largely be covered by the licence fees currently paid by wireless
carriers in this country which are expected to surpass $200 million next
The third criterion we suggest to you is sustainability. Many parties to this
proceeding have argued that the current per minute mechanism is unsustainable
and unsuitable in the a converged network environment where packets are
replacing minutes as the chief output. The telecommunications industry is
undergoing rapid change, especially in terms of the development of packet and
Internet technologies. In addition, with the distinction between local and long
distance calling quickly becoming irrelevant, Microcell agrees that the current
per minute mechanism is out of step with market developments.
Should the Commission choose to replace the existing collection mechanism
with an alternative industry-funded mechanism, the new regime should be designed
so as to ensure it is technologically and competitively neutral.
A sudden increase in the contribution burden borne by the wireless sector or,
for that matter, any sector in the telecommunications service industry would, in
our view, be unfair and disruptive. In Decision 97-8, the Commission concluded,
consistent with historical practice, that long distance service would continue
to be the only explicit source of contribution. Interexchange service providers
have long been aware of this requirement and have adapted their investment and
pricing strategies accordingly. Shifting the contribution burden to other
sectors, as we illustrated with the earlier example, would be inappropriate
without allowing for a proper transition period to allow affected service
providers to adjust to new and potentially significant contribution-related cost
As to administrative cost and complexity, in Microcell's view, there is no
evidence on the record of this proceeding demonstrating that a revenue-based
contribution tax or a subscriber line charge would necessarily provide any
improvement over the existing regime in terms of administrative cost. It is also
important to recognize that the costs of administration may be negligible
relative to the costs associated with economic efficiency losses from a
distortionary contribution collection mechanism.
If, however, the Commission decides to replace the existing contribution
collection mechanism, Microcell believes that a revenue-based contribution tax
is the best of the industry-funded approaches.
We have outlined the details of an acceptable revenue-based collection
mechanism in our written comments which were filed yesterday. We will only
provide a brief of these today.
Subject to the Commission's classification of what constitutes basic
telecommunications service, a revenue-based collection mechanism should apply to
as a broad a base as possible of such basic services, including local and long
Contribution eligible revenues should be determined based on the service
provider's total operating revenues less revenues from non-contribution eligible
services, such as enhanced services, terminal equipment and other
non-telecommunications type revenues. It should also subtract inter-carrier
payments, such as switching and aggregation charges, as well as subsidy revenues
and costs associated with other contribution-like payments and obligations.
Microcell notes that the wireless carriers, alone among telecommunications
service providers in Canada, are required to pay significant licence fees and to
meet other social obligations. Microcell submits that the costs of such fees and
obligations should be removed from each wireless carrier's total operating
revenues for the purposes of determining contribution eligible revenues.
Wireless carriers are required to pay licence fees well in excess of the
costs of administration of the associated spectrum. Other conditions of licence
intended to ensure that wireless carriers meet service obligations, such as the
timing and extent of network deployment, amount to a contribution that wireless
carriers are required to make to the achievement of government objectives for
service availability. Wireless carriers also face unique requirements, again, as
conditions of their licences, to fund research and development. These
requirements are also intended to ensure that wireless carriers make a
significant contribution to the ongoing development and deployment of
telecommunications in Canada.
Because these the requirements, which, as the previous speaker noted, are
based on commitments willingly made in licence applications, because they are
only demanded of wireless carriers that offer services that increasingly compete
with those that are offered by wireline carriers, Microcell believes that
competitive equity requires that the Commission exclude their cost from any
calculation of contribution eligible revenues. The alternative would be to
impose the burden of supporting social goals, including universal availability
of telecommunications choices even in high cost serving areas,
disproportionately on the wireless industry.
One important practical complication that arises under a revenue-based
mechanism is the treatment of bundled contribution eligible and ineligible
services. Microcell believes that the contribution eligible revenues could be
determined on the basis of stand-alone rates for any basic services included in
the bundle. Because, of course, of the difficulty of developing a simple rule
that would treat all cases fairly, the Commission would likely need to consider
some service bundles on a case-by-case basis.
Microcell also believes that under a revenue-based contribution collection
mechanism, contribution tax should be explicitly shown on consumers' bills. This
ensures that consumers are aware of the tax, unlike under the existing regime
where contribution charges are hidden. Moreover, an explicit tax or subsidy line
item on the customer<s bill would be more competitively neutral in that all
telecommunications service providers would be required to recover contribution
in a similar manner.
Microcell, as I said earlier, is strongly opposed to the replacement of the
current per minute collection mechanism with the per line mechanism. In our
view, compared to the current regime, a per line mechanism offers no advantages
in terms of any of the five evaluation criteria set out earlier. Moreover, it
amounts to a regressive tax on local access services.
First, no party advocating the adoption of a subscriber line charge has
demonstrated that it would be a more effective means of collecting contribution
than the current mechanism.
Second, shifting the burden of contribution funding from long distance
services to local access services may appear to offer some efficiency advantages
since the demand elasticity for toll services is generally considered to be
higher than the elasticity for residential local wireline services.
However, under a subscriber line charge mechanism, the contribution funding
burden would effectively fall on all local access services. This would have the
effect of reversing many of the recent reductions in business access rates and,
in doing so, reverse the recently achieved efficiency gains associated with
moving those rates closer to cost. As illustrated earlier, by increasing costs
to wireless carriers, a per line mechanism could have significant detrimental
effects on both the economic efficiency and the competitiveness of the wireless
industry in Canada.
Third, in terms of sustainability, there is no compelling evidence suggesting
that a subscriber line charge would be any more or less sustainable in the long
term than the current per minute mechanism. Consequently, if the commission
determines that the existing usage base mechanism is unsustainable in the face
of technological and market developments, then the same conclusion should apply
to a subscriber line charge.
Fourth, a subscriber line charge offers no improvement over the existing
mechanism in terms of competitive and technological equity. The shift in
contribution burden proposed illustrates that the proponents of the subscriber
line charge, primarily the interexchange carriers, are simply attempting to
transfer their current contribution liability to other segments of the
Finally, from an administrative perspective, a per line mechanism offers no
immediate or long term benefits over the existing mechanism. There is no reason
to believe that an ongoing process of refinement, similar to the industry's
experience with the existing per minute mechanism, will not be necessary under a
subscriber line charge regime also.
Just as technological and market developments are placing increased pressure
on the ability to capture contribution eligible long distance minutes, so will
it be increasingly difficult to identify and quantify access lines that should
be subject to a subscriber line charge.
In conclusion, Microcell believes that the record of this proceeding
demonstrates that the existing mechanism is both inefficient and unsustainable.
To remedy the situation, the Commission should focus first on reducing or
eliminating the subsidy requirement. Any remaining subsidy requirement would of
course most efficiently be funded directly by government.
If the Commission elects to retain industry funding, Microcell believes that
a revenue-based approach is preferable. However, the Commission should address
the need for a transition plan to mitigate negative impacts on any sector of the
Thank you very much.
THE CHAIRPERSON: Thank you, Ms McDonell.
COMMISSIONER CRAM: Thank you.
I want to take us to page 5 and your proposition that there should be a
deduction from your gross income for the purposes of deciding any revenue-based
contribution plan, not tax. You refer to a deduction for your service
Let's take an example. Let's say in order to get your cross-Canada licence or
respective licence, you said you would serve Saskatoon and Regina -- I
think that is the concept that everybody is thinking about -- and it may be
uneconomic to do that. What would we deduct from your gross revenue? Would we
deduct an acceleration of that expense, or would we deduct the loss, or would we
deduct the sort of foregone uneconomic cost of putting capital in?
MS McDONELL: That's a fine question.
As Clearnet noted and as you perceive, Commissioner Cram, in thinking about
this, we are thinking about extending service to places that might be
uneconomic. Obviously, we would have to try to find some quantification for
At the moment, all the wireless service providers are required to provide
Institute Canada with an annual report of their achievement of their conditions
of licence, which includes quantification of other elements such as R&D. I
am not aware that that report gives us a great deal to go on in terms of
quantifying an acceleration or quantifying t he uneconomic costs of achieving
that service coverage.
But I believe that if you were to accept the principle, it would be a
relatively easy matter to come up with some form of quantification for that
increment beyond what it would strike a wireless carrier as necessary to achieve
its own coverage objectives from the point of view of running a business.
COMMISSIONER CRAM: Because then my next issue is what if all of a sudden
seven million people decided to live in Regina and it then was economic, do we
put that back into your revenues when the seven million people move to Regina?
Conceptually, I am having a real serious problem with deducting it because how
do we know when it is economic and how do we deal with it?
MS McDONELL: Again, I think it is a marvellous hypothesis, although I would
have them move to Saskatoon because that's where I am from.
COMMISSIONER CRAM: It's all God's country. There's no question about
MS McDONELL: Fair enough. I think in principle it would be fair to do that.
If you accept the principle of deducting this sort of cost, the wireless
carriers would have to be under some obligation to point out when they reach
some sort of positive return for serving these places. Again, that does, as you
know, raise all sorts of issues of auditability and that sort of thing, but that
is exactly the sort of business that the Commission has been in for all these
years in dealing with this sort of question.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Thank you. Commissioner McKendry.
COMMISSIONER McKENDRY: Thank you, Mr. Chair.
I have a question in the same area that Commissioner Cram just discussed with
you on page 5 of your comments this morning and in the third paragraph, I will
just quote a sentence:
"Because these requirements are only demanded of wireless carriers offering
services that increasingly compete with those made available or wire line
carriers, Microcell believes that competitive equity requires that the
Commission exclude their costs or many calculations to contribution to eligible
I want to make sure I understand what these requirements are. I will start
first with the timing and extent of network deployment which you cite in the
paragraph above and I think you just discussed with Commissioner Cram.
What do you mean by "extent of network deployment?" I'm just taking that at
face value. I would assume you are suggesting that all your capital expenditures
with respect to network deployment should be deducted. Is that what you are
MS McDONELL: I don't think that anyone, including the wireless carriers,
would advocate that, Commissioner McKendry.
By "timing and extent," what we meant was that under the conditions of the
licence, we are required to provide service in a number of CMAs and other census
areas during an initial period of the licence, and it was a period of five
years. That means that even though if the business were to be run on a
self-sustaining basis, it might take us longer to reach places like St. John's
and -- I hate to go back to it -- Regina and Saskatoon, God's country. We are
required by condition of licence to accelerate that deployment.
Where, for example, the incumbent carriers had the luxury of 125 years of
monopoly to extend their networks throughout the service areas that they do
serve, a wireless carrier is required to extend its network to the limits that
it promised in its own licence application within a much shorter period of time.
Because that timing forces the deployment of network in places which are not
going to be sustainable certainly within that period and quite possibly for a
long period of time after that, it places additional burdens in terms of raising
financing on a wireless carrier that just simply may not be comparable to what a
wire line carrier is required to provide.
Again, I have compared us to the ILECs, but look at the situation of a
wireless competitive local exchange carrier, as Microcell hopes to become,
compared to a wire line local exchange carrier.
I am not suggesting that wire line local exchange carriers necessarily have
it easy or that they aren't getting into debt in order to extend local networks,
but they have an absolute choice of where they decide to put in facilities. The
only point we are making with this is that wireless carriers, by virtue of using
the radio spectrum, don't necessarily have an unfettered choice.
COMMISSIONER McKENDRY: Yesterday, one of the parties that appeared before us
argued or asked for a five-year exemption to contribution for new entrants,
unless they became profitable before that time. As I recall, Commissioner
Colville asked them why, in effect, other carriers should subsidize their entry
by paying contribution that they, if there wasn't an exemption, would have to
Is that situation analogous to what you have just told me, that you are
looking for an exemption, in effect, from having to pay contribution, given that
you are expanding and growing your network?
MS McDONELL: it is not directly analogous, Commissioner McKendry, because
what we are saying is that, first of all, this isn't necessarily time limited
with respect to the deployment period of our network.
The other thing is that what we are saying is that, although wireless
carriers now pay a certain amount of contribution as a result of the surcharge
on connecting trunks, the proposals that we see in the record of this proceeding
for a new system appear to result in wireless carriers paying an awful lot more.
That amounts to a new obligation on wireless carriers, in addition to its
obligations to Industry Canada, which were undertaken when they made licence
We are saying that if that kind of a new obligation is to be placed on
wireless carriers, along with other participants in the industry, that some
allowance, if you like, should be given to the fact that we are meeting other
federal government-mandated social obligations.
COMMISSIONER McKENDRY: I guess what I am trying to understand is what you
have to do that others don't, that your wire line competitors don't. You say you
have to pay licence fees. Do your wire line competitors pay licence fees?
MS McDONELL: Not in the magnitude that wireless carriers pay licence fees.
The licence fees that wire line carriers pay are simply the ones that are
payable to the CRTC. Under certain proposals that are before you, those fees
would, themselves, extend to wireless carriers, if they don't already.
The licence fees that we are talking about in this particular care are the
ones paid to Industry Canada for the use of Spectrum. Those are not payable by
wire line carriers.
COMMISSIONER McKENDRY: I understand that, but I take it the written argument
you filed will compare the licence fees that are paid by wire carriers and
wireless carriers, so we can understand that you are paying, I take it,
significantly more in licence fees than the wire line competitors pay.
MS MacDONALD: It doesn't now. We certainly will address that in reply
argument, if you would like.
COMMISSIONER McKENDRY: The timing and extent of network deployment we have
talked about already, but I take it you would agree that your wire line
competitors are extending their networks as well and upgrading their networks
and so on. So it isn't as if you are the only player that's facing an obligation
to upgrade and extend that. Wire line carriers are doing that, too, aren't
MS MacDONALD: Certainly they are, but, by and large, under the regulatory
bargain that has existed over the course of the now 90-some-odd years since Bell
and BCTel came under the federal regulation and subsequently the other carriers
started to come under provincial regulation, those upgrades and extensions have,
by and large, been explicitly compensated for by rates. Wireless carriers, as a
new entrant, are in the position of having to fund network extensions and
operations out of revenues gained in a highly-competitive market.
I certainly don't want to come before you and suggest that all we are talking
about here is special pleading or suggest that wireless carriers resent taking
on a proportion of -- or certainly that Microcell would resent taking on a
proportion of the social obligations that you might choose to impose on the
industry. I think it is worth noting that as competitors we are in a completely
different situation in terms of funding that network upgrade and roll-out.
COMMISSIONER McKENDRY: The third and last thing you want a deduction for is
R&D. What distinguishes you from the R&D expenditures or what
distinguishes your expenditures from the R&D expenditures of the wire line
competitors you face that would justify giving you an exemption and not giving
them an exemption?
MS MacDONALD: Ours are conditions of licence, Commissioner McKendry. We are
required by our licence to produce a certain amount of R&D every year and
that is quantified in an annual report. The wire line carriers do it, to my
understanding, largely as a matter of making sure that their networks continue
to be attractive in a competitive environment.
While certainly that's a benefit that wireless carriers get from doing
research and development -- and Microcell has been very active in doing research
and development -- the fact that it's a condition of licence and that it's not
an optional expenditure means that it needs to be put into budgets, including of
companies that are not turning a profit.
COMMISSIONER McKENDRY: So the rationale isn't that you are both doing
R&D, it's you have to do it by condition of licence. I guess you are saying
they don't have to do it if they don't want to do it; therefore, you can get the
deduction and they shouldn't.
MS MacDONALD: That's correct.
COMMISSIONER McKENDRY: They shouldn't get a deduction for their R&D?
MS MacDONALD: That's correct, yes.
COMMISSIONER McKENDRY: Thanks.
THE CHAIRPERSON: Thank you, Commissioner McKendry.
I think those are all our questions. Thank you, Ms MacDonald and Mr.
The next party will be Rogers Wireless.
ARGUMENT / PLAIDOIRIE
MR. ENGELHART: Good morning, Commissioner. This chart is on the back page of
the submission. For anyone in the audience who is wondering what is on it, it's
the same chart.
My name is Ken Engelhart and I am the Vice-President, Regulatory, for Rogers
Communications. I am here on behalf of our affiliate, Rogers Wireless Inc. With
me today is Mary Coates, Manager, Economics, for Rogers Wireless.
Let me say at the outset how pleased Rogers Wireless Inc. is to have the
opportunity to present its position in this proceeding to you orally and to
respond to any questions that you may have.
As you are aware, RWI operates cellular and PCS networks across Canada. Since
1998, long distance traffic carried on these networks has been subject to
contribution charges in accordance with Telecom Order 97-590, the Scope of
Contribution proceeding. Because of this, we obviously have an interest in
seeing contribution rates fall and we have supported the unfreezing of
contribution rates in past proceedings in order to accommodate such
At the same time, the vast majority of traffic carried on our networks is
local traffic. This traffic is originated or terminated on wireless networks
that we have built at great expense with the benefit of subsidies from
contribution payments generated by long distance traffic originating or
terminating on our network.
In this regard, wireless carriers are somewhat unique. We pay contribution on
our long distance traffic even when we originate or terminate it on local
wireless networks that we have built ourselves and we do not receive any
contribution payments, even when we terminate long distance traffic for ILECs or
other long distance carriers.
While RWI is not happy with this situation, I am not here today arguing for a
review of Telecom Order 97-590. Rather, I am here in the hope of persuading you
not to make the situation worse by implementing the solution proposed by the
alternative providers of long distance service.
We should really start by looking at what we are trying to achieve. What is
the problem that brings us here to this room that has resulted in the initiation
of this proceeding? The proceeding was started by a number of the long distance
providers. In the central theme of their application, what they have said is
that the contribution regime is threatening the viability of long distance
competition and their ability to earn a profit.
By increasing the rates for long distance services above efficient levels and
enforcing an artificial distinction between local and long distance services,
the alternative providers of long distance services argue that the current
system creates allocative and dynamic inefficiencies in the long distance
market, harms consumers by artificially raising long distance rates, and
inhibiting the emergence of a truly competitive communications environment.
There are three problems: efficiency, consumer impact and competition. Those
are the three tests that we have on our chart. Those, I think, are the three
criteria that we should use to measure any solution -- how well do they promote
efficiency, are they consumer-friendly, do they promote competition -- because
that's the problem that we are trying to solve.
Let's look at what has happened so far. It's important to recognize that the
concerns raised by the long distance providers in respect of the current
contribution collection mechanism are not new. We have always known that
contribution raises long distance rates and, as a result, distorts the
consumption of long distance services. The Commission has recognized these
concerns on a number of occasions and has sought to minimize them while
balancing other policy objectives such as affordability and accessibility of
local telephone service.
New entrants in the long distance market have known about these distortions
from the outset and that contribution requirements must be factored into their
business plans and service prices. They have known since 1992 that the
Commission's plan was to continue to charge contribution on long distance
traffic and to gradually reduce contribution charges down to sustainable
As we all know, the contribution regime has been extensively overhauled since
it was first introduced in 1992 to adapt the new technological and competitive
environment. These changes have included a change from a per trunk contribution
rate to a per minute contribution rate, the establishment of a peak and an
off-peak per minute rate, the expansion of the scope of contribution-paying
services, the expansion of the contribution regime to "IP telephony", the
modification of the regime to apply to competitors in the international market,
an increase in the DAL surcharge, and a recent modification to permit
"unfreezing" the contribution rate in certain limited circumstances.
So all of these changes have been designed to keep the contribution regime in
step with the new regulatory regime, the convergence of technologies and the new
In addition, the Commission has reduced contribution rates considerably by
raising local rates. In the case of Bell Canada, for example, the contribution
rate has dropped from 8.12 cents per minute in 1992 to 0.49 cents per minute in
2000, a reduction of 94 per cent.
The industry and the Commission have invested substantial time and resources
in designing and implementing the current contribution mechanism. This includes
the relatively recent implementation of a portable contribution regime in
Recent initiatives by the Commission and industry have gone a long way
towards minimizing the overall impact of the contribution subsidy. Should we
fundamentally alter it now? Is it worth it? Clearly, only if the reforms
unambiguously address the problem by improving efficiency, by being customer
friendly and by promoting competition. If it satisfies all of the three
criteria, then we should make a change. But we also have to weigh into that the
implementation costs of designing a new system.
Obviously, the long distance providers are seeking to spread the contribution
burden across more services and service providers. Two specific mechanisms that
have been proposed are revenue tax and a subscriber line charge. We discuss both
of those together, the subscriber line charge and the revenue tax, as spreading
the burden on the bottom line of that chart.
Obviously, long distance providers have a huge self-interest in shifting as
much of the contribution burden as possible onto other services and service
providers. But will spreading the contribution, through the implementation of a
revenue tax or a subscriber line charge adequately address the problems
associated with the current regime? RWI believes that the answer is no. The
proposed reforms will not solve these problems. Moreover, they will be
administratively complex and expensive to implement.
First, let's consider the efficiency effects of spreading the contribution
Spreading the contribution burden does not address the efficiency losses
associated with the contribution burden. It simply extends these losses to other
markets. Efficiency in the long distance market will increase, but the
contribution burden in the new markets and services will introduce new
allocative and new dynamic inefficiencies in these markets. There will not be
any net efficiency gain. Consider, for example, the impact of a shift of a
portion of the contribution obligation from IXCs to wireless service providers.
A $3 a month subscribe line charge will shift $240 million of contribution
payments to the wireless industry.
In addition to the allocative and dynamic efficiencies that, as discussed
above, would result from the extension of contribution obligations to new
services and markets, this proposal, the subscriber line charge proposal suffers
from the additional difficulty that, for many services, there is no "line". For
cellular and PCS, we have a lot of prepaid customers. They go into the
convenience store and they buy a card. We don't send them a bill. So there is no
way we could send them a subscriber line charge bill because they don't get a
Some of these customers don't even have a Cantel number. They can use any old
phone and just buy a card in a convenience store. Well, I suppose you could put
the subscriber line charge on the card that they buy in the convenience store.
But then if someone buys three cards in a month, they are obviously paying three
subscriber line charges.
So the subscriber line charge is a problem for us.
Will consumers see lower prices for telecommunications services? Again, the
answer is no. Long distance rates may decrease, but other rates will increase.
As a group, consumers will not see an overall reduction in their
Will competition be enhanced? Once again, the answer is no. Spreading the
contribution burden to new telecommunications markets will introduce new
distortions and barriers to entry in these markets. Moreover, unlike alternative
providers of long distance service who entered the market with full knowledge of
their contribution burden, this proposed shift of the burden onto local service
providers will result in unanticipated expenses. This is particularly true for
wireless service providers.
A shifting of the contribution burden to wireless services would inevitably
result in higher rates for consumers, greater losses for wireless service
providers and reduced investments by wireless service providers. In other words,
everyone will suffer: consumers will pay more, higher prices will reduce
consumption and wireless service providers will lose more money, thereby
limiting their ability to expand service.
The subscriber line charge proposed by Call-Net and others would require
wireless service providers to pay in excess of $240 million in contribution
charges and this amount would grow rapidly as the number of wireless subscribers
increases. That is compared to the $14 million in contribution charges paid
today by wireless service providers.
In the event that a subscriber line charge is imposed on wireless, it will
have a very different impact than the imposition of a subscriber line charge on
local wireline service. Local wireline service, at least in the residential
market, is a monopoly. The incumbent will surely pass the subscriber line charge
on to customers. Since demand is relatively inelastic, there will be no
reduction in the amount of service demanded.
The impact on wireless will be completely different. Because the market is
very competitive and given to price wars, it is unlikely that the SLC will be
completely passed on to customers. To the extent that it is, demand will be
reduced because wireless demand is very elastic.
As shown in the chart -- this is the chart showing the industry net income --
the wireless industry call ill-afford to sustain additional costs of this
magnitude at this time. The wireless industry lost in excess of $1 billion in
1998, almost twice the losses sustained by the alternative providers of long
distance services. In 1999, the wireless industry again absorbed losses in the
$1 billion range.
These losses are largely attributable to the huge capital investments that
are being made by wireless service providers as they roll out their networks
across the country, as well as the requirement to satisfy Industry Canada
licence conditions. Wireless service providers are already required to
contribute financially and operationally to important social policy objectives
pursuant to their radio licences.
For example, wireless service providers paid $130 million in radio licence
fees alone in 1998 and substantial additional sums will need to be expended in
order to acquire additional spectrum in the upcoming PCS spectrum auction. It is
estimated that the upcoming PCS auction could generate in the area of $3-$5
billion. Full payment needs to be made by the winners in a mere 30 days after
the close of the auction. Wireline carriers pay no such fees.
Wireless service providers must also contribute two per cent of gross
adjusted telecommunications revenues to research and development activities.
Again, wireline carriers are under no obligation to support research and
development activities in Canada.
Finally, wireless service providers are required to meet specific roll-out
obligations. Rogers Wireless today serves 93 per cent of the Canadian population
with our service and that includes a lot of the band C and band D areas.
The new PCS spectrum that is being auctioned will also require firm roll-out
commitments in the neighbourhood of 50 per cent of the population by year five.
These are not simply targets, but rather are firm bench marks that must be met
as a condition of licence. In addition, the $3-$5 billion figure does not
include the capital costs to build the network to meet these roll-out
requirements established by Industry Canada. These wireless networks have and
continue to be built without the benefit of subsidies.
The application of additional contribution obligations on wireless service
providers would divert spending by wireless service providers from the build-out
of their networks in rural and remote areas paradoxically hurting the very
customers that a contribution regime is designed to assist.
A requirement for wireless networks and for new access networks built by
CLECs to subsidize legacy wireline networks would also be fundamentally at odds
with competitive and technological neutrality and competitive efficiency. All of
the new wireless or wireline networks trying to create a competitive alternative
to the legacy wireline networks would be required to pay a tax to these legacy
networks. Far from promoting competition, this would be a costly barrier to new
Spreading the contribution burden to new services such as wireless would,
therefore, introduce costly new barriers to competition, would move the
efficiency losses from the long distance market to other markets and would lower
long distance contribution by raising rates in markets such as wireless.
Moreover, a fundamental change to the contribution regime would require
considerable administrative effort and expense.
There is a painless way to address the problems associated with the current
contribution mechanism. Moreover, this can be done without implementing a whole
new regime. The answer is rate rebalancing through price caps.
Efficiency and competition in Canadian telecommunications markets can be
improved through a simple rate rebalancing exercise.
RWI believes that the local rate increases necessary to remove the current
contribution requirement, which are, on average $3.50 per line per month, would
not compromise affordability of local residential telephone service.
There is widespread support for rate rebalancing in this proceeding. Most
parties recognize that moving local rates to cost would eliminate the need for a
contribution mechanism and remove the economic distortions that are inherent in
the current regime. The problem is that some customers would see a local rate
increase, and that is a problem. The Commission may, therefore, not wish to
mandate full rate rebalancing at this time.
It is for this reason that Rogers Wireless has proposed that rate rebalancing
be achieved without mandated local rate increases by including contribution in
the price cap regime.
Under this approach, contribution would be included within the price cap
regime as a cap service, either as a separate service basket or as part of the
Other Capped Services basket. The price cap mechanism would work as it currently
does. All capped services, including contribution, would be subject to the price
cap index on an annual basis.
Under this approach, ILECs could use productivity improvements to reduce
contribution rates instead of reducing business local rates, as they do today.
In this way, both residential and business customers will benefit from reduced
contribution charges, while not experiencing higher telephone bills, resulting
from a revenue tax or subscriber line charge. Business local rates would not
continue to decline, but they are already very low.
Rogers Wireless estimates that the contribution requirement could be
eliminated within less than four years under this approach, without requiring
any increases in local rates. Instead of increasing local service rates,
productivity improvements will be used to reduce contribution. For the first
time, then, residential customers would benefit from the productivity
improvements of the price cap system, which to date have been absorbed entirely
by business service rates. The approach, therefore, proxies the incentives to
reduce costs for all local services that would normally apply in a competitive
This approach is both painless and effective. It does not require an overhaul
of the current contribution collection mechanism. It does not require increases
in local residential rates. It does unambiguously improve efficiency and
competition in telecommunications markets, and it would result in overall rate
reductions for consumers.
As shown in the chart, only rate rebalancing through price caps addresses all
of the problems associated with the current contribution collection mechanism.
In contrast, spreading the burden through the implementation of either a revenue
tax or a subscriber line charge addresses none of the problems with the current
regime and would result in significant hardship for other industry sectors,
including the wireless market.
Moreover, rate rebalancing through price caps does not require a fundamental
overhaul of the existing contribution regime. The existing contribution
framework, including the portable contribution regime, would continue to operate
until it is no longer required.
We therefore urge you to seriously consider this approach in your
THE CHAIRPERSON: Thank you, Mr. Engelhart.
COMMISSIONER CRAM: Maybe if I could ask you to file this in your reply, Mr.
Engelhart, I am very interested in your definition of rural and remote areas.
What I would like you to do, if you could, is provide us the most rural and
remote area that you require by COL to service and when -- in other words, what
year of your licence -- and if you would collate that with the 1996 census data
showing the density of the population in that enumeration area.
I am certainly going to suggest that it is not as remote as Ile-à-la-Crosse
in Saskatchewan that SaskTel has an obligation to serve. What I would like is
some way that we can define this and look at it, collate the two together.
MR. ENGELHART: Certainly. In terms of our conditions of licence, we, of
course, had conditions of licence back in 1983 that required our cellular
service to expand to a number of markets. We have blown way past those
conditions of licence.
Our network now covers, as I said, 93 per cent of the Canadian population. We
are continuing to expand that network to rural and remote areas, but this is way
beyond our licence requirements. We are way past that.
Ninety-three per cent of the Canadian population is covered by our analogue
network. We got a PCS licence five years ago, and we have certain requirements
to expand our PCS digital coverage because the people in the rural and remote
areas want the fancy digital services too. Our digital footprint today is 80 per
cent of the Canadian population.
If it would assist the Commission, we would be pleased, for example, to
include in our reply argument coverage maps showing just where we are and some
What you find a lot in our business is transportation corridors get covered,
and they cover some very rural and remote areas as part of that. As I said
before, there is a lot of Band C and Band D that is covered by our network.
COMMISSIONER CRAM: But, then, really it is done merely as a collateral issue
to the obligation to serve, say, in Regina and Saskatoon; you serve the corridor
that goes between the two. Is that really what it comes down to?
MR. ENGELHART: For us at this point, we are really beyond our licence
requirements. We are in a competitive business and coverage counts. People buy
cellular service in large part based on how big your footprint is. We want to
have a big footprint.
There are good customers in rural and remote areas. We are expanding in rural
and remote areas all the time. But it is very expensive. Each of those cell
sites cost $1 million. When we expand in those rural and remote areas, without
anybody giving us any subsidies, we are improving service to those areas. The
point I am trying to make is that I have enough problems expanding my own
network into rural and remote areas without subsidizing someone else's market
networks in those same areas.
COMMISSIONER CRAM: I think I just heard you say that you are expanding for
MR. ENGELHART: Yes.
COMMISSIONER CRAM: And not out of any obligation?
MR. ENGELHART: That is correct.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Thank you, Commissioner Cram.
In your presentation today, you didn't address the issue of the determination
of the size of the required subsidy. Many of the other parties had addressed
that. Perhaps you have done it in your more extensive written submission, or
have you? Are you satisfied that the current method for calculating the
magnitude of the requirement is appropriate, or do you have a view on that?
MR. ENGELHART: The current magnitude of the contribution was really developed
as the local access shortfall. It was a Phase 3 methodology that said local and
access do not fully recover all of their associated costs. Long distance
recovers more of their costs.
The current mechanism said that it is not fair if the phone company's long
distance network is covering some of their local and access shortfall. It is not
fair if the competitive long distance carriers don't also cover it. Clearly,
that is the system that we have today.
Obviously, we don't do annual revenue requirements or Phase 3 calculations
any more, but when the price cap system was set up, the contribution amount was
based on that shortfall. In implementing the portable contribution system, we
started parcelling that money out to rural and remote areas based on Phase 2
calculations of what the costs are in different bands.
But the quantum itself is the local access shortfall. That suggests to me
that that quantum is an amount that has to be solved -- that contribution
problem has to be solved either by the long distance companies continuing to pay
that amount, which I agree is probably not workable any more, or you have to
eliminate that local access shortfall by raising local and access rates, either
through rate rebalancing or through dumping the contribution into the price cap
system, as we have suggested.
I think we are getting confused when we suggest that the current local access
shortfall is the amount of money that is needed to subsidize rural and remote
areas or needed to promote affordability. I think that if the Commission wants
to solve the problem, they have to solve the problem by getting more revenues
into the local access category and wiping out contribution. There is then going
to be a kind of rate rationalization, as I think Mr. Farmer called it yesterday.
In that rate rationalization process, there may or may not be an affordability
problem that arises. If there is, the Commission may want to look at a more
universal tax to support affordability. But I think we would be talking about a
far, far, far lower order of magnitude than the current local access
THE CHAIRPERSON: Okay. Thank you very much, Mr. Englehart and Ms. Coates.
We will take our morning now and reconvene at 11 o'clock. The next party will
--- Upon recessing at 1045 / Suspension à 1045
--- Upon resuming at 1100 / Reprise à 1100
THE CHAIRPERSON: We will return to our proceeding now. The next party is
CAIP, the Canadian Association of Internet Providers.
ARGUMENT / PLAIDOIRIE
MR. BRAZEAU: Mr. Chairman, Commissioners.
Ça nous fait énormément plaisir de nous trouver ici dans l'Outaouais où la
température aujourd'hui est tellement agréable.
My name is Phillip Brazeau, Vice-President with PSInet, and for the purposes
of these proceedings, Chairman of the Association of Internet Providers. To my
left is Kirsten Embree, a partner with the law firm of Osler and counsel to CAIP
in these proceedings.
The Canadian Association of Internet Providers is Canada's national
association of internet service providers with a membership in excess of 150
Internet providers and affiliate members located across Canada. This membership
ranges in size from the smallest of the Internet provides to two to five
employees, to some of Canada's largest providers, such as Bell, Telus, AOL
Canada and PSInet. CAIP's members provide over 85% of the connections to the
Internet in Canada for subscribers at work, home and in schools in conjunction
with an expanding array of value-added services, including access to the World
Wide Web, e-mail applications, online information services, news group services
and, of course, facilitating the development of the e-commerce industry.
As an organization whose members could be seriously affected by the outcome
of this proceeding, CAIP has taken a keen interest in the issues that are under
your consideration today, particularly those which could result in the
application of further contribution obligations on the Canadian Internet
Mr. Chairman, it is the position of CAIP in this proceeding that Internet
services are fundamentally different from other telecommunications services and
that it would be contrary to law, policy, administrative efficiency and
competitive equity to impose further contribution obligations on Internet
Some of the parties to this proceeding have proposed that the current
contribution burden be shifted in its entirety from interexchange service
providers on the one hand to local telephone service subscribers and Internet
providers on the other hand.
CAIP believes that it is neither in the public interest nor in the interest
of the growth of a dynamic and vibrant Internet industry in Canada to shift the
entire contribution obligation overnight from long distance service providers to
customers of local telephone service and competitive service providers. Not only
would such an approach lead to rate shock for residential and small business
subscribers, it would seriously harm service providers that rely on the local
exchange carriers for essential access facilities. I submit to you that any move
in this direction will bode ill for Canada's Internet industry at this stage in
Both the CRTC and the federal government have taken active steps to promote
the growth of the Internet and Internet-related businesses in Canada. Needless
to say, if new costs are imposed on Internet providers this will mean higher
overall costs in the Internet sector which, in turn, will result in fewer
service choices for customers, few competitors in the market and reduced levels
of product and service innovation.
In the view of CAIP, the Commission can best promote the Internet and the
federal government's connectedness agenda by ensuring that Internet providers
are not saddled with additional contribution obligations and by continuing with
its hands-off approach to regulation that the Commission has been so successful
in implementing to date.
As a consequence, CAIP recommends that the Commission adopt a balanced
approach to the design of a new contribution collection mechanism.
Mr. Chairman, it is the view of CAIP that taxing the Internet is contrary to
The Canadian government has placed connectedness high on its agenda. Why?
Clearly, this is because maximizing the number of Canadians who have access to
the Internet and creating an e-business friendly environment are some of the
fundamental building blocks to ensuring that Canada can compete and win in the
emerging global electronic marketplace. Not only does the electronic marketplace
represent a new way of doing business, such as business-to-business or retail
e-commerce, it is also a creative economic force. Indeed, the Internet is
responsible for creating whole new sectors of economic activity.
Using the Internet can achieve important social policy goals, such as
advancing the distribution and sharing of information between citizens,
governments, schools, hospitals and businesses, and fostering the process of
lifelong learning. We can only wonder at what new business, educational and
informational applications and opportunities this new industry sector will
create in Canada.
In building this new economy and in ensuring Canada's success in the global
electronic marketplace, the government has identified universal access to the
Internet by individual Canadians as an essential component to its strategy. In
the words of the Minister of Industry, John Manley, in a recent speech at the
NET 2000 Conference, "ensuring that all Canadians have access to the Internet is
the single most important action that government can take to ensure success in
the knowledge-based economy". The Commission's decision in this proceeding is
fundamental to ensuring the success of the federal government's objective.
We at CAIP also believe that taxing Internet access will hurt individual
Canadians as well as small and medium sized Internet providers. The market for
retail Internet services, particularly in the low speed segment of the market,
is thriving, notwithstanding the fact that it is a highly competitive market and
the margins are razor thin. Indeed, the large number of participants in the
market for retail Internet services attests to this fact.
We are of the view that the imposition of a new contribution obligation on
Internet providers can threaten the delicate balance in this highly competitive
marketplace. We also believe that any increases to the costs that are currently
faced by Internet providers, such as additional contribution charges, will make
Internet access services more expensive and will hurt lower income
We would note in this regard that statistical studies demonstrate that there
is a strong relationship between income and Internet use, the highest income
households being nearly five times more likely than those in lowest income
households to regularly use computer communications in the workplace or at home.
Needless to say, making Internet access more expensive by imposing further
contribution obligations on Internet providers would run counter to the
government's policy object of connecting as many Canadians as possible.
We would also like to point out that contrary to common perception Internet
providers do contribute toward universal service objectives through the
contribution rates that they pay on both local and interexchange voice over IP
services that are interconnected to the PSTN.
In addition, and quite apart from the explicit contribution payments that
they make, what is often forgotten is the instrumental role that the Internet
providers have played in generating additional revenues for Canada's
Mr. Chairman, Internet providers are not telecommunications service
providers, but they are significant users and purchasers of telecommunications
services. Internet providers stimulate demand for other telecommunications
services, such as leased lines, Internet backbone facilities and residential
second lines, which, in turn, creates opportunities for the generation of
additional contribution revenues.
In summary, Mr. Chairman, CAIP is firmly of the view that, as a matter of
public policy, expanding or modifying the existing contribution regime in order
to capture Internet services is counterproductive to the economic growth that is
made possible by the Internet and is contrary to the government's connectedness
Indeed, when viewed against this backdrop, CAIP is firmly of the view that
the benefits of capturing Internet services within the contribution fold are far
outweighed by the negative impacts on consumers, businesses, the Internet
industry and the economy as a whole.
Mr. Chairman, it is also CAIP's position in this proceeding that it would be
contrary to law to impose contribution obligations on Internet providers.
Although the legal basis for this position is set out in detail in CAIP's final
comments in this proceeding, essentially it is CAIP's view that because Internet
providers do not offer or provide basic telecommunications services, Internet
providers are not "telecommunications service providers" within the meanings of
subsections 2(1) and 46.5(1) of the Telecommunications Act.
It is also CAIP's view that Internet providers should not be "required to
contribute ... to a fund", as contemplated by subsection 46.5(1) of the Act,
regardless of whether that requirement is imposed directly through the levying
of contribution charges on their customers or indirectly by paying contribution
charges such as an SLC. To suggest otherwise would mean that the Commission
would be doing indirectly that which it could not do directly, which is to
require Internet providers to "contribute to a fund".
The services offered by CAIP's Internet provider members and, in particular,
Internet access service are not basic telecommunications services. Although this
position is not without its detractors in this proceeding and may well require
adjudication by other tribunals, CAIP submits that it is the correct view for
the following reasons.
First, the additions to Canada's schedule of specific commitments resulting
from the negotiation of the Fourth Protocol to the GATS on basic
telecommunications services have been widely publicized and have been
implemented in various legislative amendments and regulatory proceedings.
However, what is often overlooked is the fact that "value-added"
telecommunications services were included in the schedule of specific
commitments of 50 governments, including that of Canada, as a result of the
Uruguay Round of negotiations which were concluded in 1994.
Second, in Canada's schedule on specific commitments to the GATS, Canada
assumed a number of commitments to open up its markets with respect to
"enhanced" or "value-added telecommunications services", which, according to
Canada's schedule, include the following services: "electronic mail", "on-line
information and database retrieval", "electronic data interchange", "on-line
information and/or data processing". These are services offered by Internet
Third, Canada's schedule defines enhanced or value-added services as services
"for the supply of which the underlying telecommunications transport facilities
are leased from providers of public telecommunications transport networks."
Mr. Chairman, Canada's GATS commitments reinforce the fact that Internet
providers are not providers of basic telecommunications services. Internet
providers offer on-line, enhanced or value-added services that are delivered via
"underlying telecommunications transport facilities ... leased from providers of
public telecommunications transport networks."
In summary, Mr. Chairman, unlike carriers, Internet providers apply a
significant amount of computer or processing intelligence to the information
transmitted to them by their customers by storing, forwarding, caching and
retrieving information on their customer's behalf. Carriers and resellers, by
contrast, simply transport information from one location to another. As such, we
do not believe at CAIP that Internet providers offer basic services or otherwise
fall within the definition of a "telecommunications services provider" under
Canada's Telecommunications Act.
Mr. Chairman, in light of the policy and jurisdictional considerations I have
just outlined, the Commission needs to critically examine proposals for
contribution reform that will have a negative impact on the cost structures of
Internet providers, not to mention the costs to consumers and businesses to gain
access to and make use of the Internet. This is especially true when you
consider that the alternatives to the existing mechanism that have been proposed
in this proceeding contain serious flaws.
For example, based on the record of this proceeding, it is clear to CAIP that
the administrative costs will be particularly high with a per cent of
revenue-based mechanism. These costs are likely to arise as a result of the
Firstly, the necessity of separating out contribution-eligible and
non-contribution-eligible streams of revenue which would be particularly
difficult for small and medium-sized Internet providers.
Secondly, the likelihood of applying that mechanism to a significantly larger
number of contributors.
Thirdly, increased administrative costs. If a per cent of revenue mechanism
were adopted, a significant increase in expenses related to compliance auditing
would be required due to the increase in the number of reporting telecom service
providers. It would be an administrative nightmare for many of the small and
medium Internet providers.
Double taxation. As mentioned by other parties to this proceeding, some form
of set-off will need to be implemented in order to avoid the problems that arise
when services purchased by one telecom service provider from another telecom
service provider are resold to end-users.
Bundling. As the Commission may be aware, most Internet providers offer
bundles of services and may not account for revenues in a manner compatible with
a per cent of revenue mechanism. The overwhelming majority of the parties to
this proceeding agree that bundling is the single-most difficult problem
associated with the per cent of revenue-based mechanism.
In our view, the only way to discourage this type of gaming is to establish
"price lists" for each of the services within a bundle so that when a service
bundle is evaluated, the price list can be used to impute revenues that would
otherwise be "lost" in the service bundle. However, this approach has negative
effects as well, such as the fact that it would discourage legitimate bundling
opportunities, thereby reducing the benefit to the consumer. It would also
introduce a further layer of administrative complexity to an already cumbersome
In addition to these concerns, there is also the possibility of serious
competitive inequities. For example, under the per cent of revenue mechanism
where a telecom service provider is provided with the flexibility to recover its
contribution obligations from any source of revenue that it chooses, the telecom
service provider will likely seek to recover the obligation from revenue streams
that are generated by services that are relatively inelastic in terms of demand,
such as dial-up access facilities and residential telephone services.
The proposed subscriber line charge. The members of CAIP are also very
concerned about the competitive inequities that would arise from the application
of an SLC mechanism. Among those inequities are the following: Shifting the
entire burden of contribution recovery to local wire line and wireless services;
secondly, competitive inequity; thirdly, assigning a uniform SLC on "derived
channels" discourages the use of more efficient facilities; fourthly, and not to
be underscored, administrative difficulties.
Mr. Chairman, the massive migration to packetized networks that has been
alluded to by some parties to this proceeding has been grossly exaggerated.
Indeed, all of the ILECs in this proceeding have acknowledged that the amount of
overall traffic in the next few years that is represented by voice-over IP is
expected to be relatively small in comparison to the amount of switched voice
As evidence of this fact, none of the carriers that have participated in this
proceeding is providing voice-over IP services at the present time. Thus, it is
still quite sensible to look to the revenues that are generated by conventional
long distance services as a source of subsidy. Yet, parties such as Call-Net are
proposing that the CRTC shift to an extreme solution.
Mr. Chairman, we at CAIP believe that serious consideration should be given
to the adoption of a mechanism which either preserves the existing contribution
collection mechanism, perhaps in a modified form, or which adopts a hybrid
approach which can incorporate aspects of the existing mechanism, as well as
aspects of a new mechanism.
In the design of such a mechanism, it is CAIP's view that any replacement
mechanism should be based on the following principles. Firstly, the new
contribution mechanism should only be implemented after there has been reform of
the existing mechanism in the form of further rate rebalancing and a thorough
recalculation of the overall contribution requirement.
Secondly, the new mechanism must be phased in over a transition period that
minimizes rate shock for customers, including customers of essential access
Thirdly, the new mechanism should minimize competitive inequities between
different types of service providers.
Fourthly, contribution charges should be levied in a transparent manner and
should be explicitly identified on customer bills. Contribution obligations
should not be applied to any non-basic services, including all of the services
that are offered by Internet providers and the new mechanisms should be simple
In conclusion, CAIP urges the Commission not to assess contribution charges
obligations on Internet providers or their services. Assessing contribution
obligations on Internet services would violate Canadian law and the objectives
of the federal government's connectedness agenda. Moreover, a contribution
regime requiring Internet providers to report and remit these subsidies will
entail a manifold increase in the regulatory burden associated with
administering the contribution system.
Given these considerations, CAIP seriously questions whether it is
appropriate at this stage in the evolution of the telecommunications industry in
Canada to devise a new contribution mechanism which would apply to a whole new
set of services and service providers, particularly when there is no legal basis
for including many of those service providers within the new regime and when
there are many other mechanisms that can be relied upon to subsidize high-cost
local telephone service without the need to tax one of the most critically vital
engines to economic growth in the country at this time: the Internet.
Mr. Chairman and Commissioners, I thank you for having afforded to CAIP this
opportunity to present our views on the issues raised in this important
proceeding. Ms. Embree and I would now welcome any questions that you may have
arising from our oral or written submissions.
THE CHAIRPERSON: Thank you, Mr. Brazeau.
COMMISSIONER LANGFORD: Thank you.
I think I'm going to leave the international stuff to the folks on Sussex and
the legal stuff to the folks on Wellington and just ask you a little bit about
your position on what you call the public policy concerns because I am a little
confused by what you said this morning.
Just picking out some of the things you talk about, not wanting to hurt -- I
think these were your exact words -- not wanting to hurt lower-income households
and penalize them in some way, hard to argue against that. But I'm trying to
assess in my own mind whether you feel, though, you don't want to pay -- and
that has certainly been a constant theme here, so you are in good company, or at
least you are in lots of company. I don't know whether it's good company or not.
Nobody wants to pay. We have got that message loud and clear -- but do you feel
that there is any aspect of the services that your members provide that should
fall within that same goal, i.e. -- call it what you want, but implicitly what
you said is -- let's help lower income households take advantage of our services
for all of the eloquent reasons that you and Minister Manley and other people
Don't you feel you have a part in there even if it's a tiny marginal part at
this point, a part that may grow? But the subsidy here would go to that very
goal, wouldn't it? So how do you square those two positions of yours?
MR. BRAZEAU: I would be pleased to respond to that, Mr. Commissioner.
When I address the issues that you raise from the membership who are
basically small- and medium-sized business people who are out offering Internet
services which, to our way of thinking, is critical to the development of the
new economy, when they go out and acquire services from the telcos such as Bell,
they pay for those. In order to make attractive services, they even have to
wholesale some of the services offered by these telcos.
The margins that they are dealing with in addressing the market place are so
small that to consider at this time imposing an additional charge in addition to
everything else that they pay which is, in effect, a form of contribution, at
this particular juncture, would, from my perspective, be totally erroneous to
the development of the Internet industry.
MS. EMBREE: Just to add to that, something that a lot of people forget is
that Internet providers do pay contribution today. They pay it on voice-over IP
services. So they do actually make explicit contribution payments.
In addition to the explicit payments that they make -- and something that
Phillip has talked about in his submissions to you today -- is that Internet
providers are basically responsible for a lot of the growth that is taking place
in Canadian carrier networks. They are ordering up extra lines. There are
Internet backbone facilities that are being built. The incumbent phone companies
are creating new services that are designed specifically for Internet service
providers. And the increased demand that is being placed on networks by the
customers of Internet service providers is resulting in manifold increases in
the networks of all Canadian carriers.
COMMISSIONER LANGFORD: I don't want to gainsay anything that you have just
listed. It's probably unquestionable. But it's not unlike the argument we heard
this morning from Clearnet which has got the razor-thin margins, to use your
term, which is employing 2,000 people this year instead of -- my numbers aren't
exact -- but 240 or 400 a few years back, doing wonderful things for the
economy, contributing. It's not unlike the position taken by AT&T yesterday,
that is talking about razor-thin margins as well and why should we bear the
Now, I'm hearing that you are bearing a bit of the burden. This morning, you
have reminded us that you do bear some now. And yet, you have waived GATT around
at us. You have waived the Supreme Court of Canada at us. That's fine, they are
institutions, waive away.
But are you saying that there is no possible way your vibrant, wonderful,
cutting-edge Canadian industry can't contribute to something? And if there is a
way, what scheme would you prefer? What would you suggest even if it's in a
limited way, even if it's only on the few lines you use?
I don't know if you were here for Dr. Jackson's discussions about how
Internet is dividing one telephone line into four lines, raising problems. How
could you contribute? Or are you basically saying we contribute a little now, we
don't like it, we are not going to do it again and if you try to make us, we
will take you to court?
MR. BRAZEAU: No.
COMMISSIONER LANGFORD: Good.
--- Laughter / Rires
MR. BRAZEAU: We may have to deal with our colleagues in a court setting.
I think, Mr. Commissioner, what the CRTC is faced with -- and as you have
quite properly indicated -- is a number of parties have come in front of you and
said, you know, our margins are so thin, you should do it some other way, you
should look elsewhere.
What we are indicating to you -- obviously, you have a very significant
decision to take as to who will step up to the table.
Some of the problems we have is to think that long distance providers under
an SLC would no longer be at that table. I think what you are called upon is to
weigh the benefit of having long distance service providers no longer contribute
in the manner that they have done in the past and looking to Internet providers
and saying, we know you contribute somewhat Internet providers, but guess what?
We think you should more.
Our view is we really think you should not do away with a mechanism where
long distance providers are stepping up to the table in some manner at this
COMMISSIONER LANGFORD: Well, what if we take away more and what if I say this
to you: we are trying to make a fair decision and fair doesn't always mean
equal, but it can? So let's take a really, really easy view of "fair". Everybody
makes some kind of a just contribution, considering their circumstances.
I could argue -- and I am not advocating for anyone here, but just for the
sake of argument -- I could easily argue that it isn't fair right now that one
sector is taking a very large hit, while others are paying nothing. It may be
fair in a more complicated view of equality, but just on the face of it, prima
facie, that looks maybe not fair.
Could you suggest to us this morning some fair system whereby your sector
would pay a share, despite the fact that we don't want to injure it. We are not
trying to hurt it; we are not trying to hurt anybody here. But is there a way
that we can stay out of the Supreme Court of Canada, not violate the Uruquay
round, and get a fair contribution from your sector without putting anybody into
Queer Street, as they used to say in London?
MR. BRAZEAU: I will give Ms Embree an opportunity to respond, but I would
also like to make a few comments.
Leaving aside the policy reasons and legal reasons why we don't think we
should be brought to the table, when we speak to fair, in our oral submission
and in our written submission, we provide some guiding principles which we think
address that very issue: What is fair? Some of those are that we make sure that
the costs are transparent and they show up on the customers' bills, that we need
a transition period.
There are some principles there which we suggest as guiding posts to you in
As between the various mechanisms that we have discussed over the past few
days, I have not, within my own membership, had the opportunity to canvas them
because an awful lot of the more substantive material has come out just in the
last two days.
So, at this juncture, all we can urge you is to be guided by the principles
we have given you to date. When comes the time to submit our final submissions,
we will attempt to provide perhaps further guiding principles as to what we view
as being fair to the Internet industry.
MS EMBREE: Just to add to what Philippe has said, again, I hate to repeat,
but your question is: How can Internet service providers contribute? They do
contribute today; they contribute in an explicit manner; they contribute in an
implicit manner by generating demand for networks' components and services. That
is an incredible contribution, not only to the Canadian economy, but it is also
a source of revenues for incumbent carriers to generate contribution
The other thing I guess I would just add is that we have no indication, at
least at this point in time, that the Commission would abandon its views on the
contribution eligibility of voice over IP services.
As I said, we do pay explicitly today and, to the extent that the Commission
maintains its view on voice over IP in the future, I guess you can draw your own
conclusions in that regard.
COMMISSIONER LANGFORD: Help us a little. You are willing to pay in the
future, in other words? It is not out of the question?
MS EMBREE: The Commission, as I said, has given no indication that it would
abandon its view of the contribution eligibility of voice over IP services.
I don't know what the Commission is going to decide on this issue on a going
forward basis. We certainly don't want to pay on voice over IP, but today, as I
noted, we do.
COMMISSIONER LANGFORD: Thank you.
THE CHAIRPERSON: Thank you.
With respect to paragraph 23, would it be your view that a service provider
who did provide basic telecommunication service using the Internet or Internet
protocol would fall within the purview of the act?
MS EMBREE: I think it depends on the service that is being provided.
THE CHAIRPERSON: I said who did provide basic telecommunication service.
MS EMBREE: Using IP protocol?
THE CHAIRPERSON: Using IP protocol.
MS EMBREE: If it fell within the definition of a basic service, then arguably
that service provider would be subject to the obligation to contribute to the
THE CHAIRPERSON: Thank you.
Just on one other point. You have made a point this morning and just now in
the discussion with Commissioner Langford the issue about this being an explicit
charge on the consumer's bill. I don't recall whether you were here yesterday
when the Coalition of Consumer Groups were here, but they were quite clear in
that they did not support this charge explicitly showing up on the consumer's
In light of that, I am curious to know what your comments might be.
MS EMBREE: The problem for Internet service providers, to the extent that
they have services or offer services that are caught by the definition of a
telecommunications service provider, to the extent that their services are
caught or to the extent that they are subject to the contribution obligation,
the entity that levies contribution charges on the Internet provider, if it is
given the discretion as to how it wants to levy the charge and how it allocates
its own contribution burden, what we are concerned with is that the Internet
provider is going to be faced with a disproportionate amount of that burden.
To give you a practical example, under the revenue-based mechanism, if it is
not explicit on a customer bill and it is left up to, say, an ILEC as to how it
chooses to recover the contribution burden that is imposed on it, it may choose
to, say, recover the burden from residential telephone service subscribers and,
say, Internet providers. The reason why is because those kinds of subscribers
are demand inelastic. In other words, they don't really have an alternative to
the services that they subscribe to -- residential telephone services and
essential service. Access services, like dial-up lines for Internet providers,
are essential facilities.
So, ILEC has basically an incentive to recover a disproportionate amount of
the contribution burden from those types of services. That is why we would
prefer, if there is going to be a new mechanism, that it be a specific amount
that is explicit on a customer bill.
THE CHAIRPERSON: Thank you.
Do you have a question, Commissioner Cram? Are you asking me the
COMMISSIONER CRAM: I am just asking if I can ask.
MR. BRAZEAU: Can we edit the answer?
COMMISSIONER CRAM: What I have heard is you want them to be explicit as to
how these monies are recovered.
The question is: Why need it be explicit on the bill? ARC yesterday were
talking about the fact that a consumer doesn't have the choice of changing their
behaviour if it is SLC and if it on their bill. They can't say, well, I'll pick
another service that doesn't have an SLC or I'll use it less and I'll have a
I understand your question about being explicit about recovery. What I don't
understand is why it should then be explicit on the bill. To me, that was the
issue that I didn't think you had followed.
MR. BRAZEAU: From our perspective, we thought that was the best check and
balance to address the issues which Ms Embree indicated. If the Commission is of
the view that it can ensure that inequities don't take place as to how the ILECs
treat with the Internet providers, then we are certainly more than receptive to
an alternate mechanism.
THE CHAIRPERSON: Thank you very much, Ms Embree and Mr. Brazeau.
The next party, then, is the Canadian Cable Television Association.
Good morning, Ms Yale.
ARGUMENT / PLAIDOIRIE
MS YALE: Good morning, Commissioners. My name is Janet Yale and I am
President and CEO of the Canadian Cable Television Association. With me today is
Michael Hennessy, CCTA's Senior Vice-President, Policy and Planning, and Suzanne
Blackwell, CCTA's Vice-President, Economic Research.
We appreciate this opportunity to appear before the Commission to discuss
updating the contribution regime in light of the dramatic changes in technology
and market conditions. Some of our member companies, as you will no doubt be
aware, are also parties to this proceeding and we will be providing you with
detailed commentary from their individual company perspectives.
We have three key points that we want to address today: First, the overall
subsidy requirement remains too large and should be reduced to more efficient
levels; second, contribution can continue to be substantially reduced without
jeopardizing affordability; and, third, the size of the subsidy will threaten
the viability of competition until the subsidy requirement is substantially
In our view, changes to the current contribution mechanism should not be
implemented until there have been changes to reduce the economic distortions
caused by the subsidy regime. While these economic distortions are affected by
the contribution collection mechanism, an over-arching determinant of the
economic costs of a subsidy regime is the magnitude of the subsidy itself.
It's for this reason that subsidies should be capped at the level which is
just sufficient to satisfy the objective of the subsidy regime and no more. We
submit that the current amount of subsidy collected exceeds what is actually
required to ensure universality of access.
Subsidy flows of the size of the current contribution requirement will
continue to threaten the viability of competition in telecommunications market
irrespective of the mechanism that is used to collect contribution until the
subsidy requirement is significantly reduced. In our view, a first and vital
step in the reform of the contribution mechanism is the implementation of steps
to reduce the contribution requirement as much as possible without compromising
universality of access.
Without these reductions, alternative network suppliers like wireless
carriers and competitive local exchange carriers that are investing in expanding
infrastructure and advanced networks, could be placed at a competitive
disadvantage without any clear public benefits.
Ideally, the contribution requirement should be capped at an amount that is
sufficient to ensure affordability of access and subsidy payments should be
directed as closely as possible to consumers who would not otherwise be able to
afford cost-based rates. This, in turn, requires that the contribution
requirement be calculated by reference to the maximum affordable rate. While the
definition of that rate is not clear-cut, this rate is at least as high as the
maximum rate charged for local service in Canada.
Of course, as long as some level of contribution remains, a contribution
collection mechanism will continue to be required. CCTA believes that any reform
of the contribution collection mechanism must avoid extending contribution
obligations and the distortions they create to alternative providers of new
telecom services, most particularly, from our perspective, to cable-based
Internet services. Our view is premised on the fundamental principle that
changes in the contribution collection mechanism must unambiguously improve the
competitive efficiency of telecommunications markets.
The application of contribution charges to cable-based Internet services
would effectively require these services to subsidize the costs of the local
loop on which competing PSTN-based Internet services depend, a result that is
both unjust and fundamentally at odds with the promotion of a sustainable
competitive marketplace. Competing dial-up and DSL-based services already are
beneficiaries of the subsidy to PSTN-based access services which lower the price
for telephone access lines below costs.
Cable companies, by contrast, have undertaken the investments necessary to
upgrade their networks to support Internet services at considerable risk and
without access to subsidies. A requirement to fund subsidies to the telephone
facilities used by our competitors flies in the face of competitive market
principles and would discourage further infrastructure investments, contrary to
the Commission's policy of promoting facilities-based competition and Industry
Canada's connectedness agenda.
CCTA also notes that stand-alone cable Internet services do not benefit from
the universality of access provided by interconnection to the PSTN and these
services do not qualify as basic telecommunications services under the
jurisdiction of the Telecommunications Act. Therefore, these services should
neither qualify for subsidies, nor be required to contribute to the extension or
maintenance of universal access.
I will now expand on each of the three key points. First, the current size of
subsidy requirement threatens sustainable competition. A fundamental truism of
economics is that the introduction of any subsidy into the marketplace causes
distortions. While the type of contribution collection mechanism used affects
these economic distortions, the size of the subsidy is a major factor in
determining their magnitude and impact.
That's why subsidies are generally used only when achieving a crucial public
benefit is not possible through the normal play of market forces. It is also the
reason why economic theory holds that subsidies should be capped at the minimum
level needed to satisfy the public benefit objective.
In the case of the Commission's current contribution regime, the public
benefit sought was summed up well in Telecom Decision 97-8, which states that
the subsidy is intended, and I quote, "to ensure that residence rates in high
cost areas continue to permit universality of access." That is an objective we
Where we have serious concerns is the size of the contribution requirement.
This is a concern the Commission has also expressed in a number of decisions and
in fact regulatory reforms over the past five years have substantially reduced
the contribution requirement. Nevertheless, the total amount of contribution
still sits at $900 million a year.
A subsidy this large exceeds the minimum amount actually needed to ensure
residence rates in high-cost areas permit universality of access. At this
inflated level, the subsidy threatens the viability of competition in
telecommunications markets irrespective of the mechanism used and it causes
distortions by increasing barriers to competition through higher costs and fewer
opportunities for innovation.
That's why CCTA believes the first and vital step in reforming the
contribution mechanism is reducing the contribution requirement as much as
possible, again without threatening universal access. Unless substantial
reductions are realized, alternative network suppliers such as wireless carriers
and CLECs that are investing in extending infrastructure and advanced networks
are likely to be placed at a competitive disadvantage without any clear public
benefits arising from this income transfer.
From our perspective and in line with sound economic practice, the subsidy
requirement should be capped at the minimum amount needed to ensure
affordability of access. In theory, the subsidies also should be targeted to
specific persons unable to afford cost-based rates and the subsidy should
reflect the difference between the amount that each individual could afford to
pay and the cost-based rate.
Of course, this type of income-based approach is outside the Commission's
mandate. That being the case, the contribution requirement should be calculated
based on the maximum affordable rate being charged in Canada.
Information filed on behalf of the major incumbent telephone companies show
that for 1999 rates charged ranged from $13.75 in Churchill to $25.00 in Halifax
and Canso, and $26.33 in Whitehorse, as well as in Snare Lake in the Northwest
Territories. Common sense tells us that if a rate of $25.00 is affordable in
Nova Scotia, it must similarly be affordable in the rest of the country.
Indeed, in some suburban communities with large local calling areas, the
rates are already higher. For example, there are suburban areas in B.C. and
Alberta where consumers pay more than $27.00 a month, while a recently approved
rate increase means subscribers in Val d'Or will be paying more than $30.00 a
Putting aside markets where rate differentials can be justified based on
quality of service differentials, a number of conclusions can be reached. First,
local rates have not been established solely with affordability in mind. If that
were the case, rates would have been rationalized to ensure that lower-income
households, wherever they happen to be located across this country, would pay
similar rates to receive a similar level of access.
Second, rates at or above the $25.00 a month range have proven affordable,
even though rates in many areas remain lower. This means that the subsidy being
collected is in excess, in some instances are in excess, of what is required to
Third, telephone company rates could be further rationalized, thereby
minimizing or avoiding altogether the need for non-dominant facilities-based
carriers to subsidize the dominant incumbent local exchange carriers. In a
competitive marketplace, it makes no sense to require non-dominant
facilities-based providers of local services who are building their own networks
to subsidize primarily the local services of the dominant service provider. This
is particularly true when the amount of subsidy collected remains higher than
what is needed to keep local rates affordable.
The point we would stress here is simply this. The first step is to reduce
the contribution requirement to the minimum level required to ensure
universality of access in high cost areas based on the actual difference between
the maximum affordable rate and the cost of providing local service.
The challenge then is to decide how best to bring the subsidy into line with
MR. HENNESSY: So now if we can look at options to reducing the contribution
One of the problems inherent in the current method of calculating
contribution is that it overstates the subsidy requirement wherever the rates
charged by the telephone companies are below the maximum affordable rate. It
also serves as a disincentive for reducing costs since contribution-based and
embedded costs guarantees the telephone companies will remain whole.
That being said, there are approaches that could be taken to lowering the
subsidy which would still leave the telephone companies whole while also
minimizing or avoiding the extension of subsidies to local competitors.
These include rate restructuring and rate group compression, which we believe
should be used to bring rates up toward the highest rate in effect in
As noted earlier, rates from residential local service range from below $15
to over $30 per month.
As to whether such an approach would put universal access at risk, we would
point out that local service penetration has continued to remain high across the
country; at least 97% in all provinces, even where the highest rates are in
place or rate increases have been implemented. This suggests that further
consolidation in residential rates would not undermine affordability
In addition to rate restructuring and rate group compression, the
contribution requirement could be further reduced through the inclusion of
contribution in the price cap regime. Under this approach, the telephone
companies would be permitted to use reductions in contribution in order to
offset their price cap obligations. This would reduce the contribution
requirement without requiring increases in residential local rates. Again,
affordability of access would not be compromised in any way.
This approach also has the added benefit of treating contribution as the
amount of additional revenue that is needed to cover the cost of providing
residential local service and allows for contribution revenues to decrease in
line with any productivity improvements or reductions in the costs of providing
Allowing contribution reductions in the price cap regime would also have the
added benefit of slowing pressure under the current regime to reduce local
business rates. Business rates would no longer be forced below market-based
prices in order to absorb the entire amount of the productivity adjustment.
This current situation has had the unintended effect of removing many of the
market opportunities for new entrants. Imposing contribution on new local
service providers without reducing the overall subsidy would only further limit
their ability to compete.
Our third point is that contribution should not extend to new Telecom
services. The CCTA strongly believes that in reaching its determination the
Commission should adopt the fundamental principle that any changes must
unambiguously improve the competitive efficiency of telecommunications markets.
This requires that changes in the contribution collection mechanism must not
result in extending contribution obligations to new telecommunications services.
Specifically, this means that new services, such as Internet services, provided
over stand-alone cable company networks should be excluded from the contribution
A requirement for cable companies to fund subsidies to the telephony
facilities used by their competitors flies in the face of competitive market
principles and would penalize cable shareholders for their investment in
stand-alone infrastructure. It would be contrary to the Commission's policy of
promoting facilities-based competition and Industry Canada's connectedness
agenda to implement a contribution regime that discourages rather than rewards
investments in facilities.
Investments by cable companies to upgrade their networks to support the
provision of Internet services have been undertaken at considerable cost and
risk to cable companies and their shareholders and have already contributed to
important social policy objectives by connecting more than half a million
Canadians to the Internet and extending high speed access services to small
communities across Canada.
The contribution regime already confers an important competitive advantage on
PSTN-based Internet services. Dial-up and DSL-based Internet services already
benefit from the subsidies available to the local exchange telephony service
provider because contribution provides a subsidy for the local loop portion of
the telephone company's networks, the same networks that are used to deliver
dial-up and DSL-based Internet services.
The investments by cable companies, on the other hand, have not been nor are
they expected to be supported by mandated subsidies collected for the purposes
of providing basic telecommunications services even though cable companies are
extending their own facilities across Canada.
The extension of contribution obligations to cable-based Internet services
will compound the competitive disadvantage faced by cable-based Internet
services by requiring these services to subsidize the infrastructure used by
In effect, cable-based services would be doubly disadvantaged: first, by
having to compete with services that benefit from the contribution subsidy; and
second, by then having to contribute to that subsidy. This result would not only
be unjust, it is fundamentally at odds with public policy goals of promoting
sustainable competition and investment in competing telecommunications
The increase in costs in reduced competitiveness of cable-based Internet
services would reduce the returns generated by cable network upgrades and
discourage further investments in these facilities.
In CCTA's view, services, such as stand-alone cable-based Internet offerings
that are carried on networks that do not require interconnection to the PSTN
should neither be subsidized nor be required to contribute to the extension or
maintenance of universally accessible and affordable telecommunications
services. Our investments in high speed interactive networks represents our
contribution to increased accessibility and affordability. As Minister Manley
noted in his speech last week, we do not want to go back to a system that relies
more on subsidies.
CCTA notes that Call-Net's proposal for a subscriber line charge would not
assess a charge on services that do not provide access to the PSTN. We agree
with Call-Net that levying contribution on new services would be regressive and
that it might depress demand for such services.
In addition, if the CRTC were to adopt a mechanism, like a subscriber line
charge, it is important from the perspective of fairness to the end user that
the charge should apply only once. The problem with a subscriber line charger
being applied to new wireless or cable Internet services is that the consumer
could be taxed three or four times, as a LEC customer, a PCS customer and as an
Apart from the issues of fairness and economic theory, there is also the
question of whether Internet services are in fact basic telecommunications
To the best of our knowledge there are no interpretations of the term basic
telecommunications services that would encompass the Internet. It follows then
that Internet services should be neither required to contribute nor receive
subsidies. I will not go through our points on this. I think CAIP made a fairly
good argument both on the issue of trade and the issue of what constitutes basic
service, and it is in our submission.
So, while some providers of the Internet services may also qualify as
telecommunications service providers because they own telecommunications
facilities and/or offer basic telecommunications services, competitive
neutrality still demands that all Internet providers be treated equally and that
therefore none should be subject to the contribution obligations.
To sum up the cable industry's general position there are three points we
would emphasize. First, the overall subsidy requirement should be reduced to
more efficient levels.
Second, contribution can continue to be substantially reduced through a
combination of rate restructuring, rate group compression and the addition of
contribution to the price cap regime without compromising the social policy
objective of ensuring universality of access.
Finally, the viability of competition remains at risk until the size of the
subsidy is substantially reduced.
Thank you, Mr. Chair and Commissioners. This concludes our oral remarks and
we welcome any comments.
THE CHAIRPERSON: Thank you, Mr. Hennessy and Ms Yale.
COMMISSIONER MCKENDRY: Thank you, Mr. Chair.
I had a question that relates to your comments about affordable rates and, in
particular, on page 8 of your submission. In the fourth paragraph you say
"Second, rates at or above the $25 per month range have proven affordable, even
though rates in many areas remain lower". When you say "proven affordable", what
are you relying upon as your proof?
MS YALE: I guess the main proof would be that penetration levels have
remained relatively constant.
I guess the main proof would be that penetration levels have remained
COMMISSIONER McKENDRY: Have you looked at the penetration levels for
MS BLACKWELL: Our final comments do have a table of telephone penetration
rates that are aggregate. The breakdown within the local service pricing option
and filings that that relies on I do believe looks at low income.
We do not have that breakdown in our comments.
COMMISSIONER McKENDRY: So you don't know whether or not those rates are
affordable for low-income Canadians on the assumption that you are using
penetration rates as a measure of affordability?
MS YALE: I guess the fact is that local rates haven't been moving in any kind
of direction. What we are talking about is whether or not if a rate of $30 is
affordable for certain low-income consumers, why isn't it affordable for other
That is the simple we are making is that there are some low-income households
that are paying rates at the $30 level. The point is simply that if they are
able to do that, then there is no reason why rates can't be moved to that level
for all households. That is the first point.
The second point that I would emphasize is that we are not saying that there
aren't people for whom rate increases would be a hardship, and we are talking
about a general direction around which rates should go. We recognize that above
the level at which rates are, particularly in high-cost areas, that it would not
be appropriate to increase rates that high.
We are not saying that rates should go up to the level of costs in all cases
is the point that I would emphasize.
MR. HENNESSY: I think our point is that what we said is that rates should
rise towards the highest levels that the Commission itself has deemed to be
affordable because it is the Commission that set those rates.
COMMISSIONER McKENDRY: Are you saying that because some low-income households
are paying $30 a month, they find that affordable?
MR. HENNESSY: I am saying that the Commission deemed the rates to be
affordable. I assume the Commission sets its rates to be affordable. If the
low-income customer is taking the service, then it is as affordable as many of
the other services that it is taking.
COMMISSIONER McKENDRY: Thanks.
THE CHAIRPERSON: Commission Cram.
COMMISSIONER CRAM: I did have a question.
I wanted to talk about page 13 of your submission, at the bottom, where you
talk about the double disadvantage of having to compete with services that
benefit from the subsidy and having to contribute to that subsidy.
How is that different from Sprint today?
MR. HENNESSY: I think the main difference is that Sprint and the other IXCs,
when they accepted the obligation to contribute when they entered the market,
were not contributing to the telephone company's long distance service. They
were contributing to the telephone company's local service, which at that time
was a monopoly service.
What we are suggesting is that if you make new entrants into the local market
contribute to what was and still remains, to all intents and purposes, a
monopoly service, that that puts them at a disadvantage because you are allowing
the dominant supplier to keep its prices below cost while forcing the new
entrants into that very same market to make a contribution to the dominant
I think there is a difference between the first regime and the second.
COMMISSIONER CRAM: I wanted to talk also about page 12 at the bottom, where
you talked about the risk that cable company shareholders had undertaken.
You agree with me that at least in the last decade, the Commission has pretty
well guaranteed a rate of return for cable companies in terms of their rate of
return. So there is not that much risk in terms of infrastructure?
MS YALE: We can have, I suppose, a debate on the Commission's regulatory
regime for cable services, but we are not talking about cable television
services. We are talking about the high-speed Internet market.
COMMISSIONER CRAM: So, a different infrastructure when you are referring to
the risk here?
MS YALE: We are talking about the investments in infrastructure upgrades that
were necessary to undertake and get into a completely new market, which is the
high-speed Internet market.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Thank you, Commissioner Cram.
Just on the issue that Commissioner McKendry was raising with you and going
back to the top of page 7 of your oral presentation this morning, you refer in
the second paragraph:
"In theory, the subsidies should also be targeted to the specific persons who
are unable to afford cost-based
I guess you could accept that, regardless of whether the rate is $13.75 in
Churchill or $25 in Halifax or $31 in parts of Télébec territory. There may well
be some people in those areas who would not be able to afford that price, as I
say, whether it's $13 or $31.
Are you suggesting that this same contribution scheme should fund those who
would be unable to afford the rate, whatever it is, as well as provide this
rural subsidy, if you will, essentially to Bands C and D and whatever other
bands we come up with in the rebanding exercise as well?
MS YALE: No, we are not suggesting that. Our point is simply that we
recognize that for some people, whatever the rate of telephone service is, it
may be a hardship. What the Commission has done is made a series of decisions
about what level of rates is affordable and appropriate for certain sets of
customers. We are saying if it is appropriate for those people in those
communities, then as we start to look at a new regime, why is it not that that
rate is affordable for people in similar situations in other communities.
THE CHAIRPERSON: I guess it was the words "subsidies should also be targeted
to specific persons who are unable to afford."
MS YALE: I think there we are getting at more the idea that we are accepting
the idea that it may be longer be appropriate to think about having rates that
are kept below cost for people in general, and that there may be some isolated
cases where the Commission may decide that it is appropriate to have subsidies
that are targeted at a more narrow subset.
These are obviously very difficult questions in terms of balancing competing
objectives, if you will, between interests and ensuring affordability and the
cost, if you will, of those subsidy schemes that exist today in terms of the
impact on the various markets. I guess our simple point is that the costs of the
schemes as they currently exist are starting to substantially outweigh the
benefits. The idea of having rates kept low for the ordinary consumer doesn't
really make sense any more.
MR. HENNESSY: Just a point on that. I think clearly there are Canadians who
can't afford telephone service at rates that are in existence today.
The optimal system, from a subsidy perspective, would be one that targeted
people that could not afford service rather than communities as defined by some
Phase 2 cost band because affordability really, at the end of the day, should be
about people, not places where people live.
THE CHAIRPERSON: Switching topics, do I take it your position is essentially
the same as the Rogers Wireless one: Shrink the size of the subsidy requirement,
continue to pay for it the way we have been, bring the contribution within the
price cap regime, allow the productivity offset to bring that down over
MS YALE: I would say essentially that is correct. On the specific point of
the mechanism piece, I think our view is that any mechanism you can come up with
has advantages and disadvantages. We have one, for whatever disadvantages it may
have, that is known and works.
Our first priority is getting it down to a level where it may be possible for
some companies, for some telephone companies, at least, to eliminate it all
together, in which case the mechanism becomes much less important.
THE CHAIRPERSON: So, putting that together, then, your proposal would be
MS. YALE: You mean as opposed to a national regime?
THE CHAIRPERSON: If it was on an individual company basis.
MS. YALE: Yes.
THE CHAIRPERSON: Okay. Those are our questions. Thank you very much.
So the next party and the last one before lunch then will be CWTA.
Mr. Barnes, Mr. Farns.
ARGUMENT / PLAIDOIRIE
MR. BARNES: Good morning, Mr. Chairman, Commissioners.
My name is Peter Barnes, President and Chief Executive Officer of the
Canadian Wireless Telecommunications Association and with me today is David
Farns who is the Vice-President of Regulatory Affairs with the Association.
Let me begin by thanking you for the opportunity to present our views and our
submission in regards to the review of the contribution collection mechanism and
We represent the Canadian wireless industry on wireless issues, developments
and trends in Canada. We represent cellular, PCS, paging, fixed broadband
wireless, mobile radio and mobile satellite carriers as well as companies that
develop and produce products and services for the industry. Our members offer an
array of productivity-enabling services to Canadians.
Wireless communications is, in our view -- and I hope in your view -- an
integral component of the new economy delivering real-time information anywhere,
anytime. More and more Canadians are choosing wireless phones as a replacement
to traditional telephone service. More than one in five or 7.2 million Canadians
use mobile phones in their everyday lives. Canadians enjoy wireless Internet
access and basic telecom services today. Other yet-to- be-created applications
will be accessible through wireless devices in the near future. This
wireless revolution will transform how we will work and how we will play in the
years to come.
I expect and understand that you are all aware of Minister Manley's
announcement of June 28th dealing with a number of appeals of CRTC decisions.
One of his statements was a clear message against any return to monopolies. I
want to underline the competitive importance of wireless services in the local
Little wireline local competition exists today and wireless has demonstrated
its ability to offer customers a competitive local alternative. Accordingly, our
comments today should be considered not only as they relate to today's wireless
market, but indeed as they relate to an essential component of the local
competition goal which I know we all share.
L'industrie offre déjà aux Canadiens le commerce mobile en fournissant un
accès sécuritaire à Internet et continuera d'accroître les possibilités avec
l'introduction de réseaux et services de troisième génération.
Cependant, le déploiement des solutions de communications sans fil ne se fait
pas aussi rapidement que nous le souhaiterions. L'ACTS croit qu'il y a un nombre
de politiques et de règlements qui viennent encombrer l'industrie des
télécommunications sans fil. Ceux-ci nuisent à la capacité de développer et de
déployer des services sans fil novateurs pour brancher les Canadiens.
The licensing regime of Industry Canada determines the fees paid by wireless
carriers for the use of the radio spectrum. The CRTC already requires mobile
phone operators to pay contribution on their long distance traffic and, in this
proceeding, is examining whether more operators should be required to pay and
what the magnitude of the charges will be going forward.
The CWTA estimates that in 1999, the wireless industry's contribution bill
grew to over $14 million. In the same year, the publicly-traded cellular/PCS
carriers lost nearly $1 billion. Accordingly, we have some suggestions as to how
the current regime should be modified.
The Association recognizes the difficult challenge faced by the CRTC in
balancing social objectives against the financial burden placed on carriers
paying for social programs. However, the CWTA is of the view that such burdens
serve as a tax that limits the development and deployment of new and innovative
networks and services which, in turn, limits the technological development and
roll-out of new services which, in turn, affects the market's ability to provide
access. Moreover, subsidies like contribution are extremely difficult to
administer, encourage regulatory gamesmanship and create market distortions.
The CWTA believes that the telecommunications industry, the Commission and
Canadians in general should recognize that the era in which the regulator could
maintain a subsidy mechanism like contribution has passed. In this regard, the
CWTA strongly recommends that the Commission should engage a plan that would
first identify the absolute minimum real amount of contribution that is required
to maintain affordable access rates in rural and remote areas of the
Immediately thereafter, the Commission, in our view, should initiate steps to
move rates towards costs, i.e. rebalance rates, such that there no longer remain
geographic areas where access rates are below the affordability threshold and
attracting a contribution subsidy.
Once the rates are more aligned with costs and the contribution subsidy
minimized, the contribution mechanism should be abandoned in favour of a program
administered by a federal department -- most likely Industry Canada -- and
funded from the Consolidated Revenue Fund, a fund to which the wireless industry
contributed last year approximately $150 million in the form of licence fees
In this regard, it is worth noting that programs forming the Government of
Canada's Connecting Canadians initiative, such as the Community Access Program,
are already funded to a large extent from allocations in the federal budget.
These allocations are derived from the CRF. The CAP is a government initiative,
administered by Industry Canada which aims to provide Canadians with affordable
public access to the Internet and the skill they need to use it effectively. The
total program allocation is $100 million over three years, ending in
Requiring wireless carriers to pay contribution reduces capital otherwise
available to extend the delivery of new and innovative services to more
Canadians, especially those living in rural and remote parts of the country.
Wireless carriers are continually challenged to expand their networks to
Increased contribution payments would make it even more difficult for
wireless carriers to finance these network expansions. In this regard, the CWTA
would emphasize that Industry Canada already requires wireless carriers to pay
annual spectrum licence fees, as I mentioned above, when they expand their
networks to new areas -- and more about this later. These licence fees already
create a disincentive to build facilities in rural areas. Increasing the
contribution burden would only compound the disincentives.
La contribution a été imposée à l'industrie des communications interurbaines
dès l'ouverture à la concurrence. Les études de prix de revient du CRTC ont
déterminé que les revenus des services interurbains étaient supérieurs aux coûts
tandis que les revenus des services de communications locaux étaient inférieurs
aux coûts. Par conséquent, la contribution a été intégrée aux tarifs historiques
des communications interurbaines et la subvention permettait de maintenir au
plus bas les tarifs locaux. A la lumière de cette subvention historique, il
convenait tout à fait que les télécommunicateurs interurbains aient été tenus de
verser le paiement de contribution imposé par le CRTC au moment d'introduire la
concurrence dans l'interurbain.
Or, les tarifs historiques de communications interurbaines contenaient une
subvention du service local, mais aucune subvention du genre n'a été intégrée
aux tarifs du sans fil.
Les services de téléphonie cellulaire ou SCP continuent de perdre de l'argent
chaque année et il est inquiétant pour l'industrie que le CRTC songe maintenant
à étendre le régime de contribution aux télécommunicateurs sans fil et leur
demander de payer encore davantage.
L'imposition d'une contribution importante à l'industrie serait très
perturbatrice. La contribution envisagée pourrait avoir pour effet de limiter
l'utilisation éventuelle de la technologie du sans fil pour améliorer ou fournir
l'accès aux Canadiens.
As I indicated earlier, wireless carriers are subject to the regulatory
oversight of both the CRTC and Industry Canada. This dual regulation of the
wireless industry can be contrasted against the regulation of the wireline
industry that is predominantly regulated by the CRTC and only, in our view,
peripherally impacted by some of Industry Canada's broad telecom policy
Moreover, both of these regulatory agencies administer programs that have a
very real impact on the bottom lines of wireless carriers. The licensing regime
of INdustry Canada determines the fees paid by wireless carriers for the use of
the radio spectrum. Industry Canada, as you heard this morning, also typically
imposes conditions such as roll-out requirements, on licensees. The CRTC's
contribution regime is another example.
Under the existing CRTC contribution regime, cellular/PCS carriers pay
contribution on their long distance traffic via a per circuit surcharge.
However, some proposals being considered in this proceeding would require
cellular/PCS carriers to pay contribution on both their local and long distance
traffic. The potential impact of these proposals on the industry is well over
$100 million annually. In fact, with a contribution subsidy of nearly $700
million -- and I heard $900 million a while ago -- and wireless industry
revenues approaching 24 per cent of total telecom industry revenues, it is quite
conceivable that under some scenarios the wireless industry share of the
contribution requirement would grow to well over $100 million from the some $14
million paid today.
Moreover, there are other proposals being considered that would require
paging companies and other wireless operators to also pay contribution, which
would further hinder the ability to develop and deploy innovative wireless
services to connect Canadians.
As noted above, wireless carriers can be differentiated from their wire line
counterparts, in that they are regulated by both the CRTC and Industry Canada.
The latter department imposes conditions of licence on wireless carriers.
Some of these conditions of licence require wireless carriers to provide
service in areas of the country that do not generate sufficient revenue to cover
the capital and operational costs of providing service to those areas. This is a
fact that is not reflected, in our view, in the CRTC contribution regime.
The definitions of high-cost areas used by the Commission refer only to the
wire line telephone company serving areas and their costs, not the wireless
carrier's serving areas and costs. In this regard, wireless carriers are already
providing services to some fairly rural regions of the country. We should not be
required, in addition, to subsidize wire line service providers who serve the
By way of example, a PCS carrier with a 30 MHz licence to serve Cape Breton
would be required to pay $27,000 in licence fees annually for every PCS site it
builds. This fee is required in advance of turning the site on and is payable
every year that the site remains in operation.
For an area such as Cape Breton, a PCS carrier would most likely require four
sites to provide adequate coverage -- $100,000 a year -- to serve Cape Breton
and satisfy the conditions of licence. Obviously, traffic generated in Cape
Breton would barely cover the annual licence fees, not to mention the capital
and operational costs to serve the area. The reality of the situation is that
subscribers in more urban areas and wireless carrier shareholders are implicitly
subsidizing the operation in the rural areas.
Pourquoi ces mêmes abonnés et ces même actionnaires devraient-ils appuyer la
subvention par contribution? De toute évidence, ils ne devraient pas. Les droits
de licence comportent déjà une contre-incitation inhérente à construire des
installations dans des régions rurales et éloignées du pays. Le fardeau accru de
la contribution accentue davantage la contre-incitation en retirant le capital
qui pourrait autrement servir à étendre des réseaux à un plus grand nombre de
régions du pays. En outre, dans la mesure ou les prix de vente plus élevés
étouffent la croissance du service, une exigence de contribution accrue imposée
aux entreprises du sans fil viendrait aussi sans doute ralentir la pénétration
du marché par le sans fil même dans les régions ou le rayonnement du sans fil
est bien établi.
You have, like I, probably read the estimates of the auction fees that will
be generated this fall when 40 MHz of PCS spectrum is up for bidding. Estimates
range as high as $5 billion. These amounts would be paid, in lieu of licence
fees, to Industry Canada within 30 days of the auctions and before any capital
construction costs are engaged. Accordingly, I think you can understand our
concern with the suggestions that the wireless industry should pay out yet
another $100 million per year.
Wireless carriers are continuously challenged to expand their networks to
unserved areas. Increased contribution payments would make it even more
difficult for wireless carriers to finance these network expansions.
Paradoxically, then, payments of contribution by wireless carriers could
diminish wireless service in rural and remote areas.
By way of another example, every $20 million in contribution paid by wireless
carriers means they can build 50 fewer cell sites, which reduces coverage by
10,000 square kilometres. In our view, it is inappropriate to impose
contribution on wireless carriers in order to extend telephone services because
it causes a reduction in the coverage of wireless networks.
The ability of wireless carriers to extend their services to remote areas is
not only important to the carriers, it is a condition of their licences. The
contribution burden placed on wireless carriers must be minimized and should be
determined with due recognition of the licence fees paid by wireless carriers to
serve these areas.
In this regard, the Association submits that the contribution charges to be
paid by wireless carriers, if any, should only apply to basic long distance
services, as they do today. The Association submits that the Commission, if it
is insistent on placing a greater contribution burden on wireless carriers, must
take every step to ensure that the wireless industry's ability to extend
services throughout Canada is not unduly impeded.
We believe that ensuring that the subsidy burden is kept to its absolute
minimum would go a long way toward achieve this result. Moreover, explicitly
identifying the contribution charge on customer bills would help make the access
goal more explicit.
In conclusion, to further increase the financial obligations of wireless
carriers would be highly inappropriate in light of the significant level of fees
and obligations that are already imposed on an industry that has yet to turn a
profit. Moreover, such an increased financial burden would have the very real
and serious potential to damage the ability of the wireless industry to further
Canada's connectedness and e-commerce objectives and retard the growth in
wireless penetration overall.
Les politiques actuelles en matière de contribution devraient être examinées
en fonction de tous les frais payés par les télécommunicateurs sans fil,
notamment les droits de licence, les taux de contribution ainsi que les taxes et
les impôts. Le régime de perception de la contribution doit être réexaminé dans
le cadre d'une approche holistique en vue de créer un contexte financier
convenable qui suscitera le développement technologique et la mise en oeuvre de
services qui favoriseront l'accès sans fil aux services de télécommunications et
à Internet dans toutes les régions du pays.
The CWTA believes that the contribution regime should eventually be abolished
in favour of a specific access program administered by a federal department and
funded from the consolidated revenue fund, to the extent that subsidies are
still required. In order to facilitate this migration, the CWTA suggests that
the first step for the Commission would be to identify the minimum amount of
subsidy actually required in order to achieve Canada's local access objectives.
To the extent that Canadians continue to require financial assistance in order
to obtain access to telecom services, including access to the Internet, the
industry believes that this objective should be explicitly identified in and
funded from the federal budgetary process.
Should, however, the Commission decide to increase the contribution burden on
the wireless industry, every step should be taken, in our view, to ensure that
the industry's ability to extend services throughout Canada is not unduly
impeded. It would be inappropriate for the contribution burden to limit the
availability of innovative wireless services to connect Canadians. Ensuring that
the subsidy burden is kept to its absolute minimum by allowing local service
rates to move towards costs would be a meaningful step in this direction.
Finally, identifying the contribution charge on customer bills would also
help make the access goal more explicit.
Thank you. We would be happy to answer any questions. Merci.
THE CHAIRPERSON: Thank you, Mr. Barnes.
COMMISSIONER CRAM: This is a statistical one, Mr. Barnes.
I have Microcell's comments, and at page 3 they talk about the wireless
carriers accounting for 15 per cent of industry revenues, which I am assuming is
telecom industry, and you say 24 per cent at page 4 of what you said?
MR. BARNES: Right.
COMMISSIONER CRAM: Is there some way I can reconcile those two numbers, Mr.
MR. FARNES: I don't know what source Microcell used, but we used Statistics
Canada's most recent quarterly publication. That is a Statistics Canada
COMMISSIONER CRAM: Thank you.
MR. BARNES: As Microcell is one of our members, I am sure they are right, but
they just have a different base.
COMMISSIONER CRAM: I am sure you are both right, yes.
THE CHAIRPERSON: Commissioner Langford.
COMMISSIONER LANGFORD: Thank you for that presentation, Mr. Barnes.
There is some confusion in my mind, having listened to it, with regard to
based on the assumption that some subsidies are going to be around for a while,
who should get it, and you referred at one point to rural and remote areas, but
then at other points in your presentation you talked about people with
I am just not clear where you think this should be targeted, assuming it
MR. BARNES: Certainly to the extent that subsidies are appropriate, the
targeting, in our view, should be aimed at an affordability component.
I think it is clear that our delivery of services to rural and remote areas
is more expensive, and because services are inherently more expensive the
affordability factor might be a bit more difficult to deal with. But certainly
from a conceptual and policy perspective, affordability at an individual level
is the target.
COMMISSIONER LANGFORD: This may be an incredibly difficult formula to come up
with, and perhaps impossible, but the urban poor are not ruled out by your
MR. BARNES: No, they are not.
COMMISSIONER LANGFORD: Just to move then to another area of your
presentation. You talk about extending competitive services and what a benefit
that is. One of the problems I see with that, and I do not disagree with it in
theory, obviously, but I see that in a sense your services, at least at this
point, are a duplicate of services, if I can put it that way, so that those who
are connected to the traditional Bell area or Telus area are also connected
through your new wireless services. In a sense, it is arguable, I would suggest,
that those who are not connected are doubly unconnected, because if they cannot
afford the basic phone on the kitchen wall they are certainly not going to
duplicate that by having one in their back pocket when they walk around.
If that is the case, then I just wonder what your feeling is about how long
the unconnected will be with us, how wide that disparity will grow as you are
offering more and more services on both sides, the wireline, the wireless. Then
we get to the words of Minister Manley and they are with us in this proceeding
and in our thoughts at all times, and the government's stated desire to have as
many Canadians as possible benefit from the information revolution.
Subsidies, I know, are not anyone's favourite tool but assuming that the
government is not going to jump in, that it is going to use us, through section
46 of the act, to do the job for it, how do you suggest -- and I apologize
for this long-winded question, I guess my blood sugar levels are low or
something like this and I am having a little trouble sharpening
it -- what role do you see for your sector in recognizing that
disparity, recognizing the affordability problem and recognizing that if we
rebalance rates, to use that level of euphemism, the disparity may just get
worse? What kind of role do you see for your industry in that kind of
MR. BARNES: I will try to cover the points, Mr. Langford, but I may miss
some, so please tell me if I do.
COMMISSIONER LANGFORD: I did rattle on too long, and I apologize. But I think
you get the kind of area that I am looking at.
MR. BARNES: The first point I would like to make is that while your initial
assumption has traditionally been correct, it is rapidly changing, and that is
that wireless services are less and less duplicate of wireline services. There
are an increasing number of individuals who choose not to have a wireline phone
and just have a wireless phone.
We do a survey of customers every year, and I do not remember the exact
percentages, whereas the number was something like 4% I believe this year at
present of people who have substituted a wireless for a wireline phone. When we
asked the question: Do you think you will in the future, the number was
something over 10% or 11%, if the numbers are in that range. I think that is
more and more the case.
In addition, I think that we should not forget that wireless phones are an
instrument of affordability and accessibility in the sense that, as Commissioner
Noël pointed out this morning, the price bargains that are out there for people
who can obtain service by buying a coupon for two months and the 28 cent a
minute routine that we talked about. We are seeing in the marketplace customers
who might be, I guess, to use the euphemism, credit challenged who instead of
having a wireline phone and paying a deposit and the like are choosing to go the
wireless route, paying for a phone and buying calling cards for $28 or whatever
the amount is.
So there is actually an affordability gap that is being helped by the
wireless services and the pricing competition in that market is quite vigorous
as undoubtedly you have seen.
The other point I would like to make is that to the extent that we are
dealing with subsidies over time, our sense is that we know the amounts we pay
government for licence fees and other fees for which we pay government, wind up
in the consolidated revenue fund. There are examples where government has used
other programs. I mentioned the CAP program for either affordability or
education to ensure connected Canadians. We think that is an appropriate
We think that a lot of the money that we are handing over in licence fees
could well be used for that kind of a program
THE CHAIRPERSON: Thank you very much. I think those are all our questions,
With that we will take our lunch break and we will reconvene at 2 p.m.
--- Upon recessing at 1236 / Suspension à 1236
--- Upon resuming at 2:03 p.m. / Reprise à 2:03 p.m.
THE CHAIRPERSON: Good afternoon, ladies and gentlemen.
We will return to our proceeding now. The next party to present argument is
ARGUMENT / PLAIDOIRIE
MR. GAGNON: Mr. Chairman, thank you very much. I am happy to see there are
still hard core contribution fans in the room.
First of all, Mr. Chairman, Commissioners, members of the staff, we are
pleased to address the Commission on this very important issue. My name is
Pierre Gagnon. I am Vice-President, Public and Regulatory Affairs at Vidéotron
Communications. I am accompanied today by Franz Vendendries, who is Director,
Regulatory Affairs for the Telecom Sector in our company, and Michel Messier,
who is Assistant Director on regulatory matters also.
Again, we are pleased to address the Commission on this very important issue.
We have been discussing about revising the contribution mechanism for a number
of years. We are now at the final stages of trying to cope with this very
We filed our final comments yesterday. Today we have a presentation. It is
not a lengthy written statement that we prepared. We have some point forms that
we would like to address and we would like to cover some of the aspects of our
presentation which, in our view, are central to what we are saying.
First of all, just to position Vidéotron and the diverse entities that I am
representing today, there are essentially two areas in our company which are
involved in telecom activities. The first one is Vidéotron Telecom (1998). We
will drop the 1998 for the moment. Vidéotron Telecom Limited was a CAP operation
way back when, about ten years ago. It was then authorized to operate by the
then Régie des télécommunications under the heading of Jean-Marc Demers. So,
Vidéotron Telecom started about ten years ago as a CAP business and evolved
gradually to offer long distance services. Once their local market was opened,
it was one of the first CLECs to manifest itself and operate.
Vidéotron Telecom Limited has been a CLEC as of June 1998 and has been
operating as such in that capacity for the last couple of years.
The focus of Vidéotron Telecom Limited is to be sort of a more traditional
CLEC, using switched infrastructure, a facility-based carrier, facility-based
access to the clients, and regular switching mode and interconnection with the
incumbents and other CLECs in the area.
We also have a sort of second CLEC, which is a subsidiary of the cable
company, which is called Vidéotron Limitée, Vidéotron (1998) Limitée in this
particular case. This is the CLEC that has already interconnected. The tariffs
have been filed. It has the statutes to operate. This is the CLEC that will be
providing local telephone services or the equivalent of local telephone services
for the residential market using IP protocols. So, using the coaxial network of
the cable company and providing the equivalent telephone services transparent to
the user, mainly focused on residential markets. So, using the coaxial
infrastructure network to provide local téléphonie, using IP protocol to the
Our comments today will sort of encompass the objectives and the perspective
of those two sizable operations. We really look at it from a rather broad
perspective of facility-based CLECs, as well as long distance service providers,
operating for the moment in the market of the province of Quebec.
From our perspective, the current mechanism or the current contribution
collection mechanism has to be replaced for a number of reasons. First, we have
to look at this market as a new competitive market. The mechanism, as we see it,
introduces some distortions which prevent newcomers in the market to propose to
the marketplace some new and innovative services in terms of bundling and
packaging, to work a little bit with the paradigm of local versus long distance
We had the ability in the 97-8 decision and the local regulatory environment
to propose our own definition of what is local, what is long distance. This
option, which is enshrined in the decision, is really difficult to apply because
of this particular constraint that a contribution regime imposes in the
decision. Also, there is a prerequisite that, independent of how you define your
local or long distance services, you still have to pay a contribution in
accordance with the ILEC definition of what is local and long distance. If we
would like to move away from the traditional definition and propose some
bundling services or some new local area services or services in local areas
which are new and innovative, we are still constrained by this particular
It also imposes some difficulties in terms of network architecture. In the
decision, as you all know, there is a requirement that you establish a point
interconnection in each and every exchange and obtain NXSs for each and every
exchange in which you operate.
This is contrary to network efficiencies which we could implement in our
networks because of the new switching capabilities that we have and the new way
of transporting telecommunications. But we still have to deploy our networks in
a configuration which really dates back to the beginning of the former century.
Because of that, there is certainly some requirements to revisit this
contribution regime to accommodate the new environment in which we operate.
It is also vulnerable, the current regime, to the new technologies. We have
seen it, as you all recall, when the Commission was faced with Internet services
and the possibilities of long distance by-pass using Internet protocol. So, we
had to craft some very complex rules as to what is voice over IP. There were
three kinds of definitions of what is voice traffic over IP and what is subject
to contribution and what is not subject to contribution.
This only shows that, as we move along with new technologies and new
infrastructures in network, where distance becomes less and less of a factor, we
will be faced with challenges. If we do not work on this regime, there will be
ample occasions of contribution by-pass or evasion, however you want to quality
it. That will introduce distortions in the marketplace. It is also pretty
complex to administer.
I will pass on to Franz, who will cover a couple of topics, and I will come
back later on to address other issues.
MR. VENDENDRIES: Thank you, Pierre.
Vidéotron is not the first company to come and tell you today that the
explicit contribution requirement should be reduced, if not eliminated all
together. As a general rule, subsidies should not exist in a competitive
All companies should charge rates that generate revenues that, taken as a
whole, recover all of their own costs from all of their own subscribers, their
In this particular case, it means ILEC should be permitted to restructure and
rebalance their rates so as to reduce or eliminate the subsidies required from
competitors. There are a number of ways that this can be done.
The Commission can either mandate specific increases to specific rates or
else can grant the ILECs the flexibility under the price cap regime to reduce
their subsidy requirement, which would let the ILECs determine how to do this in
the best way to respond to the needs of their own particular markets.
In particular, ILECs should be permitted to raise residential rates to the
lowest of either a level that eliminates the subsidy requirement all together --
and this can be by rate band or all together -- or to the highest local rate
approved by the Commission which, by definition, we believe is an affordable
If the Commission should decide that at this time subsidies cannot be
completely eliminated, the amount of the subsidy should be limited to what is
strictly necessary, the minimum necessary to ensure affordable rates for
residential customers in high-cost areas. The subsidy should not exceed the
difference between the ILECs Phase 2 costs and the revenues collected based on
the highest local rate approved by the Commission, as I mentioned earlier.
Vidéotron also believes that contribution rates at this time should remain
based on ILEC territories. Vidéotron does not favour the creation of a single
nationwide subsidy mechanism or contribution rate.
Today, we have separate funds that are based on ILEC territories. Merging
these funds would create an inter-territory subsidization mechanism that we
believe would create disincentives for some companies to restructure and
rebalance their rates and otherwise rationalize their rate structures.
The contribution rate in Bell's territory today is the lowest in Canada
largely because Bell subscribers have experienced significant rate restructuring
and rebalancing over the last few years and to give credit to Bell Canada, also
because Bell has been reasonably successful at increasing other revenues, for
example, optional local revenues that have offset their phase three
Creating a single nationwide subsidy mechanism would increase the
contribution rate applicable in Bell's territory and reduce the rates applicable
elsewhere. This would effectively penalize Bell and Bell subscribers by
transferring the benefits of its efforts to the other ILECs and at the same
time, reduce the incentive of those other ILECs to rebalance their own rates and
find other new revenues because they know any shortfall or a portion of any
shortfall will be made up from subscribers in other territories.
However, if the Commission should decide that a national fund is more
appropriate than the ILEC territory specific funds we have today, the Commission
should create with that national fund a national contribution charge that should
be collected directly from customers through a separate line item on the
customers' bills. This would ensure that all the companies in the market compete
on the basis of their own costs because contribution would have been removed as
a consideration by consumers in their choice of a company. In a way, this would
reintroduce into the market place the incentive of ILECs to reduce and to
control their own costs.
I will pass you back now to Pierre.
MR. GAGNON: Insofar as Internet services are concerned, what we argue is that
it would be counterproductive to impose a contribution charge in a fully
competitive market, largely forborne from regulation which is, in fact, the
Internet service provider market.
Essentially, from our perspective, there is sort of a policy issue that is
behind this positioning. Our view is that there is a government policy, a
governmental objective which lies behind this reasoning to the effect that we
should promote and make every effort to effect the connectedness of the Canadian
market place on the Internet.
We have seen in the province of Quebec, for instance, some programs which are
designed to induce families to connect to the Internet. An approach where the
Internet market would impose an additional charge would sort of go contrary to
this particular objective.
In addition and, as has been mentioned by the CAIPA representatives this
morning -- we are not in total agreement with the CAIPA position, but in this
particular case I think it is appropriate -- there is some contribution
that is being paid by the companies that do provide Internet access services
mainly because they are customers of local exchange carriers, either CLECs or
You will see in a minute that our proposal is to introduce a subscriber line
charge in terms of what is the appropriate mechanism that could be left in the
case where the complete rebalancing of the rates is not accomplished.
In this particular instance, where there would be a subscriber line charge,
our view is that it should be as broad as possible in terms of definition of
what is a network access service and, therefore, the dial-up ISPs would, in
effect, contribute by subscribing to switch services from the various local
exchange carriers and, therefore, would provide a share of the contribution
through that means by using the switch telephone network. It remains that cable
companies do provide Internet access not using the switch telephone network and
not making use of that particular network.
As has been mentioned earlier by other parties, it would be counterproductive
and certainly not fair from a competitive perspective if ISPs that do provide
service not using the switch telephone network in any way, would have to
contribute to this network while, at the same time, competing against the
providers of this particular network in the market place.
In addition to that, if we would include the Internet service providers into
the regime, from our perspective, there would be some challenges from a
compliance perspective given to large numbers of ISPs, some of which are not as
educated in terms of regulatory issues than others and that would create in the
market place and, from our perspective, some severe distortions as to who would
comply with the regime and who would sort of escape from the regime just by
the mere fact of the number of ISPs out there.
From our perspective, putting everything in context, our view is that
Internet access services should remain excluded from the contribution
As I have mentioned, our proposal, first and foremost, is to work on the
contribution requirement and really tackle this issue to make sure that it is
reduced to its minimal level. Obviously, if there remains a contribution or a
requirement to be funded, our preference would be to go for a subscriber line
charge, more this than the current regime obviously for reasons that I have
explained earlier and more this particular mechanism than the charge on the
revenues or a certain percentage of revenues for various reasons.
First of all, a subscriber line charge would offer a high degree of
neutrality in the collection of the contribution charge. It is more
straightforward, less burdensome and less subject to regulatory gamesmanship
than a revenue-based mechanism.
When we look at the new revenue-based mechanism, although our preference
would be for a subscriber line charge, we would prefer a revenue-based mechanism
rather than to stick with the current regime.
But when we look at the revenue-based mechanism, there are all kinds of
issues that surface. Bundling will certainly be a challenge in and of itself. As
a provider of both cable and residential telecom services, we certainly plan to
introduce bundling offers in the market place and I think that would be one of
the great advantages of our offering to the market place and if we are faced
with trying to allocate various prices on a bundle of services -- which is
retail, for instance, at $79.95, I pick a number, don't take that for granted
necessarily -- what would be local services? What would be the cable services?
What would be the high-speed Internet portion of that when it is a bundled
This would certainly create some difficulties.
Also, as has been mentioned earlier, there will be an issue of double
taxation in the sense that some companies are essentially purchasing some
services from other telecom providers. So we would have to get into a complex
mechanism of determining what are really the revenues on which those charges
would have to be applied. That would create some difficulties.
We view this mechanism, the revenue-based mechanism, as being fairly complex
to administer, more open to regulatory gamesmanship. Essentially, when we look
at the revenue-based mechanism, obviously, the more widespread it is, the less
burdensome it will remain and then we look at the multiplicity of players that
will render, once again, the supervision and monitoring of this regime more
In both cases, both the subscriber line charge or the revenue-based
mechanism, whether it's national in terms of rate, or whether or not it is
determined on a company-specific basis, it is a pre-requisite in our view that
there be a separate line charge on the customer invoice or the customer
This is, in our view, very important. It would make the regime transparent
from a competitive perspective.
We have to realize that if we leave the regime open or if we let the
companies determine themselves if they will include it as a separate line charge
or not, while the smaller companies, companies with less deep pockets than
others, will be faced with the challenge -- and those companies are generally
the new entrants -- of determining how to treat that specific line item, we fear
that it will introduce some distortions from a competitive perspective that new
entrants will have difficulty coping with.
It should apply to network access services and all NAS equivalents to make
sure that it is widespread, that it is as minimal as possible. We mentioned in
our submission more particularly that the Commission, I guess, has the
discretion in looking at a subscriber line charge to determine whether or not it
would be appropriate to have a higher subscriber line charge for business
services versus residential services.
By saying that, I move away a bit from the concept that is behind the
subscriber line charge, which is really to try to bring the contribution
requirement or the cost of local services more in line with its costs.
Obviously, the cost of providing a regular line to a business customer versus a
residential customer could be defined as being the same, although, in order to
minimize the impacts on the residential customers, it could be determined as
appropriate by the Commission, from our perspective, that subscriber line
charges be higher.
To what extent, I don't know specifically. I would rely on the Commission to
try to determine what would be the appropriate difference between the two, but,
from our perspective, it could be appropriate to work on the subscriber line
charge in a way which minimizes the impact on residential customers.
We have heard some comments today and I just want to make a final comment on
it. From our view, a hybrid regime where we would keep the current regime for a
certain portion and implement a new regime would certainly not be a solution. We
would sort of end up with the worst of both worlds; i.e., keep the current
regime with all its faults and flaws and then add on the complexities and
difficulties of another regime.
I agree that all regimes are not perfect. There is no perfect regime,
otherwise everybody would have jumped on it, but, in our view, we have to get
rid of the current regime and replace it with a regime which is more neutral
from a competitive perspective and, from our analysis of the situation, the
subscriber line charge meets those requirements.
We will be happy to answer questions you may have on our positioning on this
THE CHAIRPERSON: Thank you, Mr. Gagnon.
CONSEILLÈRE NOËL: Monsieur Gagnon, est-ce que je peux vous poser une question
M. GAGNON: Avec plaisir.
CONSEILLÈRE NOËL: Vous dites dans le tableau que vous nous avez donné que la
contribution basée sur la contribution par minute établit des contraintes pour
le développement de produits, d'assemblage de produits interurbains et locaux
innovateurs. Et en même temps, vous nous dites aussi que ça pose des contraintes
au niveau de l'interconnexion.
Dans un scénario où la téléphonie IP serait disponible demain matin sur une
base commerciale, est-ce que votre intention serait de mettre en marché, par
exemple, un produit sur une base mensuelle qui desservirait des zones beaucoup
plus grandes et puis qui éviterait de recourir à des, en bon français, toll
switch... moi aussi, je suis bilingue... qui éviterait l'utilisation de
commutateurs qui mesurent l'utilisation? Est-ce que c'est ce que vous
M. GAGNON: Oui, en grande partie. Premièrement, il est évident... et puis je
ne révèle pas de grand secret de polichinelle parce que André Chagnon lui-même
le mentionne à toutes les fois qu'il a l'occasion de le faire... qu'on examine
la possibilité d'offrir à notre clientèle un service Québec-local, ou enfin, un
service local très étendu à la province de Québec, ce qui est un attrait dans ce
marché-là particulièrement compte tenu des spécificités linguistiques de la
province de Québec. Ce marché-là est très particulier en termes de communautés
d'intérêts et de pattern, pour employer une expression anglaise, le pattern de
trafic dans le marché francophone.
Alors il est évident que c'est un des scénarios. En fait, on examine ces
alternatives-là qui impliquent donc nécessairement que le service serait facturé
sur une base mensuelle fixe. Le fait d'avoir un coût variable à l'intérieur
d'une formule comme celle-là introduit des difficultés.
Call-Net, par exemple, l'a expérimenté, ou Sprint l'a expérimenté assez
cruellement lorsqu'ils ont commencé à introduire des plans d'interurbains flat
rate. Cette expérience-là, évidemment, nous enseigne que c'est extrêmement
délicat de jouer avec des services alors que nos coûts sont toujours assujettis
à des frais variables.
Alors il est certain que c'est une alternative qu'on examine.
Maintenant pour verser un petit peu plus dans l'aspect technique, il est
certain que de pouvoir s'interconnecter de façon la plus efficiente
possible compte tenu des nouvelles possibilités d'interconnexion, de la grande
puissance des réseaux de routeurs... mais ce n'est pas des réseaux commutés
traditionnels, on parle d'équipement de routing qui sont déployés... ces
équipements-là qui sont maintenant extrêmement puissants pourraient nous
permettre de s'interconnecter de façon beaucoup plus efficiente avec les
entreprises de téléphonie traditionnelles.
Pour le moment, bien on le fait de la façon traditionnelle. On est comme,
vous le savez, interconnecté dans plusieurs points d'interconnexion dans la
région de Montréal puisqu'on est dans une phase d'essai avec nos employés de
plusieurs usages, là, qui sont présentement en phase d'essai précédant le
On l'a fait, là, de la façon traditionnelle, mais si on avait pu éviter de
multiplier les trunks, de rationaliser le nombre de points où on aurait pu
s'interconnecter avec les compagnies de téléphone traditionnelles, bien je pense
que tous y auraient vu un avantage, tant les compagnies de téléphone
traditionnelles parce qu'elles n'ont pas, en soi, d'intérêts à multiplier les
facilités d'interconnexion lorsque ce n'est pas absolument requis, que nous, qui
n'avons pas plus cet intérêt-là même si de notre point de vue, on est quand même
moins pire que d'autres CLECs dans la mesure où on est quand même une entreprise
qui a beaucoup de réseaux dans les régions où on prévoit desservir.
Quand je le dis, je le dis aussi du point de vue plus général de l'équité
dans le marché concurrentiel tout en reconnaissant bien volontiers que notre
entreprise est quand même moins mal pris comme CLEC qui doit déployer les
infrastructures que d'autres entreprises qui ont moins d'historique de
déploiement de réseaux, par exemple dans la province de Québec, que nous.
CONSEILLÈRE NOËL: Dans la province de Québec, vous desservez combien
d'abonnés au câble à l'heure actuelle?
M. GAGNON: Nos réseaux couvrent à peu près 2,3 millions de foyers en terme de
desserte géographique. On a 1,4, 1,5 millions de clients parce que le taux de
pénétration n'est évidemment pas de 100 pour cent, mais le territoire de
desserte de Vidéotron couvre 2,3 millions de foyers.
Donc, techniquement, à partir du moment où notre offre va être graduellement
accessible dans le marché, on va être en mesure de rejoindre un potentiel de 2,3
millions de foyers.
CONSEILLÈRE NOËL: Je vous remercie, Monsieur Gagnon.
THE CHAIRPERSON: Commissioner Demers?
CONSEILLER DEMERS: Monsieur Gagnon, vous optez pour le fait que cette
contribution soit écrite sur la facture de l'abonné ou de la personne qui s'en
sert. Je me demandais si actuellement, par exemple, est-ce que vous faites des
facturations d'abonnés au service local?
M. GAGNON: Présentement non. On ne fait pas de facturation pour le service
local stricte. On fait de la facturation pour du service interurbain parce que
Vidéotron Limitée revend le service interurbain de Vidéotron Télécom, mais il y
a un certain pourcentage de clients du côté de Vidéotron Limitée qui sont
abonnés strictement au service interurbain.
Du côté de Vidéotron Télécom, oui, il y a de la facturation du service local
puisque Vidéotron Télécom, qui est le CLEC d'affaires, a une clientèle de
service local et il y a de la facturation locale et interurbaine qui est faite
CONSEILLER DEMERS: Est-ce que cette facturation, vous incluez le 9-1-1, par
exemple, sur une base particulière, les quelques sous, là, que vous devez
remettre aux municipalités?
M. GAGNON: Oui.
CONSEILLER DEMERS: Ça apparaît sur la facture des clients?
M. GAGNON: Oui.
CONSEILLER DEMERS: Donc, vous avez une certaine pratique à identifier...
M. GAGNON: Oui, définitivement.
CONSEILLER DEMERS: ...vous faites la facturation.
Mais d'un autre côté, pourquoi y tenez-vous tant à cette facturation au
détail alors que... comme mes collègues ont posé des questions aussi là-dessus
justement ce matin et hier... le fait que quelqu'un pourrait ou une entreprise
puisse décider de ne pas l'indiquer, elle, sur sa facturation?
M. GAGNON: Je pense qu'on est dans les premiers balbutiements littéralement
d'une concurrence en matière de téléphonie locale. On ne conte pas d'histoires.
On va se heurter à un concurrent qui est un concurrent extrêmement puissant.
COMMISSIONER CRAM: You were talking about affordability. It appears to me,
and I just want your comment, that the SLC, in taxation terms, is really more
regressive than a revenue-based contribution scheme in the sense that everybody
pays $1, and I am using $1. So that means that the very poor people pay $1 the
same as the millionaires, aside from myself, sitting at this table.
COMMISSIONER LANGFORD: I think you can ignore everything that comes after
this point. Obviously lunch is setting in.
COMMISSIONER CRAM: My point is the regressivity of it and that what we are
doing is that we, the Commission, may be hoisted on our own petard, because we
are saying "here we have this lovely everybody pay $1" and at the end of the day
we are faced, at the bottom income line, with affordability issues that we
ourselves have imposed in order to avoid affordability issues in a high cost
So, would we not be better to go with something more progressive, like a
MR. GAGNON: I don't envisage a revenue-based regime to be less regressive. A
revenue based would result in a certain amount for the company. We may think
that the company will absorb it or the shareholders of the company will absorb
it without saying anything. My guess is that it will be passed on in terms of
Therefore, if it is a $20 service, the increase will be the same for anyone
who purchases that $20 service, if we are trying to recover that particular
charge from the whole client base.
COMMISSIONER CRAM: If my long distance adds up to $60 versus somebody paying
$20 without long distance, then if I pay $60 on my bill, I pay more. It is like
an income tax as opposed to a sales tax in terms of progressivity. The more you
earn, the more the rich should pay versus an SLC.
MR. GAGNON: I don't see the revenue base being linked to your ability to pay.
It is going to be linked to the services you order, be it local or long
distance. I don't see the correlation between what the company will be charged
in terms of revenue tax and the ability of the customers to pay.
COMMISSIONER CRAM: Wouldn't you say, though, that an SLC is directly
regressive because everybody pays $1, notwithstanding what they are earning?
MR. GAGNON: From our perspective, the revenue tax would be treated the same
way. If we have to cough up a certain amount in terms of tax, it will be spread
over our services, spread over our client base. In the end, I think it would
equate to the same.
COMMISSIONER CRAM: Thanks.
THE CHAIRPERSON: Earlier today some of your friends ---
MR. GAGNON: Which friends? I have a lot of friends.
THE CHAIRPERSON: I am thinking in particular the ones at the cable
association and Mr. Engelhart.
MR. GAGNON: He was speaking on behalf of the wireless, though.
THE CHAIRPERSON: They were talking about a somewhat different scheme that
would have us take the approach that you have advocated in terms of dealing with
the rate side of the equation, but then assuming there would be still some
subsidy requirement left, leave the existing regime in place, bring the
permanent rate under the price cap scheme and then let it fall, as the case may
be, with the productivity offset.
What would your view be on that, in light of your comments about the network
implications of the current regime, which you have probably stressed more than
anybody else has, I think, over the last two days.
MR. GAGNON: From our perspective -- and I was half joking when I said that
Ken was really seeing things from a wireless perspective this
morning -- we don't see the world through a wireless window, in this
particular instance. It is clear to us that the current regime needs to be
We have advocated that for the last I don't know how many years. From our
perspective, in light of our business plan and our business strategy, it is very
important that we get into a regime or a contribution collection mechanism which
is more mutual and which does not force technical solutions or prevent us from
implanting some new service offerings that the new competitive environment is
designed to achieve basically. There is no need for a competitive environment if
all that is available in the marketplace is an exact duplicate of what was
formerly provided by the incumbent.
From our perspective, we need to review this regime for those two aspects,
which are very crucial to our business strategy. If there still is a subsidy
requirement, we need to design a regime because, even if we tackle the issue of
the subsidy requirement, the likelihood is that we will be faced, for a certain
number of years, with some form of subsidy. There are some territories in our
country which will probably, for the foreseeable future, require some subsidy
I don't think we can do away totally with subsidies within a very short time
frame. We have to look at a solution, as long as we accept the fact that we will
be faced with a subsidy requirement for a period of time, which at least creates
less constraints than the one we have now. From our perspective, the one we have
now creates some difficult challenges.
THE CHAIRPERSON: Thank you very much, Mr. Gagnon and gentlemen.
MR. GAGNON: Thank you for your time.
THE CHAIRPERSON: We will turn to the next party, then, which is Group
ARGUMENT / PLAIDOIRIE
MR. WOLFE: Good afternoon, Mr. Chairman, members of the Commission and
My name is Bob Wolfe. I am the President and Chief Operating Officer of GT
Group Telecom Services Corp. Joining me today is Robert Fabes, our Senior
Vice-President and General Counsel, Fiona Gilfillan, our Vice-President,
Regulatory Affairs, and Bob Noakes, our Director, Regulatory Affairs. I will be
presenting the first part of the submission in English. Then I will turn it over
to Robert Fabes, who will continue in French, and finally I will be presenting
the last portion in English.
Group Telecom welcomes the opportunity Public Notice 99-6 provides to review
the existing contribution collection mechanism and to examine alternative
Canada is one of the many countries in the world that has embraced
competition in its telecommunications sector. The Commission has been
instrumental in opening this sector to competition through a number of seminal
decisions over the past two decades that have progressively dismantled the
barriers of monopoly. In these decisions, the Commission has consistently found
that increased competition brings economic and social benefits to Canadians and
is, therefore, in the public interest.
At the same time, technological and economic developments in the industry
over the past several years have required the Commission to revisit a number of
its rules and policies from time to time to ensure that they continue to meet
their original objectives in a manner that appropriately balances considerations
of efficiency and of equity.
Group Telecom welcomes the opportunity to participate in this proceeding to
review the contribution collection mechanism. While a relative newcomer to this
sector, Group Telecom is directly impacted by the existing contribution
collection mechanism. To date, in order to support our CLEC operations, Group
Telecom has had to expend significant resources in order to implement the
internal procedures necessary to track and collect contribution from long
distance service providers and remit such contribution to the relevant central
Currently, Group Telecom resells long distance services. However, as we
evolve to a fully integrated telecommunications supplier and begin to provide
long distance services from our own facilities, Group Telecom will be further
required to implement the necessary internal procedures to track, collect and
remit on its own long distance traffic. We, therefore, applaud the Commission
for initiating this proceeding to review the mechanism.
We believe that the Commission has the opportunity to look back to the
original goals of the subsidy and establish an appropriate mechanism with those
same goals in mind, but eliminating the negative impacts that the current
mechanism has on the Canadian telecommunications sector. We are confident that a
mechanism can be established that ensures a subsidy to basic residential service
in high-cost serving areas, but removes the economic inefficiencies,
technological distortions and regulatory burdens created by the current
Group Telecom currently participates predominantly in the local, Internet and
data markets, and is not required to pay contribution directly. However, as the
Commission implements a more sustainable mechanism, sectors of the industry,
such as the newly competitive local sector, will be required to bear a portion
of the subsidy where, to date, they have not been so required. Unlike the more
mature wireless market, the local market is newly competitive and is fraught
with a number of remaining impediments, including equitable and economic access
to buildings and municipal rights-of-way. Accordingly, Group Telecom expresses
concern that the subsidy collection mechanism does not artificially entrench the
dominance of the incumbent carriers.
Our presentation is divided into three sections. First, since Group Telecom
is a recent addition to this proceeding, we will briefly describe our company.
Second, we will offer our assessment of the existing contribution mechanism in
light of its objectives and implementation requirements, concluding that it
requires changes to the current mechanism going forward. Third, we will discuss
the merits of both the subscriber line charge and per cent of revenue mechanisms
that have been proposed by various parties to this proceeding.
Robert Fabes will now continue this presentation in French.
M. FABES: Bonjour. Groupe Télécom, fondée en 1996, a comme objectif de
fournir des services voix-données intégrés aux petites et moyennes entreprises
ainsi qu'aux fournisseurs de services Internet, aux transporteurs interurbains,
aux revendeurs de services de télécommunications et aux intégrateurs de
technologies de l'information. En mars 1998, nous sommes devenus une entreprise
de services locaux concurrentiels.
Groupe Télécom exploite à l'échelle du Canada un réseau de fibres optiques
très large bande qui sert à fournir des services Internet, voix et données haute
vitesse. Groupe Télécom a récemment acquis les actifs de télécommunications de
Shaw FiberLink et de Moffat Communications. Notre réseau est déjà en service à
Vancouver, Victoria, Edmonton, Winnipeg, Montréal, Calgary et Toronto et nous
avons prévu de l'étendre aux marchés clés du pays. D'ici la fin de l'année 2000,
le réseau de Groupe Télécom couvrira Ottawa-Hull, Québec, Hamilton, London et
Kitchener-Waterloo. Notre réseau comprend présentement plus de 8 000 kilomètres
de fibres optiques.
Les services de Groupe Télécom comprennent l'hébergement de sites Web et
d'applications, l'hébergement d'équipement, le commerce électronique et d'autres
services Internet à valeur ajoutée dispensés grâce aux fonctions
d'infrastructure à clés publiques de l'entreprise. Nous offrons également des
produits et des services de télécommunications traditionnels, tels l'extension
de réseaux locaux et les services téléphoniques locaux et interurbains
La stratégie commerciale de Groupe Télécom consiste à être le chef de file en
matière de services de télécommunications aux entreprises, aux établissements et
aux autres fournisseurs de télécommunications du Canada. Nous avons actuellement
plus de 3 000 clients et près de 1 300 immeubles sont raccordés à notre réseau
de fibres optiques. Groupe Télécom emploie au-delà de 850 employés.
Groupe Télécom désire concentrer ses produits dans le domaine des services de
données et d'applications Internet, segment du marché canadien de services de
télécommunications qui aura, selon nous, la croissance la plus rapide. Notre
gamme de services de donnés constitue un point d'entrée attrayant nous
permettant de vendre aux clients un ensemble d'applications de données et de
Afin de respecter la politique du Conseil visant à promouvoir la concurrence
livrée par les entreprises propriétaires de leurs lignes, Groupe Télécom a
l'intention de détenir ou de contrôler les liaisons optiques qui composent son
Bien que le domaine d'activité prioritaire de notre entreprise, soit celui de
données et des applications Internet, Groupe Télécom demeure un fournisseur de
services de télécommunications intégrés complets. Servir de guichet unique en
matière des services de données, d'applications Internet et de voix nous permet
de mieux satisfaire les besoins de notre clientèle et d'en accroître la
Groupe Télécom, étant une nouvelle venue sur le marché des transporteurs
locaux, nous croyons apporter une perspective particulièrement importante à la
présente instance. Nous travaillons actuellement à élaborer notre architecture
pour l'avenir. Nous avons l'intention de tirer profit des nouvelles technologies
accessibles aux entreprises de télécommunications afin d'offrir aux Canadiens
des services efficaces et novateurs.
MR. WOLFE: Thank you very much.
Group Telecom is fully supportive of the goal of universal service. To this
end, the company recognizes that while revenues from local basic residential
services can be expected to cover their costs in urban areas, a subsidy is
likely to be necessary to achieve the objective of affordable access for
residential customers in high-cost serving areas.
At the same time, we believe that this objective needs to be achieved in a
manner that balances the benefits of universal access against the requirements
of a competitive telecommunications system that facilitates economic growth,
industrial development and business efficiency in Canada. Affordable basic
telephone service is in many ways part of the social safety net in Canada.
Access to basic telephone service is seen as part of our entitlement as
Canadians and could be considered to be an element of the government's
Most economists would argue that a direct identifiable government subsidy in
addition to placing responsibility where it belongs avoids giving incorrect
economic signals and incentives. Indeed, many participants in this proceeding,
including the incumbent telephone companies, have proposed that the universal
service subsidy be funded using revenues from general taxation. This would
alleviate the distorting effects inherent in any industry-specific
To the extent, however, that the required subsidy is not accepted as part of
the government's mandate, but continues to be a responsibility placed upon the
telecommunications industry, it should, in our view, at least do minimum harm in
compromising the efficiency of the industry not only for the industry's sake but
for the sake of the benefits that the Commission has found competition to carry
Group Telecom submits that an appropriate contribution mechanism should be
governed by four criteria. In our view, such a mechanism should: Number one, be
sustainable; number two, technologically neutral; number three, minimize the
subsidy amount; and, finally, achieve competitive equity.
I would like to turn first to the criterion of sustainability. The current
usage-based contribution mechanism was established in Telecom Decision 92-12,
which authorized facilities-based competitive entry into the public
inter-exchange voice market. At that time, it was accepted that the revenues
from long distance service, then offered on a monopoly basis, were subsidizing
basic local telephone service.
Since new long distance competitors would be drawing away part of those
revenues, including the contribution subsidy component, the new competitors were
required to contribute the share of the local subsidy no longer available from
the incumbents. Since that time, the Commission has modified the mechanism a
number of times to respond to various issues related to internal inconsistencies
and inequities in the application of the mechanism, including moving from a
mechanism-based on interconnected lines to one based on minutes of usage. The
essential logic of the mechanism as set out in 92-12, however, has remained
Since that decision, however, and most particularly over the past few years,
the industry has rapidly been moving from a circuit-switched environment to a
competitive market employing network architecture that relies increasingly on
packet networks and, more particularly, Internet Protocol. This was widely
recognized by representatives from across the industry at the two-day workshop
recently held by the Commission to discuss the architecture, interconnection and
inter-operation of the Canadian telecommunications network.
Internet services are oblivious to distance and both circuit-switched and
packet-switched services are increasingly being offered to Canadians on a flat
rate or "postalized" basis, without distinctions being drawn between local and
inter-exchange usage or, indeed, between voice and data. Yet the current
contribution mechanism requires that these distinctions be maintained and that
inter-exchange conversation minutes continue to be counted and reported.
This "disconnect" has a number of consequences. One is that emerging
companies such as Group Telecom, which are simultaneously deploying both packet
and circuit networks, will have to bear significant costs in order to measure
minutes that there would otherwise be no need for measuring. Moreover, when
changes to the mechanism were made by the Commission in response to perceived
inconsistencies in its application, these invariably increase costs for new
entrants, again without commensurate benefit. As the incumbents transform their
telecommunications networks in Canada to an IP architecture, we expect that they
will encounter similar problems.
A further and perhaps more serious consequence of the present situation from
a Canadian policy perspective is that resources that could be devoted to
technological and service innovation in a dynamic converging sector are diverted
to the preservation of an outmoded contribution mechanism.
We believe that it is time to recognize that the existing mechanism itself is
not sustainable, based as it is on measuring and reporting conversation minutes
and that making further ad hoc changes to it will only compound its
unsustainability. In our view, a primary criterion for a Canadian contribution
collection mechanism is that it be sustainable, which, in turn, requires that it
be based on the realities of the rapidly evolving Canadian telecommunications
I will now address our second criterion, technological neutrality. In
addition to maintaining a regime that is sustainable, it is important that the
subsidy not inhibit technological development in Canada. Technological
neutrality is necessary to ensure that the industry can evolve using the most
efficient technologies without regard to the collection mechanism.
Today the Commission differentiates between PC voice and PSTN voice, with PC
voice being contribution-exempt. This creates an incentive for deploying PC
voice purely to avoid the imposition of the contribution regime.
Not only does this frustrate the purpose of the contribution regime by
reducing the total potential funds available for contribution, but it inhibits
the development of technologies and services which are not exempt from
We consider that a technologically neutral contribution collection mechanism
will provide a predictable source of revenue. In addition, a technologically
neutral contribution mechanism will not adversely impact the roleout of next
I would now like to discuss our third criterion, the quantum to be collected
by the subsidy mechanism.
Group Telecom recognizes that the magnitude of the subsidy is not being
determined by this proceeding. However, we believe that if the distortions on
investment and demand inherent in an industry specific subsidy mechanism are to
be avoided, the quantum collected should be restricted to no more than is
required to maintain universal service at affordable rates.
Since subsidies raise prices to end users, they ultimately discourage
customers from using the services that bear the subsidy obligation. As a result,
investment in those services and in the infrastructure on which they depend is
discouraged and investment and services and infrastructure, which are exempt
from the subsidy obligation, is artificially encouraged. Without control on the
amount of the subsidy, the Commission risks harming both Canadian consumers and
the Canadian telecommunications industry.
We therefore believe that the subsidy should be restricted to what is
necessary in order to maintain affordable basic service rates for residential
customers in high cost serving areas.
While the Commission has yet to make a determination as to what is an
affordable rate, both the magnitude of the subsidy and the line of demarcation
between a high cost and low cost serving area are dependent on that finding.
Group Telecom considers that the affordable rate should be set at a national
level to ensure uniformity and consistent application.
I would like to next discuss our fourth criterion, competitive equity.
As the Commission is aware, the existing regime has been marked by ongoing
disputes relating to the degree to which one set of industry participants are
being disadvantaged relative to another. A subsidy collection mechanism should
not give preference to one class of service or service provider over
In addition to ensuring that the broadest base possible of service providers
bear the obligations of contribution, Group Telecom submits that the
contribution mechanism should minimize the ability of the incumbents to shift
the collection of their subsidy obligations away from services that face a high
degree of competition and have low margins to less competitive high margin
services. To allow for a truly equitable collection mechanism, such a practice
can only be eliminated by the subsidy being collected directly from the end
user. This would reduce the ILEC's ability, given the pricing flexibility within
the price cap regime, to shift collection obligations away from the more
Also, since local competition is in its infancy, virtually all contribution
collection accrues to the incumbents. Any over collection could be used by the
incumbents to subsidize aggressive pricing in more competitive markets. New
entrants do not have access to these revenues and therefore disadvantaged in
competing with the pricing by the incumbents in competitive markets.
Considerations of competitive equity thus lend further support to the previous
criterion of minimizing the subsidy amount. They also Commission review of the
subsidy amount on an annual basis and to the extent it is determined that excess
revenues were collected in a given year, a reduction in the subsidy amount for
the following year to reflect that excess collection.
Competitive equity considerations also dictate that the use of a national
fund, which would place all service providers, as well as the communities they
serve, on an equal footing. A particularly important feature of this national
fund is that it would establish a vested interest on the part of the incumbents
to ensure that the subsidy requirement is minimized.
Group Telecom considers that meeting all four criteria, sustainability,
technological neutrality, a minimal subsidy amount and competitive equity, is
essential for a Canadian collection mechanism. We also believe, as we hope we
have shown, that the existing regime does not meet these criteria.
The Commission has a very aggressive agenda before it over the next year and
a half which will culminate with the terms and conditions of the second price
cap regime commencing January 1, 2002. With the introduction of the first cap
regime in 1998, the Commission froze contribution rates. This eliminated the
causal relationship between the amount of subsidy collected and the amount
required and set in motion a series of Part VII applications, proceedings and
appeals which Group Telecom submits were inevitable because of the rapidly
changing Canadian telecommunications sector.
Group Telecom considers both the percent of revenue and subscriber line
charge to be clearly superior to the existing regime. Both alternative methods
could be implemented such that they explicitly appear as a separate line item on
the end user's bill and are passed on to a national fund. Group Telecom
considers these two criteria essential for the implementation of a competitively
equitable, sustainable regime.
Both the percent of revenue and subscriber line charge mechanisms can be
applied over a broader base of service providers than presently exists. As new
services, service providers or technologies are developed they can be captured
by either mechanism as appropriate. As such, both the percent of revenue and the
subscriber line charge mechanisms increase the base over which contribution
recovery can be realized and thus moderates the impact on any one market,
minimizing the distortions inherent in an industry specific collection
As well, both the percent of revenue and subscriber line charge mechanisms
are more equitable. Neither regime will saddle new entrants with the competitive
disadvantages that exist under the current regime. New entrants would no longer
be required to make capital outlays to retrofit their architecture to calculate
switched minutes. In addition, an annual review of the subsidy ensures that the
quantum collected is no more than what is required to maintain universal
residential service at affordable rates, thus eliminating any advantage that the
incumbents may have by virtue of an over-collection of the subsidy.
In conclusion, Group Telecom submits that the current subsidy collection
mechanism, which is based on measuring and reporting conversation minutes, is
not sustainable going forward. As a relative newcomer to this proceeding and to
these deliberations, Group Telecom does not have a particular preference between
the alternate mechanisms.
However, as the Commission undergoes its deliberations regarding the
appropriate mechanism, Group Telecom recommends to that the Commission adhere to
the principles that Group Telecom has enunciated in this submission in order to
compare the attributes of percent of revenue versus subscriber line charge.
Developed on a national basis, reviewed annually and applied directly by means
of a separate line item on customer bills, both the percent of revenue and
subscriber line charge mechanisms are the most competitively equitable,
technologically neutral and sustainable mechanisms available.
The implementation of either mechanism will be complicated. Accordingly,
Group Telecom recommends that the Commission refer the details of implementing a
new contribution collection mechanism to the CRTC Interconnection Steering
Committee. Group Telecom would be pleased to participate in any such forum or
proceeding necessary to establish the implementation of the next contribution
We thank you for your consideration and are prepared to answer any questions
you may have.
THE CHAIRPERSON: Thank you, Mr. Wolfe. Ms Noël.
COMMISSIONER NOËL: Mr. Wolfe, I have one question. You mentioned a national
fund. Do you have any particular reasons why you would favour a national fund as
opposed to a regional, territorial or provincial fund? We have heard all these
words used. I think regional refers more to a Bell concept which is the Quebec
and Ontario area that is served by Bell Canada. Territorial would be to the same
effect. And provincial would be based on provincial boundaries.
MR. WOLFE: Our view is that a national fund would be the most equitable
mechanism to distribute the proceeds of the collection. I think that essentially
if you create a fixed amount there is a higher likelihood that people will seek
the highest level of efficiency in productivity. We think that if you do it on a
regional basis you may end up rewarding inefficiency. And we think that by
making it a national fund that you can drive the benefits from those funds to
the people who are most efficient.
COMMISSIONER NOËL: Thank you.
THE CHAIRPERSON: It seems that we have had a number of people who have
advocated the revenue mechanism because to them it is simpler, and those who are
advocating the subscriber line charge advocate it because it is simpler.
Since you do not seem to have a particular preference between the two, do you
have a sense of which one or the other is simpler?
MR. WOLFE: I think they are both very complicated, to be honest. The reason
is that there are so many different participants in this market, from cable
companies to wireless companies to CLECs and incumbents. Everybody has a
different type of offering that they are coming to the market with, with new
technology and different pricing structures. Our view is that whichever
direction you choose you need to be very careful in the application of that
So we debated it considerably and, frankly, we think it is more in the
application of whichever route you choose to go that will be important rather
than the actual route itself.
THE CHAIRPERSON: The issue of how to calculate the requirement, you haven't
addressed it here today. You may well have in your more extended written
submission. The current method is using essentially Phase 3. Most of the parties
seem to be advocating the issue of taking a Phase 2 costing approach with
anywhere from 10 per cent to 25 per cent mark-up. I am curious to know what your
views might be on that.
MR. WOLFE: I will let Bob answer that. Go ahead, Bob.
MR. NOAKES: Mr. Chairman, we would agree with a Phase 2 approach. I think
AT&T made a very good point yesterday with their appendix, where they
demonstrated that even with a Phase 2 methodology, the end contribution
collected could vary dramatically. We would agree completely that the fixed
common cost factor should be reviewed. The economic life characteristics should
be scrutinized extensively. The affordable rate also would play a very important
role in the end result of the amount collected.
Phase 2 is definitely what we would recommend, but also, along those lines,
what goes into the Phase 2 is also very important.
THE CHAIRPERSON: Thank you very much.
The next party, then, is Multi-Sync. It's Mr. Graham, is it?
ARGUMENT / PLAIDOIRIE
MR. GRAHAM: Yes, sir. Normally at the beginning of any presentation, it is
customary for the speaker to thank his audience. However, I am having great
difficulty conforming to that custom. Here are some of the reasons.
Briefly, several months ago I contacted your office, requesting I be placed
on the list of speakers for this oral hearing. It was indicated to me at that
time the order in which the presentations would take place would probably be
alphabetically. This is not the case.
Recently, a few days before these presentations were to begin, I was
contacted via fax and informed that my presentation would essentially be last.
When I contacted your office, I was told the order was determined based on who
had a vested interest in contribution charges. Furthermore, it was indicated to
me that if I would like to move myself up in the order of these presentations,
that I should contact one of the presenters and request that they exchange their
position with mine.
Needless to say, that last comment was, in my opinion, idiotic at best. Who,
in their right mind, would exchange their position with a last place presenter?
I realize someone has to come last. However, that determination should be based
on more neutral criteria, such as alphabetically.
I am not intending to make this presentation one that is based purely on the
fact that I was placed last. My concern is your organization seems unable to
promptly assess those who might be presenting and how important hearings like
this are to small business, not just big business.
Need I remind you -- and you are well aware of the stats -- 80 per cent of
Canada's work force works for small business. The majority do not work for big
business and, more importantly, for monopolies. We are the very backbone of the
Canadian economy in terms of employment, taxation and consumption. We do not
have the capacity, like larger organizations, to hire expensive legal advice to
deal with issues that could determine our very future.
Again, for this reason, it is critical we are given a fair and equitable
chance to address an organization such as yours, which yields such bureaucratic
control over the telecom sector in this economy.
Now I will address the very reason we are all here today: Contribution taxes.
I am not going to regurgitate the decisions, orders, interrogatories, or the
Telecommunications Act as part of my presentation. I find this practice is a
phenomenal waste of time and resources. It is one that the legal representatives
of the incumbent carriers seem to aspire to. In addition, I will not be
discussing the varying formats of contribution taxes.
Specifically, my greater concern is that of the contribution tax as it
pertains to resellers.
Today, with competition finally entering into all aspects of
telecommunications, we see the landscape vastly different than a few years ago.
Competition has been both good and bad for this industry. It has obviously
resulted in price reductions for the consumer. Unfortunately, we have seen a
reduction in service and an adoption of unsavoury tactics used to gain market
share by even the largest telephone companies and long distance providers in
All said and done, it would be impossible to get a consensus from this
industry that would even remotely suggest opening up the markets was a bad thing
to do. Against this backdrop, we still have situations where telephone
monopolies are thriving. Now added to this clearly unpalatable monopolistic
environment, we have contribution charges, a tax on free enterprise. A tax on
free enterprise that is paid to monopolies smacks against a logical person's
The very rationale for contribution taxes might -- and I hesitate when I use
the word "might" -- have made sense some time ago. Today, under the shadow of
monopolistic competition, I ask you: Does it really make sense for an
independently owned and operated small business to pay a monopoly this
contribution tax? If your organization firmly believes in competition, as it has
publicly stated from time to time, then let market forces operate.
In those areas that are supposedly under serviced and require price
adjustments to ensure local line costs are not exorbitant, I suspect incumbent
Telco is inefficient in its ability to provide services to that area. They
should not be subsidized.
Let us simply look at the smaller and truly independent telephone companies
that are not only owned by the likes of Bell Canada to see how more efficient
they are. Contribution taxes permit the Telcos to remain inefficient and merely
reactive, as opposed to proactive. Consequently, this contribution tax is being
used not only to prop up a monopoly, but an inefficient monopoly. I say this
somewhat loosely, as I am not aware of a monopoly that operates efficiently.
So-called under serviced areas in most cases are adjacent to independents.
Why are these organizations able to charge out their line costs to the consumer
at rates considerably less than the likes of Bell Canada?
There is no secret formula to why this is occurring. It is simply because
these small organizations are, in fact, more efficient. To add insult to injury,
these monopolies have been able to obtain government funds to increase their
penetration into the so-called under serviced areas, as well as upgrade their
facilities, while at the same time collecting this contribution tax. This has
been a common occurrence in northern Ontario, whereby the provincial and, in
particular, the federal governments have set aside considerable sums of money to
improve the telecommunications infrastructure. Unfortunately, it is very
difficult not to be cynical when one sees this occurring.
In my opinion, the contribution tax should be paid back to the various
resellers in those areas where government funding has been gained exclusively by
the Telco. Please do not make the assumption that we are in a truly competitive
environment and that small resellers have the ability to obtain this very same
funding. We are not in the same league. We do not have the resources or ability
to lobby government. Therefore, we have been excluded from any
In addition, resellers are at the mercy of the Telco when it comes to
calculating the contribution tax to be paid. What I mean by this is a reseller
must rely upon a monopoly which does not wish it to exist to report the total of
this contribution tax for remittance. Resellers are not permitted to question or
audit this information. Resellers must rely on the honesty and integrity of a
monopoly to provide this information.
I would like now to touch upon an issue earlier raised at the opening of my
My question is: Who really has a vested interest in this contribution tax?
Comments made to me by one of your employees was that the order in which the
presenters were to appear at this hearing was based upon his, and apparently
others, perception of who had a vested interest in this contribution tax.
For a moment, let us pretend that the hard one by and financially strapped
Telco was to actually get its way and yet convince the CRTC that contribution
taxes should be imposed upon resellers that operate, let's say, a one-hop
service. The end result would be catastrophic. Some of you might think I
exaggerate when I use the word "catastrophic", however it is an understatement
to the financial burden that would easily devastate most of these small
Many of these organizations employ less than ten people. They operate on
volumes and low margins, which is somewhat contrary to how small business
typically functions. A contribution tax would result in elimination of these
Therefore, we would have a situation whereby the CRTC and their friends at
Bell Canada have effectively eliminated some of the competition. We have seen a
prelude to this already by the creation of what is called "natural Calling
Centres". The end result of their creation was increased line costs for the
consumer, more money for Bell Canada and less money for their competition.
Coupled with this is the fact that long distance rates have literally
plummeted over the last few years and you do not have an attractive environment
in which a reseller operates. If your organization feels comfortable with the
elimination of people's livelihoods, then go ahead, expand the contribution tax,
such as is imposed upon one-hop resellers.
For the very reasons I have previously mentioned, this is why I take great
offence and find the comments that the order in which presenters of this hearing
was determined was based upon those organizations which supposedly have a vested
interest in a contribution tax.
I am here today to tell you that to me this is a clear indication of your
organization's inability to fully comprehend or appreciate what is happening in
all aspects of this industry. To make the broad assumption that because an
organization like Bell Canada collects a lot of money from private enterprise to
prop up their monopoly and somehow they should be at the top of the list is
Here is another reality that your organization seems to have missed. If Bell
Canada did not collect one cent of this contribution tax, the impact on their
bottom line would be insignificant when compared to imposition of this same tax
on small business. I ask you: Who really has a vested interest in this
You are absolutely right if you draw the conclusion that this contribution
tax is in the telcos best interests because it inhibits competition, acts as a
barrier to entry in the marketplace and any increase in our expansion of it
would result in elimination of competition.
Many of you presuppose the reason why you do not hear from resellers is
because of the famous Canadian syndrome: apathy. One of the reasons why you do
not hear from many resellers is partly because of just that, apathy, mainly due
to lack of trust in your organization.
In addition, resellers lack the resources and the time to fight the fight.
Your organization through these oral hearings tries to resolve the problem.
However, it is now clear that it is really only in your vested interest that you
create barriers, such as small organizations, who are unable to deal with it.
That's a sad reflection on your ability to gather consensus from the public.
Many of us see your organization as a tool that is already manipulated by the
telcos. This very hearing is evidence to that effect.
Finally, in summation, maintaining or broadening this contribution tax no
longer makes common sense. Its original purpose might have appeared noble, but
this is no longer the case. It is another ill-gotten source of revenue for the
telcos. Moreover, it distorts and reduces competition. Without it, we would be
able to better cast our eyes upon the face of real competition. However, with
this contribution tax in place, along with the continued existence of
monopolies, we do not have a clear picture of what competition really looks
As previously stated, it acts as a barrier to entry in the marketplace,
therefore ensuring there is less competition than there could be. That is why it
is in the vested interest of the consumer that competition be fostered.
Furthermore and lastly, the attempts by Bell Canada to introduce this
contribution tax into the one-hop resellers market under the guise that they are
acting in the best interests of CLECs adds a bit of nauseam to this whole
experience. I think I have made it abundantly clear that this contribution tax
demanded by the likes of Bell Canada and in the past given the blessing of the
CRTC is hurtful and unnecessary in a truly modern, competitive environment.
THE CHAIRPERSON: Thank you, Mr. Graham.
I apologize for the confusion in terms of the order of appearance, in terms
of whether perhaps it was indicated to you originally it was going to be
alphabetical. We did change the order and I had a hand in that. It was not to
disadvantage anyone who appeared near the end of the proceeding.
Indeed, it could be argued that those who come closer to the end are the ones
that we remember the most, with no disrespect to Bell Canada coming first. Maybe
it's hard to remember what you heard first thing two days ago.
Certainly it wasn't any attempt to disadvantage anyone who was coming near
the end of the proceeding. Indeed, you are not last and Mr. Menard may be
commenting similar to you as he is, indeed, the last person to appear this
I guess our view is that everybody who has appeared here and, indeed, every
Canadian has a vested interest in this proceeding that is going on because the
decisions impact on this. As you noted, this contribution fund is very
important. It has a huge impact on the competitive framework that we have tried
to put in place in this country, it involves several hundreds of millions of
Regardless of the outcome of the proceeding, it will have a huge impact not
just on big business but small business such as yours, which we want to see
succeed as part of the competitive framework in this country, as well as every
consumer in this country who uses telecommunications facilities and
infrastructure. We certainly don't want to disadvantage you or anybody else in
the proceeding. We wanted to hear what you had to say on this important issue
and we have certainly had an opportunity to do that.
I take it your view is, essentially, that we should get rid of contribution
as we know it. I take it your view is that we should just throw the switch and
do away with it tomorrow.
MR. GRAHAM: If you believe in competition.
THE CHAIRPERSON: Is it your view -- you come from part of northern Ontario --
that we could just do away with contribution and that competition itself would
manage to deal with telephone rates in rural parts of Canada and parts you are
familiar with in northern Ontario, some of the smaller communities in the more
MR. GRAHAM: I think so. I think if you look at the areas where GT Telecom and
AT&T will never exist in northern Ontario because it's not in their best
interests profit-wise, Bell Canada would more than suffice. Any attempts by Bell
Canada to increase rates in these smaller communities would result in the
typical uproar by the community, so let them react to services provided by the
Many of these communities have done a very good job of communicating to Bell
Canada their dissatisfaction in not just pricing but service and Bell Canada has
reacted. If competitors don't want to move into that market because they don't
see it as profitable, Bell Canada still has to deal with the residents and the
businesses in that community and they, in essence, force Bell Canada to provide
THE CHAIRPERSON: I take it it's your view then that it would be considerably
less costly to provide the service in that territory than Bell claims it to
MR. GRAHAM: I think so. I think so. We have had discussions with
organizations in different parts of the United States and Canada that provide
work or do contract work to telcos. We have talked to some municipalities and
PUCs that provide local line services and they provide it at costs that are
considerably less than what Bell Canada provides. It's hard to fathom how they
can manage to accomplish this.
We have considerably less resources, considerably less technological
resources than a company like Bell Canada, which basically can buy anything they
want or any technology that they want. So it's hard to imagine how some of these
smaller independents manage to keep their prices so low and yet adjacent
communities that are serviced by Bell Canada are paying higher prices. It seems
to me there is a logic there that is missing.
THE CHAIRPERSON: Is it your understanding that these independent companies
are not subsidized?
MR. GRAHAM: I don't know. I don't have the ability or the resources to gather
all that type of information, so I simply don't know. I know that in our
discussions with them, which they will not publicly state, they see no reason
why, some of them, anyway, telephone line costs have to be as high as they are
in adjacent communities.
THE CHAIRPERSON: Thank you very much. I appreciate your presentation here
today. Again I apologize for the confusion over the order of appearance.
MR. GRAHAM: Thanks.
THE CHAIRPERSON: Now for the last presenter, Mr. Ménard.
ARGUMENT / PLAIDOIRIE
MR. MÉNARD: I would first like to thank the staff which considered my request
to print the latest version of my presentation and has so kindly distributed
The reason for my presence is that I personally consider that the current
contribution regime is being ran over by new Internet architectures. I find that
the questions that were asked by the Commission to all the incumbents were not
essentially proportional to the fact that the Internet is running over the
existing networks. So, they are very focused on the costs of current
public-switched telephone networks and why should they persist, but nobody is
even questioning the very existence of a public-switched telephone network
I entitled my first slide "Contribution in an Internet Age." My position on
this issue is that the main reason for contribution is to support the current
cost structure of the public-switched telephone network. I would encourage that,
in the process of coming up with a decision on this public notice, the
Commission would pay attention to the numbers that have been crunched out by the
incumbents and try to assess if the current contribution subsidies pay for the
outside plant or actually pay for the clunky Class 5 switches and related
In my view, recent developments in the Internet environment, as demonstrated
mainly by the packet cable initiative of the cable carriers, clearly
demonstrates that it is possible to implement public telephony services using a
much lower cost structure.
The problem with the CLEC competition model is that it essentially forces
everyone to buy into the existing cost structure of the public-switched
telephone network. In my view, Internet-based interconnections between the
service providers is the only way out of the current hole we are all in.
Unfortunately, the packet cable specification is way too proprietary. It also
shifts interconnections at higher layers than the physical infrastructure. The
danger with that is that discrimination, when you are not dealing with physical
interconnections, is potentially much larger. There is also a danger that new
entrants, which potentially may use this packet cable infrastructure, use
under-specified technologies and force interfaces on competitors which simply
cannot be dealt with adequately.
I call this self-preference because of interconnections at a higher layer.
What I mean by "higher layer" is it is in reference to network design charts
that we call the OSI seven layers of interconnection. It essentially describes
the fact that the Internet protocol is not something that speaks resistance and
voltage and is at the physical electrical layer. It is some software-based
concept that spans over the physical infrastructure. So, it is at the higher
layer than the physical infrastructure.
The next slide essentially maps out the reference architecture of packet
cable. The slide after that is sort of a higher level view of the packet cable
architecture. The slide after that is the network elements of the packet cable
infrastructure. The slide after that demonstrates all the different links
between all of those elements in the packet cable infrastructure. Believe it or
not, despite all of this being way more complex than a public-switched telephone
network, it is ten times cheaper.
The point behind all of this is that there is great need for the Commission
to understand what is behind all of that before buying into the arguments of the
incumbent telephone operators that current cost structures must be
My next slide is entitled "More Complex to Regulate the Current Environment."
There is a lot of new interfaces to understand. It also means that the number of
interfaces from which self-preference can be exercised has increased
Packet cable might be the first, but it is not the last. The industry is
moving faster than the Internet. Today there is a technology called
multi-protocol label switching, which is being implemented by nation-wide
Internet service providers to replace ATM, asynchronous transfer mode. Are we
going to talk about public and PLS interconnections and are we going to have to
redesign different points of interconnection between phone companies and
incumbents using MPI's technology?
We need regulation which is reasonably abstracted from those physical
software-based implementations of technology. Thus, it means that you need
regulation which is higher layer proof; it can reasonably be disassociated with
the physical infrastructure from which it is being implemented on. A phone call
in an Internet environment is no different than accessing a web page. It is
really high up above the physical infrastructure. There are many levels of
direction in between what constitutes a phone call and the physical
infrastructure which it runs on.
The only thing that the Commission can regulate is the physical
infrastructure. There is a big gap between what can be done by the Commission
and what is actually out there in the world.
Internet-based interconnections, the bottom line is that they are possible.
They are preferable technically. They are less costly. They are more desirable
to actually implement competition in the marketplace. To get to the point of
today's hearing, they are prevented by the existing contribution regime. I am in
full agreement with everybody else here that the current contribution regime is
What is cool about the current contribution regime is that it builds
interfaces from which you can actually make money. So PSCN to PSCN interfaces
make money. Packet cable interfaces, because they are actually built out of PSCN
interfaces, make money. People that will be implementing packet cable will not
interconnect with the incumbent telephone companies using Internet. They will
interconnect with the existing incumbents using plain old clunky classified
switches, and they are allowed to make money out of these interfaces.
Is it just a ploy to sell more circuit switch equipment? Why do IP-based
CLECs -- I mean Internet protocol-based competitive local exchange carriers --
that deploy packet cable do the exact same thing to the local exchange carriers
that the local exchange carriers are doing to the IP-based CLECs, which is that
everybody is forcing on each other circuit switch, contribution-enabled
interconnections so as to actually benefit from the monies generated by
None of the incumbents seem to want to move towards IP-based
interconnections, and for a good reason. Why would you replace money-making
interfaces between incumbents and competitors with interfaces which make no
money? Though, if it was not for the fact that contributions were flowing across
those interfaces, people would choose the most technically viable interfaces,
the cheapest form of interfaces, and, by all means, everybody knows that it is
clearly Internet based interfaces that would be used.
So the current contribution regime is clearly standing the way. As a result
of the current contribution regime, network architectures are designed to
maximize the inbound flow of contributions and minimize the outbound flow of
contributions, therefore creating situations where entrants get more money from
the incumbents than incumbents get money from the entrants. It clearly shows in
the network architectures.
The barriers to entry of the current regime are the following. We clearly see
that they are not that high for everybody. For small business and for ISPs those
barriers to entry are just impossible to deal with, but for competitive local
exchange carriers and cable operators, talking SS7 and buying one piece of gear
that speaks SS7 is not that big of a deal. The point is that we have to look
beyond interconnection with SS7 and question the very existence of SS7 as the
network upon which all of the public switched telephone network is built on and
the so-called advanced intelligent network which is implemented by the SS7
One key question that the Canadian society faces is how will the databases of
the public switched telephone network ever be interconnected with the domain
named system on the Internet so as to be able to go back and forth from a domain
name to a telephone number and find out whether this person is on a certain IP
address or is on a telephone number. This does not require the SS7 network. This
just requires the Internet to be interconnected with the databases of the public
switched telephone network by many other methods than an SS7 network.
In the same way, how will the advanced intelligent network be unbundled to
give Internet service providers a chance to play a role in the web-PSTN
integration game, so-called click to finally go on a website, you click on a
phone number, it makes a phone call and you do not have to wait in line for a
call agent to answer you. The call agent calls you back automatically when he is
free. Things like that.
In my view, ISPs will never have SS7 point codes. On the Internet we are
moving from IPV4, with 32 million IP addresses, to IPV6 with billions of IP
addresses. In the SS7 network we are still dealing with a network which is like
IP version IPV0.01. It does not have enough addresses to serve competitors
So, the competition is not strong. It is just more of the same with small
discounts. My personal view is that whenever I make a phone call and I compare
what I am paying for long distance today to what I was paying with Unitel with
the black box that was required because there was no equal access, I am still
paying something that is like 3 cents cheaper. Big deal, 10 years after. I am
still paying 35 cents a minute to make a long distance call during the day
because the price cap that Bell -- this is my personal
experience -- but it is $20 a month, but if you choose that price cap
during the day you cannot benefit from any other deal. You have to pay 35 cents
a minute. So, in order to keep my girlfriend happy and so she can call her
mother as often as she wants, I get nailed on 35 cents a minute long distance
calls. This is nuts.
To get back to the point, getting rid of contribution based interfaces is
just a necessary step in the right direction. I am going to make this more
evident in the next slide.
In my view, the current regime is designed to augment demand for PSTN
services. The current regime -- and this is a key point -- you have to
remember this -- forces entrants like me to buy twice as many phone lines
as necessary to implement services. Why? Because there is no way that I can be
billed for contribution on a per call basis. I can only be billed for a
contribution on a per trunk basis, which means that I have to have a trunk that
is dedicated to dial-in PPPV.90 56K modem and I have to have a different trunk
that I use for making voice-over IP calls on my network to talk to Bell Canada
or local exchange carrier subscribers. I am actually using a piece of gear that
can, like a network access server, automatically figure out if this call is
voice, is data or is fax and route the call to the appropriate network or
applications. But I have to buy twice as many phone lines as is necessary.
Now big companies do not care. Like the big CLECs and the big cable operators
have different divisions. They have a CLEC division, an ISP division and six
other divisions. The point is that each of the divisions cannot share resources.
In a smaller business any competitor which seeks to optimize costs, why the heck
would I have to buy twice as many phone lines as is necessary because the
current contribution regime that. Cobalt programmers working for a big incumbent
telephone company programming on a mainframe cannot figure out how to bill for
contribution on a per call basis. Get the software updated.
So the revenues generated by the existing regime prevents evolution. Again,
this is another key point. Self-preference in an Internet-based environment will
materialize through the use of IP Internet protocol based interfaces between
allies and circuit-switched interfaces between competitors.
People who are friendly to one another may say "Let's speak Internet here. It
is simpler and cheaper. We will share cost easier and we will speak Internet,
but I hate you. Talk to my classified switch, talk SS7, try to inter-operate
with my service control point database". It just does not work.
I said earlier that packetcable is just way too proprietary. The reason it is
too proprietary is that for years the governments of this world have not been
participating in the standards bodies which have been creating these standards.
This sentence can be a call to action upon governments of this world to actually
consider participating in standards bodies which are shaping the future of
networks, because those standards are vendor-driven. The only objective of a
vendor-driven standard is to get a box sold to an incumbent monopoly
So the standards which exist today do not factor in at all logic or the end
user's wishes in the system. They only factor in how to enable monopolies to
make more money. Packetcable is the best example of that.
In my view, interfaces between competitors -- when I say interfaces I
mean points of demarcation between the network of an incumbent and the network
of a competitor and where they talk to one another. In the public switched
telephone network this is a circuit on a trunk. The interfaces between
competitors cannot be used to raise taxes intended for the good of the general
population. You cannot simply use an interface between a network of an incumbent
and the network of a competitor to collect a fee because this creates networks
which have abnormal architectures and cost more than necessary.
I do have an opinion on subscriber line charges, although I think I am going
to make the most controversial proposal to date. I am personally going to ask
Mr. Chrétien to add an additional box on my income tax statement that says how
much do I have to contribute to the Canadian universal service fund? Revenue
Canada will take care, hopefully not through Human Resources Canada, but,
actually, give the subsidy to Bell Canada directly.
I see no reason, despite not disliking any of the CRTC processes, but I see
no reason for the CRTC to be involved in collecting income tax.
Assuming that is implementable in this marketplace, a subscriber line charge,
in my view, is the only mechanism that correctly recognizes years of subsidy in
this environment. How people will fear a subscriber line charge is only a
function of how expensive that subscriber line charge will be.
As I said in my very first slide, when going through the current numbers of
the phone companies, if you find out that all of this contribution money only
serves in maintaining clunky classified switches, then it is probably going to
be five cents on my phone bill for the subscriber line charge. If it is five
cents, who cares? Second line, five cents. Goodbye, thank you. But if it is $2,
I might worry that the subscriber line charge is a problem.
In my view, the current PSTN has been built. It serves 95 per cent of the
population. It does not need to be built again. So, the only purpose of a
subscriber line charge is just to maintain its existence. In my view, that does
not cost a lot of money when distributed amongst millions of people. It is just
pennies a month.
In conclusion, in my view, contributions have served their purpose. The PSTN
has been built and basic service is available to almost all of the population. A
tax regime for PSTN users, based on subscriber line charges, will be more than
enough to cover the maintenance of the PSTN cost structure, providing that it is
not there to entertain another 20 years of buying the clunky classified
This is another key point. New regulations set forth by the Commission should
force incumbents to buy the Internet gateways, not require entrants to buy
equipment that inter-operates with the big clunky classified switches of the
incumbent carriers. It is just not the way competition begins.
The day I start a new business, if I have to speak SS7, how will I do that,
and if I have to buy expensive gear. It does not make sense. The software -- and
I have seen it at Nortel -- exists today. Running inside a DMS switch, that
speaks Internet. It is variable. It can be deployed. It does not require any new
hardware from the incumbent carriers. Why isn't it being deployed?
I claim, in my humble opinion of one little guy out there in the world, that
the current contribution regime is just one of the many things which adds up to
the fact of why you would not replace existing revenue-making interfaces with
Internet-based interfaces, because they make money. You have to get rid of
contribution. It is just like the normal course of things that happens.
Until such time as you still make money, based on the fact that you have one
type of interface rather than another, you are never going to scrap that
I think that the Commission should eliminate, if possible, all barriers to
entry to IP-based interconnections between entrants and competitors and not
require new entrants to massively invest in circuit-switched public-switched
telephone network technology.
After my conclusion, I do have some humble recommendations. The Commission,
from now on, in my view, has a fresh new role in telecommunications regulation,
which is to worry about discriminatory IP-based interconnections between
entrants and competitors. The Commission has a responsibility to enable true
competition between new entrants, which clearly have a lesser amount of
facilities than the incumbents. The Commission should not require new entrants
to replicate the infrastructure of the incumbents, especially not
public-switched telephone network infrastructure.
Unless I don't understand, I please myself in telling my friends that we are
three years out of the five years of mandatory prices on the different bands.
When this five years is gone, all of the CLECs will have to go back to the
government and ask for an extension for another five years and another extension
for another five years. We will still never have competition in the rural
So, yes, our universal service fund has an importance. But should this fund
be exclusively used to buy into inefficient and old cost structures for
equipment? I don't believe so.
In my view, the market, unless the Commission recognizes this, will move at
the speed of -- and you can quote me on that -- the development of IP
interfaces for 911 municipal call centres. I had to go through that recently:
How the heck am I going to do 911? What if I could put a routor into a 911 call
centre and just have fine line IP network talking to a call centre and give IP
phones to all of the agents of the call centre? It can be done tomorrow. The
only way I can get to a 911 call centre is through the most simplest possible
form of public-switched telephone network interfaces, and there is just no other
way. The market will move at that speed.
Finally -- and this is just one for me -- the terminoloy "equal access to
packets" has to be carefully considered in all telecom regulation in the future.
You can ask me as many questions as you want on that topic.
THE CHAIRPERSON: Well, Commissioner Cram.
COMMISSIONER CRAM: Recognize that I am lucky that I knew what a computer was
When you are talking about the purpose of a subsidy being to maintain the
present PSTN, the concept being that in 20 years, 10 years, it should be gone.
Is that what you mean when you say it doesn't need to be built again, it should
MR. MÉNARD: The present PSTN serves basic service. The definition of basic
service is built upon the capabilities of the existing PSTN. So, unless the
Commission wants to look again at what is basic service, as far as I am
concerned, the existing PSTN can serve the population for the next million
years. I see no reason to flesh it; it works. It is a $20 a month 911 line.
People are happy with that. It is a great source of electrical power.
COMMISSIONER CRAM: I am almost afraid to ask because your intelligence is
clearly four times that of mine, but what is the distinction between what we are
doing now in terms of what we build into the costing for the subsidy and what
you are suggesting? When you say only maintain instead of rebuild, does that
mean we should take out depreciation?
MR. MÉNARD: Oh, absolutely. It has been written down already. There is a
lawsuit in the United States by the New Networks Institute, which is doing it on
behalf of the IRS, going after all of the local income and carriers in the
States saying that they have written off their investment in circuit-switched
copper networks way too fast and that they are enjoying profits that they
shouldn't be entitled to today because they have devaluated their networks too
In my view, the lifespan of copper cabling might be -- let's say it's 40
years that the copper cabling needs to be replaced. It's the incremental cost of
maintaining the existing plant, not the cost of expanding into a new area and
requiring the build-out of a new super node and requiring the build-out of a new
class 5 switch. Those numbers shouldn't be part of the picture.
COMMISSIONER CRAM: Thank you.
THE CHAIRPERSON: Mr. Langford, are you going to explain those charts?
COMMISSIONER LANGFORD: I don't have a question, but I am a little worried
about the amount of time your girlfriend is spending on the phone with her
mother and I thought maybe you might want to spend a little less time on the
Internet. I see a causal connection there and I am a little worried.
I just wanted to thank you for your presentation. I have no questions.
THE CHAIRPERSON: Commissioner McKendry?
COMMISSIONER McKENDRY: I want to thank you for your presentation, too.
I don't know whether you were here when TELUS made their presentation to us,
Mr. Grieve. As I recall -- and I hope I am recalling correctly -- what he told
us was that he shared, I think, your view or TELUS shared your view that packet
switching was the way of the future.
In fact I think he told us when I asked him a question that he felt in five
years TELUS' network would be a packet-switched network, although he did say not
everybody in the company necessarily agreed with that five-year projection.
There we have a major incumbent telephone company that seems to be saying they
are going to do this. I take it from what you are saying there is no incentive
for the companies to do this. In fact the incentive is the opposite.
I am just wondering if you have had any opportunity to think about the TELUS
position, that they would be moving in this direction in, presumably, the
regulatory environment that exists, although obviously they were recommending
changes to the contribution regime.
MR. MÉNARD: My personal note on the TELUS opinion is what I have seen lying
out there on a piece of paper in the audience, that they were actually in favour
of an end-user revenue-based contribution mechanism. I am all for that. It's the
same thing that the little box in my income tax said, as far as I am
Considering the issue of the replacement of the existing public-switched
telephone network with a packet-switched environment, in my view -- and this is
the view from somebody who has spent the last four years of his life trying to
figure out what new applications the mass population would want in an
Internet-based telephony environment -- I have only to conclude that the mass
population does not have the need for something which is substantially better
than basic telecom service.
The plain reality is that the most optimal dumbest piece of gear you could
build to make a telephone call is what exists today and the mass population is
satisfied with that. If what you are telling me is that TELUS wants to replace
its existing circuit-switched environment with some funkier IP-based
packet-switched service, it's certainly not to go after basic telecom service.
It's to go after those subscribers who, like me, are savvy for more
functionality in their use of telephony applications.
I am very sceptical to believe anyone who is telling me that they are
replacing the existing infrastructure, which has already been written off, on
the basis that it no longer works. It works. It's there and it can last for the
next million years.
Now what do we do? Do we consider the cost structure of this infrastructure
as part of the subsidy requirement or do we just consider the maintenance of
that infrastructure into the subsidy requirement? That's my question.
COMMISSIONER McKENDRY: Thanks very much.
THE CHAIRPERSON: Mr. Menard, in the discussion with Commission McKendry just
now you used the term that a revenue-based tax would be acceptable. I take it
your view is, as was expressed by Mr. Gagnon from Vidéotron, that in putting
this all together, the current contribution regime inhibits the development of
efficient network infrastructure whether they may be circuit-switched or
packet-switched because even in a circuit-switched world the current regime
drives you to certain architecture that is largely driven by the contribution
Your view is we should get rid of that and let an efficient network
architecture be designed regardless of whether it's circuit-switched or
packet-switched. Would it then be your view that if you get rid of the per
minute, either the revenue-based or the subscriber line charge would be about
equal or do you have a view that one might be better than the other?
MR. MÉNARD: I personally prefer an additional box on my income tax statement
and the CRTC to manage that. It's just a subsidy determined by whoever is
responsible for having a good idea as to how much it cost to keep this
circuit-switched infrastructure alive and functioning.
My first reaction when you formulated your question was that there is many
other things which are wrong with the existing circuit-switched telephony
environment and a lot of it has to do with the SS7 network: local number
portability, area code expansion, assignment to phone numbers, CISC processes,
lack of involvement of Internet service providers in CISC, lack of
accountability of CISC, lack of participation of government into an Internet
standards body. Contribution is just one of the many things.
Is it my view that getting rid of contribution is a step in the right
direction? Yes, absolutely. Is it my view that a subscriber line charge, in the
event that Mr. Chrétien tells me that I can't have a little box on my income tax
statement, is a good thing? I am totally for it.
Do I believe that it is something that will be acceptable to the mass market
and the people that Action Réseau Consommateurs represents, which apparently are
against a subscriber line charge on the basis that it's going to be way too
expensive? My feeling is it's going to be pennies, we might as well add it.
THE CHAIRPERSON: I thank you very much. I think I am going to quit while I am
Thank you very much, Mr. Menard. It was informative and entertaining and it
was a good note to finish our proceeding on. Thanks again.
That concludes all the parties who had registered their intention to present
We have the written argument from all those who appeared and the others who
chose not to appear and we will be going over that material carefully as well as
their reply, which will be forthcoming.
I want to take this opportunity to thank everybody who did appear. I think I
can speak for all my colleagues to say that this was extremely helpful for us to
better understand the various positions of the parties through our questions and
get a better understanding of the issues themselves and the concerns that all
the parties that brought to bear. It has been very helpful.
As I said, in Whitehorse, when we were there two weeks ago, it certainly
demonstrates the value of this sort of oral process to be able to engage in a
discussion with the parties to help in our understanding of the issues.
Again, I would like to thank all those who appeared and certainly the people
who have helped support the hearing here today, the court reporter, the
translators, the Commission staff and my colleagues.
With that, we will close this phase of the proceeding and we will now be
going over the more lengthy written comments that you have all sent in. I am
looking forward to the reply comments.
--- Whereupon the hearing adjourned at 1615 /
L'audience se termine à 1615