ARCHIVÉ -  Transcription - Hull, QC - 2001/10/04

Transcripts

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

bilingual as to their covers, the listing of the CRTC members

and staff attending the public hearings, and the Table of

Contents.

However, the aforementioned publication is the recorded

verbatim transcript and, as such, is taped and transcribed in

either of the official languages, depending on the language

spoken by the participant at the public hearing.

Transcription

Afin de rencontrer les exigences de la Loi sur les langues

officielles, les procès-verbaux pour le Conseil seront

bilingues en ce qui a trait à la page couverture, la liste des

membres et du personnel du CRTC participant à l'audience

publique ainsi que la table des matières.

Toutefois, la publication susmentionnée est un compte rendu

textuel des délibérations et, en tant que tel, est enregistrée

et transcrite dans l'une ou l'autre des deux langues

officielles, compte tenu de la langue utilisée par le

participant à l'audience publique.

BEFORE / DEVANT:

ALSO PRESENT / AUSSI PRÉSENTS:

Hull, Quebec / Hull (Québec)

--- Upon resuming on Thursday, October 4, 2001

at 0900 / L'audience reprend le jeudi

4 octobre 2001 à 0900

5474 THE CHAIRPERSON: Good morning and welcome back to our proceeding.

5475 In my haste to adjourn yesterday, I neglected to give our Hearing Secretary an opportunity to enter a number of exhibits, so we will do that now.

5476 Mr. Secretary.

5477 MR. SPENCER: Thank you, Mr. Chairman.

5478 I would like to assign exhibit numbers to 13 documents this morning.

5479 The first document "Bell Canada Utilities Segment Estimated Impact of not Applying Offset to all Capped Services Revenues" will be RCI Exhibit No. 1.

EXHIBIT NO. RCI-1: "Bell Canada Utilities Segment Estimated Impact of not Applying Offset to All Capped Services Revenues"

5480 MR. SPENCER: "Bell Canada Utilities Segment Return on Equity Impact of Not Applying Offset to All Capped Services Revenues" will be RCI Exhibit No. 2.

EXHIBIT NO. RCI-2: "Bell Canada Utilities Segment Return on Equity Impact of Not Applying Offset to All Capped Services Revenues"

5481 MR. SPENCER: Order CRTC 2000-408 will be RCI Exhibit No. 3.

EXHIBIT NO. RCI-3: Order CRTC 2000-408

5482 MR. SPENCER: Letter dated 18 September from Fiona Gilfillan providing CVs for GT Group Telecom's panel of witnesses will be GT Group Telecom Exhibit No. 1.

EXHIBIT NO. GT GROUP TELECOM-1: Letter dated 18 September from Fiona Gilfillan

5483 MR. SPENCER: Bell Canada General Tariff Item 70 will be Exhibit GT Group Telecom Exhibit No. 2.

EXHIBIT NO. GT GROUP TELECOM-2: Bell Canada General Tariff Item No. 70

5484 MR. SPENCER: Bell Canada letter dated 9 February 2000 associated with Tariff Notice 6448 will be GT Group Telecom Exhibit No. 3.

EXHIBIT NO. GT GROUP TELECOM-3: Bell Canada letter dated 9 February 2000 associated with Tariff Notice 6448

5485 MR. SPENCER: Order CRTC 2000-346 will be GT Group Telecom Exhibit No. 4.

EXHIBIT NO. GT GROUP TELECOM-4: Order CRTC 2000-346

5486 MR. SPENCER: "Installation, Testing and Maintenance Guidelines for Unbundled Loops", GT Group Telecom Exhibit No. 5.

EXHIBIT NO. GT GROUP TELECOM-5: "Installation, Testing and Maintenance Guidelines for Unbundled loops"

5487 MR. SPENCER: Telecom decision CRTC 97-16, GT Group Telecom Exhibit No. 6.

EXHIBIT NO. GT GROUP TELECOM-6: Telecom decision CRTC 97-16

5488 MR. SPENCER: The CRTC Interconnection Steering Committee Consensus Report, Quality of Service, May 11, 2001, will be GT Group Telecom Exhibit No. 7.

EXHIBIT NO. GT GROUP TELECOM-7: CRTC Interconnection Steering Committee Consensus Report, Quality of Service, May 11, 2001

5489 MR. SPENCER: MTS Communications Inc.'s response to CRTC Exhibit No. 3 will be MTS Exhibit No. 1.

EXHIBIT NO. MTS-1: MTS Communications Inc.'s response to CRTC Exhibit No. 3

5490 MR. SPENCER: We also have two undertakings this morning. Undertakings to The Companies regarding state of competition will be CRTC Exhibit No. 13.

EXHIBIT NO. CRTC-13: Undertakings to The Companies regarding state of competition

5491 MR. SPENCER: Undertakings to The Companies regarding service improvement plans will be CRTC Exhibit No. 14.

EXHIBIT NO. CRTC-14: Undertakings to The Companies regarding service improvement plans

5492 MR. SPENCER: Thank you.

5493 THE CHAIRPERSON: Thank you, Mr. Secretary.

5494 I understand Mr. Farmer wishes to correct a response he had made on the record yesterday and perhaps raise one other issue.

PREVIOUSLY SWORN: JOAN HIGHET

PREVIOUSLY SWORN: BARRY R. DIXON

PREVIOUSLY SWORN: MEGAN G. DAVIDSON

PREVIOUSLY SWORN: ROBERT F. FARMER

5495 MS HIGHET: Actually I would like to correct one first, if I may.

5496 THE CHAIRPERSON: Sure.

5497 MS HIGHET: Thank you, Mr. Chairman.

5498 I would like to correct my conversation with Mr. Engelhart at pages 768 to 780 of the transcript with respect to Smart Pack and visual call waiting bundles.

5499 These services were originally introduced in 1995 and 1996 respectively. Yesterday I was of the view that visual call waiting involved a new service enhancement when it was introduced as a new bundle in April 2000. Upon checking last night, I want to confirm that this is not the case.

5500 Accordingly, the filing reference in the exhibit presented by Mr. Engelhart did not introduce any incremental service feature or price discount.

5501 Thank you.

5502 MR. FARMER: At page 781 of the transcript I indicated to Mr. Engelhart that the number of high-cost residential lines included in bundles should not be included in the calculation of the total subsidy requirement.

5503 Upon reflection, I have changed my views. I believe that a high-cost residential line should be eligible for subsidy whether it is included in a bundle or offered on a stand-alone basis. To do otherwise would preclude the possibility of offering bundles which include lines in high-cost areas.

5504 Including the number of such lines in the total subsidy requirement calculation has the effect of imputing a revenue for those lines equal to the stand-alone residential line price applicable in the high-cost area.

5505 Now, on quite a separate matter, I had noted earlier that tomorrow we would be in a position to provide the undertaking which I had committed to Ms Lawson at page 281 of the transcript.

5506 Having looked at that task a little bit further, I find that we cannot make that date, but we will provide the information by October 12th.

5507 THE CHAIRPERSON: Thank you, Mr. Farmer, Ms Highet.

5508 Any other preliminary matters? No.

5509 Then we will turn to the next party to cross-examine which is going to be BCOAPO.

5510 Ms MacDonald.

--- Pause

5511 MS MacDONALD: Good morning, Mr. Chair, Commissioners, panel members.

5512 Mr. Chair, I have two exhibits coming. They are going to be delivered to me and I will have to sort them out when they get here. They should be here in the next 15 minutes.

5513 MR. HENRY: Could I just ask for a clarification on that? Have they been provided to the panel ahead of time?

5514 MS MacDONALD: No, they haven't, but I don't believe they are going to be controversial.

5515 For clarification, one of them is a CRTC decision and one of them is in reference to an answer to a question Mr. Farmer had provided. He had provided some statistics and I have provided the background document for those statistics, if that helps.

5516 MR. HENRY: Well, we will wait and see if it presents any difficulty.

5517 MS MacDONALD: And here they appear.

5518 Mr. Commissioner, the Hearing Officer has told me that perhaps people don't know who I am.

5519 My name is Pat MacDonald. I represent BCOAPO et al.

--- Pause

EXAMINATION / INTERROGATOIRE

5520 MS MacDONALD: I am going to be asking  -- my first line of questions, and actually my only line of questions this morning is with regard to payphones.

5521 I'm not sure who is responsible for that.

5522 MS HIGHET: I can answer your questions, hopefully.

5523 MS MacDONALD: Good. I am looking at your evidence with regard to local payphone services. Your evidence is that the local pay telephone industry is in decline.

5524 MS HIGHET: That is correct. It's primarily declining from a perspective of usage relating to Internet. About a third of Canadians have cell phones today so we are seeing the usage decline substantially.

5525 It certainly just isn't in Canada. We are seeing it in the States and Europe as well.

5526 MS MacDONALD: And that's actually my next question.

5527 It Is really with respect to the growth of wireless and two-way paging. That's what your evidence says. But you are also saying it is with respect to Internet that the local payphone is declining?

5528 MS HIGHET: Well, there may be an alternative substitute from the perspective of utilizing Internet. Any alternative technologies obviously has an impact on usage, whether you choose to go and pick up a phone and make a call versus using the Internet.

5529 MS MacDONALD: Thank you.

5530 In a declining market, the payphone service is increasingly more difficult to maintain and you state that in your evidence. That is a "yes", for the transcript.

5531 MS HIGHET: Sorry, I nodded. Yes. That is a yes.

5532 MS MacDONALD: In fact, it's your evidence that The Companies -- actually Bell, because this is only with respect to Bell's evidence I understand -- that Bell may have to decommission sets where revenues don't cover the costs.

5533 MS HIGHET: That's correct. We have a business model that if there isn't enough traffic, so not enough substantial traffic to that actual payphone, we decommission the set. We decommission the set for two reasons, because we actually recycle the set and we use them to fix other payphones in the marketplace.

5534 Obviously if there isn't enough traffic to the payphone itself, it doesn't make a lot of sense keeping that payphone in service.

5535 MS MacDONALD: That evidence was found in interrogatory response to ARC's question 306, just for a reference for everyone. I am not going to ask you to turn to it.

5536 Would you say that in high-traffic low-cost areas that the service is compensatory then?

5537 MS HIGHET: In high traffic -- yes, it would be.

5538 MS MacDONALD: I gather, then, that the flip side would be that the less travelled in the high-cost areas aren't compensatory and these are the sets that are being decommissioned.

5539 MS HIGHET: The sets that are being decommissioned are any sets that do not generate enough traffic to warrant keeping that set, that payphone itself in the marketplace.

5540 MS MacDONALD: That would include less travelled and high-cost areas.

5541 MS HIGHET: Not necessarily. I don't have any specifics, but that wouldn't be an assumption I would make.

5542 MS MacDONALD: And it's your evidence that the revenues aren't covering the causal costs?

5543 MS HIGHET: I will have to check that. Can you give me a moment, please?

--- Pause

5544 MS HIGHET: If you will just give me a sec.

5545 I believe, though, what we filed in the evidence was that the service itself, given the business model that we deploy, which is removing sets that don't make sufficient -- don't have enough traffic, therefore don't make sufficient money, we pull them out. So as an overall base it is compensatory.

5546 I will have to check that.

5547 MS MacDONALD: Yes, please. I would like you to check that.

5548 I want to go back to your statement. You said that you are removing sets from the less travelled areas. I'm just looking at your response from my question right before that when I asked whether the less-travelled and high-cost area telephones, these are the areas that aren't compensatory, yet now you are also saying that the sets that are being decommissioned are in the less travelled areas. Could you expand on that, please?

5549 MS HIGHET: No, I don't think I said that. I apologize if I was saying that.

5550 MS MacDONALD: Could you clarify for me. I'm uncertain now, in less travelled areas, would you say that those are where the sets aren't compensatory?

5551 The second part of my question is: Are those sets the ones that are being decommissioned?

5552 MS HIGHET: No, I don't think -- I apologize if I indicated that.

5553 What I am suggesting to you is that where there is less traffic in the marketplace we decommission those sets because the phones are not actually being used.

5554 I'm not suggesting from an overall perspective that the business is not compensatory. The reason for that is that we monitor the traffic at each one of these payphones and pull them out. As a result of continuing to pull phones out of the business, it is a compensatory model.

5555 MS MacDONALD: For the whole service.

5556 MS HIGHET: For the whole thing, yes.

5557 MS MacDONALD: And it is less travelled areas that are not compensatory?

5558 MS HIGHET: That's right.

5559 MS MacDONALD: Essentially your evidence states that the 25 cent call that you currently have is insufficient to providing an adequate return on your investment.

5560 MS HIGHET: No. What the rating flexibility we are requesting is for is to manage two things. Maybe I can just spend a couple of minutes to make sure we are clear with respect to this.

5561 I have already stated this is a declining business and it will continue to decline. It has been declining over a number of years. It will continue to decline. The usage is going down substantially in this business.

5562 There are a number of other factors associated with this. Long distance prices have gone down so payphones are a mix of cash, they are a mix of long distance calls, third party billing, so there are a number of things that actually bring revenue into the payphones. All of that has declined.

5563 Local expansion for EAS with respect to having more expansion on the EAS side, the technology of the providers themselves that are in this business, alternate technologies as you suggested, Internet and some of those other things.

5564 If you add all of this up, this business is declining and it going to continue to decline. It will not actually recover. There are a number of telcos in the States that are actually getting out of the business or actually selling the business.

5565 We have a model in which we take a look at the payphones and if there isn't enough traffic generated we pull those payphones out of the business. That continues to happen, so we will continue to decline this market and we will continue to pull payphones out of the business.

5566 What we are trying to do is, because we recognize the convenience that our customers see in these payphones, we are simply trying to keep more payphones in the business. You know, there is a discussion about indoor/outdoor with respect to why we chose this. It was a very simple thing, recognition that a phone is indoor versus outdoor.

5567 We recognize the convenience associated with outdoor, so we are not asking for any rate flexibility on the outdoor phones. We want to remain in the business, but recognizing it is declining.

5568 MS MacDONALD: Ms Highet, if I could get you to return to paragraph 6-70 of your evidence.

5569 MS HIGHET: Yes.

5570 MS MacDONALD: My question to you had been whether or not -- if it was the evidence of Bell that the 25 cent call is insufficient to provide an adequate return on the investment.

5571 Paragraph 6-70 actually states that, doesn't it, in the second sentence in that paragraph.

0920

5572 MS HIGHET: I'm sorry, where are we referring to?

5573 MS MacDONALD: Paragraph 6-70 of your evidence.

5574 MS HIGHET: I starts with "One critical factor".

5575 MS MacDONALD: That is right. But essentially, that paragraph does indeed state that:

"The 25 cent call is insufficient to provide an adequate return on the investment." (As read)

5576 MS HIGHET: I think we are specifically talking here about competitors and the ability for competitors to get into this industry. There is only about 5 per cent competition in this marketplace. So what we are suggesting here is that the margins aren't high enough for this business.

5577 I'm not going to sit here and say that there are going to be substantial new entrants in the business with the rating flexibility we have asked for.

5578 What we are suggesting is that there may be incentives for someone else to come into this business. And there may be incentives for the competitors that are in this business to expand their geographic coverage that they have or become more stable in the business.

5579 But I believe that this paragraph is relating more to the competitive aspect rather than the business model itself.

5580 MS MacDONALD: Yes. In fact, it says "competitive situation" right at the top of that.

5581 But this paragraph is also stating that:

"The 25 cent call is not sufficient to provide an adequate rate of return." (As read)

5582 That is correct, isn't it? That is what your evidence states?

5583 MS HIGHET: Yes, it is saying that to provide payphone operators with an adequate return on their investment.

5584 Adequate return on their investment. It is understanding the investment that is required in the payphone business. To remain in the payphone business, given the declining nature of the business itself and given some of the barriers that are associated with how the market has evolved from technology, from the decrease in the rates, from the technology providers themselves being in financial difficulties, the inability to get piece parts, there are a multitude of factors associated with this business, that are all associated with barriers to entry. It becomes more difficult to maintain this business on a going-forward basis.

5585 MS MacDONALD: Now, your proposal is asking for pricing flexibility, but unlike the proposal for pricing flexibility in the local market itself, the broader application, you are saying that prices must go up or there is a risk that Bell will close down its payphones.

5586 MS HIGHET: Yes, and that is -- at the end of the day it is a business decision. We need rating flexibility for all the reasons that I have suggested with respect to ensuring that we can keep phones in the business and in the marketplace. It is our view that we want to continue to be in this business, but we cannot make a commitment that we can remain in this business.

5587 We certainly recognize the convenience that we are providing our customers, but we don't have an obligation to serve in this business. At the end of the day, a decline in the business with costs going up and substantial barriers, you have to make some kind of sound business decision.

5588 MS MacDONALD: There is no question that if you do get the pricing flexibility as outlined in your evidence that Bell will be raising the rates?

5589 MS HIGHET: Well, the request proposal is to increase the rates in indoor phones to 50 cents, which is a request that, as is indicated here, we have not had a rate increase in almost 20 years.

5590 MS MacDONALD: And you are raising those rates to meet the costs and to get a reasonable rate of return?

5591 MS HIGHET: We are raising the rates to ensure that we can continue to keep phones in the business and to ensure that our customers have the convenience that payphones offer, and all the other business reasons that I have cited.

5592 MS MacDONALD: Those business reasons would include raising the prices to keep costs -- pardon me, to meet your costs and to get a reasonable rate of return?

5593 MS HIGHET: I have cited the business reasons.

5594 MS MacDONALD: If you could confirm that those are two of them. I have heard you cite them but they have been with respect to different questions, different answers. I am trying to link them that this is an actual -- Bell is going to be raising the prices with the pay telephone service and you have stated that it is in order to keep the phones. Two of those business reasons are, indeed, to meet costs and to get a reasonable rate of return?

5595 MS HIGHET: That was put in our evidence. So yes, that is correct.

5596 MS MacDONALD: This is being asked without a full examination of the revenue requirement, isn't it?

5597 MS HIGHET: I would have to assume that, yes. I'm sorry, I wouldn't -- but I would assume, yes.

5598 MS MacDONALD: That is because this is a proposal, not a scheduled rate increase?

5599 MS HIGHET: It is a proposal.

5600 MS MacDONALD: But you will have to raise the rates, as you have already stated?

5601 MS HIGHET: We are asking for the rating flexibility to increase the rates, that is correct.

5602 MS MacDONALD: I'm interested in the exchange between ARC et al and this panel as well as Panel 1. I certainly don't expect you to answer me with respect to the Panel 1 exchange.

5603 But let me summarize it as follows, and you can certainly correct me.

5604 In the area of true competition -- so we are not looking at a regulatory model at all -- the Commission won't have to look at costs or earnings because the competitive market will take care of all of that. We don't have to worry about costs or earnings, we don't have to worry about a regulatory model, true competition takes care of everything.

5605 Would that be a very simple summary of how Bell sees true competition?

5606 MR. FARMER: Yes. I would say when one is was talking about true competition. I think true competition means fully competitive. We would be talking, I suspect, about forbearance at that point, no regulation. That is right, it would be competition itself that would be regulating prices.

5607 MS MacDONALD: In the transition period to competition, one would have a regime such as the price caps. In a price caps regime it is also Bell's evidence that costs and earnings would not be looked at. Is that a fair assessment of Bell's --

5608 MR. FARMER: That is correct.

5609 MS MacDONALD: Instead you would look at affordability, investment and competition. I believe that is the evidence of Bell, those are the three things to look at, not costs, not earnings.

5610 MR. FARMER: Those are the three certainly predominant objectives that we have put forward that we should be looking at now to set the rules going forward.

5611 MS MacDONALD: But the payphone evidence is asking this Commission to look at both costs -- because the current 25 cent call costs are not compensatory -- and you are asking them to look at earnings because you are not earning an adequate rate of return. Isn't that correct?

5612 MR. FARMER: That certainly has something to do with it. It is information, if I could put it that way, that one can take into account in looking at what is a reasonable thing to do for the price of payphones going forward.

5613 I guess we are not saying it is the only thing that one should look at, it is a consideration. We are not proposing anything like a revenue requirement for payphones.

5614 Rather -- and I may be repeating something of what Ms Highet had said -- we are saying that if you look at the payphone business on a stand-alone basis, if I can put it that way, we are looking at a business which hasn't had a price increase in 20 years. The flexibility that we are looking for matches about the change in the CPI over that period of time. Not to say that must mean we must not be making money, just to talk to the reasonableness of price change.

5615 Again, as we have spoken about in earlier days, and we have talked about on Panel 1, you can also look at other benchmarks in terms of the price for payphone services, and we find that in the U.S. 50 cents -- that is 50 cents American -- is quite common. Thirty-five cents is also fairly common.

5616 We have seen quite recently, I think it was Verizon who had proposed, or perhaps it was SPC, I forget -- had proposed 50 cents and/or 10 cents a minute on payphones in some locations. It was Verizon.

5617 MS MacDONALD: I see.

5618 MR. FARMER: So again, that speaks to sort of reasonableness of the price, the affordability issue related to that price.

5619 Ms Highet has talked about one of the other considerations and that is: What is going to happen to this business as we go forward? Well, we are going to continue to see a decreasing demand and therefore does it make sense for anybody -- obviously we are by far the largest player in this market, readily agreed -- but does it make sense to continue to invest in this market? What we is, frankly, a future for this business which is going to be dwindling over time, as measured by the numbers of phones available to the public.

5620 One of the things we would like to do is, frankly, to be able to keep that investment in place so that we can continue to make phones available.

5621 MS MacDONALD: So it is Bell's position that in the payphone market this Commission should look at costs and should look at earnings, and that is information to take into account in assessing your proposal?

5622 MR. FARMER: Well, only in the following sense, Ms MacDonald: I would say it is a piece of information they should look at. I don't think it is determinative, if I can put it that way.

5623 In other words, I think it is relevant in the sense that this is a business which really, from a pricing perspective, has had no changes for 20 years and therefore one might want to consider what the financial situation is. But it is only one of a number of factors which should be taken into account.

5624 Another factor is, as I spoke about, generally speaking, the demand for the service. One of the things that Ms Highet talked about was when do we take out service? When do we remove a phone? Well, one of the things we look at is definitely the revenue that is being generated. Currently when you see a $1.00 a day out of phones, we very seriously look at taking that phone out.

5625 The reason is: (a) it is not generating very much revenue. One question whether it is covering its cost. I don't have the figures. That probably isn't sufficient.

5626 But also you look, then, at the demand. There doesn't appear to be any demand for the phone in that position -- in that place either. We are talking at today's prices, four calls a day at the flexibility we are asking for, two calls a day, there doesn't seem to be any demand for it. So there doesn't seem to be any particular reason to keep the phone in place.

5627 MS MacDONALD: So as I understand your answer, that this Commission should look at costs and earnings in this particular segment because this segment is in decline. With respect to all the reasons that you have just mentioned, it is in decline and it is a service that Bell wants to provide. Would that be a correct summarization of your evidence then?

5628 MR. FARMER: Yes, it is just a question of how much emphasis one puts on it.

5629 The reason my last answer was so long, it was just to say that they are any number of considerations that should be really taken into account.

5630 I am not denying that the financial situation for this business isn't something that might be of some importance to the Commission in its deliberations on this matter, but nor am I proposing that it be the utmost, if I can put it that way. It is just one of many.

5631 MS MacDONALD: Yes, but you haven't put in any evidence in your submission on your three major points, which are affordability, investment and competition. You have put in information on costs and earnings. Isn't that correct?

5632 MR. FARMER: I would have to check the general record as to what evidence we have put in so far. Again, in the long answer I gave you a moment ago I think we talked about affordability.

5633 We didn't talk much about competition, only to say that we are by far the largest player. There are other players in the market, but they have not taken a substantial amount of the business. I suspect partly it has to do with the financial situation that they are facing in this particular business, but I am speculating on that.

5634 In terms of the investment, we did talk about the incentives to continue to provide these payphones in various locations and how demand does seem to be dwindling, in which case not only do we not have an incentive but there doesn't appear to be any particular desire for us to have the incentive to put the investment in in certain locations.

5635 So I would like to think that we did cover all three. Just exactly where we have covered it in the record, it is just a matter of looking it up.

5636 MS MacDONALD: Thank you.

5637 So then costs and earnings are one piece of information that this Commission should look at, I believe that is what you have said, but it is not a piece of information that this Commission should look at with respect to local payphones -- I'm sorry, local market?

5638 MR. FARMER: Again, it is a question of the emphasis one is putting on each one of these various things. That is way I want to -- forgive me for repeating myself -- I want to say, yes, it is a consideration. One could look at it, I'm not denying that. I think it is maybe a useful piece of information that relates to this business.

5639 Predominantly, though, and preeminently, I will still come back to our three affordability investment competition issues, and I am perfectly happy, quite frankly, if the only consideration as it relates to payphones are on that basis as well.

5640 MS MacDONALD: Would it be your position, then, that this Commission should look at costs and earnings as one piece of the information when you are looking at a market that is in decline, a market that is potentially in trouble?

5641 The second part of my question is that they shouldn't look at costs, reasonable rate of return, when the market is robust?

5642 MR. FARMER: I would be hard-pressed to give any condition. I don't think I could accept that.

5643 I know you were just trying to capture our thinking on it and I accept that. But I don't think I am really in a position to say under what conditions one should or shouldn't consider for each particular service various pieces of information.

0930

5644 I think they can all in their turn be relevant. However, I would say that as it relates to the payphone -- as I said, I think the three predominant issues, once you look at it, are the same three that we have talked about over the whole scope of our proposal, which relates obviously to pricing for many, many services. I think those are absolutely the three predominant ones that should be looked at.

5645 If one finds it instructive to look at the financial situation faced by the telephone companies in a particular service, I suppose one could at least think about it. But I would say it is really very much a subordinate issue, generally speaking.

5646 I say that would apply to the payphone business as well. As I said, I am perfectly happy if one didn't look at that in this particular business. If all one looked at were the three major ones, then I think one could still come to the right conclusion.

5647 MS MacDONALD: In your interrogatory response from ARC, at 305, you have provided the numbers of payphones decommissioned as well as numbers of payphones located indoors and in high-cost serving areas.

5648 I am wondering if you are able to provide -- the figures here are with respect to overall reductions and proportions. I am wondering if you can give me, not today, but if you would be able to provide me with the total numbers so that I would be able to understand exactly how many phones are actually being decommissioned.

5649 Can that evidence be provided?

5650 MS HIGHET: We can provide that information for you.

5651 MS MacDONALD: Could I ask for an interrogatory response from ARC for (a) through to (e), if you could provide the total numbers.

5652 MS HIGHET: Just so I understand, it is the total numbers since the beginning of time?

5653 MS MacDONALD: Let's look at the first question, and then the rest might fall out for you. If not, you can certainly talk to me during the hearing.

5654 The first one asks for the number of payphones decommissioned in each ILEC. That would be just Bell, of course, because you have only answered Bell: the number of payphones decommissioned in Bell's territory annually since 1997.

5655 Could you then provide the total payphones in Bell's territory in 1997?

5656 MS HIGHET: Certainly.

5657 MS MacDONALD: Then with respect to the same -- each one is asked for a proportion or a reduction; if you could provide the total during the same time period asked in the question so that I am able to understand what this figure actually means.

5658 MS HIGHET: We will provide that to you, absolutely.

5659 MS MacDONALD: Ms Highet, you had stated that approximately 5 per cent of payphones are operated by competitors. In the Part 7 application, Removal of Credit Card Surcharges, which is part of this record, at paragraph 12 of that Part 7 application you stated that competition is now established in the payphone market.

5660 MS HIGHET: We were specifically referring to the 5 per cent market share loss.

5661 MS MacDONALD: I am wondering if you would like to comment with respect to the Part 7 application where it states that competition is now established in the payphone market with your evidence in the March filing, the actual filing for this proceeding, the price cap proceeding.

5662 Is there a contradiction in those two? Or could you help me understand the different statements with respect to competition? Or maybe there are not different statements.

5663 MS HIGHET: Do you have any reference I can refer to?

5664 MS MacDONALD: Sure. Your evidence is at 6-33, and your competition portion is entitled "The Competitive Situation". You begin your discussion at 6-68 and you continue to 6-73.

5665 Probably your most emphatic statement is at paragraph 6-69, where you state that after three years payphone competitors have not made significant inroads into the payphone market.

5666 MS HIGHET: Yes, I have that reference.

5667 MS MacDONALD: I have referred you to paragraph 12 in your Part 7 application, where you stated that competition is now established in the payphone market.

5668 Could you explain that to me.

5669 MS HIGHET: We may be debating the word "significant".

5670 Our understanding is that there is around 5 per cent market share loss in this business. There are approximately 100,000 payphones in the business, and we have around 90,000 of them.

5671 I probably in this reference might not use the word "significant" to represent competition necessarily. But I am not quite sure of the context.

5672 We are saying that there have not been significant inroads, and 5 per cent obviously reflects that. Your other reference was...?

5673 MS MacDONALD: The other reference was to paragraph 12 of your application.

5674 MS HIGHET: That is with competition now established?

5675 MS MacDONALD: That's right.

5676 MS HIGHET: My understanding is that competition has been open in this market for approximately three years. There were a number of entrants that applied to get into this business. I believe it is anywhere from 200 to 300 that actually applied to get into this business.

5677 What we see at the end of those three years is 5 per cent of the market going to competitors. I believe there are approximately five major competitors in this business.

5678 I certainly stand by the statement that competitors have not made significant inroads into this business, and I think I have cited a number of reasons why it is difficult to get into the business and remain in the business. Primarily, it is because of the decline in the use of payphones themselves with respect to either cellular or Internet, or the other factors with respect to long distance decrease in rates, and things like that.

5679 But I stand by competition is established in the payphone market.

5680 MS MacDONALD: In the Part 7 application you don't discuss that the market is in decline at all, do you?

5681 MS HIGHET: I don't see any specific reference to that, certainly in 12.

5682 I must say I am not that familiar with this document, as to when it was introduced. But it looks like the 22nd of August, 2000 versus our evidence filed this year.

5683 So I will rely on that there are significant changes in the marketplace over a year. And yes, I acknowledge that I don't specifically see any reference to that in this document.

5684 But there is a year later timing associated with it, as well.

5685 MS MacDONALD: Ms Highet, you have just stated that there would have been a significant change in the market from August 2000 to your filing in March 2001.

5686 MS HIGHET: The market changes over a year. Technology changes. People's use of technology changes. More and more people are getting cellulars. The growth of technology is changing the way our customers manage their day-to-day life.

5687 So a year is tremendous in the life of this industry.

5688 MS MacDONALD: We are not actually looking at a year.

5689 Could you confirm for me the date of your --

5690 MS HIGHET: I apologize. I suggested it was a year. It was from August until whenever the evidence was filed.

5691 MS MacDONALD: Could you tell me when your evidence was filed? I don't have my paper in front of me.

5692 MS HIGHET: May.

5693 MS MacDONALD: It was May.

5694 MS HIGHET: That's correct.

5695 MS MacDONALD: The beginning of May or the end of May?

5696 MS HIGHET: The end of May. I think the 31st of May, to be precise. Let me just check.

5697 MS MacDONALD: So we are looking from the end of August to the end of May.

5698 You have stated that the markets changed significantly in that time. Would you be able to confirm that in any way?

5699 We have your evidence from May, and we have this document from August 22nd.

5700 MS HIGHET: I can't confirm precisely. I could probably tell you how many more people bought cellular phones. I could probably tell you that there were seven or eight different pieces of technology.

5701 How I can relate the way people change their day-to-day lives with new technology -- it is a given. All you have to do is look at the penetration of Internet to see how quickly things turn around.

5702 MS MacDONALD: Be that as it may, that it is a given or not, given that your evidence in May states that the market is in decline, and your application in August of 2000 doesn't mention that the market is in decline but instead says that competition is well established and we would like to have some increases --

5703 MS HIGHET: Actually, we reference now established. We don't say well established.

5704 MS MacDONALD: Pardon me.

5705 MS HIGHET: Well established is a different connotation than now established.

5706 MS MacDONALD: Yes, it is.

5707 MS HIGHET: All right.

5708 MS MacDONALD: That is why it is really careful to be precise when we are speaking, both myself and you. So when you have stated that the market has changed quite a bit in the last year -- and as you say, it is not quite a year -- could you provide me with something that actually shows that there has been a significant change from August 22nd to the time of the filing of your evidence?

5709 MS HIGHET: I can certainly provide you with the number of new subscribers for cellular phones.

5710 One of the main factors that is associated with decline in payphone usage is cellular use.

5711 I don't know whether that would actually help you in trying to understand.

5712 I think you are specifically asking why we didn't reference the decline in the payphone business in one document versus another, and I cannot actually answer that question.

5713 But my reference to market change is a reality, and it will change six months from now as well.

5714 MS MacDONALD: I would refer you to your evidence at 6-64.

5715 MS HIGHET: Would that help you, that piece of information?

5716 MS MacDONALD: I am going to use 6-64, because that paragraph actually describes how you came up with your submission that the payphone industry has declined in the last two years.

5717 That is paragraph 6-64.

5718 You said you would give me the amount of payphones. In order for me to understand exactly when this decline occurred, it might be actually useful to as well -- you see, mine is crossed out. Bell Telephone's payphone revenue decreased by a certain per cent per year.

5719 In 6-64, that is how you came to the conclusion that it declined. Looking at 6-64, and with your offer to give me the payphone usage, would there be any way for me to tell what has happened since August 2000 and the time of the filing of your evidence in May?

5720 MS HIGHET: I could probably provide you with information with respect to growth of wireless over this period of time.

5721 MS MacDONALD: Thank you.

5722 MS HIGHET: Will that be helpful?

5723 MS MacDONALD: I am hoping so. I will have a look at it.

5724 It is not a major point. It is just with respect to something that you had said, that there had been a significant change from August to May. That might be one of the reasons why the Part 7 application didn't actually talk about the decline in the market.

5725 MS HIGHET: I strongly believe that technology is going to be as strong a competitor in this marketplace as any other wireline product could be.

5726 We see that in all parts of our business, and in this one specifically.

5727 MS MacDONALD: The Bell evidence is similar to the local phone market evidence: that the Commission should be looking at an increase in rates, and that will be one factor that will assist competition.

5728 MS HIGHET: I apologize. I was looking at the Commission's report on "Status of Competition in Canadian Telecommunications".

5729 In there, on page 35, Figure 4-22, they actually talk about the growth in wireless. I will show this to you, if you would like to see it.

5730 May I have your question again? I'm sorry.

5731 MS MacDONALD: Yes. Could you give me that reference again, the one that you just referenced.

5732 MS HIGHET: Certainly. It is page 35 of the report. This is a very informative report. We have all been using it.

5733 It is Figure 4-22. It talks about mobile service, evolution of subscribers and spending.

0950

5734 MS MacDONALD: Thank you.

5735 MS HIGHET: Now, this is not the specific timeframe that you were referring to, but we can probably break it down a little finer for you.

5736 MS MacDONALD: Okay. Thank you.

5737 Now, my question was that the Bell filing with respect to payphones is similar to the filing with respect to the local phone market generally and that the Commission should be looking at an increase in the rates. That is one factor that will enable competition to occur -- sorry, will help out competition, pardon me.

5738 MS HIGHET: Just so I understand your question, the reference is that by providing flexibility to Bell, it will incent competition?

5739 MS MacDONALD: Flexibility for Bell to raise their rates, that will allow more competition to occur.

5740 MS HIGHET: Let me just reiterate what I said previously.

5741 I can't say that it will incent further competition. It will provide some incremental health to the existing competitors and potentially allow them to expand their market. But the marketplace recognizes the decline of this business.

5742 So whether or not it would incent a competitor from a risk perspective to get into the marketplace, I can't guarantee that the rating flexibility we are requesting would do that. I would suggest that it probably would help the existing competitors remain stable and more healthy from an industry perspective.

5743 MS MacDONALD: Given what you have just said, the declining market overall, I gather we are not going to see a rash of competitors into the local payphone market?

5744 MS HIGHET: You may see some further entry, but, as I have indicated with respect to this whole business, we are not going to see a substantial amount come into this market, in my perspective. Obviously I am not a market industry expert.

5745 MS MacDONALD: Ms Highet, I missed one of your words. You said we are not going to see a substantial --

5746 MS HIGHET: I don't suspect that the rating flexibility we are requesting will incent a great number of competitors in this marketplace.

5747 MS MacDONALD: Competitors.

5748 MS HIGHET: There may be new entrants because the margins will be better for them to come into the market.

5749 I think you referred your question to a "rush". I was taking it as a reference to a rush of people entering the marketplace.

5750 I don't expect to see that. Whether or not one or two more players come in, this certainly would provide a signal to them from a margin perspective, but there is a substantial other number of factors that they have to take into account before they can enter this business.

5751 One of them is ability from a technology provider perspective as well.

5752 MS MacDONALD: Ms Highet, assume for a moment that there is no competition in the local payphone market at all. What would your proposal to the Commission look like then with the market conditions that we have now, a declining market?

5753 MS HIGHET: That's a little difficult since there is competition in the marketplace of limited -- I would suspect that our proposal would remain the same.

5754 MS MacDONALD: If I could get you to turn to your evidence at 6-60. In that paragraph it states that:

"Wireless and two-way paging are the dominant forms of public communications." (As read)

5755 You might add to that "wireless", as you stated earlier.

5756 MS HIGHET: It indicates here:

"Wireless and two-way paging have become dominant forms of public communications." (As read)

5757 That is correct.

5758 MS MacDONALD: Now, this wouldn't be for people who couldn't afford those types of communications? For example, low income people, people on fixed income, seniors, that wouldn't be their dominant form of public communication?

5759 MS HIGHET: And we recognize that. We recognize that the payphone business still has a convenience and still has a need for accessibility. We recognize that.

5760 This is one of the reasons, and probably the primary reason, why we chose this indoor/outdoor. The outdoor payphones are more widely accessible to the public. They are more visible. They provide a level of, I will use the word, safety net to our consumers. We are continuing to keep those rates as the same rates that they have had for the last 20 years, because we do recognize that and that is important to us.

5761 We are asking for the rating flexibility on the indoors.

5762 We also recognize that the outdoor phones are available all the time, 24 hours a day, where the indoor phones have limited availability with respect to the hours of operations of shopping malls or airports and things like that. So that is critical to us. We understand that.

5763 MS MacDONALD: There was a conversation between Commissioner Langford and Mr. Farmer with respect to: What do people do when they don't have phones in their own homes? Mr. Farmer, you had replied that 90 per cent of them had service available to them in an emergency. You assumed that that meant -- I had looked up your transcript answers from October 2nd. They are at page 563, paragraphs 3388 and 3389.

5764 Ninety per cent of them had service available to them in an emergency, and you assumed that that meant public payphones, a neighbour's phone and perhaps a phone in an office.

5765 That information would have come from the monitoring reports that Bell does?

5766 MR. FARMER: That's right. I'm sure that was the original source of the information I had.

5767 MS MacDONALD: I have brought an excerpt from the 2000 monitoring report. It is a two-sided copy. The last page, if you flip it over, that might not have been the year that you referred to, but this was probably similar to what you were looking at when you referred to that figure of 90 per cent?

5768 MR. FARMER: I'm sure that's right. I was frankly looking at a note that somebody had given me, but I am sure the original source is this report or one more recent than this, if there is one more recent than this.

5769 MS MacDONALD: This is the annual, so there is one more recent. But this is the year, 2000.

5770 MR. FARMER: I'm happy to accept this as representative.

5771 MS MacDONALD: If we look at Ontario, the percentage that use a neighbour's telephone would be 80.5 per cent; the percentage that uses a payphone would be 57.1 per cent; and other would be 55.2, for an overall of 91.9.

5772 In this report, in the summary that is at page 2, the last paragraph, it talks about:

"163,000 of Canada's 11.5 million households do not have basic telephone service." (As read)

5773 Extrapolating from that, it's difficult. We don't know how many people actually don't have access to phones, because this is a household figure. But there is 11.5 million households, there is more than double that in terms of people in Canada, so perhaps double the number 163,000, rough, double that number in terms of people who might not actually have telephones.

5774 Would that be somewhat of a fair extrapolation?

5775 MR. FARMER: I guess you can do that arithmetic. You are right, this counts numbers of households and there are so many people per household and one can do the arithmetic. So I don't have any difficulty with that.

5776 I guess the thing I would remind us all, that when one looks at the penetration rates of phone service in Canada it is exceptionally high when you compare it across all other countries. I believe it is only Sweden that has a higher one than we have in Canada.

5777 MS MacDONALD: Right, and that has been looked at by other persons who have cross-examined you on that point, and I won't return to it.

5778 For low income people that payphone might be the dominant form of public education, there might be a fair number of Canadians that do use pay telephones. Because the market is in decline, there are less payphones around for people to use. That would be fair?

5779 MS HIGHET: There are less payphones around, that is correct.

5780 MS MacDONALD: And you might be forced to close down the operations entirely?

5781 MS HIGHET: We are basically saying that we are not making any commitment. Obviously, the market and the traffic of the payphone usage, the decline, all of the things that I have cited plays into what business decision anyone takes at the end.

5782 MS MacDONALD: Right. And your solution, then, is to have price flexibility, which includes a payphone rate increase?

5783 MS HIGHET: We are asking for rating flexibility for indoor phones, that is correct.

5784 MS MacDONALD: But as we have discussed, then payphones for poor people that is the dominant form of public communication for them, looking at an increase for those people, then we are looking at two pretty important public policy goals. One is affordability on the part of the consumer, and the other one is even having a telephone.

5785 MS HIGHET: We are trying to sincerely address that by not raising the rates on the outdoor phones. The outdoor phones represent about 25 per cent of our in-service base. That is precisely why we are not requesting any rate increase on the outdoor phones, to ensure --.

5786 Given the things that I have mentioned with respect to the availability of the outdoor phones, 24 hours a day and the visibility of them, this is why we are putting forward the model that we are.

5787 MS MacDONALD: So that is the way that Bell is looking at the balancing of these two public policy goals of affordability and even having telephones. This is the proposal you are looking at to balance those two goals?

5788 MS HIGHET: We are certainly recognizing the social convenience that payphones bring to our consumers, and we are certainly proposing a rate flexibility that addresses that. I'm being very precise in the words that I am using.

5789 MS MacDONALD: And there might be other ways to balance those two particulars goals. This is just Bell's submission that we are looking at?

5790 MS HIGHET: Of course there are other obviously social issues. I'm not sure that this is the right forum to address those or that we are necessarily the right body to address that.

5791 But we recognize it, and through that recognition this is what our proposal is with respect to the convenience and accessibility.

5792 MS MacDONALD: In the payphone Decision 98-8, as part of that decision ILECs were to file where payphones were located in their territory, and thereafter where they were removed and why.

5793 My understanding is that those filings are confidential?

5794 MS HIGHET: I would have to assume so. I'm sorry, I am not aware of that. I apologize.

5795 MS MacDONALD: Okay. But there are no filings on this record that tells us where payphones were located at the start of the period covered by Decision 98-8 and where they were removed or why. There is nothing on the record that tells us where payphones were removed and why they were removed?

5796 MS HIGHET: I'm sorry, I'm not actually aware of that, so I would have to assume not.

5797 MS MacDONALD: Assume that those filings aren't on the record, is that what you are saying?

5798 MS HIGHET: Yes, that it was confidential information.

5799 MR. HENRY: I wonder if we could have a reference to the portion of the decision that you are referring to that says what you say it says?

5800 MS MacDONALD: My reference is -- unfortunately, Mr. Chairman, I'm sorry, I have cut off the reference. It is under "F. Other." It is page 3 of 26. At the bottom of the page it says "F. Other" and then the next side of the page heads into public interest payphones itself.

5801 I didn't want to bring the entire decision because I was concerned that it was quite long and I didn't want to do the photocopying in order to save paper. I do apologize for that.

5802 I can certainly tell you that the reference does indeed say that under "F. Other", that those filings were to be provided.

1005

5803 MS HIGHET: Yes. I don't imagine I will be able to respond to your questions as I --

5804 MS MacDONALD: I understand.

5805 MS HIGHET:  -- don't have any references.

5806 MS MacDONALD: Let's look at that question another way.

5807 If the Commission had stated that those filings were to be made with respect to where telephones are and where they were removed and why, basically all I am asking is: That is not on the record in this proceeding?

5808 MS HIGHET: No, I would assume not.

5809 MS MacDONALD: As well, what is not on the record from your interrogatory response from ARC is customer demand for payphone service, customer reliance and customer attitudes. That's reference 3-07 from ARC's IR.

5810 MS HIGHET: That's correct. I will take your word for it that it is not on the record.

5811 MS MacDONALD: I assume that information is confidential.

5812 MS HIGHET: That's we have stated, that it's confidential.

5813 MS MacDONALD: In your proposal and in your evidence today you have stated that price changes may adversely affect the ability of some consumers to use payphones.

5814 MS HIGHET: Correct.

5815 MS MacDONALD: In the proposal you recognize that price changes may adversely affect the ability of some payphone users to actually use the payphones because of affordability concerns.

5816 MS HIGHET: We recognize -- let me just talk about this for a minute.

5817 We recognize two things. One is that payphones are still a convenience to some of our customers.

5818 We recognize that there are social issues. I mean we are all consumers, so we recognize there are social issues.

5819 We recognize that outdoor phones are more widely acceptable. They are more convenient for our customers because they are available more hours of the day, in fact they are available 7-24.

5820 Under the proposal we are putting forward a proposal that requests for rate flexibility indoors only, which will actually allow to have 50 per cent more phones in the marketplace. So the rating flexibility allows us to keep -- even though this business will continue to decline, it allows us to keep an incremental 50 per cent more phones in that business.

5821 We recognize the convenience and we are suggesting that we differentiate very simply between indoor and outdoor because of the accessibility.

5822 MS MacDONALD: You just mentioned a figure that actually isn't in your evidence. You said that this increase will allow you to keep 50 per cent incremental. Could you expand on that a little bit, because I'm not familiar with that number or where it came from.

5823 MS HIGHET: Well, I think we filed in confidence to the Commission numbers that we had identified. They are confidential because it is a competitive market.

5824 The number of phones that we had in place today and the decline that we forecasted over the next four years, the price cap period, given the status quo situation, and the number of phones that we would be able to keep in business under rating flexibility would be about 50 per cent more.

5825 We have also proposed that we will maintain the same proportion of indoor and outdoor to ensure that we have that level of flexibility that I have been talking about, that level of convenience to our customers.

5826 MS MacDONALD: When you say the same proportion, that is the same proportion that you have currently and that is about --

5827 MS HIGHET: Yes. We have about a 75-25 split.

5828 MS MacDONALD: Okay, 75 for indoor.

5829 MS HIGHET: Seventy-five per cent are indoors.

5830 The reason it is proportionately that way is indoor phones generally are banks of phones, so you see six or seven of them lined up together versus the outdoors that are geographically dispersed across Ontario and Quebec.

5831 MS MacDONALD: Now, you have stated in your evidence that Bell is willing to commit to retain a portion of the outdoor phones. Could you tell me whether Bell is willing to commit to retain a portion of the indoor phones at a cost of 25 cents and that may not necessarily be in your compensatory looking at a high-traffic low-cost.

5832 Would Bell be willing to commit to retaining some 25 cent calls indoors, period, and some 25 cent calls indoors in areas that might not be high traffic, that might be in low income neighbourhoods?

5833 MS HIGHET: Well, the reason that we are requesting the rating flexibility with respect to an increase on indoor and no increase on outdoor, that rating flexibility allows us to make some commitments with respect to this business and how many payphones that we can actually keep in the business.

5834 That proportion that we are proposing to ensure that we have the flexibility is part of the rate flexibility requesting indoors.

5835 So the answer would be no, because we need that rating flexibility to ensure that we can keep the phones in the business. It is a matter of balancing between the two of them.

5836 MS MacDONALD: No. I understand that. I'm looking at it, of course, from the perspective of the elderly person who may not have telephone service and, of course, is outside in winter in Ontario and looking for a payphone. Obviously that is the perspective that I'm coming from.

5837 MS HIGHET: I certainly understand that perspective.

5838 MS MacDONALD: Now, if Bell is not willing to look at a commitment with respect to indoor phones that may retain the current cost of 25 cents, would Bell have any objection to more exploration on this topic?

5839 You have mentioned that perhaps this isn't the forum to do it or perhaps this isn't the actual place to do it, but would Bell have any objection to, say, a subsidy with respect to payphone service in order to keep this valuable service, this valuable service for low income people as well as for other consumers that don't necessarily have access to some of these alternatives for public communication?

5840 MS HIGHET: I guess there are two things. One thing I want to mention, the other reason is the indoors/outdoors is the simple perspective of everyone understanding what a price point is and how much it costs to make a call.

5841 Exceptions to that with respect to administrating and knowing who to provide that to and who not to provide that to becomes a horrendous task. You know, there is a whole thing about tracking and monitoring as to how you manage that.

5842 I can certainly take this back to the organization that is responsible for this business to have that conversation with them. I can make that commitment to you. Today I would have to simply say I would need to understand what you would want to propose.

5843 I mean we have talked about -- I think we have heard references to shelters, with respect to putting payphones in shelters. In talking to some of the folks who have been looking at those kinds of things, maybe payphones isn't the right option. Maybe phone lines are a better option to those kinds of things. So we would have to understand the need.

5844 I can make the commitment to either undertake it myself or to go back and talk to the people, yes, but I can't make a commitment to you here today that says "Yes, I am going to agree to the proposal", because I don't understand what the proposal would be.

5845 MS MacDONALD: Yes.

5846 Mr. Farmer, you stated that payphones were stand-alone. I'm just wondering with respect to this idea of looking at exploring what to do about this declining market and how to ensure that the needs of low income people's access to this really valuable public form of communication is met.

5847 Would it be your position that we couldn't look for a subsidy from other segments of your operations, that payphone has to be stand-alone?

5848 MR. FARMER: Perhaps "couldn't" isn't the right word. I think "shouldn't" is probably more appropriate.

5849 It has to do generally with subsidies in the business. We have talked over the years about that a lot. Generally speaking, I think we have to move, from an industry perspective, away from subsidies. There have been some pretty good strides made in the last number of years in doing just that.

5850 I would be very reluctant to entertain the thought of introducing subsidies, frankly for any kind of service, to expand the scope of subsidies. That is just a general comment. So it doesn't rule it out, but extremely reluctant. So you can sense I am away over on one side on this one.

5851 When it comes to payphones in particular, I think there is -- one wouldn't even contemplate it unless one thought that you could position payphones or payphones were actually a substitute for your basic line. Quite frankly, I don't know if I could accept that as a proposition generally.

5852 I think payphones -- as I think has been noted in some CRTC decisions, but I believe it as well -- that payphones are primarily a convenience. They are for folks who are on the road and there is a payphone and you can use them. That is one of the reasons, of course, why wireless is very much eating into the demand for that particular business.

5853 So when it comes to payphone in particular, without having some, I would say, additional information as to what role it plays as a substitute for basic service, again I would be extremely reluctant to get into it.

5854 MS MacDONALD: The monitoring report does show, though, that people are using the payphone because they don't have access to service in their own homes.

5855 MR. FARMER: I don't disagree with that. It does show for those few people who don't have a phone in their home, they do have other alternatives. The second among them apparently would be payphones. It's not even the first.

5856 Again, to what extent that is -- how can I put it -- even a fact, I mean I don't mean that the numbers aren't right, I'm sure they are correct, but if it means that one person once in the last three years had to use a payphone, okay, I don't say that they didn't need it, but it doesn't tell me that there is a huge issue.

5857 I just don't know what the situation is. So I think we would really have to, before we even contemplated this, look to get some more information as to what role payphones are playing in society.

--- Pause

5858 MS MacDONALD: Mr. Farmer, I could be wrong on this point, but with respect to payphones being a stand-alone, is that consistent with your evidence yesterday which, as I understand it, is that revenue from a totality of the operation should cover its costs.

5859 MR. FARMER: I'm not too sure what "payphone as a stand-alone" means. I mean I used that expression earlier today and I guess we were talking about sort of the finances associated with that business in particular, so I guess that is what you are referring to.

5860 I don't think there is any inconsistency. The statement, the latter one that you just mentioned, is a much more general comment, that services together collectively have to cover the costs of the total set of the company generally speaking. One does it by various means. There is no question that from service to service, one has different markups.

5861 What we are talking about is a service which wouldn't have a markup at all, I think in the situation we are talking about here, if we are talking about subsidies, and that is obviously the issue that we would be talking about. Again I would end up repeating myself if I went further.

5862 I think to say services in their totality recover total costs, absolutely correct.

5863 It does not follow from that, of course, that it is okay to have some services not cover their total cost of that particular service. I think there have to be some pretty compelling public policy reasons for that not to be the case.

1020

5864 That is why I expressed my last response in those terms. I would like to look a little bit deeper into what those compelling public policy reasons would be for subsidizing certain payphones.

5865 MS MacDONALD: With respect to the credit card charges and the part 7 application, that application, it states in paragraph 12 that:

"Only incumbents are constrained in the pricing of credit card surcharges." (As read)

5866 I take it that this is the justification for removing the surcharges from the toll schedules?

5867 MS HIGHET: Actually it is a very simple justification, given the conversation we had yesterday about toll and the availability of our consumers to choose whether they have service with us or with the competition.

5868 We are just proposing that there is no requirement for upward pricing constraints. It is very simplistic. It is tied to the basic toll schedule and it is totally discretionary whether or not a customer uses a credit card or not.

5869 The charges themselves that are put forward are put forward by the credit card merchants themselves. We don't actually bill the customers. So it is simplistically that.

5870 MS MacDONALD: So in 5 per cent, approximately, of all payphones there is no constraint. So in the 95 per cent of payphones that Bell operates there is a constraint, so they are still protected. They are still protected under the current regime?

5871 MS HIGHET: That would be my understanding, that is correct.

5872 MS MacDONALD: Paragraph (c) of IR 309 from ARC.

5873 In that paragraph you outline the costs of credit card surcharges and what those costs are designed to cover and you note that the costs are similar to any other merchant.

5874 Are there any other differences that you can point to me that other merchants would have?

--- Pause

5875 MS HIGHET: I'm not in that business, but I would suspect that we have covered most of the ones that we believe are similar.

5876 MS MacDONALD: Would you agree that for other merchants carrying on business and accepting payment via a credit card, that that is part of the cost of doing business?

5877 MS HIGHET: Yes.

5878 MS MacDONALD: And except for Saskatchewan, in the totality of The Companies' filing, the basic toll schedules aren't on the telephone? Basic toll schedules are not posted on the telephone. That was part of the local telephone decision. So when you go up to a telephone you have no idea what you are going to be paying for your toll charges.

5879 MS HIGHET: The actual rates themselves.

5880 MS MacDONALD: The actual rates?

5881 MS HIGHET: Yes, that is correct.

5882 MS MacDONALD: And you would get those by phoning the company, if you are at a payphone, if you wanted to find out?

5883 MS HIGHET: That would be correct.

5884 MS MacDONALD: I guess you would agree that using a payphone is frequently an urgent exercise for people and they would have little inclination or time to phone the company and discuss with them rates charged and any surcharges above those rates?

5885 MS HIGHET: I'm sorry, I didn't quite understand that point.

5886 MS MacDONALD: Would you agree with me that people using a payphone, it is frequently urgent and they would have little inclination or time to telephone the company when they are at the payphone and ask them "How much is this going to cost me and is there any surcharges on that?"

5887 I'm just wondering if you would agree with that statement.

5888 MS HIGHET: Actually, I'm not sure whether I can agree or not agree, because I think what you are suggesting is that people use the payphones on more of an urgent basis than on a chit-chat basis.

5889 Payphones themselves represent mobility and convenience. So I'm not sure I could address that specific point without understanding what kind of -- going through the usage and particular requirements.

5890 MS MacDONALD: So how about the person using a credit card in a fairly urgent -- they are about to miss an appointment or something, they have no cash and they use a credit card. Would you agree that that person, in an urgent situation, is unlike to dial up the company and ask them "What rate am I going to be charged for this and am I going to be charged any surcharges?

5891 MS HIGHET: I think what we are discussing here is the 5 per cent of our customer base that don't have any toll plans, because anyone that who has a toll plan understands exactly what the parameters of that toll plan are, I would suspect or I would assume.

5892 So what we are talking about is a small base of individuals that use credit cards that don't have the toll plan who would need to understand what the costs of incurring that call would be. That is what we are talking about precisely, right?

5893 MS MacDONALD: Yes. So those persons would be unlikely to phone the company?

5894 MS HIGHET: You are correct, they may not decide to do that. So they may be placing a call where they are not sure of the exact amount of that call, yes. For that limited base of customers, that is correct.

5895 I don't know the relationship between someone who doesn't have a toll plan and uses a payphone. I don't know what that percentage would be. I would suspect it is probably less than the 5 per cent that I am speaking of on the basic toll plan, but I have no idea what that would be.

5896 But it is those two factors that you are talking about specifically.

5897 MS MacDONALD: That's right. Is it your position that this would provide full disclosure to the consumer in order for them to make an informed choice?

5898 MS HIGHET: Full disclosure with respect to --

5899 MS MacDONALD: Rates and surcharges.

5900 MS HIGHET: We have processes today that we follow under the basic toll schedule. Those processes with respect to making our tariffs available, having notification to the customer to any changes, all of those would continue to be in effect.

5901 MS MacDONALD: In the circumstances of a person without a plan, with a credit card in an emergency situation, about to miss an appointment, running up to the payphone, do you think that that person is able to make an informed choice based on the information in front of him at the payphone with respect to the surcharges?

5902 MS HIGHET: Again, if he hasn't or she hasn't already received the information with respect to any changes, the assumption would be no, in that particular instance.

5903 MS MacDONALD: Would you say that it is right to be given the opportunity, for Bell to be given the opportunity to have no limits on prices charged in those circumstances?

5904 MS HIGHET: What we are suggesting here is that it is an extremely competitive market. We are suggesting that pricing constraints that were in play during a period of time where it was more of a "monopolistic" market no longer need to be there. So we are asking for that pricing constraint to be removed.

5905 We are not going to propose changes to the basic toll schedule or changes to the credit card surcharges. That is going to be negatively perceived by our customer base from a perspective of doing anything outrageous.

5906 This customer base is extremely important to us. These two pieces of the business -- what you are suggesting is that we would do something with these prices that would be totally outrageous. We are not going to do that to this percentage of the base.

5907 There is substantial opportunities for our customers to take toll plans, either from us or from the competitor. It is the customer's choice to remain on this basic toll plan.

5908 MS MacDONALD: I just want to pick up on your first sentence. You said that this is an extremely competitive market.

5909 MS HIGHET: The long distance market is extremely competitive, yes.

5910 MS MacDONALD: But we are talking about payphone usage and credit card surcharges at those payphones. That is not an extremely competitive market.

5911 MS HIGHET: No, but you were referring specifically to the basic toll schedule, so I was actually responding to that specific point.

5912 MR. DIXON: If I might add, given that I run the Wholesale Division, there were arrangements made over the past years to provide access, card access, to most -- I stand to be corrected in terms of volume, but there was at least a great deal of opportunity that I understand the long distance competitors avail themselves on so their plans would work, like 1-800 dial-up through payphones and such. So I think there is a choice out there on the LD side for people to avail themselves.

5913 MS MacDONALD: Right. I'm not wanting to go down that road in terms of talking about the tolls, only with respect to the Part 7 application, which is part of this record, and the surcharges on payphones.

5914 You have said that, that we don't have an extremely competitive market for payphones. We are looking at 5 per cent.

5915 MS HIGHET: Right. But we have a customer base that we want to maintain a very strong relationship with. The market itself, that is very important to us to maintain that relationship.

5916 We are suggesting that, where you don't need to put pricing constraints, you remove them. It is very simplistically that way.

5917 MS MacDONALD: Right.

5918 Mr. Commissioner, those are my questions.

5919 I understand I went over. I apologize for that. I will be more careful in the future.

5920 THE CHAIRPERSON: As far as I know you were pretty well on the time you estimated.

5921 Thank you, Ms MacDonald.

5922 We will take our morning break now.

5923 We will reconvene in 15 minutes.

--- Upon recessing at 1030 / Suspension à 1030

--- Upon resuming at 1047 / Reprise à 1047

5924 THE CHAIRPERSON: Order, please.

5925 We will turn to the next party now to cross-examine Panel 2, CallNet, Mr. Koch.

EXAMINATION / INTERROGATOIRE

5926 MR. KOCH: Thank you, Mr. Chairman.

5927 Good morning, Ms Davidson, Mr. Dixon, Mr. Farmer and Ms Highet.

5928 Ms Highet, could I ask you to turn, first, to ARC Exhibit 2.

5929 It is the billing insert that was first introduced with the first panel, Mr. Chairman.

5930 MS HIGHET: I have it in front of me.

5931 MR. KOCH: As I understand this exhibit as it was put together by ARC's counsel, it was a folded insert. I remember getting it in the mail. The outside of the insert is printed on the front of this exhibit, and the inside of the insert is printed on the back side.

5932 Is that correct?

5933 MS HIGHET: That is correct.

5934 MR. KOCH: Are you familiar with this insert?

5935 MS HIGHET: Yes, I have seen it.

5936 MR. KOCH: I would like to draw your attention to the first bullet on the front. This indicates, of course -- the first language is:

"Bell Canada has filed proposals with the CRTC that are intended to..."

5937 And the first bullet is:

"ensure that competition is maintained and encouraged in Canada's healthy, competitive telecommunications market." (As read)

5938 Do you see that?

5939 MS HIGHET: I do.

5940 MR. KOCH: Then when we flip over -- so we are basically opening the insert now as a customer. As a customer, I open the insert and I see some Canadian industry facts, and then I see Highlights of the Bell Proposal.

5941 Do you see that?

5942 MS HIGHET: Yes, I do.

5943 MR. KOCH: I take it you will agree with me that there is no highlight of the Bell proposal here that deals with maintaining and encouraging competition. Is that correct?

5944 MS HIGHET: No, there doesn't appear to be any specific reference. I think there is an assumption that the highlights themselves will generate competition.

5945 MR. KOCH: So there is an assumption. but that is not drawn to the customer's attention; correct?

5946 MS HIGHET: If you refer to the last line, it says:

"Through gradual and moderate increases in basic residential service prices, service would remain affordable while encouraging greater competition and innovation." (As read)

5947 So there is a reference to the gradual and moderate increases in basic residential service prices with respect to encouraging innovation and thus competition.

5948 MR. KOCH: And that refers just to the basic residential service prices; correct?

5949 MS HIGHET: That specific point is referring specifically to residential service prices. That is correct.

5950 MR. KOCH: There is nothing in your proposal, I put it to you, that directly encourages competition. Is that not correct?

5951 MS HIGHET: No. I would disagree with that. I think we have competition today in the business market. I think we have spent a couple of days talking about that, obviously, specifically in the urban core areas.

5952 Our proposal is to do a couple of things but primarily to send a signal to the marketplace that there are incentives being put forward that will allow competition to enter this marketplace, both in residential and in the business side. There is going to be some stability over the next four years with respect to price points, and it is going to be at a gradual pace that will allow incentives into the marketplace. Specifically on the residential side, there is the affordability factor.

5953 So I believe that we have put forward a perspective and a signal to the marketplace that indicates that.

5954 MR. KOCH: Is it not fair to characterize your proposal as one that gives The Companies, including Bell, more flexibility?

5955 MS HIGHET: There is rating flexibility, but there are a number of reasons why in any business you need flexibility.

5956 MR. KOCH: Without going to the reasons, though, Ms Highet, you would agree with me that this proposal is primarily to give your companies flexibility; correct?

5957 MS HIGHET: That is a factor. But it is also, as I indicated, a signal to the marketplace.

5958 MR. KOCH: There are rationales for giving you flexibility, and I am sure you have many. But I am just focusing on what your actual proposal is. It gives you flexibility.

5959 There is nothing in your proposal, aside from in high-cost areas, that dictates that prices are going to go up. Is that correct?

5960 MS HIGHET: That dictates that prices are going to go up?

5961 MR. KOCH: Yes.

5962 MS HIGHET: Other than a high-cost area specifically, yes.

5963 MR. KOCH: So there is nothing; correct?

5964 MS HIGHET: That is correct.

5965 MR. KOCH: Likewise, there is nothing that dictates that certain prices are going to go down.

5966 MS HIGHET: That is correct, specifically to that point.

5967 MR. KOCH: Other than raising rates in the high-cost areas, the effect of your proposal is greater flexibility for The Companies; correct?

5968 MS HIGHET: It is greater flexibility to be able to manage within the markets.

5969 And yes, one of the proposals that we have is to bring rates closer to costs -- there is no question -- in the high-cost area specifically.

5970 Our proposal encompasses a number of other areas of the business, though, specifically in the service improvement and in the payphone business in the residential market.

5971 MR. KOCH: I wasn't trying to suggest that there are not other elements of your proposal. I was focusing on the contention, what you sent to your customers, that your proposal is meant to maintain and encourage competition.

5972 In our conversation so far, Ms Highet, you have agreed with me that really what this is about is giving The Companies more flexibility; correct?

5973 MS HIGHET: No. I think what I indicated to you was that having the flexibility allows you to incent the market, so allows you to put forward a signal of stability, sustainability and an incentive to ensure that there is competition.

5974 We need to have competition in those markets.

5975 MR. KOCH: I agree with you.

5976 Your contention, really, is that greater flexibility for you will lead to greater competition. Is that the logic?

5977 MS HIGHET: No. The rating proposal will lead to greater competition. Rating flexibility is associated with the different bands across our market, whether it is bands that are in high-cost areas or bands that are in low-cost areas.

5978 It is a flexibility within a very constrained environment. We are requesting rating flexibility which is average of inflation. And given the concentration of our market in specific bands, there is limited flexibility within that.

5979 MR. KOCH: One of the proposals you make to give yourselves more pricing flexibility is the introduction of the competitiveness test; correct?

5980 MS HIGHET: That is correct.

5981 MR. KOCH: As I understand your proposal, if a service in a defined geographic area passes the competitiveness test, then that service will no longer be subject to any upward price constraints; correct?

5982 MR. FARMER: That's right. We discussed that at length yesterday. That would be right, if it passes the test.

5983 MR. KOCH: I don't want to belabour the details of the competitiveness test, but I would like to explore a few aspects of it.

5984 As I understand your proposal, you are not proposing forbearance for the services that meet the competitiveness test; correct?

5985 MR. FARMER: That's right. They would still be tariffed.

5986 MR. KOCH: So the Commission's test for forbearance which it established in Decision 94-19 remains the test for forbearance.

5987 MR. FARMER: That's right. If were to propose forbearance, we would do it within the context of 94-19.

5988 MR. KOCH: In spite of the fact that you are not proposing forbearance for these services, you are basically proposing that all constraints on the pricing of these services be removed, subject only to maintaining the imputation test.

5989 Is that correct, Mr. Farmer?

5990 MR. FARMER: Upper constraints removed, that's right; and downward, it would be the imputation test.

5991 MR. KOCH: You would agree with me that it is crucial that the imputation test be maintained; correct?

5992 MR. FARMER: Yes.

5993 MR. KOCH: It has been recognized, has it not, the imputation test, by the Commission as a crucial safeguard against below-cost pricing?

5994 MR. FARMER: Yes, I would agree with that.

5995 MR. KOCH: I guess it was first imposed in respect of long distance services; correct?

5996 MR. FARMER: Probably. You may be right, yes. I will accept that.

5997 MR. KOCH: It might have been earlier, but I have only been in this business for ten years.

5998 MR. FARMER: I have been here longer, but you are probably still right.

5999 MR. KOCH: The imputation test was imposed out of a recognition by the Commission that incumbents have the opportunity to engage in practices that limit competition; correct?

6000 MR. FARMER: I think that is not a bad way to characterize it; that's right. There should be some safeguards to make sure that the telephone companies aren't in a position to use any anti-competitive practices, if I can put it that way. And pricing is one possibility.

6001 MR. KOCH: Mr. Farmer, while being cross-examined by Commission counsel on Tuesday, you were in a discussion about cross-subsidization, I recall. You indicated that if you dropped the rate of a service but that rate still passed the existing imputation test, in your view you wouldn't be said to be cross-subsidizing the rate for that service; correct?

6002 MR. FARMER: That's right. As long as it covers its underlying cost, including of course the tariff price for essential facilities, then there wouldn't be any cross-subsidization.

6003 MR. KOCH: So your response to that question was predicated on the definition of cross-subsidization as being below cost price.

6004 MR. FARMER: Correct.

6005 MR. KOCH: And specifically in the case of near-essential facilities, I take it I am correct that under the current rules you are only required to use your incremental costs as a price floor. Is that correct?

6006 MR. FARMER: That's right.

6007 MR. KOCH: There is therefore nothing requiring you to recover the mark-up, which is now 25 per cent, from the customer paying for the service. Is that correct?

6008 MR. FARMER: Nothing from a regulatory point of view. There is a great deal from our general requirement to be able to operate the business, which means, as we have discussed earlier, the requirement overall to recover all of our costs.

6009 That is certainly the pre-eminent driver there.

6010 MR. KOCH: But it is a requirement to recover your costs on an overall basis, not on a service-specific basis.

6011 MR. FARMER: That's right, outside the essential facilities.

6012 MR. KOCH: The competitors, including I believe it was GT, AT&T Canada and CallNet, in the proceeding that is currently under way regarding the imputation test, are challenging that. Is that right?

6013 The competitors in that proceeding are saying that even for near essential facilities -- or what have become known as near essential facilities -- you should be required to impute your mark-up as well.

6014 MR. FARMER: That is my understanding.

6015 MR. KOCH: Correct me if I am wrong, but unless the test is changed in that manner, the pricing flexibility that you propose in this proceeding will allow you to use revenues generated in areas where there is no competition to fund pricing of services in areas where there is competition at a level below the tariff rate for those services charged to competitors.

6016 MR. FARMER: If you look at our proposal, you will note that we have proposed the competitiveness test, which certainly removes any incentives for just that kind of behaviour that you talk about, which is of course why -- I explained it at length with Mr. Janigan and I won't repeat it -- we actually proposed the competitiveness test.

6017 MR. KOCH: It is your claim that the competitiveness test eliminates the incentives. It doesn't eliminate the opportunity to do what I just described.

6018 MR. FARMER: It doesn't eliminate the opportunity. But there are so many other things that do.

6019 Again, I will cast back to Panel 1. There is a benefit to being on all the panels. You can actually remember everything that went on.

6020 When we talked about this particular issue, Mr. Talbot talked about some of the very important conditions that we face just in the market, that any company in the market faces, which talks about why it would be particularly difficult for anybody to engage in the kinds of practices that you talk about, simply because it would be very tough to be able to continue to run the business.

6021 And I will stand by those comments, generally speaking.

1105

6022 So it is true that you can look at the technical aspects of various pieces of flexibility that we have and conclude that: Well, here is a possibility, one of the advantages we have now that we didn't have five years ago when we talked about the forms of pricing constraints that should be in place then.

6023 Another way of talking about pricing constraints, of course, is pricing flexibility. So to your conversation with Ms Highet, of course that is exactly what we are talking about here: What should be the scope of pricing flexibility.

6024 The last four years of experience we have with price caps would say that we would have been able to do just again what is premised in your question, but we didn't. The reason we didn't is because there were so many other conditions that really tell us that it would be foolish to do that. When you look at the business market, yes, there is competition in the business market. It is more in some areas than it is in others, but we haven't engaged in differential pricing, if you will note, in our market.

6025 MR. KOCH: My recollection of the first panel -- and it was an interesting panel, to say the least -- was that Mr. Nicholson acknowledged that incumbents, of course, have this enormous base of customers and that they can be expected to defend market share, subject of course to the overall constraint that they will act in a manner that maximizes their profits. Correct?

6026 MR. FARMER: Yes, I think that is right.

6027 MR. KOCH: Moving to the competitiveness test itself, I understand that you went through the competitiveness test with Mr. Janigan, so I won't take you through it in any great detail.

6028 My understanding of the test is that you took it from the other of the two solitudes that the Commission is responsible for, which is the broadcasting regulatory.

6029 MR. FARMER: That is where we picked the numbers. Perhaps not the concept, but the numbers, yes.

6030 MR. KOCH: Okay. So you would agree with me that when the Commission actually applied this test to the broadcasting market, it was aware at that time that direct-to-home satellites, although perhaps not fully rolled out or not with significant market share at that time, certainly from a technical point of view would have ubiquitous coverage, or near ubiquitous coverage?

6031 MR. FARMER: You may well be right on the timing, I'm not sure. Certainly if it wasn't then it was shortly thereafter that it was recognized that it was essentially a market loss test at that point.

6032 MR. KOCH: That's right. So the 30 per cent didn't mean much because with DTH out there, frankly, it is met pretty easily by the cable companies, isn't it?

6033 MR. FARMER: That is my understanding.

6034 MR. KOCH: There is no similar ubiquitous current competitor in the local telephone market. Correct?

6035 MR. FARMER: Not in the total market, I agree.

6036 MR. KOCH: That is my question, Mr. Farmer.

6037 MR. FARMER: Well, that is right. That is why the competitiveness test doesn't speak to necessarily applying it on a total market basis. In fact when we did speak to it in our evidence we did indicate there that in all likelihood we would be doing it on a band basis and possibly at a more disaggregate level as well.

6038 MR. KOCH: If the Commission were to accept your competitiveness test, obviously the crucial element in that test is the geographical area within which it applies. Correct?

6039 MR. FARMER: Yes, I agree with that.

6040 MR. KOCH: Mr. Dixon, I have a few questions for you.

6041 MR. DIXON: Yes, Mr. Koch.

6042 MR. KOCH: I won't belabour the issue of quality of service. Just a few points with you.

6043 I take it you would agree with me under price regulation there is a greater concern regarding quality from the regulator's perspective than under rate base rate of return regulation? I'm happy for Mr. Farmer to answer.

6044 MR. DIXON: I haven't really given that a great deal of thought.

6045 MR. KOCH: I'm happy for Mr. Farmer to answer.

--- Pause

6046 MR. FARMER: Maybe you could repeat it. Just repeat the question.

6047 MR. KOCH: I will repeat it if I can.

6048 The point of my question is that regulators certainly acknowledge or recognize that there is a greater concern regarding maintaining quality of service under price regulation than under rate base rate of return regulation?

6049 That is not a controversial statement, is it?

6050 MR. FARMER: Let me just take a crack at that, Barry.

6051 I think it would be fair to say that under rate of return regulation there was always an opportunity for the regulator to have a look at quality of service and make their determination of it within that context, the theory being that there wouldn't be many periods in between, if I could put it that way, before the Commission was able to do that, or the regulator would be able to do that.

6052 Under price cap there is a concern that is stated that says that under price regulation there is an incentive to lower costs and that lowering of costs may impact on service quality over time. That is sort of the essence of the concern.

6053 I notice in TELUS' evidence they have brought forward evidence to say that perhaps that concern, though it can be expressed academically, is perhaps not borne empirically, but I will leave TELUS to talk to that. I certainly can't go there.

6054 That is the nature of the concern, which of course is the reason behind our service quality guarantee that we put in our proposal.

6055 MR. KOCH: So whether or not you take the extreme TELUS approach of disagreeing with the premise entirely, clearly your proposal presumes that there is something to that, or at least that there is enough to that the regulator would want there to be something in its regime to deal with that?

6056 MR. FARMER: Again, I would say there is enough there that our position -- I guess, when it comes right down to it, our position is given that there may well be that concern, and we can understand at least the theoretical basis of it, and if it is easy for us to put something forward that might allay that concern, then that is what we have done.

6057 MR. DIXON: I might add, Mr. Koch, over the last price cap period where, for three or four years there were forms of, let me say, monitoring of the quality of service to competitors, the Bell Canada group met every month for 36 months for three indicators, apart from two months, one of which was associated with the strike. I think under that type of regulation, with the indicators that we had, we seemed to have performed pretty well.

6058 MR. KOCH: But apart from your performance, we are talking about incentives and opportunities, and Mr. Farmer I think is agreeing with me that there is a recognition that there is a concern?

6059 MR. DIXON: I agree. I think Bill Taylor's paper, as I read it, points in that direction as well, that there should be some linkage. I think my comments yesterday said while my experience says that we have delivered in the past there seems to be a concern moving forward and I think we have put forward a path to move in that direction.

6060 MR. KOCH: You have certainly put forward a path -- although I know this isn't the right panel for the retail quality of service issues, but certainly on the retail quality of service issues you have put forward a path which includes penalties.

6061 Correct, Mr. Farmer?

6062 MR. FARMER: That's right.

6063 MR. KOCH: Although you didn't put forward a path which included penalties on the wholesale side, I take it you would agree with me that the concern -- I think it is implicit in your remarks and in the evidence of Dr. Taylor is that the concern is at least as great on the wholesale side?

6064 MR. DIXON: I think we have put forward a plan; I think we worked with the industry at the CISC level to come up with some indicators.

6065 But I would reiterate: I am supportive of moving forward on this, but for the past number of years we delivered the prerequisites for long distance, cellular competition and interconnection in services. We delivered all of the prerequisites on the local side.

6066 Our service levels, both informally from my perspective and those shared with my customers, are generally sound. On the formal indicators that we have submitted for the last three years, I would suggest there were no misses.

6067 So I am willing to go forward. I'm just suggesting that there is a historically pretty good track record. But I understand the need as indicated by the industry.

6068 MR. KOCH: Can I take that as a yes to my question, which was the concern is at least as great?

6069 MR. DIXON: I would recognize that there is a concern.

6070 MR. KOCH: And your economic expert says this is of crucial importance? I am paraphrasing.

6071 MR. DIXON: Absolutely.

6072 MR. KOCH: As I understand it, although you didn't put forward in your proposal penalties associated with wholesale quality of service issues, you did in an interrogatory response, which I don't have at my fingertips, acknowledge at least that you wouldn't be adverse to penalties -- and I haven't finished my question yet -- leaving aside the issue of the nature of the penalty, and so on and so forth, you wouldn't be adverse to penalties, as I understood it, for those quality of service indicators which were both finalized and which really reflected quality of service issues within the incumbent's control. Correct?

6073 MR. DIXON: I think we provided three of the six as a start. I think we had some reasons on the other three.

6074 MR. KOCH: Mr. Daniels took you through that yesterday.

6075 MR. DIXON: Yes.

6076 MR. KOCH: The Commission can certainly decide whether or not your reasons were good enough for leaving those other three out.

6077 I want to get to the interim, the issue of the distinction between the interim and final.

6078 MR. DIXON: This would be, I think, total 19, so this would be the 13 others.

6079 MR. KOCH: Thirteen others.

6080 MR. DIXON: Others, that's right.

6081 MR. KOCH: Leaving aside, again, the magnitude and nature of the penalties and the issue which the Commission is well equipped to determine, which is what quality of service issues are within your control and which are within the CLEC's control, there is an additional issue which is that some of the quality of service indicators for which my client, CallNet, has proposed penalties have not been finalized. Correct?

6082 MR. DIXON: That is correct, yes.

6083 MR. KOCH: But assuming they are finalized, Mr. Dixon, I take it you would agree with me that in principle -- again subject to the same caveats, which is that you don't necessarily agree with the nature and extent of the penalties and you also feel that the Commission should give careful consideration to which quality of service issues are within your control as opposed to the competitor's control -- I take it you wouldn't disagree with me that in principle -- and once we have dealt with those caveats -- in principle, if and when those interim indicators become final they should equally be subject to a penalty?

6084 MR. DIXON: I think they could be considered for a penalty.

6085 I noted, in reading the various suggested plans, that there are a variety of plans put forward by the different competitors.

6086 In reading the Sprint plan I saw overlap and I think it addressed that in some of the comments. So I think there could be a subset of those that are interim that we might feel appropriate to have financial penalties associated with, or we could end up back on the original six.

6087 I'm not prejudging where we end up, I'm just indicating I think we need some experience. I would like to focus on the most meaningful indicators that generate the most appropriate behaviour in both the competitors and ourselves and not overburden ourselves with measurement.

6088 MR. KOCH: We won't want to overburden ourselves, and I agree with that. There is a whole section in your evidence on regulatory streamlining.

6089 We are here today talking about the advisability of penalties for wholesale quality of service indicators. I am trying to streamline the regulatory process to get you to agree with me, which I would have thought would be -- regarding what I would have thought is a relatively uncontroversial point, which is that, to the extent these interim indicators become final, then subject to the concerns regarding the indicators themselves --

6090 MR. DIXON: I agree.

6091 MR. KOCH:  -- it makes sense to have a penalty. Correct?

6092 MR. DIXON: I agree, yes.

6093 MR. KOCH: I wasn't trying to do --

1120

6094 MR. DIXON: No, no. I had misinterpreted your question.

6095 MR. KOCH: Back to you, Mr. Farmer.

6096 You will agree with me that price regulation is meant to be a transitory step between rate base rate of return regulation and no regulation at all?

6097 MR. FARMER: I think that is the way it's going to play itself out in Canada. That's correct. That is certainly the way it has positioned, given that we are in rate based rate of return regulation in essentially a monopoly situation. So it will be a transition, that's correct.

6098 MR. KOCH: When there is sufficient competition, presumably you have -- presumably the theory is there should be no regulation of your earnings and there should be no regulation as well of prices and no taking into account your productivity gains. Correct?

6099 MR. FARMER: That's correct.

6100 MR. KOCH: The reason for that is presumably that because in a fully competitive market competition should drive down prices to the point where your productivity gains have been effectively taken out. Correct?

6101 MR. FARMER: I would put it a little differently I think. Whether the productivity gains are taken out or not I suppose plays itself out in the market. I think you leave it to the market to determine that.

6102 I would say the reason you don't regulate in a competitive market is because the competition is going to do it for you.

6103 Customers will have choice and they can choose one service provider versus another based on price and any other number of considerations that they are going to bring to the table in terms of the quality of the service and so on.

6104 That's really the reason one doesn't regulate in a competitive market, simply because the competitive forces are already there and you don't need regulation to superimpose on that.

6105 How that drives prices in the relationships to cost is probably going to be quite different from player to player.

6106 MR. KOCH: Before you get there, we are talking about the transitory step. I take it is not your evidence we are at that point yet?

6107 MR. FARMER: That's correct.

6108 MR. KOCH: I don't -- we shouldn't go back to the glass and whether it's half full or half empty or filling up or 4 per cent full.

6109 MR. FARMER: We would be having a forbearance discussion in that case. That's not where we are.

6110 MR. KOCH: That would be quite a discussion.

6111 But under The Companies plan, I think as you explored with Mr. Engelhart, The Companies productivity gains are only calculated under your plan on services provided to high-cost bands. Correct? He took you through that and I don't want to belabour the point.

6112 MR. FARMER: That's right. Again, I won't repeat it. There was one other exception I noted in that though put into effect somewhat different than it is put into effect as it relates to the high cost band. Productivity gains are incorporated into the pricing of services provided -- or competitor services I should say.

6113 It's just done differently. Rather it's done through performing a cost for a service and that cost calculation from which the prices are then set includes within it a productivity and an inflation factor.

6114 MR. KOCH: That is the Phase 2 costing process.

6115 MR. FARMER: That's correct.

6116 MR. KOCH: But other than that, under your proposal there are large areas of service which presumably -- and I believe you agreed with Mr. Engelhart about this -- are presumably going to produce productivity gains and those are not being used to drive down prices or otherwise return anything to other stakeholders. Correct?

6117 MR. FARMER: Not being used to drive it down, that's correct. That regulation wouldn't force it under our proposal. That's right.

6118 MR. KOCH: So in effect you get to keep those gains under your plan. Correct?

6119 MR. FARMER: Well, the extent to which we get to keep them again is going to play itself out in a competitive market.

6120 As I did speak to Mr. Engelhart, there is a question of what is going to be the impact from, say, a competitive dynamic point of view and obviously as prices get driven down our market share is lost, then they are not capped.

6121 MR. KOCH: I would like to ask you to turn to page 50 of your evidence, please, The Companies evidence.

6122 This is the section of your evidence, section 5, describing the current price cap regime. 5-1 specifically talks -- provides an overview of the current price cap regime.

6123 5-2, which starts on 49, discusses the principal weaknesses of the current regime.

6124 Paragraph 5-13 at the bottom of page 50 is where I would like to direct your attention, Mr. Farmer.

6125 Do you have that?

6126 MR. FARMER: I have it open. Which paragraph?

6127 MR. KOCH: I have an abridged version so there may be stuff that you gave the Commission that we didn't see that changes your pagination.

6128 Paragraph 5-13 on page 50.

6129 MR. FARMER: Okay, I have it.

6130 MR. KOCH: It states:

"The overall pricing constraint requires that capped services prices increase in aggregate by the inflation rate less 4.5 per cent. This has had the effect of reducing prices in nominal terms each year since the beginning of 1998. This result has been unnecessary for achieving the objective of portable telecommunications services and has hampered achieving the objective of competition on a broad basis. The Companies believe that the proposals contained below establish a regulatory framework that will overcome these shortcomings and can lead to full and open competition in Canadian telecommunications."

(As read)

6131 So as I understand your evidence, your proposal is meant to remedy the failings of the first price cap plan or the weakness that you describe. Correct?

6132 MR. FARMER: That's what we are attempting to do, yes.

6133 MR. KOCH: Okay. And one of the failings you identify in your evidence is the fact that the productivity offset has been driving prices downward. Correct?

6134 MR. FARMER: That's correct.

6135 MR. KOCH: And this because this, in your view, was a troubling aspect of the previous regime. Correct?

6136 MR. FARMER: That's right. We felt that it was driving prices down somewhat faster than would have happened otherwise.

6137 MR. KOCH: I take it your view was that this was not in the public interest because it had the effect of limiting opportunities for competitive entry. Correct? You would agree with that?

6138 MR. FARMER: I think that's a good way to put it.

6139 MR. KOCH: I take it you thought long and hard about how to deal with this conflict between the previous regime and the public interest.

6140 MR. FARMER: Yes. I would have to say we did. In putting forward proposals, there are always different models one can take, but I think it is first very important to latch on to what the key objectives are and then you work forward as to what you think is the best way of making those happen.

6141 MR. KOCH: Presumably there was a defining moment when you realized that the solution to the public interest was not to use your productivity gains to drive down rates. Correct?

6142 MR. FARMER: Well, a defining moment. I would say -- no. I suppose if I was going to be precise, let's just say it was an evolutionary process in terms of how we would go forward.

6143 One of the things that was clear to us as we went through the last price cap regime, which was probably most pointedly observed in the case of NBTel was that what was happening for some prices in the business market, for instance, that we were forcing those forces down to really quite low levels where now the business prices are at $30 for single line business in NBTel, the lowest I think in Canada, at least of the major ILECs, and ran into the situation where they simply couldn't do any more as a combination because they were getting to close to costs and they were having tremendous impacts on issues -- or on services outside of the price cap basket themselves.

6144 So that was an issue that we recognized was a difficulty going with the rules that we already had. We could see that that might continue and possibly the situation would be exacerbated if we didn't change the rules. So that was one of the things that we were looking at.

6145 The other one was, we were very keenly aware of the situation among competitors and were wondering if there was something that could also be done that would at least work towards making that situation somewhat better.

6146 MR. KOCH: Don't get me wrong, Mr. Farmer, I'm not suggesting that business prices should be driven down lower. But my point is about if you don't drive down prices, effectively to the extent that the productivity gains aren't competed away, to go back to your earlier answer, your proposal is that you get to keep them. Right?

6147 MR. FARMER: That's what would happen. Yes.

6148 MR. KOCH: Okay. That is a pretty convenient solution to the public interest dilemma, is it not?

6149 MR. FARMER: You can characterize it any way you want, Mr. Koch. I think one of the things -- we should put it in another context.

6150 As part of my discussion with Mr. Engelhart, when one looks at the broad range of services that we are talking about multiplied by the millions of customers multiplied by numbers of years, you do quickly run into very large numbers.

6151 I don't dispute that the numbers we were talking about were quite large in absolute terms. But I think it is also important to perhaps put it in the context of what it means to the individual customer.

6152 If, for instance, we were going to take and keep, to put it in your terms, inflation rate increases -- as Mr. Nicholson talked about it, it is kind of a freeze in real terms, but even in nominal terms we are talking about less than 50 per cents per month per line.

6153 It's perhaps a different way of looking at the same situation.

6154 MR. KOCH: That inflation rate freeze though, or freeze in real terms, that doesn't take into account the productivity gains. Correct.

6155 MR. FARMER: No. I'm talking about how prices would change.

6156 MR. KOCH: Okay. Thank you.

6157 Those are my questions, Mr. Chairman.

6158 Thank you.

6159 THE CHAIRPERSON: Thank you, Mr. Koch.

6160 I believe those are all the parties who had indicated an intention to cross-examine this panel.

6161 We will turn to Commission counsel.

6162 Counsel Moore.

6163 MS MOORE: Thank you, Mr. Chairman.

EXAMINATION / INTERROGATOIRE

6164 MS MOORE: I would like to turn first to some questions regarding The Companies SIP proposals.

6165 In the Interrogatory The Companies(CRTC)26Jun-1500 supplemental -- I don't think you need to turn to this -- pardon me, this is a question with respect to the basic tolls constraint, before I get into SIP.

6166 So in Interrogatory 1500 The Companies stated that:

"In May 2001 approximately 42 per cent of Bell Canada's customers made at least one call that was billed according to the basic toll schedule." (As read)

6167 The Companies also noted in that response that:

"The vast majority of these customers do subscribe to a toll discount plan like First Rate." (As read)

6168 Could you please explain why 42 per cent of Bell's customers, the vast majority of whom do subscribe to a First Rate plan, would make at least one call on the basic toll schedule. In what circumstances would this occur?

6169 MS HIGHET: They would call at a specific time of day that was covered by the basic toll plan, but not another specific plan. So they could have a plan that is associated with, you know, cross-border or overseas, but they would also be using this during a specific period time during the day.

6170 MS MOORE: Are those the only circumstances in which that is likely to occur?

6171 MS HIGHET: That would be my understanding.

6172 MS MOORE: In terms of that percentage for May, would that be a typical result or is that above average, below average?

6173 MS HIGHET: I would have to assume it would be average, but it was a specific month, but I would assume that you would see some results across, other than for obvious seasonal requirements that are associated with either Christmas or Easter or some period of time like that.

6174 MS MOORE: Do you have statistics available for, say, a 12-month period in that same year?

6175 MS HIGHET: Can we check and get back to you.

6176 MS MOORE: Yes.

6177 MS HIGHET: With the assumption that we can, we will provide that.

6178 MS MOORE: Yes. Thank you.

6179 Okay, now, turning to The Companies SIP proposals.

6180 In paragraph 7 of the Executive Summary of Bell Canada's SIP, Bell indicates that it will use a cost limit of $25,000 for permanent premises and $5,000 for seasonal premises.

6181 Could you please explain to me in some further detail how Bell distinguishes between permanent and seasonal premises?

6182 MS MOORE: Permanent are permanent residents that actually are there as compared to seasonal who use the premise on a part-time basis. So year-round versus part-time.

6183 MS MOORE: So if Bell provides service to a premise throughout the year, is that sufficient to characterize the premise as permanent?

6184 MS HIGHET: I'm sorry. I have --

6185 MS MOORE: If Bell provides service to a residence for the entire year, is that sufficient to characterize it as permanent?

1135

6186 MS HIGHET: The residence itself with respect to the usage of the premise is how the definition was made.

6187 MS MOORE: So if it were at what we would characterize as, in colloquial terms, a cottage, that would receive --

6188 MS HIGHET: That would be classified as seasonal. So it is year-round living versus part-time.

6189 MS MOORE: So it is not service that --

6190 MS HIGHET: No, it is premise, yes.

6191 MS MOORE: So if a cottage gets year-round service it would nevertheless be considered seasonal?

6192 MS HIGHET: Let me just check that.

6193 There may be -- I would suggest that a cottage is still classified as seasonal unless the customer has specified in the undertakings that we took from a perspective of getting the actual consolidation of the number of premises that it is a year-round residence. In that case we would classify it as permanent.

6194 MS MOORE: In terms of how you obtain the information about distinction between permanent and seasonal residences, it basically amounts to how the individuals report the information. It is up to them to characterize whether they are permanent residents or seasonal residents?

6195 MS HIGHET: We used a number of techniques to actually pull together the unserved areas. One of them obviously was customers providing information to us and indicating permanent versus seasonal.

6196 We also did a survey and went out and actually looked at the surrounding areas of the unserved locations to actually determine the requirements there.

6197 There were four specific localities that did petitions to the customers themselves. We have troops and network engineers that spend their time roaming those kinds of areas and they also provide the information back from having conversations with the customers and identifying new localities.

6198 So there is a number of ways that we actually get that information in order to make that distinction.

6199 MS MOORE: Do those engineers provide written reports to you?

6200 MS HIGHET: No, generally speaking, it is phone calls, it is verbal.

6201 MS MOORE: Okay. Thank you.

6202 Do you agree that in general Bell's proposed SIP does not serve all unserved premises that have been identified in your territory?

6203 MS HIGHET: There are approximately 36,000 premises that have been identified. Of the 36,000, when you take away those premises that have what we classify as "access issues" -- and those access issues are associated with right-of-way, easement structure, there are a number of areas of inability for us to serve.

6204 So when you take those numbers away and you look at the research that we provided, and the take rates that we identified with respect to customers that wanted the service, the numbers came down to about 5,500, I believe. That has been filed, the specific numbers have been filed in the evidence.

6205 So to answer your question, yes, there are customers that we will not be serving for the reasons that I have mentioned.

6206 MS MOORE: Can you just elaborate on why, in your view, it is appropriate not to serve those customers in light of those issues that you identified?

6207 MS HIGHET: I guess there are two aspects to what we would classify as those that are unserved but may not want to be served. So there are customers that don't want to take the service, there is a small piece of that. Then there is a number of what I will call "property managers" that actually will not provide us access.

6208 So there is a number associated with -- and they are trailer parks, they are campgrounds, and those localities will not permit us access in there. So we would end up dropping the wire meters before the actual campsite or the trailer park.

6209 That represented, I believe, 19,000 of unserved. I can give you the specific numbers, if you want.

6210 MS MOORE: No, that is fine.

6211 You mentioned that in some cases it is the property managers who won't grant access and in some cases there are individuals who do not wish to take service. But what about the case of an individual who has indicated that they want service and yet they live in a locality that doesn't qualify under the SIP? Let's say that that same individual who is requesting service is fully prepared to pay up to the maximum of $1,000. Would you propose to serve such individuals?

6212 MS HIGHET: As part of the SIP program we have put forward a proposal. The proposal was $25,000 for a permanent and $5,000 for a seasonal.

6213 The reason we put forward two different rates rather than uniform rates, that I think have been presented by some of the other parties, is to ensure that we were able to serve as many of the permanent residents as we could.

6214 So there is a cost component with respect to being able to serve. And there will be specific premises that are, number one, outside that cost limit, which is $25,000, and it would be prohibitive to actually serve that customer.

6215 MS MOORE: So you are saying that there will be cases where there are individuals who want service, but because they live in a locality that doesn't qualify it won't be an option for them unless they were to pay much more than the $1,000?

6216 MS HIGHET: As I indicated, of the 36,000 that we have put forward as unserved, we are proposing to serve 5,500 of them in the SIP program.

6217 There are other vehicles through the -- so what we are suggesting here is whether a customer will pay up to a $1,000 to -- and that is a construction charge. There are obviously other ceilings associated with the SIP program and those associated with the cost of actually serving that customer. That is something that has been -- that cost point has been put in and approved by the Commission and that is the cost point that we are using.

6218 If a customer costs substantial to serve, it would obviously not be the appropriate business decision to do that.

6219 MS MOORE: Thank you.

6220 I would like you to consider the following scenario: Suppose there is a locality that currently is unserved and currently doesn't qualify under the SIP formula that you propose, but suppose that there is growth in the locality in the future such that if you were to apply the formula in the future they would qualify. Does Bell propose to provide service in such localities?

6221 In other words, does the company propose to re-evaluate unserved areas, for example on an annual basis, in order to determine whether they will qualify under the SIP?

6222 MS HIGHET: I will make sure I understood your question.

6223 Under the SIP proposal we have a cost limit of $25,000 for permanent and $5,000 for seasonal. We believe that we have consolidated all of the unserved areas today and so we have put forward that proposal.

6224 On a going-forward basis within the price cap period we intend to certainly maintain those records of any future going-forward unserved localities and, at the end of the price cap period, we will review whether we need to look at an incremental service improvement plan.

6225 MS MOORE: So you are proposing that you would review the qualifications of localities only at the end of the next price cap period?

6226 MS HIGHET: You have to take a cut-off point, I guess, at some point. We have actually increased the number of localities from our March submission to our September submission. I think it is 89 localities that we have included. So we have included those in our service improvement plan, but at some point we have to allow for the implementation of the service improvement plan.

6227 So our cut-off point unfortunately is the 14th of September from the filing. We believe that we have all of them, all of the premises, and on a going-forward basis it is going to take the next couple of years to roll out what we have. Then we still have the factor in the 89 localities on top of that, from an operational implementation perspective.

6228 So we believe the end of the price cap period is an appropriate time to revisit that plan.

6229 MS MOORE: I assume that you are assuming that the length of time of the price cap period would be four years perhaps?

6230 MS HIGHET: No. We have put in the plan I believe 2002-2003, given we are in 2001.

6231 I'm sorry, the price cap? Sorry, Mr. Farmer just clarified.

6232 That would -- yes, I'm sorry, I made that assumption.

6233 MS MOORE: Yet, you did just mention

6234 MS HIGHET: So anyway, you are smiling.

6235 MS MOORE: You did just mention that you thought it would take you about two years to roll out your proposal. Would a review after two years as opposed to four years be possible, reasonable in your view?

6236 MS HIGHET: No, we believe that the price cap period at the end of the four years is appropriate.

6237 MS MOORE: I also have some questions that are specific to the Aliant SIP. Would it be more appropriate to address those to the company-specific panel?

6238 MS HIGHET: It would be appropriate.

6239 MS MOORE: To the next panel?

6240 MS HIGHET: Yes, that is right.

6241 MS MOORE: Okay.

6242 Just turning to some issues relating to the recovery of the SIP proposal I note that, first, in paragraph 8-2 of your evidence The Companies indicate that they propose to fund the SIP from price changes that would flow from the pricing flexibility proposals that you have put forward.

6243 In addition, in Interrogatory Bell(CRTC)27Apr-615 The Companies have also indicated that in the absence of any residential rate increases in high-cost serving areas, SIP costs will increase the size of the subsidy requirement. You have noted that the monthly rate increases that would needed so as not to impose a burden on other companies would be, for example, in Band E 81 cents, in Band F 28 cents, and 4 cents in Band G.

6244 With that general background would you agree that in general for the purpose of funding the SIP in high-cost areas there are basically two options, through pricing flexibility applied to local rates and/or through increases to The Companies' subsidy requirement?

6245 MS HIGHET: I would agree with that.

6246 MS MOORE: The Companies have indicated that only Bell and Aliant are proposing SIP expenditures in non-high-cost areas. Is that correct?

6247 MS HIGHET: I can't address the Aliant, unfortunately.

6248 Mr. Farmer suggests I assume it is correct.

6249 MS MOORE: Okay, I think it is correct.

6250 In Bell(CRTC)615, section (b), Bell indicated that it is not seeking any rate increases for SIP costs incurred in non-high-cost areas?

6251 MS HIGHET: That is correct.

6252 MS MOORE: In The Companies(ATT) Interrogatory 215, The Companies' response in that interrogatory indicates that, if the costs for the entire SIP were to be recovered as an across-the-board recovery, both non-high-cost and high-cost residence rate increases, the amount of the increase would be 3 cents in the case of Aliant and 6 cents in Bell's case?

6253 MS HIGHET: That is correct.

6254 MS MOORE: So if the total cost of your SIP recovery over the entire base is between 3 to 6 cents, then wouldn't you agree that the non-high-cost serving area SIP cost per subscriber would be even less and consequently negligible?

6255 MS HIGHET: Yes.

6256 MS MOORE: I would like to turn now to some questions regarding possible pricing constraints during the next price cap period.

6257 I note that, as has been discussed already, The Companies are proposing that the Commission remove the overall pricing constraint on the basis, among other reasons, that competition is increasing. Others, however, question to what extent competition has or will develop in the near term.

6258 In light of these different arguments the Commission might determine that it is appropriate to impose an overall price cap constraint.

6259 So I would like to discuss some different approaches that might be taken and just get your comments on whether they might be appropriate, fully acknowledging that this is not your proposal but just that in the event the Commission were to nevertheless determine that an overall price constraint were appropriate.

6260 Let's first assume that an overall price cap constraint equal to inflation less productivity is applied to total utility segment revenues. Can you comment on whether this would be an appropriate regime over the next price cap period? You can assume that that would, of course, include contribution revenues.

6261 MR. FARMER: You are quite right.

6262 Obviously, we are going to be -- well, you never know, you may have a scenario that I am going to really like.

6263 But this particular scenario, we have talked about it already. I'm not holding my breath, though.

--- Laughter / Rires

1150

6264 MR. FARMER: The difficulty with that we have already discussed quite a bit, and obviously it is not the inflation part; it is the productivity part. We are going to find, I believe, going forward, just what we found out in the last number of years; and that is that it is going to be pushing prices down. That is not helpful to the competitive agenda, nor necessary for the affordability agenda, just to paraphrase a lot of what we said over the last few days.

6265 It is the use of the "X" which is the difficulty here obviously.

6266 If, for instance, one were to have one constraint on utility altogether but it was at the inflation rate, again, that would not be dissimilar to our particular proposal.

6267 So it is not so much the fact that it is overall but rather that it has an "X" in it that is the difficulty here.

6268 MS MOORE: Thank you. Let's now assume a slightly different scenario where an overall price cap constraint equal to inflation less productivity is applied to total utility segment revenues, as well as to the following: competitive segment revenues that are derived from services which continue to be regulated under a Commission-approved tariff; for example, analog private lines and certain non-forborn digital lines.

6269 Why wouldn't this be an appropriate approach?

6270 MR. FARMER: To use your examples in terms of digital private line and analog private line, we are talking here about services which are available generally in the market. Not only are they provided by us, but they are provided by others. So really they are competitive.

6271 Not only are they provided by ourselves and others, but they could actually be provided by again yet another party by using essential facilities that we make available.

6272 I don't believe that we should be putting a constraint on those that wouldn't apply in the retail market generally speaking. That gets us back to the I minus "X" discussion that we had just a moment ago, so I can't really add to that.

6273 I believe it has the same difficulties as I expressed in talking about the first scenario, in that it would be unhelpful to the competitive agenda, generally speaking.

6274 I don't think I can carry it any further than that.

6275 MS MOORE: You have acknowledged this morning that there isn't sufficient competition to forbear, for example.

6276 MR. FARMER: That's right. I am assuming that that was part of your assumption. There is not sufficient competition to forbear, but they are available in the market by other folks as well, and can be made to be available, if I can put it that way. Certainly substitutes for them can be, even utilizing our essential facilities.

6277 So not ready for forbearance, but I don't believe it is necessary to regulate the prices by forcing them down.

6278 MS MOORE: Now I would like you to assume that an overall price cap constraint equal to inflation less productivity is applied just to total utility segment revenues. I wonder if you could comment on what sub-basket structure and additional pricing constraints The Companies might consider appropriate in that kind of scenario.

6279 MR. FARMER: Perhaps because I wasn't thinking, I just realized Scenario 1 was I minus "X" on utility generally. I have to say in my response that earlier I was thinking cap services as we know them today.

6280 So I guess I would have had something additional to say in the first scenario as well, had I thought about it.

6281 MS MOORE: Why don't you go ahead and do that.

6282 MR. KOCH: I will do that right now -- and I don't suppose it will be surprising to you.

6283 I do not believe it is necessary to put a price constraint on what currently today is not capped. It is not capped today because it is discretionary. We have talked about that, so I won't go further on that.

6284 So it is not necessary to do it.

6285 I would say that putting a constraint on services which are currently not capped also can work again against the competitive agenda, as I think we discussed with some cross-examiners this week.

6286 Part of the service that competitors can compete for are not only the lines that we provide but also those vertical features that we provide as well. Therefore, by virtue of an overall constraint that would apply to the broad range of services in the utility, it would capture those uncapped services as well, forcing those prices down probably over time; and if not those prices, then other prices even to a greater extent.

6287 I think it would be very much a retrograde step in that case.

6288 Now I will turn to the third scenario.

6289 The additional thought here is: What would be the sub-baskets if in fact we had a scenario of that sort? Obviously, I would have to suggest that if you are going to do that, then at least for those services, that part of the utility that is currently uncapped, don't put any constraints on it. They would be constrained by the overall constraint.

6290 But there is certainly no necessity to put any further constraints on them, for all the reasons that I just discussed.

6291 I suspect that -- let's see, how would we do it?

6292 The difficulty I am having with this is because what I am attempting to do here, quite frankly, is to say: If I had to live within the constraint posed within your scenario, how can I make it look as much like my proposal as I can?

6293 Frankly, it is rather difficult to do that.

6294 I would say, for instance, if you were going to have a constraint of this sort -- I still think there is a sound public policy reason to put a constraint on residential services separately, again for some reasons that we discussed, not the least of which is affordability. There are other reasons as well.

6295 I would propose the same proposals that we made; i.e., at the rate of inflation. I would also make the same proposals we made in terms of the high cost areas, which we sometimes speak of as a basket of high cost, but really there are many, many baskets, each parade element as in our proposal.

6296 So that would be one element of it.

6297 I suspect that on business -- though we have business and other, as we have put them together, I wouldn't think that any additional constraint would be necessary there if in fact you are going to have an I minus "X" overall. That, without question, would be more than enough in terms of actually limiting any kind of pricing.

6298 I have one other comment.

6299 Part of the utility is the competitor services prices. By competitor services prices, I am thinking of the ones that we have in our proposals called competitor services. It is not any service used by a competitor but rather those essential interconnection and near essential services.

6300 Again, I think for reasons of policy related to competition, it would be appropriate to have a constraint on that basket as well.

6301 I am perfectly prepared to put a constraint even within this overall constraint of saying: Allow prices to move as costs move.

6302 MS MOORE: Thank you. Let me ask you to consider one other scenario for a basket structure.

6303 We are assuming that we have a pricing constraint equal to inflation less productivity on two baskets, one containing residence services and a second basket containing optional services that are associated with residence services.

6304 Let's also assume that in this scenario annual increases to individual residence rate elements would be limited to the rate of inflation.

6305 Could you comment on that scenario, please.

6306 MR. FARMER: The rate of inflation applied on the basic service basket?

6307 MS MOORE: On the individual residence rate elements.

6308 MR. FARMER: In both baskets, both the optional and the -- just so I understand the scenario.

6309 And that was at 10 per cent?

6310 MS MOORE: No. It was the rate of inflation.

6311 MR. FARMER: I guess a lot of the comments I have made I would already make. I am not too sure whether I am to assume that these are the only constraints.

6312 Obviously, if these were the only constraints, it would be positive in the sense that constraints would have been lifted on other services. So that would be a positive feature of this if in fact that is what we are talking about.

6313 For the reasons I talked about a little bit before, both because the services are discretionary and it kind of works against the competition agenda, I do not believe it would be appropriate to have any constraint on these optional services.

6314 So I really think I minus "X" is unnecessary and possibly damaging.

6315 The I minus "X" on the residence basic -- again, I think I am just going to end up repeating myself.

6316 I do not think it is the right way to go. I do not think, in fact, even putting an inflation cap on individual price elements is the appropriate thing, simply because it isn't going to permit the reduction in subsidies which I think generally is required in the industry, for all of the many reasons we have spoken about subsidies in the industries for many, many years.

6317 So one can imagine that if there was an individual rate element constraint that our high-cost areas would continue to be subsidized for a very long time, and there would be no appreciable change in that over time.

6318 I think that would not be conducive at all to moving forward on that particular agenda.

6319 That is about as much as I can say on that scenario.

6320 MS MOORE: With respect to the possible basket of optional services associated with residence, do you agree that if a subscriber doesn't have a competitive alternative for the basic line, in effect there really is no alternative for the optional services -- putting aside the argument that they are discretionary?

6321 MR. FARMER: Well, the premise of your question I think answers it as well. If there is no alternative, there is no alternative.

6322 It really is the discretionary nature of it which says that there shouldn't be any constraint.

6323 MS MOORE: I would like you to refer now to Interrogatory The Companies(CRTC)25Sept-4200, at page 4.

6324 MR. FARMER: Yes, I have it.

6325 MS MOORE: At page 4, towards the end of the first paragraph, The Companies state that:

"The Commission has correctly refrained in the past from imposing differential pricing simply to reflect that a competitor is using a service. This approach has allowed the development of services which can reflect more accurately a competitor's needs. For example, services such as high capacity 45 and rebiller services are distinguished from retail counterparts, not just by price but by service characteristics as well." (As read)

6326 Could you elaborate for me what the service characteristics are that distinguish these services you have mentioned from their retail counterparts?

6327 MR. DIXON: The services you mentioned were specific services that were designed specifically for wholesale customers. So the cost base associated with them was appropriately wholesale.

6328 So effectively applying a further reduction to it, or even considering it, wouldn't make sense.

6329 MS MOORE: So it was a situation where there was a potentially very large wholesale customer, and it was possible to design a service for them that would better meet their needs?

6330 MR. DIXON: There was not one wholesale customer but a variety of wholesale customers. There have been, apart from the essential and near essential services, a number of wholesale specific products that over time we have designed, which on occasion get used in a retail application. But most of the time they are used specifically for ISPs.

6331 Typical ones would be bandwidth select or even most recently a wavelength based service, where it is absolutely high capacity service that mostly carriers or CLECs or ISPs or wireless carriers might want.

6332 So we effectively design them almost perfectly for that market.

1200

6333 MS MOORE: So in terms of some service characteristics that would distinguish services that are appropriate for retail versus wholesale, you have mentioned their high capacity.

6334 If you had to elaborate specifically on the phrase "service characteristics" --

6335 MR. DIXON: There are some minor additional costs associated with wholesale services with regard to differing service arrangements. There are also reduced costs sometimes on a repair standpoint. I won't say "reduced costs." It is just the appropriate repair costs associated with it.

6336 You would also consider the appropriate billing mechanism. For example, on Rebiller Elite, which was one of the services you mentioned, it was appropriate to consider in that particular case where the service allowed me to direct one bill to the customer and then that customer direct 400,000 bills to their customers there was some reduced cost.

6337 But when you put it in terms of overall perspective, when I have ever looked at costs -- and they are not easy to ascertain at times -- but typically the underlying costs of the services, about 80 to 90 per cent of them are typically network-based. Then there are usually additional costs that might include repair and billing and customer service and a variety of other issues.

6338 But the core, for the most part, is very common in terms of its network elements, be it on a wholesale service or a retail service that wholesale customers might use.

6339 Is that helpful?

6340 MS MOORE: Yes, thank you.

6341 Maybe we can explore this from just a slightly different but related angle now.

6342 I wonder what comments you would have to the following: In what circumstances would The Companies develop a service for use by competitors based on existing retail services?

6343 MR. DIXON: I don't know why we would develop per se if they already exist.

6344 I'm not sure I'm understanding the question.

6345 MS MOORE: So there aren't any existing retail services, in your view, that might have service characteristics akin to high capacity 45 and rebiller that might be more appropriately structured as wholesale services for competitors?

6346 MR. DIXON: There are existing tariffs at this point for those services. A great deal of the business that we in terms of with competitors or CLECs or other industry partners is in the sale of those services today.

6347 MR. FARMER: Maybe I can just add a little bit as well on this.

6348 We do have services that we provide that give volume and term discounts. It is really the volume that I am focusing on here now.

6349 Take Centrex as an example. It is a retail offering obviously, but the greater the number of locals that the customer would take, the lower the price perhaps is the best way I can put it, which allows competitors -- not that it was necessarily developed in a wholesale market, but it does allow competitors to take the service and to use the ability that the lower price on a higher volume basis gives them and allowing them then to resell it. There are a number of instances where that is happening today.

6350 In the long distance market, again we have seen the same kind of phenomenon in that the larger the business that is brought to the table the lower the price on a unit basis. Again, that can be utilized on a resale basis.

6351 So it is not as though someone had to do something to make wholesale opportunities available. Rather, it was already available through the mechanisms in the retail market already.

6352 MS MOORE: Some parties in this proceeding have indicated that, for example, digital network access or DNA is one of The Companies retail service offerings that is important to them from a competitive perspective.

6353 In your view, is there some potential there to tailor the service characteristics of this retail offering to competitors' needs?

6354 MR. DIXON: I think there are thousands of DNA accesses in-service. I forget the exact number. I think it was one of the interrogatories. It is somewhere between 5,000 and 10,000 that the competitors use today.

6355 So I'm not sure there is any further customization of the product per se, but I think the direction people were heading with that was with regard to was there any potential discount that could be applied perhaps of reduced cost associated with wholesale.

6356 Is that correct or is that where you would like to go?

6357 MS MOORE: I am just wondering if, in your view, there is any room or appropriateness to tailoring a service that the competitors have identified as being important to them?

6358 MR. DIXON: It is just essentially a DS-1 connectivity. It is pretty basic. While there are 6,000 or 5,000 wholesale uses, I think there is multiple of that retail uses.

6359 With regard to could there be any difference in terms of the costs associated with it, I would come back to my earlier comments that there probably is, but in the examination of any service you would have to look at that specifically to see what that is. At times there are increased costs associated with the provision of dedicated help desks or those types of things, or rework associated with -- orders associated with competitors because you are not front and centre with the end user.

6360 So there is a translation between what the customer wants and, in some cases, what is translated to us. So it adds cost.

6361 For example, on the CLEC service orders today, which would not be like DNA, but on those loop orders today, there is a significant amount of rework that we are going through after best efforts to try to improve that and that costs significantly more.

6362 I think there is room to consider that and study that.

6363 MS MOORE: So ultimately there is room to consider with respect to DNA, for example, as to whether there could be a more tailored offering for competitors?

6364 MR. DIXON: I think there is. I think you have to look at the broad picture, though. In terms of overall considerations, there are issues that you factor in in terms of billing costs. This year, in particular, it has been a heck of a year for me for accounts receivable.

--- Laughter / Rires

6365 MS MOORE: Are there any other services that could be tailored in this fashion? Perhaps megalink you might have some comments on, for example.

6366 MR. DIXON: I think any service you could consider. I just think, as Bob Farmer mentioned, there are volume discounts on many of the services today that recognize the benefits of high volume.

6367 Fundamentally, there is not a whole lot of difference in provisioning an access between a wholesale customer and a retail customer. It is a connection between A and B. You may have to roll a truck, you may not; it is either there or not.

6368 There are some differences between predictability which at times can come into play. For example, if you considered the Royal Bank -- or not the Royal Bank, a large bank, their needs for services are far more predictable and could be laid out to perhaps my retail counterparts or one of the competitors' retail counterparts.

6369 The needs from a competitor are more based on their next sale and you have no idea where it is going to be. So the provisioning of the service can be on a more short-term basis, on an accelerated basis, which incurs additional costs.

6370 MS MOORE: Do you know if the carrier service groups of The Companies have had discussions with any competitors with respect to developing competitor-specific services based on, for example, DNA or megalink?

6371 MR. DIXON: Price is always an interesting discussion with all customers. In the last year we have had discussions with a couple of major customers about the potential for -- I wouldn't call it specifically cost avoidance issues, but whether there was a possibility for longer-term contracts, loyalty discounts, those types of things.

6372 Unfortunately, at this point we haven't consumed those -- or consummated those, I should say, but we occasionally do have discussions about that.

6373 But specifically to DNA and a request to me directly to, say, develop a service with avoided costs in it, I can't say we have had that.

6374 MS MOORE: Just to clarify a couple of things, you said you have had discussions with customers. Would those include customers that we could characterize as competitors?

6375 MR. DIXON: Those are my customers, that's right.

6376 MS MOORE: You say you haven't had discussions with respect to DNA, but what about megalink, for example?

6377 MR. DIXON: That is kind of part of the same bundle of services, yes.

6378 MS MOORE: I would like to turn now to considering ILEC services that competitors use as inputs in the provision of their own retail services.

6379 On Tuesday -- the transcript reference is Volume 2, page 465 to 466. At line 9 at page 465 and line 5 at page 466.

6380 In general terms, I take it from Mr. Nicholson's comments there that he thought The Companies would agree that facilities-based competition includes the resale of unbundled local loops. He also indicated that the purchase of the incumbents' loops is part of the process whereby competitors increasingly use their own on-net facilities and in some cases may be a permanent feature, depending on market situations.

6381 Does that generally reflect the nature of --

6382 MR. DIXON: Yes, I agree with that.

6383 MS MOORE: In your view, does facilities-based competition also include the resale of any other ILEC services that are currently identified as competitor services?

6384 MR. FARMER: I think any of the essential services that we provide, they are obviously provided to them and they, in essence, resell them in the sense that they make up a component of the service that they eventually provide.

6385 Clearly any of those would qualify for facilities-based competition.

6386 Let's also remember, competitors take all kinds of services from us. In fact, it is only the smaller portion of the business that we get from them are what are currently classified as competitor services, and even a portion of that is the essential and near-essential services.

6387 Of all of those services that they take from us which they then resell -- Centrex is an example and there are others -- I would not call that facilities-based competition.

6388 The reason I wouldn't is simply they are using our facilities. When it comes right down to it, they use not only the copper and the other nuts and bolts to go into making up service from a technical point of view, they also use the processes that we put in place to serve customers and most everything else. So it is really our service just resold, and that is not using their facilities, it is using ours.

6389 MS MOORE: Would you agree that, like local loops, many services that are identified as competitor services either involve the provision of an ILEC facility or interconnection facilities? Some examples would be payphone access lines, cellular access, mobile satellite access.

6390 MR. FARMER: Your question was: Do they involve the use of interconnection facilities?

6391 MS MOORE: Do they involve either the provision of an actual ILEC facility or interconnection facilities?

6392 MR. FARMER: Yes, they do.

6393 MS MOORE: So what current competitor services would you include in facilities-based competition, and do those services share any characteristics, in your view?

6394 MR. FARMER: Well, I guess, if I'm understanding the sense of the question, I would say that any of the services that we would call essential or near-essential or interconnection services -- so that is the interchange of traffic between carriers, that is the interconnection, if I put it very broadly, essential and near-essential -- there is not a tremendously long list, but there is a list there. Obviously, the loops in some areas are essential.

6395 For near-essential we get into issues like EAS transmitting services and other services like that.

6396 I would say the use of those services, together with their own components, would constitute facilities-based competition.

1215

6397 I think once you step beyond that you probably are not doing that, you are just reselling the telephone company services.

6398 MS MOORE: If you had to say what characteristics, both the essential and near-essential share, how would you comment?

6399 MR. FARMER: Well, I will probably give you the definition of essential facilities as we find it in 97-8, but I probably won't do it very well because I am just speaking off the top of my head.

6400 Really, the essence is that there are certain services that have to be provided by the telephone company because the telephone company is the only place to get them and they have to be provided to competitors because competitors need them.

6401 Almost as a corollary of the first one, they just are not able to be duplicated by the competitor in any of their technical or an economically feasible way. There is the definition of essential.

6402 Near-essential is not quite that. I guess that's the use of the term "near", not a term that we invented.

6403 Near-essential is really non-essential, but it is believed that, and I think there is strong reason to believe this, that at least to allow competition to move along for some period of time, recognizing that they could be provided by others but maybe aren't provided by others to a great degree, then it is important -- I'm just trying to paraphrase 97-8 here -- important to make those services also available to competitors at prices which are considered to be reasonable, if I can put it that way.

6404 It is after that you get into services which are really available on a commercial basis or could be made available by using the first group of services that I talked about.

6405 MS MOORE: Thank you.

6406 I would like you now to consider a situation where a competitor is using an ILEC-provided DS-1 or DS-3 to connect to the competitor's leased unbundled loops from its point of co-location with the ILEC back to the competitor's own switch.

6407 Please further assume that in this scenario because of difficulties relating to rights of way and access the competitor is effectively unable to provision its own facility for this purpose.

6408 In that scenario, would you agree that the competitor has little choice but to use the ILEC's facility?

6409 MR. DIXON: That seems to be close to an example I had seen, yes, with Almonte. Is that the reference?

6410 MS MOORE: That's not my particular reference.

6411 MR. FARMER: Okay. It's pretty close.

6412 There are growing alternatives in terms of connectivity between remotes and switching centre with the, I think, over a thousand IX routes that are foreborn which is reflective of growing competition.

6413 It's hard to say, okay, unless you said which city it was or which town it was, you were forced to use the DNA access or an access service to get back.

6414 In terms of sizing, I would question -- although of course it is anybody's prerogative or company's prerogative to move forward using a DS-1 -- what I see in the market is typically a DS-3 and OC-3 connectivity with the pipes. So the unit cost associated with the -- of a DS-0 is substantially less.

6415 An example might be that if you put a DS-3 -- now, you have to have the volume so you have to carefully plan your entry into that area, but your cost of the major components in an example like Almonte would reduce significantly when you go to the capacity of a DS-3.

6416 Just on tariffs there is at least a 60 to 75 per cent reduction in unit cost by going to a DS-3. Of course you need the volume, which comes back to is co-location or virtual co-location with a loop the right approach initially. Perhaps you need to build a base of customers with resale and then evolve to perhaps something where you have enough magnitude so there are some economies of scale with regard to carriage.

6417 MS MOORE: So you say it's hard to say whether in any particular case the CLEC has little choice but to use the ILEC's facility. In saying that you mentioned that there are growing alternatives.

6418 Could you provide some specific examples of what the alternatives would be for the CLEC to get from the co-located ILEC switch to their own switch?

6419 MR. DIXON: I think it comes back to the investment that I think has been talked about in this hearing, at least $4 to $5 billion in investment. A lot of that was put into the ground.

6420 In effect, if you look at the co-locations there are a great deal of them where there is connectivity that has been self-supplied by the carrier. They have perhaps pulled fibre in.

6421 Vidéotron might be a good example where I think it's very public knowledge that they invested significantly in infrastructure in Quebec. You always go to accumulation points of subscribers or large volumes of people to provide connectivity and quite often those are very close to our central offices. So there is a growing opportunity to go directly.

6422 I'm not saying at times there is not a dependency on us, I'm just saying there is growing competition. Since I became involved in this industry when there was little choice, even at the wholesale level where I deal, the competition that I feel today compared to the competition I felt, you know, six years ago is just tremendously different.

6423 There's a lot of that fibre that was put in the ground and prices -- there is a hell of a lot of price competition. I think it's unfolding.

6424 MS MOORE: Are there any alternatives when there is a right-of-way problem for the CLEC to get from the ILEC switch back to their own switch?

6425 MR. DIXON: I know there is -- I'm not an expert on this, but we certainly provide opportunity to enter our ducts under terms and conditions that I think the Commission was involved in. I administer that. I just haven't been at it recently. I don't see that as a difficulty.

6426 MS MOORE: Thank you.

6427 Mr. Chairman, this might be an appropriate time for a break.

6428 THE CHAIRPERSON: Okay. Thank you, counsel.

6429 We will take our noon break, then, and reconvene at 2:00 p.m.

--- Upon recessing at 1225 / Suspension à 1225

--- Upon resuming at 1400 / Reprise à 1400

6430 THE CHAIRPERSON: We will return to our proceeding now.

6431 Before we return to cross-examination by Commission counsel, are there any preliminary matters anyone wishes to raise? No.

6432 I will just note, I understand there is at least one more person who wants to make a general representation and a number of other people who we weren't able to get to the other day on the phone call, so we are trying to schedule an opportunity for that appearance and the other calls probably next Friday, either after the morning break or early afternoon. I think there is about eight or ten of them. So that will be next Friday.

6433 Commission counsel.

6434 MS MOORE: Thank you, Mr. Chairman.

6435 I would like to turn now to a discussion of some questions relating to exogenous variable, and if you could turn to section 6.7 of The Companies' evidence, and in particular paragraph 6-176. In the abridged version, it is at page 105.

6436 MR. FARMER: I have it.

6437 MS MOORE: Thanks.

6438 In this paragraph The Companies address their proposal for exogenous-related issues. Towards the end of the paragraph, roughly the third last sentence, it begins "Consequently, the material..." -- the sentence before that:

"Based on these considerations, pricing flexibility for The Companies' utility services will be established for the next four years, i.e., under your proposal. Consequently, the material impact on a company's costs of an unforeseen event should not necessarily trigger an exogenous adjustment." (As read)

6439 Then you go on to explain this:

"Rather, an exogenous adjustment would be necessary only if the event were to materially change the nature of the utility services or be inconsistent with the predefined pricing flexibility, both of which are fundamental to the regulatory regime." (As read)

6440 And you go to say that:

"It is likely that only decisions of the Commission would qualify as exogenous events under this proposal." (As read)

6441 I would just like to explore in a little more detail the precise meaning of these phrases.

6442 First, I would like to discuss the idea that:

"...an exogenous adjustment would be necessary only if the event were to materially change the nature of utility services." (As read)

6443 You have given an example of an event that you think would qualify as such in Interrogatory The Companies(CRTC)1100. I don't think you need to turn to it, but just for the commissioners I will reiterate. In that interrogatory response you stated that:

"If an order expanded the definition of the basic service objective, this would impose costs which the company should be permitted to recover." (As read)

6444 You have given an example of a Commission order that would impose costs on the company, but I wonder whether your proposal also contemplates exogenous adjustments for upward changes to utility services and, if so, what would some examples of that be?

6445 MR. FARMER: I'm not too sure what is meant by an "upward change to a utility service". Could you just tell me?

6446 MS MOORE: You give an example of a Commission order that you say would impose costs on you, that it would change the nature of utility services, because presumably you would have to extend service to a greater number of people.

6447 Are there Commission orders or other events that might lead to a material change, perhaps a financial impact, that was positive to the company as opposed to negative, that could qualify as an exogenous adjustment under your proposal?

6448 MR. FARMER: I suppose there could be. I certainly can't rule that out as a possibility. I have to say an example doesn't come to mind right now.

6449 I would say, though, that if it met the two criteria that we talk about, then it should symmetric, so it would count the other way, if I could put it that way.

6450 I can't rule out a possibility. It just doesn't occur to me what one might be right now.

6451 MS MOORE: You say that, in addition:

"Exogenous adjustments should only occur if they are inconsistent with the predefined pricing flexibility..." (As read)

6452 That you are proposing. Again, in Interrogatory 1100 you give an example of this and you say that:

"If there were to be a Commission order to decrease rates for services, where the order clearly contradicts the pricing flexibility..." (As read)

6453 That you have presumably been granted:

"...this should qualify for an exogenous adjustment." (As read)

6454 I just wonder in what circumstances do you consider that such an order might occur. Is this a realistic example? What circumstances did you have in mind when you put that forward as an example?

6455 MR. FARMER: I suppose it could be.

6456 Let's say, for instance, that we had agreed and there is a decision at the end of this proceeding that says that a price for a certain service is permitted to move in a certain way -- and let us just say the rate of inflation, just to pick something to talk about here, as an example -- if for whatever reason, and there could be very sound policy reasons why the decision is that, you know, we have changed our mind on this one and in fact that shouldn't happen any longer, it should be something else, for whatever reason, then there should be some form of adjustment to make up the difference.

6457 I have to say that one of the things that we did contemplate in thinking about the overall position on exogenous adjustments was the issue we had with direct-connect rate, which changed, as you know, in the year 2000, I believe, and was reduced. That was fine, it was treated the way it was treated. We are not talking about the way it was treated in the last price cap regime, but we were thinking of a situation like that.

6458 For whatever reasons there would be, if in fact the direct-connect -- or whatever service we are talking about -- was allowed to move in a certain way but in was then changed going forward, then there could be an adjustment to offset it.

6459 MS MOORE: Thank you.

6460 At paragraph 6-177 on the same page that I have referred you to in your evidence, you also indicate that:

"A material impact on The Companies' costs as a result of the addition or change to its liability for taxes should be subject to an exogenous adjustment." (As read)

6461 So I take it your position is that changes to a company's tax liability, if it results in a material impact, whether positive or negative, should be subject to an exogenous adjustment. Is that correct?

6462 MR. FARMER: No. What we are really indicating there is this is an exception to a general rule.

6463 I would say that, generally speaking, a change in the tax situation of a particular company obviously affects the costs of its doing business, whether up or down. Normally, we would not include that as a factor requiring an exogenous adjustment.

6464 We have put this paragraph in here as a very important exception to it, simply because of the possible magnitude on Saskatchewan if, in fact, they were to change their status today, as it was done in Manitoba a couple of years ago.

6465 So that is really what it was intended to imply. It is just an exception to the general rule, simply because of the magnitude on one company.

6466 MS MOORE: In that case it is a question of magnitude, it is a serious material change in a downward sense?

6467 MR. FARMER: That is correct. It is like a lot of rules when you put them forward, one tries to abide within those rules as you go forward. It is very, very difficult to say at any time that, no matter what happens that is just the way it is going to be.

6468 I think, given the circumstances that you are facing at a particular time, one should always at least entertain the thought of addressing the issue on a stand-alone basis, if I can put it that way. This is an issue I have certainly absolutely no idea whether this is even practical to contemplate over the next number of years.

6469 The point was that it did happen for Manitoba and we didn't want to forget that it could happen again.

6470 MS MOORE: Thank you.

6471 You also take the position -- and again I don't believe you need to turn to this, but Interrogatory Bell(CRTC)1101 with respect to the Ontario GRT tax savings, you take the position that the 2002 and 2003 Ontario GRT tax savings would not meet your criteria for an exogenous adjustment.

6472 Can you reconcile that rationale with your concern about SaskTel?

6473 MR. FARMER: Again, I suppose in one sense I could say I can't reconcile it because SaskTel is really meant to be an exception to the general rule. It is the GRT issue which is the general rule.

6474 Yes, it is cost affecting, if I can put it that way. But what we are proposing is we step away from this kind of cost-based impact and not look to it because it is frankly an exogenous adjustment of the sort that we have had over the last number of years. It isn't really consistent overall with their overall approach which says there are other criteria that one should take -- you know, bring to bear when looking at how you are going to set prices going forward.

6475 So I can't reconcile it because the Saskatchewan situation is an exception and it is a question of magnitude.

6476 MS MOORE: With respect to both the Ontario GRT tax savings as well as the Quebec TGE tax changes that were discussed in Interrogatory 1100, is it your position that it is not a material change?

6477 MR. FARMER: Again, materiality is a tough -- it is a tough thing to put a pin in and say what is material and what is not material.

6478 Frankly, in absolute dollars, I don't know even how the GRT in the Saskatchewan situation might even compare. But when one looks at the possible impact on Saskatchewan as a particular company of the change that we are talking about, there is not question that that is material.

6479 Where things don't become material, it is kind of hard to say. Rather than picking materiality as the issue, because I don't think it is, it is really: What is the threshold where perhaps an exception is required? And I would say: For Saskatchewan, on the tax, this particular tax issue we are talking about, I think it would clearly qualify.

6480 But where that fine line is, I simply can't draw that line.

6481 MS MOORE: So you take the position that exogenous adjustments shouldn't be cost-based because this isn't consistent with your view about your overall pricing flexibility approach. You do, however, think that a significant adjustment might have to be made because of a negative material impact in terms of costs on SaskTel.

6482 If there were a material impact that resulted in savings equivalent to whatever that order of magnitude will be with respect to SaskTel, would it be appropriate for an exception to be made in that regard as well?

6483 MR. FARMER: Maybe we would have to look at it at the time. I can't imagine what could force, let me say, a positive impact of the magnitude we are talking about here in this exception that we are noting in paragraph 6-177.

6484 As I say, it is difficult to say now that there would be no other exceptions that one should look at. I think maybe at the time all of us would have to look at whether an exception is required in a particular circumstance.

6485 MS MOORE: Thank you.

6486 I would ask you now to turn to evidence filed by AT&T Canada on August 20th and to paragraph 3-23.

--- Pause

6487 MS MOORE: In this paragraph AT&T is discussing the following, they say:

"The ILECs not only benefited considerably from the pricing flexibility accorded under the current regime, but also from the variety of exogenous factor adjustments that have been permitted to date. Collectively, the adjustments have added in the order of $750 million in annual revenues, contributing significantly to the ILECs super normal earnings performance." (As read)

6488 There is also a table in the appendix with respect to this same evidence.

6489 Do you agree with these figures? Do you have any comments on what AT&T puts forward here?

6490 MR. FARMER: I have certainly read this evidence before but I have to say I never went back to try to verify a number here. So I can't comment on the $750 million figure right now, I'm sad to say, and perhaps we could do that at a later date.

6491 But I would note, if we were talking about exogenous adjustments of, for instance, perhaps local number portability -- and local competition was the largest of the ones that is probably talked about -- when one talks about adding additional revenues it's true, but remember they were there as, in that case -- I'm just hesitating --

1415

6492 I am not sure whether they were a partial recovery of the costs associated with number portability in competition or if it was entire compensation for it. That is what it was for. It was meant to be revenues to offset the costs.

6493 So yes, it would clearly have an impact on the revenue side but not on the earnings side in that situation.

6494 MS MOORE: In terms of the general concept that is being put forward, the idea that monies from exogenous adjustments contribute to increased ROE, what is your position on that type of argument?

6495 MR. FARMER: I suppose one would have to look at the individual circumstances. But generally speaking, as I said, the exogenous adjustments are granted to offset costs that have been imposed.

6496 Frequently the costs are attributed to, if I can put it that way, a broad range of our services, not all of which are cap services. Therefore, the adjustments are taken on a portion of our revenue base through the exogenous adjustment mechanism. The cost recovery which then is put into effect is only a partial cost recovery.

6497 Typically speaking, I would have to say for exogenous adjustments that are related to the recovery of costs associated with some event outside our control, it is generally an increase in revenues, but typically not sufficient to recover all costs that would have been incurred.

6498 So typically speaking, we are talking about events which probably reduce earnings overall, unless we are able to recover additional costs in some other quarter but not on the cap services.

6499 MS MOORE: Can you undertake to provide your view of the figure, its accuracy and perhaps if there are any other comments you would wish to make about the suggestion that exogenous adjustments contribute to super normal earnings performance?

6500 MR. FARMER: Absolutely. We will analyze the 750, give our assessment and carry on with the other point you made.

6501 MS MOORE: I would ask you to do that -- would it be possible for the end of tomorrow or perhaps Tuesday?

6502 MR. FARMER: Tuesday, no difficulty.

6503 MS MOORE: Thank you. I would like to discuss an issue raised in some of ARC's evidence. I don't believe you need to turn to it, but I will give you the reference.

6504 It is at page 10, paragraph 47.

6505 They state that:

"It is unlikely that the reduction in provincial taxes is fully reflected in the Canada-wide GDP-PI, which is used for the current price cap." (As read)

6506 I wonder if The Companies agree with this statement.

6507 MR. FARMER: Yes, I wonder too. I just don't have an answer for you.

6508 I suspect Mr. Hariton or Mr. Park may be able to give you some assistance on a panel, one or two later.

6509 MS MOORE: I will defer that question to another panel.

6510 MR. FARMER: Thank you.

6511 MS MOORE: I would like to turn now to some questions regarding quality of service. I believe the questions I have identified are appropriate for this panel in terms of wholesale. But if I should stray into any questions you feel are more appropriately addressed by another panel, please let me know.

6512 Could you turn to Interrogatory The Companies(CRTC)1503.

6513 MR. DIXON: I have that.

6514 MS MOORE: At part (c), on pages 4 to 6, The Companies suggest that a rebate scheme for competitor service quality should be implemented only after the Commission has settled on final indicators for competitor services.

6515 Currently, of course, these indicators are interim.

6516 Could you please elaborate on the reasons for which a penalty mechanism could not, in your view, apply with respect to interim indicators.

6517 MR. DIXON: I think we covered some of this yesterday with Mr. Daniels, but I will try to summarize it.

6518 We have a little history with the current indicators in terms of performance data. We really need the opportunity to collect the data and understand it to ensure that whatever penalty scheme we perhaps mutually develop or we put forward as an idea, that the thresholds associated with that are appropriate, and consider a new perhaps level of granularity that we have not looked at before.

6519 I think there is also a need to link and understand the relation of load to this. I think our experience in the last couple of months with the failure of Axxent and the load tripling -- with Norigen and Axxent failing, should that be considered a failure or not a failure, depending on the results, I think we need to look at that.

6520 Even the World Trade Centre issue where we stopped service provisioning for two days as we kind of locked down all our central offices comes to mind as another issue.

6521 We really looked at the CISC work that I think was pointed to in June -- on June 20th -- looking at the results. And I indicated, I guess in my commentary to Mr. Daniels, that I would be happy if we could accelerate that process, looking at both the final indicators and the interim indicators. We would be part of that, and I would be happy to accelerate it and also accelerate an end development of a financial penalty mechanism to move this forward in some faster way.

6522 MS MOORE: Thank you.

6523 MR. DIXON: I wonder if we could discuss closure. There was one item I mentioned to you just before the break with regard to right-of-way.

6524 Would that be all right with you?

6525 MS MOORE: Certainly.

6526 MR. DIXON: Just to bring us back to our discussion, there was a question relative to right-of-way and obstacles with regard to right-of-way. We closed for lunch and a couple of things came to mind.

6527 One was that on top of our Structures and Access Agreement -- which was the name that failed me, I think -- at the time, as I understand it, there was similar availability to structures with the utilities as well, which is significant. I know in many cases we are involved with them in use of it.

6528 I also checked because there seemed to be concern about that link between the collocated space and the CLEC switch. I don't have specific numbers, but I know that while there has been a lot of change in the industry and collapse in the last while, we had 400 to 600 collocation sites. It is my understanding that over half of those are connected with fibre connectivity at this point.

6529 To further underscore, the connectivity is available -- because you will recall my comments that there was a lot of money put in the ground in the last while. We provide a service, which is part of central or near central, which allows that if one CLEC is into the collocated space, an alternative CLEC in that space can kind of go in and out of their cage to get to that fibre connectivity.

6530 Additionally on that line of focus, we have two services that are cost based, cost plus 25: EAS transport and local transport that allow effectively -- and these are used by all CLECs today.

6531 If you want to get from the east end of Toronto, from your CLEC switch to Bell or CLEC subscribers in the west side, then you could use the EAS transport transit or local transit. Those effectively run on a cost based on the ILEC's infrastructure.

6532 I hope that closes that item out.

6533 MS MOORE: You did refer to some statistics about the number of collocation sites.

6534 MR. DIXON: Yes.

6535 MS MOORE: Could you undertake to provide those for the record?

6536 MR. DIXON: Sure. I am only hesitating because there are a number of them in a transitory state right no w with all of the bankruptcies. I am more than happy to tell you what the total is. I might not be able to tell you who owns them.

6537 MS MOORE: That's fine, if you could just undertake to provide them with the most current reflection that is possible.

6538 MR. DIXON: Okay, thanks.

6539 MS MOORE: If we can return to Interrogatory 1503, in part (d) of that interrogatory The Companies were asked to comment on the appropriateness of a five-cent penalty to give The Companies an incentive to provide service that meets or exceeds the quality of service indicators.

6540 In your response you noted that with respect to penalties, it is important to balance between incentives to maintain service quality and concerns about over-provisioning the network to avoid penalties that could be too severe.

6541 Is this the appropriate panel to which I should address this question?

6542 MR. DIXON: It depends on the question.

6543 MS MOORE: I wonder if you can comment on whether the five-cent penalty would strike an appropriate balance, in light of the concerns that were raised in that answer.

6544 MR. FARMER: Maybe it is not -- I thought you were going to put it in the context of wholesale services. I don't believe that is the nature of the question.

6545 This is really an issue that Mr. Park will address.

6546 MS MOORE: I suppose. But this penalty could be arguably imposed in respect of wholesale or retail.

6547 MR. FARMER: Yes. And in that case -- and let me carry it a little but further, if I can put it that way -- I suspect we would be looking at something different than five cents.

6548 When we put that number forward, of course, it was related to retail services, the indicators associated with the retail services. And five cents multiplied by millions of lines of folks who take those services, it quickly becomes a large number.

6549 That was really appropriate to address the retail side of the issue. Although I could take it a little bit further, I would prefer not. Mr. Park is really going to address that further.

6550 If one were now talking about what form the penalties would take on the wholesale side, which can be addressed here -- and Mr. Dixon may have something else to add -- I suspect we would have to put it in terms other than this five cents, simply because the numbers of lines no longer become relevant to that particular consideration.

6551 I imagine we would be trying to frame it in terms of the services provided to competitors as opposed to the broad base of retail customers.

6552 MS MOORE: Could you undertake to provide an appropriate monetary amount in that type of scenario?

--- Pause

6553 MR. DIXON: There were interrogs I think sent out yesterday to a number of parties, including ourselves, that asked us to look at financial regimes for next Friday, I believe, October 12th. I think we would consider this model, with perhaps other multipliers, as at least one option.

6554 MS MOORE: So you will be addressing that in your interrogatory response?

6555 MR. DIXON: Yes.

6556 MS MOORE: Thank you.

6557 In terms of some issues with respect to adequacy of wholesale quality of service, I note that in the transcript, at line 5453 -- this is page 876 of October 3rd -- Ms Davidson stated that:

"There isn't a history of non-performance with respect to service indicators to wholesale customers."

6558 I wonder if you could clarify this for me. My understanding is that in July of 1997, with Decision 97-16 you were required to begin tracking indicator 2.6 for competitor repairs met.

1430

6559 I just wonder, your statement seems to imply that there is a history. You have tracked these issues perhaps even earlier than that requirement. So I wonder if you could give us more information about the tracking of these services?

6560 MS DAVIDSON: My comments in that circumstance were with respect to the indicators 1.6, 1.7 and 2.6. I didn't mean to imply that there had been tracking before that particular decision.

6561 I think our data for 1.6 and 1.7 are on the record for quite a few years, and we were able to segregate our data out of service indicator 2.2 at the beginning of 2001.

6562 So the data with respect to competitor repair appointments is on the record, and we have exceeded the objective in all cases since we began reporting.

6563 MS MOORE: During GT's cross of Bell concerning quality of service, specifically with respect to competitors, Mr. Dixon stated that -- and some of the transcript references are lines 5423, 5430 and 5421.

6564 In general, Mr. Dixon was indicating that based on his years of experience he anticipated that more work needed to be done with the new indicators and that it could take some time to sort out various difficulties.

6565 I wonder if you could just describe for us, please, Mr. Dixon, in a little more detail what difficulties, in particular, you are anticipating and what steps, if any, are being taken today to mitigate these anticipated problems?

6566 MR. DIXON: For example, Centrex resell is a huge issue historically. I think today I in-service a few hundred thousand, even with the demise of some recent players. There was a need, through that, to be sure we were counting the same and talking the same language so that we had a common focus on, quite honestly, moving forward and provisioning.

6567 There was also a great deal of need for increased staff and coordination of forecasts, because at one point I think I ended up hiring about 80 people just to process orders. So we were trying to gate the volumes with the load from the various players at the time.

6568 The end result of what I saw as cooperative work was a common understanding of process and counting that brought us to some solutions. Today, for example on the Centrex side, I believe we are delivering services for sub-five line Centrex in Welland, or five days. I think at times we are doing it in three through some cooperative effort between the industry and ourselves.

6569 MS MOORE: I wonder if you anticipate having any difficulty in reporting on the quality of service indicators, particularly the competitor-related indicators in the fashion and time line established in Decision 2001-217?

6570 MR. DIXON: Is that the full 19, if you could help me?

6571 MS MOORE: I believe that in Decision 2001-217 there are various requirements for reporting, including with respect to competitor indicators, and I am wondering if you are anticipating any difficulties in reporting --

6572 MR. DIXON: I'm just trying to verify which. There is three, six and then nine.

--- Pause

6573 MR. DIXON: We have been working on this for some months.

6574 The difficulty in collecting data, quite honestly, is that we have kind of gone from little loop activity to a significant loop activity. So whenever you multiply something by 20,000, which is around the level we did in the month of August, one has some difficulties.

6575 Having said that, I think we are putting processes in place to gather data in the way that is needed and are starting to have the results we need.

6576 I would hope as we move forward the availability of that data would be shared transparently with the CLECs, as we move forward perhaps on at least a monthly basis. Maybe we will get to a weekly basis so we are all focused on the same data.

6577 Some of my concerns were in fleshing out and ensuring that we had the same common data, because in exchanges -- and we meet with the larger customers, talk daily, sometimes hourly, because when you are doing 1,000 a day, you run into problems and you really do have to check.

6578 But in our weekly meetings and monthly meetings you get easily misinterpretations of whether a date was met or not met. From our perspective we feel a date was met, but then when tested we will get a report that it was not working.

6579 Of those reports we find 60 per cent of those -- I would have to say 96 per cent go through fine. I'm talking about the small 4 per cent left over.

6580 Sixty per cent of those turn out to be Bell-related problems. We actively fix those. Forty per cent turn out to be CLEC. But you end up with two sets of books, essentially, relative to misses with regard to provisioning.

6581 So it is just those things we have to get more closely linked or I, quite honestly, would rather have a common set of books that we both agree on rather than some huge dispute which at the end of the day doesn't get to the core of the issue, which is if there is something wrong that we can focus on jointly that we will address it.

6582 MS MOORE: I don't think I have heard a clear answer, though, on whether these difficulties or concerns that you are raising are, in your view, going to interfere with your ability to report in the fashion that you were required to do so.

6583 MR. DIXON: No, I don't think we will have difficulty reporting it. There are some challenges is all I'm pointing at.

6584 MS MOORE: With respect to ensuring that all indicators are reported on in the fashion that the Commission requires, I wonder if you could comment on whether it would be appropriate to treat failures to report in the same manner that below standard results might be treated?

--- Pause

6585 MR. DIXON: I think in the longer term that makes absolute sense. I'm not anticipating huge problems in what we are doing, but there was mechanized development and stuff that we have had to go through to capture these 20,000 orders.

6586 I'm not anticipating problems in terms of our November 15th submission of initial indicators, but with any kind of start-up arrangement we could potentially run into issues.

6587 MS MOORE: You have mentioned a number of challenges that you foresee with respect to this. Are you comfortable, though, that you will be able to report with respect to failures on the competitors' indicators and competitor indicators in particular?

--- Pause

6588 MR. DIXON: Not anticipating great difficulty on reporting the final. But I mentioned yesterday there are issues like sample size, because there are some very small CLECs, there are facilities-based CLECs that, quite honestly, don't use a great deal of loops. It is just reporting only a percentage, which would be the approach at this point, might be misleading.

6589 So there are some issues to work through.

6590 MS MOORE: I just wonder, were these issues that were raised in the CISC process?

6591 MR. DIXON: I can't say I participated in that, but I haven't heard that relative to volumes.

6592 I believe, from my understanding of some U.S. arrangements, there are adjustments made because of sample size. Because in some cases, quite honestly, we are doing 1,000 a day, but those 1,000 may come from two or three customers and there may be one or two from other customers. So you can miss one and then you miss the indicator. I'm just not sure that that is necessarily appropriate.

6593 MS MOORE: Thank you.

6594 I would like you to turn now to an exhibit which was provided to counsel, I believe two nights ago. It is an eight-page exhibit with tables. The title on the first page is "Months Below Quality of Service Standards."

6595 MR. DIXON: I have that.

6596 MS MOORE: Thanks.

6597 I just want to refer you to Table 1.

6598 MR. DIXON: That is the Bell Canada table?

6599 MS MOORE: That is correct.

6600 I want to discuss a little bit with respect to indicator 2.6 and 2.2.

6601 The Companies report combined results for these two indicators. 2.6 is "Competitive Repair Appointments Met", and 2.2 is "Repair Appointments Met". Based on the information in this table, it seems that Bell reported misses 10 of 12 months on the combined results in 1999 and 6 of 12 months on these same combined results in the year 2000.

6602 I note that yesterday Ms Davidson did state that there is no history or data of any problems with service quality levels relating to competitors. So are we to take it, then, that because of the combined reporting the misses in this category relate solely to indicator 2.2?

6603 MS DAVIDSON: I think it's worth talking about my comments a little bit.

6604 I did confirm that within service indicator 2.2, "Repair Appointments Met", the data for loops has been included. So I guess my information would then be in the past year it looks, where there has been compliance with respect to the standard for 2.2, that would include the competitive voice and loop business as well.

6605 I'm not sure at what time those competitive services were added to 2.2. so there may have been a collective breach because there are some competitor services there into that sample prior to, I guess, the past maybe 12 or 13 months.

6606 MS MOORE: Are you able to break down for us, on the basis of your records, what percentage of the misses related to 2.6 and what percentage related to 2.2? Perhaps as an undertaking.

6607 MS DAVIDSON: There haven't been any misses with respect to 2.6. We have been reporting that since January 2001. That is exclusively competitor services and we have exceeded the objective.

6608 So prior to segregating that data it appears that there hadn't been any problems with respect to meeting the standard for 2.2 in the prior six months. So I am saying at least a year-plus there has been some compliance.

6609 There is, though, loops within 2.2. I'm just not sure how far back that data started to be collected in 2.2.

6610 MS MOORE: I just want to be very certain I understand.

6611 In 1999 for indicator 2.2 there is 10 months of misses. None of those misses relate to indicator 2.6?

6612 MS DAVIDSON: No. I haven't been able to segregate it like that between the two indicators, because the whole issue was we weren't able to segregate the data until January 2001, otherwise we would have reported 2.6 much earlier.

6613 All I was saying is, a small part of the activity that is involved in 2.2 would relate to competitor services.

1445

6614 So if there was a breach with respect to the standard for 2.2, it may include some competitor services. I just wasn't certain at what point we started to include the data for the competitor services within 2.2.

6615 Yes, we have been provisioning loops for a number of years. I'm just not certain at what point and what volumes that might have been able to be included. We probably don't have the information, otherwise we would have segregated the data for 2.6 earlier on than we did.

6616 MS MOORE: I don't wish to belabour the point, but because of that inability to segregate, do you believe that it's possible that some of these misses relate to 2.6 as opposed to 2.2 because of the combined reporting?

6617 MS DAVIDSON: I think that's possible. Like I said, I wanted to quality that with respect to that particular indicator we could only go back 12 or 13 months to say that there has been complete compliance.

6618 MS MOORE: And there is no way -- you just don't have the data to break that out? For example, for 1999 there is no way to estimate for us what percentage might have related to one indicator as opposed to the other.

6619 MS DAVIDSON: I can go back and look at it, but my understanding would be that if we could have segregated the data in 2000, we would have started to report 2.6.

6620 If you would like me to pursue that further, I can.

--- Pause

6621 MS MOORE: Yes. Well, if you could just undertake to provide whatever you might be able to provide in terms of clarity of the percentage that might relate to one indicator as opposed to another, that would be helpful.

6622 MS DAVIDSON: Okay. I will do that.

6623 MS MOORE: Thank you.

6624 I would like turn you now to an exhibit that was provided this morning I believe. I apologize for the delay, but this is derived from your own Q4 reports. It's titled "Bell Canada Quality of Service Indicators". It's a one-page exhibit and it lists your reports for the year 2000.

6625 MS DAVIDSON: Yes, I have it.

6626 MS MOORE: Okay. If you could just look at indicator 2.5, which is roughly halfway down the page, and 2.5 is the indicator for "Competitor Access to Repair Bureau". The standard is 80 per cent or more. Do you have this?

6627 MR. DIXON: We have the form. Yes. Thanks.

6628 MS MOORE: If you look under May and June, the standard is 80 and the report says 57 for May and 65 for June. Is that correct?

6629 MS DAVIDSON: Perhaps if you could help. Quality of service indicator 2.5 was put forth in Decision 97-16. Could we just go back to refer exactly what the definition of that indicator is.

6630 MS MOORE: It's actually -- it was revised in 2001-217.

--- Pause

6631 MS MOORE: It was originally in Decision 2000-24 but then subsequently revised.

6632 MS DAVIDSON: If you could just give me a moment then, please?

--- Pause

6633 MS DAVIDSON: I was just looking in the Commission's decision to find a definition of 2.5. I didn't find it in 2001-217. Could you help me with that?

6634 MS MOORE: In Decision 2000-24 indicator 2.5, "Access to Repair Bureau", the "percentage of calls to a repair bureau answered in 20 seconds or less".

6635 Is this a wholesale or a retail indicator?

6636 MS DAVIDSON: In my understanding, that would be a retail indicator.

6637 MS MOORE: Thank you. That clarifies it.

6638 MR. DIXON: I'm feeling better.

--- Laughter / Rires

6639 MS DAVIDSON: I thought you had prefaced it with a competitive-type comment.

6640 MS MOORE: I believe I had. I believe that was my mistake.

6641 MS DAVIDSON: Sorry.

6642 MS MOORE: Thank you. This clarifies the matter.

6643 Now, I would like to turn to a few questions relating to your payphone proposal. We are done with quality of service for the moment.

6644 In your submission at section 6.33 and particularly paragraphs 6-80 and 6-81, you provide some more detail on your payphone proposal.

6645 In paragraph 6-81 you state:

"Outdoor payphones in Ontario and Quebec are broadly dispersed over Bell Canada's territory and currently represent 23 per cent of your payphone base." (As read)

6646 You explain that:

"Under your proposal, widespread accessibility to a low-cost alternative for local calling and free directory assistance would be available to all customers." (As read)

6647 Then you go on to state that you:

"...further commit to retaining the proportion of outdoor payphones at 23 per cent across your territory." (As read)

6648 Now, assuming that the pricing flexibility that you seek in respect of local payphone service rates is granted, and further suppose that in spite of this payphone revenues continue to decline and unprofitable payphones continue to be removed, could you please explain how Bell Canada's commitment to maintain the proportion of outdoor pay telephones at 23 per cent ensures that all customers across the territory will have access to a low-cost alternative for local calling and free DA.

6649 MS HIGHET: Well, what we are proposing is, as we indicated in this paragraph, the per cent between outdoor and indoor is 75/25 approximately, so we are actually committing, and I think as I indicated previously, as the payphones decline and as the need to pull more out of the business, we will keep the same proportion in base.

6650 With the proposal of the rate flexibility, we will actually be able to keep 50 per cent more payphones with the same proportion of outdoor/indoor under some rate flexibility on the indoor phone side.

6651 So it's the proportion of payphones that we are committing to, which is 23 per cent, as well as an incremental 50 per cent of payphones.

6652 In the last -- first half of the year, we have only removed 100 payphones outdoors. The rest of our payphones that we have removed are indoor payphones. So we haven't seen that proportion change substantially over the last number of years.

6653 MS MOORE: Do you anticipate that proportion to change? Do you have any reason to anticipate --

6654 MS HIGHET: Well, the whole point behind the proposal with respect to outdoor and indoor is to recognize that need and it is to maintain that level of convenience and accessibility for our customers.

6655 I mean, there isn't any logical sense to keep a phone in place if no one is actually using it. That number can't be really committed to as much as proportion can be committed to. So if no one is actually using the phone, it actually becomes a boat anchor.

6656 We have obligations to location providers. We have a profitability to them that we have to meet. Their real estate obviously can't be taken up with phones that are actually not generating any traffic. They will ask us to remove the phones. So there is an obligation there as well.

6657 What we are trying to do is ensure that phone accessibility that we have had in the past, while recognizing the business is declining.

6658 MS MOORE: Now, if I were to ask you to assume that the pricing flexibility sought by the company with respect to local payphone service rates is granted, would the company have any willingness to commit to maintain no less than the current actual number of outdoor pay phones, as a first parameter and, secondly, to also maintain the proportion at a minimum of 23 per cent should the number of indoor payphones increase.

6659 MS HIGHET: Well, let me address both of those.

6660 The same number of phones would suggest that we would keep phones in place that weren't generating any traffic and the business would continue to decline and the profitability associated with the business would continue to decline.

6661 I think what we can make a commitment to is that we can commit to not removing a certain percentage of phones out of the business, so the decline becomes less on an overall basis.

6662 If we committed to not removing more than 5 per cent of the base a year, I think that would address the accessibility and availability, without having a commitment to a specific number of phones, for the reasons I have indicated with respect to if there isn't any traffic, we are not actually benefitting anyone.

6663 MS MOORE: I believe that this morning you have undertaken to provide the number of payphones withdrawn in your discussions with --

6664 MS HIGHET: That is correct.

6665 MS MOORE: I wonder if you could also undertake to break this down into the percentage of payphones withdrawn to compare outdoor versus indoor.

6666 MS HIGHET: That is correct. Now, the undertaking that I took this morning was specifically from 1997 on.

6667 MS MOORE: And that would include a percentage breakdown.

6668 MS HIGHET: We can provide that percentage as well.

6669 MS MOORE: Okay. Thank you.

6670 I just have one final question with respect to payphones. I just wonder if it is at all possible that these payphone operations, that it might be contemplated that eventually they might be sold to a third party.

6671 MS HIGHET: There was a business case, I believe last year, that was undertaken by the company. There was analysis done and it was -- I will just use the words -- put aside.

6672 It is the company's intention to stay in the business, with obviously the proposal that we put forward as well as some of the business models that we have been talking about this morning.

6673 MS MOORE: Even if the pricing flexibility were to be granted, that wouldn't affect considerations of the business case for a sale, for example.

6674 MS HIGHET: No. One of the things that is important is the relationship we have with our customer and the recognition of us being in this business as well.

6675 Another thing that is extremely important to us is the brand recognition that the phone booths bring with respect to our brand and our name. Those are important aspects to us as well in this business.

6676 MS MOORE: Thank you.

6677 Those are my questions, Mr. Chairman.

6678 My co-counsel has a question with respect to contribution, so I will pass the microphone.

6679 MS TURMEL: Thank you.

EXAMINATION / INTERROGATOIRE

6680 MS TURMEL: I believe Mr. Farmer will be the right person to address my question.

--- Technical difficulties / Difficultés techniques

6681 MS HIGHET: We are having technological problems.

6682 THE CHAIRPERSON: I think although it is a little early we will take our afternoon break and see if we can't get these microphones fixed while we are doing that.

6683 We will break until 3:15.

--- Upon recessing at 1500 / Suspension à 1500

--- Upon resuming at 1519 / Reprise à 1519

6684 THE CHAIRPERSON: Order, please.

6685 So we will see now if counsel, who was already somewhat nervous to start with, can manage your question without the microphone failing.

6686 Counsel.

6687 MS TURMEL: Okay, let's try again. It's working.

6688 I have one main question on the subject of subsidy requirements, specifically the rate component of the calculation. I believe Mr. Farmer will be the right person to address this question to.

6689 In your evidence, you proposed that the use of the maximum rate level allowed for subsidy calculation would remove the incentive to forego rate increases since the subsidy found will supply the required revenue.

6690 There have been comments submitted that using rates other than the actual approved rates will not be appropriate. I would like to explore whether there are any other alternatives besides using the maximum rate for calculating the revenue component of the subsidy requirement that would remove the incentive that you referred to in your proposal.

6691 So in order to remove the incentive to forego rate increases, should the Commission consider mandated rate increases in some, or even all, high-cost bands?

6692 MR. FARMER: Well, that would remove the incentive, there is no question about it.

6693 I don't think it's really necessary to mandate it, in the sense that if it's just very clear that if the rate doesn't actually go up, then it will be assumed that the rate goes up and therefore it doesn't make any difference as to whether the rate is actually at that "mandated" level or not. If it is assumed that it's there, then it is really on the -- well, it's then in the choice of the company as to whether they choose to take it or not, which is why we talked about the allowable price increase.

6694 But clearly a mandated price increase would have the same effect in terms of the incentive that we talked about.

6695 MS TURMEL: But if the Commission decided to mandate rate increases, on what basis should the Commission determine the appropriate level?

6696 MR. FARMER: I guess it's the same kind of basis that I would expect the Commission to look at in terms of what the allowable prices should be as well. It is really exactly the same consideration.

6697 So it becomes this balance that we have talked about in terms of meeting various objectives. So one is the affordability.

6698 That has a couple of dimensions. One is to what price levels would the prices actually rise, and the second dimension is at what pace would that happen?

6699 So one could imagine that it may be -- it may be somewhat easier to get to a particular rate level over a longer period of time than a shorter period of time, that sort of thing.

6700 So it is those two considerations that we brought to bear when we put our proposal forward, not only the eventual price level, but also the pace over which it would be reached. But I think that those are reasonable things to consider, together with, again -- or what I should say is entirely within the context of the affordability question.

6701 MS MOORE: Mr. Chairman, I just have one additional question, returning to our earlier discussion about the scenario with respect to the DS-1 between the ILEC switch and the CLEC switch.

6702 I just wonder if it is possible for The Companies to undertake to provide some more precise estimation of the number of self-supplied -- if I can use it that way -- self-supplied co-locates. Is that something that --

6703 MR. DIXON: I'm not sure that's what you want. Let's talk about that.

6704 Are you looking for the self-supplied connections, not the self-supplied co-locates?

6705 MS MOORE: I think I'm looking for both actually, if that's possible.

6706 MR. DIXON: Because the co-locates are something we supply as ILECs. So they --

6707 MS MOORE: I guess I mean where the co-located CLEC is able to get to its switch without reliance on --

6708 MR. DIXON: Using its fibre or perhaps another CLECs fibre?

6709 MS MOORE: That's right?

6710 MR. DIXON: Yes, okay. It is more the connection side. I was going to give you that anyway. We had talked earlier. Thanks.

6711 MS MOORE: Okay. Just to clarify.

6712 MR. DIXON: Yes.

6713 MS MOORE: Thank you, Mr. Chairman.

6714 THE CHAIRPERSON: Thank you, counsel.

6715 Now, I understand we have a few questions from several of the Commissioners.

6716 Commissioner McKendry.

6717 COMMISSIONER McKENDRY: Thank you, Mr. Chair.

6718 I just had a question for Ms Highet.

6719 I just want to make sure I understood something you said yesterday in your discussion with Mr. Daniels from GT Group. What I'm looking at is page 806 of yesterday's transcript. You might want to get that in front of you. I'm looking at paragraph 4945, at line 4. And perhaps I will just read that, quote:

"MR. DANIELS: Right."

6720 Here I should say you are discussing, as I understand it, what happens when a contract -- a one or a three-year contract ends, or is about to end, with a customer. And I quote,

"MR. DANIELS: Right. But I guess what I'm trying to get at, if the customer takes no action, what happens at the end of their period? They are renewed, are they not?

6721 MS HIGHET: That is correct."

6722 What I would like to understand is how that approach that you have identified there reconciles with Order CRTC 2000-346. That is GT Group Exhibit No. 4.

6723 MS HIGHET: Could we have a moment to find that reference, please?

6724 COMMISSIONER McKENDRY: Sure. In particular, once you have it, I'm interested in paragraph 11 in particular, in that order.

6725 MS HIGHET: In paragraph 11 it indicates that under Order 2000-250 there was four acceptable methods of demonstrating customer consent and the company choose number (c) and number (d).

6726 As I indicated yesterday, we have a toll free number, an IVR, as well as electronic confirmation via the Internet.

6727 So that actually, either from a visible perspective or from listening to the IVR, identifies the terms and conditions of the contract, which includes the automatic renewal piece of it. Sixty days prior to the end of the contract we send a notice to the customer, again requesting that they go back to those two mechanisms, and again understand that their contract will be automatically renewed. As I indicated, at the end of the 60 days, if, assuming the customer has done that, if the assumption would be -- and I think I indicated to Mr. Daniels -- we would be automatically renewed at the end of the 60 days.

6728 COMMISSIONER McKENDRY: You say the company picked (c) and (d) of paragraph 11. You don't then feel that the company is under any obligation, for example, to implement (b) if the company -- or if your customer doesn't reply to (c) and (b)?

6729 MS HIGHET: Well, we believe that we have covered all of the -- I will use the word "bases" from an overall perspective. We actually implemented two out of the four methods. So I think from that perspective, plus we are reiterating the terms and conditions of the contract, which includes the automatic renewal which is an incremental measure, and requesting the customer to do that 60 days prior to it.

6730 So it is a matter of -- certainly with our larger customers, we have ongoing relationships with them. When you have a larger base to manage, this method, which is an electronic method, is more manageable.

6731 COMMISSIONER McKENDRY: I think I understand what you are saying. I take what you are saying is that from the company's view, the company can elect to pick from (a), (b), (c) or (d) which methods it will implement. Presumably, you could pick them all or I take it you are saying you could pick one or two. Is that right?

6732 MS HIGHET: Yes, any one of the four. We actually chose to pick two to give the customers an option of choosing which one they would prefer to use.

6733 COMMISSIONER McKENDRY: So in paragraph 12, where we say -- this is the Commission speaking, and I quote,

"The Commission finds it appropriate to require Bell Canada to obtain its customers' consent through one of the four methods described above."

6734 Your view is that this doesn't require you to obtain consent, necessarily, it just means that you can take one or all that we just discussed of the four methods and rely on them, and if that one in particular doesn't work, or the two in your case, don't work, then you can automatically renew. You don't have to go to, say, (b) and actually have a third party orally confirm?

6735 MS HIGHET: No. The understanding that I have from this order is that one of the four is considered to be appropriate. As I indicated, we actually chose two of the four in order to give the customers a choice. We certainly feel that that complies with the order.

6736 We also have an Order 99-511 where it was indicated that -- the Commission did indicate that the proposed automatic renewal feature of this proposal, which was actually prior to us implementing the business line contract management, does not constitution negative option service subscription. In this case business customers specifically subscribe to a service and sign a new agreement or do an electronic version that outlines the automatic renewal feature.

6737 COMMISSIONER McKENDRY: Perhaps you can just tell me a bit, in the message toll market, if you win a customer from one of your competitors, I understand that there is a confirmation process required there, where there is independent third-party verification or written confirmation from the customer, and so on. Do I have that right?

6738 MS HIGHET: Yes, there is a different process used in that market. But, as I indicated, this was the process that was outlined for this particular piece of business.

6739 MR. DIXON: Perhaps I could just add because I was involved in the pick process. I think the way that that process is triggered, I think, is if a customer questions or challenges their current location, let me say, being, "Which carrier am I at?" and says, "How did I get here?" then there is a requirement for, in fact, my group to go back to that carrier, including Bell Canada, and say, "Do you have those types of proof that the customer authorized the move?"

6740 I hope that's helpful, sir.

6741 COMMISSIONER McKENDRY: Yes. That is, thanks.

6742 So the situation here is different than the situation that exists in the message toll market with respect to confirming or obtaining the customer's consent.

6743 MS HIGHET: That is correct.

6744 COMMISSIONER McKENDRY: Thanks very much.

6745 Those are my questions, Mr. Chair.

6746 THE CHAIRPERSON: Thank you.

6747 Commissioner Demers.

6748 CONSEILLER DEMERS: Merci, monsieur le président.

6749 My interest would be on SIP, a few questions.

6750 Maybe the first one would be that I understood that 5,500 residents would be involved and I understand that you are now up to 8,800.

6751 MS HIGHET: Let me provide the numbers for you. I will give you the precise numbers.

6752 There were 36,302 premises that were identified through the various methods we used to determine underserved, or unserved, which represented 1,830 localities. When we looked at access issues, which included structure or easement or right-of-way issues, and applied the market research take rates associated with the localities themselves, it left, from a net perspective, 527 localities or 5,366 premises. That was a combination of both permanent and seasonal.

6753 Again, if you apply market take rates -- and the market take rates have been filed with the Commission -- it came to 3,160 with respect to the program itself.

6754 COMMISSIONER DEMERS: Okay.

6755 MS HIGHET: That is using our cost limit of $25,000 for permanent and $5,000 for seasonal.

1535

6756 COMMISSIONER DEMERS: So that if a resident or if somebody were to pay the $5,000 it would be over and above the figures that you are outlining? Your limits are $25,000 and $5,000.

6757 MS HIGHET: That is the cost limit. There is up to $1,000 construction charge that has also been put forward by the Commission.

6758 COMMISSIONER DEMERS: If a prospective customer pays the $1,000 and it costs $30,000, and is ready to pay the other $5,000, would that person be included in the number of residences or dwellings that you would serve under that --

6759 MS HIGHET: No, they would not be included in the specific study because, again, the cost limit was $25,000. So there was no exercise undertaken to see whether or not customers would pay more than the allowable construction limit.

6760 We have provided, in some of our interrogatories, and I believe in some of the other back-up material that we are in the process of providing -- we have looked at different cost limits and both from a seasonal and from permanent-premise perspective and provided the different cost allowances associated with that and the different costs to build out these infrastructures and networks. I think we have provide 40K as an example.

6761 The incremental of increasing the cost limit doesn't actually get you substantial more premises at the end of the day.

6762 So we are putting forward in our proposal that we have -- because we have to build the infrastructure, we are putting forward in our proposal that we will build to 5,366. The assumption from the marketing perspective is that 3,160 will decide to take this.

6763 I believe there are some other interrogatories who we are in the process of looking at with respect to different take rates with or without the $1,000 construction charge as well -- that we are in the process of developing for you.

6764 COMMISSIONER DEMERS: So if I am a permanent resident and it is $27,000 to serve me, from your engineering survey -- maybe I'm wrong but I want to find out -- and if I tell you that I will pay $2,000, will I be able to get the service?

6765 MS HIGHET: No. The parameters were very clear with respect to how we did the exercise itself.

6766 COMMISSIONER DEMERS: Thank you.

6767 The service that people will get will be the basic service, the single line --

6768 MS HIGHET: They will meet the -- between the local service improvement plan and the service improvement plan that the company has put forward, they will, by the end of 2001, I believe -- yes, this is 2001 -- by the end of 2001, through the local service improvement program and through the service improvement program, all of those individuals will have the basic service objective with the criteria associated with that basic service objective.

6769 COMMISSIONER DEMERS: Touchtone and so on?

6770 MS HIGHET: Yes. And the LSIP program has been over the last four years.

6771 COMMISSIONER DEMERS: A more general question on figures.

6772 Yesterday or this morning, I forget, we were talking about approximately a little more than 150,000 dwellings without telephone. Now, I'm trying to find out whether the 36,000 residences in your area are counted as part of the hundred-and-some thousand dwellings without service.

6773 MS HIGHET: May I ask someone to provide me with where the 150,000 number came from? Is that a Canadian number? I will make an assumption that if --

6774 COMMISSIONER DEMERS: Yes.

6775 MS HIGHET: I'm sorry?

--- Pause

6776 THE CHAIRPERSON: Ms Highet, if it is of help, it was the exhibit from BCOAPO this morning and it was your own 2000 monitoring report which showed there were 163,000.

6777 COMMISSIONER DEMERS: Yes, that is right.

6778 MS HIGHET: Okay, thank you.

6779 So the only other thing -- I would accept that they would. I think the discussion Mr. Farmer and I just had with -- acceptance of that would be whether or not all the seasonal would be included in that number or not. I don't actually know the answer to that.

6780 I mean, if it is general households, certainly the permits could be assumed to be within that number. Whether the seasonal would be captured, I do not know.

6781 COMMISSIONER DEMERS: Thank you.

6782 You have touched this morning, I think, through questioning, on when was a residence a seasonal one and permanent one. I was left with the impression that in case of an argument or a difference of opinion you would decide.

6783 MS HIGHET: We would err on the customer side.

6784 COMMISSIONER DEMERS: Thank you.

6785 Merci, monsieur le président.

6786 LE PRÉSIDENT: Merci.

6787 Commissioner Noël.

6788 COMMISSIONER NOËL: One of my questions Commissioner Demers already asked, so I won't repeat it.

6789 With your SIP improvement program, the way it is structured in your proposal, would that solve the problems that we have seen in the papers in the Granby-Shefford area of Quebec? There were a number of potential subscribers that cannot get any service. Would that cover that area? Frankly, it is a quasi-urban area.

6790 MS HIGHET: Can I take that as an undertaking, because I would need to actually understand the 1,830 localities. So let me take that for you and find out.

6791 COMMISSIONER NOËL: Yes.

6792 THE CHAIRPERSON: Commissioner Cram.

6793 COMMISSIONER CRAM: Thank you, Mr. Chairman.

6794 When you were talking yesterday, Mr. Farmer -- I think it was with Mr. Janigan and the issue was the issue of inertia, consumer inertia and the analogy drawn to the long distance residential market -- I again began to philosophically question the value of your proposal to increase rates in the residential area in terms of it efficacy -- how well it would work -- the efficacy to promote competition.

6795 I say that because I know, we all know, that the demand for residential is incredibly inelastic. So any rate increases, if there were no competition, you would expect a very minimal drop-off. Would that not be true?

6796 MR. FARMER: That's right. It is quite small.

6797 COMMISSIONER CRAM: Under 0.5 per cent?

6798 MR. FARMER: Probably, yes. Yes, I would think so. Quite small.

6799 COMMISSIONER CRAM: In fact, I think the numbers -- my memory for numbers is not that hot, but I thought it was something like 0.32 per cent, or something like that.

6800 MR. FARMER: I really don't have the number. I am certainly prepared to accept that. I know it is a small number.

6801 COMMISSIONER CRAM: So there is that issue, there is the issue of the inelasticity. Then there is the issue of inertia.

6802 MR. FARMER: Yes.

6803 COMMISSIONER CRAM: What statistics should we look -- I guess my reaction is: Even if there were a competitor around, let's say, in your view, that the residential increases do work and that somebody finds it marginally attractive to enter the market, but there is the whole consumer inertia. Should I be using something like a factor of 9 to 1 in terms of inertia, that it really takes nine times more effort to get a customer?

6804 MR. FARMER: I'm not sure if we are talking about the same thing. We know, certainly from our long distance history, that it is more expensive to get a customer than it is to keep a customer. I'm not sure if that is what you are referring to.

6805 COMMISSIONER CRAM: No. This question is to, number one, get them to move, the whole inertia issue.

6806 MR. FARMER: Yes. I don't have any measurements on inertia nor -- and there may be such an index, I'm not even aware of one.

6807 I guess again we would look to our own history within the market. Obviously, we have talked that we don't have a great deal of experience in the local residential market but we do in the business market. There may be other factors that play in the business market.

6808 COMMISSIONER CRAM: If you compare long distance there sure is.

6809 MR. FARMER: That's true in terms of the market share losses, that is correct, they are not the same. So I wouldn't pretend that the two markets are identical, but it is really the only model that I have to point to right now, other than those other examples which Mr. Nicholson talked about, which are not widespread, to say the least, when we talked about EastLink.

6810 But we do see in the business market that customers do move, even in the local market.

6811 Whether customers have greater inertia on the local side or not, I don't have -- and that is back to the consumer market, I really don't know, I haven't done a test. I know theoretically one might presume that there may be more inertia simply because in the long distance market there was always the possibility when you switched that you could switch back fairly easily.

6812 Mr. Dixon can talk about how easy it is to switch back in the local market because that is what he does on a day-to-day basis. I don't know whether technically it is a great deal more difficult, for instance, as to whether there would be a period of time when a customer would be without service.

6813 I suspect that if customers were given the comfort that should they choose to switch back that they wouldn't be without service for -- except for a very short period of time, or something, then whatever inertia there might be would disappear. But, of course, they would have to understand that to be the situation.

6814 I'm speculating here. Obviously, I can't give you a number. I can't even tell you whether the inertia would be greater in this market or not, but I would suspect that education would probably get over whatever difficulties associated with inertia would be there.

6815 COMMISSIONER CRAM: That, of course, brings me to what you said yesterday about the fact that people know there is long distance competition.

6816 Have you done studies on that, like empirical evidence?

6817 MR. FARMER: No. I would say the studies are probably done in the market in the sense that we know people leave. So it seems to be a well-known phenomenon, I would say. I'm not aware of any studies in terms of people's awareness of competitive alternatives. There may be some.

6818 COMMISSIONER CRAM: If the present residential market were a proxy for people, would you agree that that could be a proxy for people's knowledge about local competition?

6819 MR. FARMER: You mean the residential market on long distance could be a proxy? I suppose. I'm not too sure in what context. If it's in terms of understanding --

6820 COMMISSIONER CRAM: Knowledge.

6821 MR. FARMER:  -- whether there are competitive alternatives?

6822 COMMISSIONER CRAM: Knowledge. Yes.

6823 MR. FARMER: I would have to say I suspect that -- I tell you I am basing this on nothing but just acquaintances.

6824 COMMISSIONER CRAM: Anecdotal evidence.

6825 MR. FARMER: Anecdotal evidence.

6826 COMMISSIONER CRAM: That is what we call it.

6827 MR. FARMER: So take it for what it is worth, quite frankly.

6828 I would say that, in the long distance market there is a very keen knowledge and awareness of competitive alternatives. I would have to say that that is not the same situation today and I think that that is simply as a result of the fact that many customers of ours have not been informed of competitive alternatives because in many locations they are not available yet. Again I am talking about the consumer market.

1550

6829 COMMISSIONER CRAM: If I can come back to my philosophical question, and even using your companies, trio, it seems to me that raising rates, aside from the subsidy issue and high-cost service, in residential services does not satisfy the competitive issue because of inelasticity and inertia and does not satisfy the affordability issue -- because clearly the higher it goes the less affordable it is -- and may presumably do something about the market issue because of course your net incomes are going higher.

6830 Tell me where I am wrong.

6831 MR. FARMER: I can't say that you are wrong. I can say there are a number of untested assumptions in the statement, if I can put it that way.

6832 First of all, when we talk about the inelasticity of the market, those very low numbers that you are talking about are not -- that is, that measures the propensity of people to drop their service associated with price hikes. That is to drop service entirely. That is not talking about switching suppliers.

6833 So one can't use the very low elasticity figures to talk about the propensity to move from supplier to supplier. You would need an entirely different measure.

6834 On the question of inertia, we have talked about it a little bit and I don't think I can go any further than that. But I would say that it is untested assumption right now that we are talking about.

6835 On affordability, I guess what I would say is that I do not believe, with the measure of price increases that we are talking about annually, at the rate of inflation overall, that it would harm the affordability issue at all. So I think it would continue to be affordable.

6836 I am not saying customers wouldn't prefer lower rates when they have a choice for a lower price. Obviously, that is the case. But I do not think that it would in any way harm the issue of affordability.

6837 As it relates to the two other issues -- one is competition. Is it enough to entice competitors into the market? It is frankly difficult to say, as we have said over the last few days.

6838 We are not talking about huge changes here. So there is really going to be a combination of effects that is going to be required. One is the evolution of technology, as Mr. Nicholson spoke about -- and I won't repeat it -- and the other one is the pricing.

6839 The two are going to have to work in concert to make this happen.

6840 I guess what we are really talking about is at the same time it is important to send a signal to competitors that they are not going to have to continually readjust their plans as prices drop in this particular market.

6841 The third item is investment. I suppose the way I would look at it is that there are two factors associated with that. One is I think it is the goal to have competition in Canada where our competitors would also be investing in providing services to their customers.

6842 So if they are brought into the market, there would be more investment that way.

6843 Another issue is the investment that the telephone companies would do. One of the things we have to keep in mind is that we make the investment for, or at least in an attempt, if I can put it that way, if we are successful, to actually invest in services and development of our services that customers would be looking for.

6844 Again, Mr. Nicholson talked about the Internet and the wireless industry as examples of that.

6845 That, I hope, too, would be a benefit to customers.

6846 This is turning out to be a long response, but I think I have probably covered off all your points.

6847 I would say the bottom line is that I can't say you have gone wrong. I am just saying that in the thinking there are some untested assumptions that are in there. One of the tests can be to see what happens, frankly.

6848 COMMISSIONER CRAM: I think it is Ms Highet, and I am not sure with whom you were speaking. But yesterday there was a discussion -- I think again it was with Mr. Janigan -- of what I will call the default toll subscribers, those who are subscribing to your regular toll plan.

6849 MS HIGHET: Do you mean the basic toll plan?

6850 COMMISSIONER CRAM: Yes, the basic toll plan. There was some discussion about you know who these people are, the 5 per cent; that they are spread across all demographics.

6851 In terms of age group, is there one age group that is higher than the others?

6852 MS HIGHET: No. I am not sure what the transcript said, but I think I was trying to indicate that they were spread across all demographics. I didn't have any specifics to that.

6853 COMMISSIONER CRAM: Equally or --

6854 MS HIGHET: No, I don't have any specific -- unless we have some.

--- Pause

6855 COMMISSIONER CRAM: Have you actually done a correlation between who these default subscribers are? Or have you not?

6856 MS HIGHET: No, I don't believe we have.

6857 COMMISSIONER CRAM: So instead, the answer you should have given is that you don't know.

6858 MS HIGHET: Well, we certainly know demographics with respect to what kind of customers take the various toll plans that we have.

6859 COMMISSIONER CRAM: Yes.

6860 MS HIGHET: As a result of that, we can understand who doesn't take those toll plans.

6861 I can't specifically say that I have any statistics. I can certainly take a look to see if we have any specific demographics for the 5 per cent.

6862 COMMISSIONER CRAM: Yes, in terms of age and income.

6863 MS HIGHET: I will take that.

6864 COMMISSIONER CRAM: If you could file it, counsel can deal with the filing date.

6865 I want to move on to billing information.

6866 Again, Ms Highet, I think you said you have done surveys. The information is that people want less information rather than more.

6867 MS HIGHET: We had done some research with respect to our bill and the detail that we provide to our customers, and we are providing that to the Commission with respect to the results of that.

6868 COMMISSIONER CRAM: So you don't know exactly what you asked them. Is that the point?

6869 MS HIGHET: I don't have that information here, but we will provide that information with respect to the results of the questions that we have asked.

6870 It was specific in relationship to options and features, and I had indicated that I would have to get back to whether that was specifically included.

6871 But I did agree to provide the details.

6872 COMMISSIONER CRAM: The next issue I wanted to ask about that is if you have ever done any polling about providing discretionary versus mandatory charges.

6873 Mandatory charges such as 9-1-1, who cares if it is there or not because they have to pay it anyway. The issue is discretionary versus mandatory.

6874 If you could include that in that last undertaking, I would appreciate it.

6875 MS HIGHET: I will certainly check and see if we have any research on that as well.

6876 COMMISSIONER CRAM: Thank you.

6877 With regard to quality of service, I confess, Ms Davidson and Mr. Dixon, that I found myself feeling like a pendulum.

6878 Mr. Dixon, you said today that you have historically a good record of quality of service to competitors.

6879 Ms Davidson, you say you have had no history. I am having problems being able to reconcile that.

6880 Mr. Dixon, you were talking yesterday about having done scorecards for many years. For how many years have you done them?

6881 MR. DIXON: It was probably within three or four years of inception of the group for major customers; so at least five or six years.

6882 COMMISSIONER CRAM: Surely the scorecards would have talked about provisioning and service.

6883 MR. DIXON: Absolutely. I think the difference perhaps is a shift in focus, if I can try to help.

6884 The traditional indicators that carriers and customers and co-carriers that I deal with were interested in were very much focused on data services: DS-1, DNA, all the things we have talked about today.

6885 They had less interest in voice services, although there was some interest in voice Centrex resale -- although I had to say the degree of interest, in terms of measure surrounding that, was limited. But we had some.

6886 Those were informal scorecards but shared continually. And objectives, although we didn't have service level agreements in many cases which would have specified penalties and such, there were mutually established objectives.

6887 On top of that, there was mutuality. For example, if we were expected to provision 90 per cent of the time or more on the date that we said we would, we were expecting that we would have less than 50 per cent churn or 20 per cent churn in the orders after they had given them to us.

6888 We had a very good framework surrounding that.

6889 The indicators that we were referencing today were relatively new with regard to the CRTC supplied indicators. Those were focused only on voice and loops.

6890 Voice had not had a huge historical focus, and loops is quite honestly something that is relatively new in the last year and a half, two years. And there is a great deal of focus on that loop portion of the business. So I think the two do fit.

6891 We are struggling a little bit with some of the new stuff, which we don't have as much experience with. My comments relative to having a fair amount of comfort with our abilities and our historical record, I feel that is true. We have historically given, in my view -- on the informal indicators that we shared, we met weekly and monthly with a number of major carriers, and I think we demonstrated fairly well our track record.

6892 In fact -- and I didn't mention this through the hearing -- my group I pay them based on surveys done by independent third parties, much the same as some of the indicators used on the retail side. At the business office level, at the project level, at the customer service level, we actually go out and interview -- not myself, but a third party -- relative to the general satisfaction.

6893 Questions with regard to installation and provisioning are in there, and the results are generally good.

6894 In fact, on a broad basis, in the last couple of years we pay the whole management team based on customer service within the group.

6895 So there are 600 people in my group, pushing hard to make sure that the customers and the co-carriers are getting the service levels that they want.

6896 COMMISSIONER CRAM: Surely in the past you have had contracts with certain large establishments for service when you provide them with the lines. Be it data or phone, you also have some sort of service provisions in there.

6897 MR. DIXON: Yes. It is interesting that in all of the agreements with the 700 customers that I have, I have one contract with a service level agreement.

6898 COMMISSIONER CRAM: Ever.

6899 MR. DIXON: Ever. I have many arrangements that have been quite satisfactory, at least in my understanding with customers, that we call service level objectives, where we in many cases agreed on an objective that we would work towards. And some customers I might be doing 20,000 orders with and others thirty or forty.

6900 The service level agreements seem to come up more in discussions of, say, broad long-term contracts where people are providing a vast majority of services.

6901 So there is in fact not a great deal of experience on SLAs.

6902 There has been a move -- and I have to say in the competitive services that I sell, long-haul transport is extremely competitive. It is really emerging there as a prerequisite in the U.S. and Canada to say: Will it be there 99.99 per cent of the time?

6903 But I don't have any of those at this point.

6904 COMMISSIONER CRAM: It appears to me that quick provisioning and service would be quite crucial, clearly.

1605

6905 So you have the history of the reporting, the accountability, looking at the standards, but not in these types of wireline and in the loops. Is that your point?

6906 MR. DIXON: Essentially. I think Ms Davidson had a comment.

6907 COMMISSIONER CRAM: Yes. Sorry.

6908 MS DAVIDSON: I just wanted to add since the inception of the electronic interface between ourselves and the CLECs earlier this year we have again established what we consider informal score cards.

6909 Maybe my comments before we were talking about the regulated quality of service measures, that we do exchange now on a monthly basis with all our CLEC customers information with respect to the provisioning of loops.

6910 The problem is that the data that we have been discussing on a working level isn't the same data, okay, that we will be reporting in the quality of service indicators. We have been talking about order, quality and revisions, rejections, forecasts, but we haven't been capturing everything that we are going to in the future.

6911 COMMISSIONER CRAM: I guess I have a difficult time imagining that if they are suffering a financial loss as a result of a lack of quality, of provisioning or servicing, that there wouldn't be some recourse for them aside from going to court. Believe me, I know they can do that.

6912 What would you say to something like lower penalties payable on the interim standards until they are finalized and then real penalties on those three standards that you said you would accept penalties on?

6913 MR. DIXON: I think, as we indicated --

6914 COMMISSIONER CRAM: You better put your microphone on, otherwise it just won't be there.

6915 MR. DIXON: I indicated that we were going to give this some thought relative to the request that came out for next Friday. I indeed will look at the final and interim indicators.

6916 COMMISSIONER CRAM: Yes. You see, the difficulty I'm faced with is that -- and I heard you yesterday, Ms Davidson, talking about CLEC involvement an integral -- what was your term?

6917 MS DAVIDSON: I don't know exactly, but they are part of the process in order to satisfy what was in the indicator.

6918 COMMISSIONER CRAM: Notwithstanding that the indicators themselves don't specifically exclude CLEC actions.

6919 MS DAVIDSON: Yes. More like CLEC errors would be excluded.

6920 COMMISSIONER CRAM: Yes.

6921 MS DAVIDSON: But in a number of situations there is CLEC involvement to actually reach like the completion of a loop order. In order to reach them and speak to them, there needs to be some contact and we need to work together to define what the process is.

6922 I am aware on a working level we haven't come to any conclusion on exactly how that process is going to work best for us collectively. That was how I was just trying to distinguish those sort of two sets of the next six quality of service indicators.

6923 COMMISSIONER CRAM: So in the long term that's not an objection to penalties per se on those standards. It's only once you work out the communication ability, is that it?

6924 MS DAVIDSON: I'm confident that when we work the processes out -- and I believe Mr. Dixon made some comment that some of the CLECs are still operating on an annual basis, some are mechanized, so we need to get to a point where the processes is very well defined. I was just talking about timelines with respect to the indicators.

6925 COMMISSIONER CRAM: Yes.

6926 MR. DIXON: I think one of the principles that corporately we put forward is a need to have some opportunity if something does go off the rails to recover.

6927 I think some of the plans as portrayed there is almost an immediate penalty. I think in at least the starting phases of this, from my perspective, it's like -- we are doing 20,000 of these a month that we weren't doing a few months ago and there are going to be some fits and starts.

6928 I feel comfortable that we have the right people, we have done a lot of this before, that we will move forward and we will deliver.

6929 At the end of the day this is going to -- like my success really does link to the success of this industry, my job and my group's job and the way my whole management team is totally focused on, you know, customer service and success.

6930 It sometimes sounds strange relative to the large company I work for, but my job is focused on the communications and industrial segment.

6931 COMMISSIONER CRAM: The conundrum I find myself in is what is the alternative. The alternative would appear to be that you would file these reports as to adherence, non-adherence, meeting the standards, not. And then what?

6932 I will tell you what increased my inquietude more, and I will just use one example. In CallNet(The Companies)903 -- and you don't need to look at it -- the question was:

"What are the consequences for breach of quality of service in terms of the CLECs?"

6933 The answer is:

"The Commission has `a variety of powers at its disposal'." (As read)

6934 My question in my notes: "And they are". What are the variety of powers that we have at our disposal?

6935 MR. DIXON: I think corporately we are not new to the submission of actions from a wholesale perspective. Submitting of our indicators, although we had numerous previously on an informal basis with the carriers, is relatively new.

6936 I had some confidence in our comments that there were indeed remedies, that if there were severe problems, which I do not anticipate, but if there were severe problems that there were remedies that the Commission had applied in the past. I have to admit --

6937 COMMISSIONER CRAM: Please help me.

6938 MR. DIXON: I'm saying, I guess I don't know at this point, but I anticipated that there were remedies.

6939 I know from reading some retail entries there was clear emphasis on action plans like "What went wrong and what is your plan to fix it?" That is fairly remote because I haven't --

6940 COMMISSIONER CRAM: But what remedy vis-à-vis the CLECs is there?

6941 MR. DIXON: Pardon?

6942 COMMISSIONER CRAM: What remedy vis-à-vis the CLECs is there if you file and file and don't meet the standard? What remedy is there vis-à-vis the CLECs?

6943 MR. DIXON: I think I offered to work within the CISC committees on some accelerated basis. We were on a bit of a timeline with regard to the finalization of the indicators using the CISC committee.

6944 I'm absolutely supportive if the industry of which we are part of can get together and reduce that from what I think in the -- 2600 was the document, June 20th anyway document, that really pointed to examining these indicators for a year, so starting at the start of this last three month period.

6945 If that could be shortened, you know, with the industry work, then lay an egg on something sooner. As I indicated yesterday, I am quite happy to work through that.

6946 I don't have great comfort with the indicators at this point because they are relatively new. When you start talking financial penalties associated with it I would like to see how precipitous it is, how much the penalties should be.

6947 As I said, I am supportive of it and supportive of the process and later on if we are in an arrangement where we have a need for an auditing of results, I'm there.

6948 COMMISSIONER CRAM: And in the interim, unless and until penalties are assessed, you don't know of any remedies we can impose vis-à-vis the CLECs?

6949 MR. DIXON: I couldn't comment. My suspicion was that you had some remedies and ability to encourage us to get better.

6950 MS DAVIDSON: I think there were some provisions, perhaps in 97-16, when there had been some discussion with respect to financial penalties for service indicators, certainly not penalties with respect to the individual customers, or now the CLECs, but ways that the company themselves may be penalized for failure --

6951 COMMISSIONER CRAM: The just and reasonable rates issue.

6952 MS DAVIDSON: Yes. Okay. I can't find the exact quote, but I think perhaps we were thinking that there are those types of options that are open to the Commission.

6953 COMMISSIONER CRAM: There is that option.

6954 MS DAVIDSON: Yes.

6955 COMMISSIONER CRAM: Are there any others?

6956 MS DAVIDSON: Not that I can think of, but I think we would probably have further comments that it's not in fact the case that the only incentive to provide the quality is because you won't have to pay financial penalties.

6957 COMMISSIONER CRAM: Yes.

6958 MS DAVIDSON: I think our position has been that we have a long history of providing good service and without a history of non-performance then maybe we need an opportunity to work through a model that is going to work well on behalf of the entire industry. We just thought we are not there yet in terms of the data collection. That's all.

6959 COMMISSIONER CRAM: Perhaps then you could, by way of undertaking, simply say what other powers we have at our disposal in terms of a remedy for the CLECs in the event of a failure to live up to quality of service.

6960 MR. DIXON: Could we include that in our response to the interrogatory?

6961 COMMISSIONER CRAM: Yes.

6962 MR. DIXON: Yes.

6963 One point that hasn't been highlighted and that is that most of the customers that we are talking about, and co-carriers that we are talking about, buy a great deal of services from me that they have a lot of options on, because the wholesale market is very competitive.

6964 Quite honestly, if we misperform, general market conditions apply, so there is leverage in the arrangements much the same as the services that I buy from these carriers in western Canada.

6965 You know, you make choice based on service and you make choice based on service in terms of the whole portfolio.

6966 COMMISSIONER CRAM: Yes.

6967 Ms Highet, I wanted to talk about the bundle issue that was raised yesterday.

6968 Do I now understand you that really this tariff is just a combination of the two tariffs?

6969 MS HIGHET: Yes. The two services that were specifically in the exhibit yesterday, visual call waiting and Smart Pack, were introduced in 1995 and 1996 respectively.

6970 COMMISSIONER CRAM: And there was no enhancement.

6971 MS HIGHET: That is correct, yes. The enhancement I was describing was actually the enhancement that was introduced in 1995.

6972 COMMISSIONER CRAM: Please tell me, did you actually advertise it as promotion?

6973 MS HIGHET: No.

6974 COMMISSIONER CRAM: At payphones, there was some discussion this morning and in one of the interrogatories -- I thought it was around 1200 and ARC-1, I could be wrong -- there was -- and you discussed it this morning -- 5 per cent market loss effective the first of this year in payphones.

6975 MS HIGHET: Five per cent market loss, yes.

6976 COMMISSIONER CRAM: Yes. What is your estimate of the market loss effective August of last year, August 2000?

6977 MS HIGHET: I think the indication of the 5 per cent was on an overall basis. I'm not -- I can check but I don't think it was specifically referring to a year as much as it was referring from a general market perspective. Can I just check that?

--- Pause

6978 MS HIGHET: It's at the beginning of 2001 in our interrog.

6979 COMMISSIONER CRAM: Yes. So what's your estimate for August of last year, August of 2000?

6980 MS HIGHET: I would have to get that information.

6981 COMMISSIONER CRAM: Could you?

6982 MS HIGHET: Certainly.

6983 COMMISSIONER CRAM: And also from May of this year, by way of undertaking.

6984 MS HIGHET: That's right.

6985 COMMISSIONER CRAM: Thank you.

6986 Thank you, Mr. Chairman.

6987 THE CHAIRPERSON: Thank you, Commissioner Cram.

6988 Commissioner Langford.

6989 COMMISSIONER LANGFORD: Thank you, Mr. Chairman. I will try to be brief.

6990 I have three or four areas I want to touch on. It's kind of a pot pourri at this point because I don't want to duplicate any questions so you will excuse me if I jump around from one little area another. It is pretty hard to link some of them, though they are all about telephones. That's about all I can tell you.

--- Laughter / Rires

6991 COMMISSIONER LANGFORD: Starting out with what I could call, I guess, the 5-30 test or the 35 -- it feels like 5:30, it's only 4:15, but --

6992 I was interested in the notion of the 5 per cent as a test and the comments that you, Ms Highet, made earlier today with regard to the 5 per cent competition you have now in the payphone market.

6993 Now, I know it's always dangerous to mix apples and oranges, but yet we have to try to -- you have put forward a relatively novel proposition with this 5-30 idea and I am looking for ways to test it.

1620

6994 I don't want to put words in your mouth, but I certainly got the feeling, Ms Highet -- and it may end up that this will be someone else that is answering. But I got the feeling from you this morning that the 5 per cent was not threatening you all that much in the payphone world; that you are still incredibly dominant in that area -- maybe not as happy as you would like to be, but dominant.

6995 MS HIGHET: Again, I think the difference is the two markets and the two specific products. One, obviously, is the business market, that we are talking with respect to the competitive test and the fact that this market is on the uprise. And the other is associated with the payphone business that is on the decline. So 5 per cent market share loss in declining business is not substantial.

6996 When you are talking about market share loss in a business market where you see very clear signs of competition, that is a different market and it's a different perspective.

6997 I don't know whether Mr. Farmer wants to add anything to that.

6998 MR. FARMER: I don't really have a great deal more to add. Joan already indicated that in one case our sense, at least in the payphone business, is that it is around 5 and perhaps going south. And in other markets where competitors are rolling out their services, it is perhaps at 1.5 and going north, which is quite a different situation or perspective on the business.

6999 The other issue is on the 530 test. I don't know that we have really turned our mind to how one would look at the availability in payphones. It is somewhat more difficult to imagine how one really measures availability. Are competitive payphones available to 30 per cent of the population, given that they are used, in many cases, by folk who are travelling and what not?

7000 I am not terribly sure what the test would be there.

7001 I suppose what we would say is I suspect that the 530 test in the payphone business would be rather hard to even show, even illustrate.

7002 COMMISSIONER LANGFORD: But you did indicate yesterday, I think -- and it's very difficult harkening back to what anyone indicated, because I am trying to take a whole transcript and get a sense of it.

7003 You did indicate in your sort of pre-hearing warm-up, pre-submission warm-up, back in your war room, wherever these things happen, you did toss other ideas around. This one bears an eerie resemblance to the cable test, but there were other ideas. I didn't get a sense from you, though, sort of which one ran second: 7 per cent, 10 per cent, 15 per cent.

7004 I don't think it would have tickled my sort of questioning mind as much if I hadn't heard this morning that 5 per cent wasn't so bothersome. I understand some of the differences you are making, but still 5 per cent is 5 per cent. Were there any other numbers you looked at?

7005 MR. FARMER: Well, you name them, really. Sure, there were numbers. It was a question of, first, picking what are the parameters, and we thought share loss and availability were quite reasonable parameters to look at because it shows (a) availability and (b) that customers are actually making choice already.

7006 So then it was just a question, as I said with, I think, Mr. Janigan, a question of picking the numbers.

7007 The cable test was there in front of us. So why did we use a cable test? Answer one, it had the right parameters; answer two, it was there.

7008 They could have been other numbers, absolutely. And I suppose the second choice would have been higher numbers on both of the parameters. That is why I indicated maybe 10/40, 15/40, 15/45. Those would be other ones that we could talk about.

7009 Basically, the parameters and what they are measuring are really where we started. Picking the numbers, I recognize, is somewhat subjective.

7010 COMMISSIONER LANGFORD: So is this sort of a trial balloon type of situation, where we are floating a new idea and seeing if anyone salutes? Or how tied are you to this notion of the future, this vision of the future?

7011 MR. FARMER: Do you mean this particular aspect of the future, the competitiveness test?

7012 COMMISSIONER LANGFORD: Yes.

7013 MR. FARMER: I suppose everything we propose is a trial balloon, in one sense. It's a set of proposals which, taken together, we think are the right way to go. We recognize when you look at every one individually, one can always play around the margin of them.

7014 It wasn't a brand new idea, if I can put it that way. I think I indicated yesterday there is an interrogatory that talks about other examples where tests are used, some of which use both availability and shares; some use just availability as examples. So it wasn't a brand new concept in that way.

7015 I think we are tied to the idea that one should move. And in this transition that we have talked about, moving from a monopoly to a competitive market, I think we are very much tied to the idea that, as the competitive nature of the market changes so, too, should the various tests and the various regulatory rules that apply change.

7016 Exactly what the nature of those are, again, we can play around the margins.

7017 COMMISSIONER LANGFORD: It's a nice segue to my next question, which is again an attempt to try to capture what I thought you said yesterday.

7018 It seems to me you described -- and I think this was probably an answer to Mr. Janigan, although I can't remember, to be honest.

7019 It seems to me you described this 530 proposal as something like a way station or a halfway house along the road to forbearance, and you seemed to suggest that similar sort of idea just now.

7020 If I get it right, the element in this proposal that you thought would give comfort, more comfort than forbearance, is the notion that you would still be making rate applications to the Commission.

7021 I just wonder what comfort, precisely, would subscribers find in this? What would you suppose, if the Commission were to adopt this -- let's take your proposal as born, the 530 proposal, and we were to adopt it and work it into the new price club  -- Price Club. You can see where I spend my weekends! What an exciting social life, I have.

7022 If the Commission were to adopt this and work it into the price cap submissions, or into the new price cap proposal, the new price cap status quo, over the next four or five years, whatever it is, what precise comfort could be gained from the fact that you would be making applications to us, but surely expecting, almost as a right, us to approve them?

7023 Or have I got something wrong here?

7024 MR. FARMER: No, I don't think you have it wrong. That is basically the model that we have proposed.

7025 I suppose the comfort may be more on the side of the competitors, in terms of ensuring that there's no anti-competitive pricing practices that are being followed. That is one level of comfort, I guess, if I could put it in those terms.

7026 But I don't suspect customers, generally speaking, really spend a lot of time thinking about that.

7027 There are other terms, as I said, in terms of -- and again, I can't give you any concrete examples. But I know, though, when we do file tariffs that it's not just a question of price. There are other questions apply.

7028 We talked earlier today about -- for instance, Ms Highet talked about the requirement to inform customers in terms of the expiry of their existing contracts, and things like that. So that is something that begins to impact the customer generally speaking.

7029 Again, are customers aware of this? Very few, I suspect. They are generally not aware of regulation -- pardon me, very few are aware of regulation, I would think. It just doesn't play a large role in their life.

7030 So to what extent that would give them a lot of comfort, I don't know.

7031 Maybe some other, if it was deemed -- again, this gets back to this notion of a halfway house. There are different ways of defining what that halfway house would be. Maybe one looks at a different kind of price cap constraint. Rather than moving from whatever it is to nothing, you move from whatever it would otherwise be to something higher. Maybe that would be a form of comfort.

7032 COMMISSIONER LANGFORD: But that wouldn't work in the proposal you have put before us. I'm not saying it's not something we could look it --

7033 MR. FARMER: Right.

7034 COMMISSIONER LANGFORD:  -- and you have now put it in a generalist way on the table.

7035 But in what you have before us, we would be in a situation similar to optional services or discretionary services, whether it be perhaps a floor, which would bring some comfort to competitors, but no ceiling.

7036 MR. FARMER: In terms of the price level itself, that is correct. The only other comments I can make are those rather non-price related conditions.

7037 COMMISSIONER LANGFORD: Thank you. I have a final one on the 530. As I said, this is a bit of a mix, but coming at the end of the day and not wanting to repeat, that is what we are stuck with.

7038 In discussions with Mr. Janigan -- and I could refer you to a transcript page, if you need it. Well, perhaps I will.

7039 It is transcript page 648, at the bottom, and 649; so the last line on 648 and the top five or six lines on 649.

7040 You confused me somewhat. You were discussing the notion earlier of averaging charges, and then it seemed that you mused somewhat about the notion that possibly there could be pockets where de-averaging would take place within what previously had been regarded as one area, one market. I am not quite sure how to define it here.

7041 That sounded very much like the thin edge of some kind of a wedge to me, though I confess I'm not sure what. Could you give me a little more information on that, or was it merely something that just came off the top of your head and you wish you had not said?

7042 MR. FARMER: I don't regret saying it, and it didn't come off the top of my head. Now, having said that, I don't know if I can take it a great deal further.

7043 The idea is simply this. One can imagine the situation where competitors come into an area and the competitiveness test is met; we make the application, you approve it and these services are uncapped. Competition in fact begins to heat up in some particular area, if I can put it that way, where it begins to look to us, or it would be our opinion at that point, that if we were really going to be able to compete in this area, we are actually going to have to do some -- how can I put it? -- surgical price response, if I can put it that way.

7044 As opposed to applying the same kind of pricing action over an entire band, if that was the way we had applied it, we would actually have to do it on a much more granular basis.

7045 I guess what I am saying is that at that point we would come back to the Commission and make the case to show that it would be necessary that the prohibition on de-averaging be lifted so that we might be able to make this response.

7046 Again, as I noted here, it would be incumbent upon us to make the case.

7047 COMMISSIONER LANGFORD: Just to be perfectly clear, though, if we were talking about downtown Ottawa, an area that most of us in this room are familiar with -- call it the business district, from Parliament Hill down as far as, I don't know, Somerset, Gladstone, somewhere in that area -- that would be one area under the present 530 proposal.

7048 But if you saw competition heating up on Sparks Street or Queen, you might want to pinpoint one set of buildings, one very much smaller geographic area, one niche market, whatever you want to call it, and apply to us to see it in that way.

7049 Is that what you are saying?

7050 MR. FARMER: Well, that is the idea. I have to say that example is probably never one that we would play out. I think there are probably a number of tools available to us in terms of marketing to customers. And marketing down to the street level probably creates more difficulty for us than any benefit it could provide.

7051 So one of the tools, I suppose, that we would use, and we do use today, is you look at the customers who you are dealing with and say, "Well, how is it that we are having trouble competing?"

7052 Well, perhaps it's because we are not taking into account the particular volumes that that customer can bring to us, or we are not taking into account the different kinds of features that customer might find attractive.

7053 The more likely response is that we would tailor our service, or invent new services, to actually meet those needs.

7054 This point in the transcript that you point me to, I can't say we would never use it and I can't say we ever would use it. I would say there is a whole bag of tools at our disposal. I just wanted to not preclude this possibility as being one of the tools.

7055 As I say, that example is correct in its nature, but it's probably not practical.

7056 COMMISSIONER LANGFORD: Well, that will bring some comfort to you competitors, I would think. This is rather a cruise missile rather than a cluster bombing approach, isn't it? If you can actually pick very, very narrowly defined markets and go in, that is going to make it somewhat tougher for anyone trying to compete with you, isn't it?

7057 MR. FARMER: Well, that is what you try to do, actually looking at your customers. You try to segment the customer base, at least at some stage in your product cycle. And that is probably the way we really try to approach the situation, as opposed to the cruise missile approach to marketing.

7058 COMMISSIONER LANGFORD: It's always nice to look into the future.

7059 I would like to move to payphones. I feel everyone has probably had more than enough today, but I have a little more for them, I'm sorry to say.

7060 I think I was perhaps a little flippant the other day in my characterization of your payphone proposal. I was actually trying to capture the spirit of poor Mr. Vincent, whoever he was, under his dripping eave in Nova Scotia. But it is an interesting proposal.

7061 The most interesting thing to me about it is that it is brand new; it is different. It tries to bring a whole new perspective to a very old story and a very old problem. You know, we are not allowed to tip our hat here, but it's kind of exciting, in a way. It's different. I like the idea of new approaches and new ideas.

7062 So "good for you", I heard somebody say. But having said that, I wonder if we couldn't get even a little more different, and that is what I wanted to explore very quickly with you.

1635

7063 Before I get to the 50 cents on the inside, I was wondering about the maintenance of the 25 cents on the outside and the free directory. I just wondered whether -- and I got a feeling from you, Ms Highet, today, that you had looked at this a little when you talked about shelters.

7064 Had you looked at any exceptions to the strict inside/outside rule? In other words, when you sat in that war room, the lot of you, though this is nice and clean and novel and exciting, did anyone say: What about hospital emergency rooms? What about schools? What about community centres? That sort of thing, that line of country.

7065 So we are not talking the Eaton Centre, but we might be talking the local shelter, the local high school. Did you think of any other way you could delineate between the 25-centers and the 50-centers?

7066 MS HIGHET: And we did. Obviously, we had conversations about outdoor/indoor and whether there would be any specific areas that we could change the definition of outdoor/indoor. I mean, we obviously talked specifically about shelters as well.

7067 It came down to a very simple approach of what was in and what was out would become the definition and the inability to actually administer any changes to that delineation.

7068 We believed it was a very simple approach for our customers to understand. You can get into conversations about when the Skydome is open versus closed, but it's indoor at the end of the day. We have had those kinds of conversations.

7069 I'm not suggesting that there isn't any exceptions to the rule, but the proposal that we are putting forward is very clearly from an indoor and outdoor perspective.

7070 COMMISSIONER LANGFORD: I'm thinking more of necessity and less of convenience, more of the high school and the food bank and less of whether the Skydome is open or closed, to be perfectly honest with you.

7071 What I wondered is: If you had directed your mind to the financial impact, because obviously that seems to be a concern from time to time in these matters, of some other exceptions. Did you do any studies? Example: What would happen if we left them in the schools? Did you do any studies of certain inside phones and what the financial impact of that would be?

7072 MS HIGHET: I'm not personally aware of any studies that we have done. I believe that, to address the affordability, the reason that we have proposed the rate increase indoor versus outdoor is really to address affordability. It is to ensure, from an overly cautious perspective, that we have addressed that issue.

7073 Obviously, I have cited all the reasons with respect to the rate increase itself and the desire to continue to be in the business as well as to continue to provide the level of payphones that we are looking at.

7074 We did not do any specific studies to take a look -- I'm not saying they haven't been done in the past, specifically the areas that you are talking about, but not specific to say: Should we have them in schools or should we not? Again, it was a very simple approach so that our customer base would actually very simply understand and have the option to choose whether they were indoors our outdoors.

7075 COMMISSIONER LANGFORD: In this attempt to play a societally sensitive role, did you look at anything else? In other words -- I can't have as much imagination as all of you folks in the room -- but did you look at things like tokens that people could buy, perhaps in some way and how, I can't quite tell you, but perhaps the high schools would have them or the food banks or the shelters, or some way that people, without subjecting them to the ignominy of a means test, but in some way people could buy cheaper calling cards or something.

7076 I'm searching here, I admit, but I am just -- to me, as I said, and I don't want to beat this to death with a stick, but as refreshing and interesting as this double system inside/outside, as it does have a "cachet" about it, depending on how you look at it, which can be a little disturbing, but it also perhaps may not solve some of the real problems of these 163,000 households and the people in them that don't have service.

7077 MS HIGHET: We did. One of the things that we did discuss, from migration over to the new rates from an indoor perspective, was to provide a promotional ability on our quick-change cards with respect to discounting those cards from a transitional perspective.

7078 I didn't propose that in the beginning of my comments this morning because it is something that -- whether that would be perceived as valuable, we weren't quite sure. But that certainly is a proposal that we can put on the table.

7079 COMMISSIONER LANGFORD: Well, all proposals are interesting, equally interesting, I think.

7080 I wanted to come now quickly to the 50 cent issue and wonder whether -- I'm going to your submission, section 6, paragraph 82, where you say, in the second last sentence I think -- this is where you discuss the fact that at 50 cents provincial and GST taxes kick in and so the person who makes the call, in fact according to your figures here, is paying 10 cents in tax and 40 cents of the 50 cents is going to Bell Telephone.

7081 I wonder whether then you did other calculations. You say, at one point:

"A local payphone services rate or local directory assistance service rate of less than 50 cents is not sufficient to materially change the viability of this industry in Canada." (As read.

7082 Did you look at in another way? In other words, I assume that you took - too make the split simple: a 75/25 inside/outside split -- inside, you are getting 50 cents for every call, whether it is a dialled number or directory assistance; outside, you are getting nothing for directory assistance, 25 cents for each call.

7083 Did you then say to yourself: What would happen if we charged 35 cents for everybody and what would the tax consequences of that be and what would the overall viability of your industry be? What would happen if we charged 40?

7084 I'm trying to get a sense of what would happen if we only charged 40 inside, charged 25 outside, then maybe charge them for directory assistance. How many different variations on this theme did you try and what kind of figures might you have lying around that we could study?

7085 MR. FARMER: Do I know the answer, she asks me?

--- Laughter / Rires

7086 MR. FARMER: I suppose the answer is no, but we did talk about some of these things.

7087 Obviously, those were some alternatives that we did look at.

7088 Now, Ms Highet did talk about sort of the abundance of caution we brought to this issue, the sensitivity about the price going up for payphones and so we did want to find some way that some would not change and, therefore, kind of went to the 50 cents for where it would change.

7089 You talked about the tax. So 35 cents didn't really seem to do it simply because half of that increase would actually in tax at any rate.

7090 Then you get into the somewhat more practical matters, and here I have to admit I am somewhat out of my depth but at least I understand it in this case: If you are going to pay 40 cents, now you need three coins. It becomes more cumbersome for customers, generally speaking.

7091 I'm not sure if we heard it on Monday, but certainly I have seen it in the letters that people have sent me in response to our Bell insert talking about payphones and how convenient a quarter is, and so on. You know, I will take that into account and I think perhaps two quarters is perhaps more convenient than a quarter, a nickel and a dime, for instance.

7092 There are other practical issues too. I mean, if you have three coins sitting in a coin box you actually have to go out and collect the coins more frequently.

7093 So it has become somewhat more mundane, but they were considerations that we brought to the table.

7094 COMMISSIONER LANGFORD: I have great a sympathy for the sherpas somewhere in the back rooms who are probably listening to this and sighing every time we ask for an undertaking for more information, so I won't ask you to get anything, but if you do have anything lying around, any alternatives you have done, I think we would appreciate seeing them, but I wouldn't want to trouble you to start doing a whole lot of number crunching on it. I'm sure that those sherpas, whoever they are, have enough to crunch.

7095 But it would be interesting for me to see, because it seems to me that -- you know, one can either see this as a final proposal or a kind of an opening sort of -- not gambit really, but a kind of opening suggestion of what could be quite an interesting discussion and quite a different matrix down the road.

7096 So if you have something I would like to see it.

7097 MS HIGHET: Okay. Let me check for you.

7098 COMMISSIONER LANGFORD: Now moving on to the last of my grab-bag collection and that is optional services. Your position on it is pretty clear.

7099 What I would like to explore with you, obviously, is again whether when sitting in the war room anything else was discussed that you might want to share with us.

7100 I would take you, Mr. Farmer -- I'm sure it will be probably you, Ms Highet, that answers these -- but a comment that you made yesterday, Mr. Farmer, in discussions again with Mr. Janigan -- I will give you the reference just out of courtesy. We don't need to go there, as the kids say, but it was page 634 of the transcript.

7101 Essentially, you and Mr. Janigan were discussing $10 raises in basic service and your reaction was "We would lose all our customers", to put it pretty mildly. This is at the top two paragraphs. You said at line 3785:

"We are not in the business of losing all of our customers. That is clearly not what we want to do."

7102 So it seems to me that one of the things one can read in there is that if there is an option and one competitor gets too greedy, people will vote with their feet.

7103 Now, local residential competitive options are few and far between, unless we are lucky enough to live in Halifax, and not all of us are. But in optional services, discretional services over the last couple of years, I think you will agree with me that there have been some quite considerable rate increases, 30 per cent, 40 per cent at times.

7104 MS HIGHET: There has been two rate increases over the last few years.

7105 COMMISSIONER LANGFORD: Yes, really good ones, sizeable, measurable.

7106 Did anyone vote with their feet and do you have numbers on who did in these raises? Did people, in other words, cancel the service? Did your penetration rates drop?

7107 MS HIGHET: One of the things that we measure is inward/outward movement and we measure the churn from many aspects of our business. One of them is associated with products and services that we introduce. We measure from the promotions that we put out. We measure from the bundles that we have put out in the marketplace and we measure price. That is another factor that is measured. And we see inward/outward movement in any of those aspects that we put into the marketplace and we monitor that on a weekly basis.

7108 COMMISSIONER LANGFORD: Is it possible to find out how many people quit or cancelled their services when you put these price increases in? Do you have those numbers?

7109 In other words, when you put these two substantial prices in for different optional services, I think there was -- I'm going by memory now, but it was the call answer one, I think it might digital display in another package. It was two big applications. What kind of losses did you experience?

7110 MS HIGHET: It's difficult to understand. As I indicated to you, there are many factors that actually cause inward/outward movement. Some of it is seasonal, some of it is specifically related to product, price, related to the benefits that we are providing our customers, the communications that we provide if there is a campaign or a contest going out in the marketplace. It would be difficult for us to isolate what would specifically be price.

7111 We certainly understand when there is a price increase that there is a churn impact. To suggest that all of that churn impact is specifically price related would not be correct, because there are also a number of other factors that are associated with it.

7112 But I will acknowledge that there is change in churn when price goes into effect. It levels off again and when it is identified is obviously when a customer is notified of a price change and when it goes into effect.

7113 So the churn level does change, it is very slightly.

7114 MR. FARMER: Just if I might add?

7115 Ms Highet was talking about some of the numbers that we track and we track them on an ongoing basis. She is absolutely correct that it is difficult to tease out some information. You do see, as a price change goes into effect, that some customers leave.

7116 You do then notice that customers also join the service, take the service.

1650

7117 It is difficult to say whether they are the same customers or not. Those numbers we just simply can't get at.

7118 But it does show that demand continues to rise, for some of them at least, and showing that those new customers actually see, even at the higher price, the value of the service.

7119 MS HIGHET: If you look at the NAS base that have Smart Touch services, almost 60 per cent of the revenue is demand related. There is a large portion associated with new product introduction or bundles -- and even I don't know the names of some of the bundles, obviously. Then there are some related to price.

7120 But the most substantial is the actual demand in the service base itself.

7121 COMMISSIONER LANGFORD: Well, at this point, under the present system and under the proposed system -- the Bell proposal, that is, The Companies proposal -- there is no ceiling on these prices. That seems to be the interpretation that has been generally accepted.

7122 MS HIGHET: Can I comment on that? I believe that the customer puts that ceiling. I believe that the customer, through their actions, by either taking these services or disconnecting these services, puts that ceiling.

7123 COMMISSIONER LANGFORD: I have asked you if you have disconnect figures, and you are telling me that it is just too difficult to get them because there are all kinds of reasons. So how do you know that?

7124 MS HIGHET: We know from an overall aggregate perspective numbers that what we were talking specifically was price.

7125 I am suggesting to you that the customer base obviously has a personal choice as to whether or not they take these services. The demand generated by these services indicates that.

7126 COMMISSIONER LANGFORD: Let me suggest to you that there could be other reasons. As you suggested to me that there could be other reasons that caused people to vote with their feet rather than just price, let me suggest to you that people perhaps are locked in to some of these services.

7127 Let me give you the hypothetical of the sort of home-based business that has based their customer service strategy around having a number of your optional services -- the obvious one being Call Forwarding. If they are out on the road or something, the message; you want to be able to have messages from your customers so they can feel that you are at least going to get back to them some time.

7128 Your system -- here is a little advertisement for it -- is better than the Radio Shack phone because it will take a message even when you are on the phone.

7129 Then you can have a call waiting so that you can reach out -- and again to borrow one of your phrases -- touch your customer a little more quickly, to give them that feeling of service.

7130 So they have built a service strategy somewhat around your products.

7131 They may feel captivated in some way, may they not? What you are telling me is that they are absorbing these prices, but we don't know whether they are absorbing them willingly.

7132 May some of these people not feel captivated? They just simply can't afford to say no.

7133 Maybe they would if you came in at $100, but if you are raising it by a dollar or two dollars, they can't afford to say no.

7134 I doubt they are doing handstands in glee over it, because no one likes to pay more. But essentially they are captured, aren't they?

7135 MS HIGHET: I think there are two points that I would like to bring up.

7136 One is the availability of alternatives. So there are alternatives to specifically the products that you describe, both in the wireless market, and certainly in the messaging market there are alternatives with respect to answering machines and two-way pagers, and some of the other technology that is available --

7137 COMMISSIONER LANGFORD: I hate to interrupt, but I did try to cover that by saying how different your products were. They aren't the same as a Radio Shack answering machine or something. They are better.

7138 MS HIGHET: They may not be. One of the ways that we are addressing all of the other issues that you were talking about specifically is through our bundles. Our bundles, which is what we are focusing on, is to really provide to our customers a combination of the services that are most popular and provide an effective discount.

7139 In the last number of months, that is where our focus has been in order to bring more and more bundles out to the marketplace from a marketing strategy perspective, and provide the effective discount associated with it.

7140 COMMISSIONER LANGFORD: When our hypothetical small business person is running their home-based consultancy or pet grooming business. or whatever it may be, they not only build, I would think, a level of service and a reputation for service partially on what you are able to offer them -- because communications is a big part of quality service. On the other hand, they are also going to build a budget on what they think they are going to pay for it.

7141 Granted, two or three dollars isn't the end of the world, but still...

7142 You spoke rather eloquently yesterday, Ms Highet, on the subject of long-term contracts. I thought you were persuasive in your discussion of the benefits of long-term contracts and the certainty they bring to users, particularly business users who know precisely what their expenses are going to be with a farther horizon line.

7143 Don't you feel that there is a certain -- I hate this word; it is loaded. So just take it as a colloquial use.

7144 Isn't there a certain unfairness to signing someone up at a certain rate when you know and they don't know that there is nothing to stop you from going in the next day and applying to the CRTC for a much higher rate, knowing that the interpretation of how optional services rate applications are made, the current interpretation, means you are going to get that rate?

7145 These people have signed on. They have put the Radio Shack advertising machine out in the yard sale, and they have made their business plan. Then they get blind-sided.

7146 Isn't there some argument to be made for building some certainty in for these people?

7147 MS HIGHET: Specifically, in a home based business we do actually have bundles that are associated with not only options and features but are also associated with different e-commerce type applications and things.

7148 That is not the point you are concerned with.

7149 COMMISSIONER LANGFORD: No. I am complaining that my Chevy is not running well, and you are trying to sell me a Mercedes. I would like to have one, but that is not the issue.

7150 MS HIGHET: The issue here is that these are discretionary services and that a customer has a right to choose.

7151 There is the perspective that the market will dictate these prices.

7152 COMMISSIONER LANGFORD: I am not questioning that. What I am asking you is whether you have looked at other alternatives to this.

7153 I would draw your attention, if I may, to Interrogatory The Companies(CRTC) -- I am not good at citing these yet.

7154 It is No. 1203. It was information requested by the Canadian Radio-Television Telecommunications Commission, dated June 26, 2001. It is a one-pager, you will be glad to know at this late hour.

7155 You were asked:

"Assume that the Commission were to determine the rates for optional services should be capped. Elaborate on the modifications that would be necessary to The Companies' basket structure and pricing constraints proposal to accommodate such a determination." (As read)

7156 You came back with a 10 per cent solution, no less than 10 per cent, and no individual rate element constraint should apply.

7157 I am not trying to hold you to this. What I am saying is that someone somewhere in your war room turned their attention to an alternative.

7158 Are there any other alternatives which would put a cap that you have looked at?

7159 I will give you an example of one.

7160 Have you considered letting people choose one or two and capping those; in other words, almost making them part of basic?

7161 MS HIGHET: As including it within the basic service.

7162 COMMISSIONER LANGFORD: In some way. You are the experts at putting these things together.

7163 Has that been tossed around? Okay, if we can't open the whole door, let's open the door a little bit. The world is changing. We have raised prices. People haven't voted with their feet. They are terribly dependent on these things. People want the Call Display because they are scared that it's Uncle Louis calling for another loan again and they don't want to answer.

7164 I don't know. People have lives. They build their lives around certain tools. Communications tools are terribly important to those lives.

7165 Have you considered alternatives to the proposal you put before us? You did consider one in answering this interrogatory. It is clear enough. We don't have to discuss it today. Did you consider others?

7166 MS HIGHET: I will answer the question that yes, we have looked at bundling with respect to residential service plus.

7167 I can't profess to be the expert with respect to what that means to the basic service objective in all the regulatory tariffs and things that we would have to look at.

7168 I know that my team specifically had looked at that.

7169 COMMISSIONER LANGFORD: Would you have some paper on that?

7170 MS HIGHET: I don't know that, Commissioner Langford.

7171 COMMISSIONER LANGFORD: I don't want to make the sherpas apoplectic tonight.

7172 Could you look? Could you at least undertake to look; and if you have something --

7173 MS HIGHET: It is a strategy. It is a bundle.

7174 COMMISSIONER LANGFORD: We would be interested to see it.

7175 MS HIGHET: All right.

7176 COMMISSIONER LANGFORD: I have one last topic. I am moving right along.

7177 That topic is extra listings.

7178 The present situation, as I understand it, is that if you have the basic service, residential, you get one light font listing -- not bolding, but just the regular font, the regular level of highlighting.

7179 I am not a printer. I don't know how to describe that.

7180 Am I basically right: one listing, one line?

7181 MS HIGHET: I believe you are right.

7182 COMMISSIONER LANGFORD: How long have you had that policy? Can you give me an idea?

7183 Is this an old one? Has this been around since the flood?

7184 MS HIGHET: I profess I actually don't know the answer. But I would assume it has been around since pretty close to the flood, if not at least the unicorns.

7185 COMMISSIONER LANGFORD: Old then. So there were real Indians on Pontiacs when this came in.

7186 What I want to know is why wouldn't you change somewhat with the times? It seems to me that if we go back 20, 30 years, whenever this may have come in, women fell in love with men who fell in love with women, and they got married and they took the same name. Now they don't any more, always certainly; not even often.

7187 So there is one example.

7188 Marriages fall apart. Other types of unions are formed. Just plain roommates get together at college.

7189 Why wouldn't you revisit this and update it? Or have you and decided not to because you can just make a lot more money if you don't?

7190 MS HIGHET: No. There is a direct connection to the actual phone number and the listing. I would make an assumption -- and I am making purely an assumption here, because I must say I don't have any background on this.

7191 The assumption is that there is a phone number and there are two criteria provided with that. It is as simple as that.

7192 COMMISSIONER LANGFORD: So the answer is that's the way we do it basically.

7193 MS HIGHET: Well --

7194 COMMISSIONER LANGFORD: I am not trying to be facetious. But basically that's the way we do it.

7195 MS HIGHET: That is probably the answer.

7196 COMMISSIONER LANGFORD: What about the notion of giving a second listing in legitimate circumstances? Obviously, if the person wants to list themselves as Fred Smith and then list themselves as --

7197 MS HIGHET: Smith, Fred?

7198 COMMISSIONER LANGFORD: No, as ABC Goldfish Services or something. You are not going to be fooled by that for even a minute.

7199 If you have Fred Smith and Harry Jones, who have formed an alliance of some sort, live together, share a number, why not offer them a second one at cost rather than at whatever the rate is now -- which is far above cost, I would assume?

7200 MS HIGHET: I am speculating. It may simply come down to the size of the phone book and the cost of production, and some of the other operational things.

7201 If you are suggesting that it becomes a chargeable item, I don't know whether or not we have addressed it.

7202 COMMISSIONER LANGFORD: Do you know what the second listing costs now?

7203 MS HIGHET: No, I do not.

7204 COMMISSIONER LANGFORD: I don't remember either.

7205 MS HIGHET: We have a whole panel shaking our heads here. So, no, we do not.

7206 COMMISSIONER LANGFORD: It is not cheap. It is not cost. I am pretty confident of that. We did do an analysis of it once.

7207 Would you turn anyone away? If Fred Jones and Harry Smith were to ask for a second listing and were willing to pay the freight, would you turn them away on the grounds that if everybody did that, your book might be too big?

7208 MS HIGHET: As I indicated, I believe it is a matter of the operational aspect of it more than turning customers away.

7209 COMMISSIONER LANGFORD: But you said the size of the book.

7210 MS HIGHET: We don't profess to try and turn customers away at all.

7211 I was speculating that it could be associated with the production issues of the book itself.

7212 COMMISSIONER LANGFORD: But probably now you think it isn't?

7213 MS HIGHET: No. You asked me whether I would turn someone away if they were willing to pay, and my response to you is the same.

7214 I don't know why we don't do it in the first place. I speculated that it could be associated with the production and the size of the book and the amount of time that we would put it together, and all those kinds of wonderful things.

7215 So I am only speculating.

7216 COMMISSIONER LANGFORD: Again, not to induce heart seizure in the sherpas, but would it be possible to get one present rate -- which I assume probably we even have somewhere. Would it be possible to get the present rate for a second residential listing and the cost?

7217 MS HIGHET: That should be pretty easy to get.

7218 COMMISSIONER LANGFORD: And the actual cost?

7219 MS HIGHET: The cost, I don't know whether we would provide that.

7220 MR. FARMER: It is not a question of confidentiality, obviously. It is a question of whether or not it is available.

7221 MS HIGHET: Yes.

7222 MR. FARMER: We can certainly undertake to see what we can find. The price, clearly, is not a problem. The question of cost, we will have to look.

7223 COMMISSIONER LANGFORD: You may have a page cost or something that you could provide by the lines and get a rough idea. I don't know, but perhaps you could give us some guidance.

7224 It just seems to me that you have done such a remarkable job modernizing yourself on payphones that you might just want to carry the trend on.

7225 MS HIGHET: We will take an undertaking to provide as much information as we can with respect to this subject.

1705

7226 COMMISSIONER LANGFORD: Thank you very much.

7227 Those are my questions, Mr. Chairman.

7228 THE CHAIRPERSON: Thank you, Commissioner Langford.

7229 I just have a couple of questions myself.

7230 Ms Highet, on the issue of payphones and this commitment to the sort of social aspect of it with respect to the phones that are outdoors --

7231 MS HIGHET: Yes.

7232 THE CHAIRPERSON:  -- you have indicated that -- I take your point that the payphone business is probably shrinking and probably in a lot of the indoor areas shrinking quite dramatically.

7233 We can see in airports, those of us who travel a lot, that the large banks of payphones that were there and used extensively are hardly being used at all now because everybody is on the cell phones or PCS, whatever. I expect that you probably are going to be taking a lot of those phones out.

7234 I would take your commitment to maintain the ratio of outdoor phones to indoor phones as a commitment to actually significantly reduce the outdoor phones.

7235 MS HIGHET: The commitment was to maintain the same ratio, so yes, if the assumption is -- yes, because of the decline, you would be correct.

7236 THE CHAIRPERSON: So how is that consistent with what you characterized as your social responsibility?

7237 MS HIGHET: Well, because the payphones themselves are declining, and because the outdoor usage is also declining, it is actually declining as -- I don't know whether it's declining at the same ratio as indoor phones, but the commitment that we are trying to make -- and then maybe the ratio commitment is not the right one to make. Maybe the commitment should be made with respect to the number of phones, period, versus the 75-23.

7238 THE CHAIRPERSON: Do you think that would be more reasonable, given your --

7239 MS HIGHET: Well, that is what I did put forward this morning, that that kind of a commitment basically says that we will manage the shrinking of the marketplace.

7240 THE CHAIRPERSON: Perhaps I misunderstood. I understood you to say this morning that you would not make a commitment to --

7241 MS HIGHET: No. I actually put forward a commitment that we would minimize the payphone removal to 5 per cent per year when I was having a conversation this morning with Ms MacDonald.

7242 THE CHAIRPERSON: Okay.

7243 Switching topics then. Mr. Dixon, I noted your title was Senior Vice-President, Carrier Services with Nexxia.

7244 MR. DIXON: That's correct.

7245 THE CHAIRPERSON: You have indicated that you have about -- you have 600 employees in your division. Is that how I would understand it?

7246 MR. DIXON: That's correct. Yes.

7247 THE CHAIRPERSON: What do they all do?

7248 MR. DIXON: They are sort of a full service group, so there is the usual finance people and business planning, but a lot of front line business office people, if that is a familiar term, taking orders. There are accounts receivable people. Because of the needs for confidentiality in my market they are centralized.

7249 There is a pick processing group who performs the functions for long distance competitors. There are sub-groups in that business office function to look after voice provisioning, loop provisioning, about 80 people, data provisioning, rebilling provisioning.

7250 As an augment to that, because that is just processing day-to-day orders with the industry, there is also a project management team that implemented 4,000 projects last year in terms of installations for the competitors.

7251 Then there is another group which is customer service engineers that help design the circuitry and network designs as we provide services to the industry that I serve.

7252 Then there is actually a sales force as well that has some market support behind it. So it does not include -- maybe that's another way to come at it -- it does not include the network operations people who perform the function for the whole of Bell Canada and sort of the field forces, but pretty well everything else is kind of soup to nuts.

7253 THE CHAIRPERSON: And this is all for the wholesale market.

7254 MR. DIXON: That's correct. So the customers or carriers that I deal with are national in nature. It includes all the wireless carriers. It includes all the ISPs, resellers, refillers, carriers and it is, as I said, national in nature.

7255 It actually includes U.S. customers as well, because we have assets in the U.S. and wholesale business is pretty well tucked under my wing.

7256 THE CHAIRPERSON: We established a number of years ago this notion of a carrier services group to maintain the confidentiality of customer information when you are dealing with competitors who are customers --

7257 MR. DIXON: 92-12.

7258 THE CHAIRPERSON:  -- the retail marketing people in 92-12, yes.

7259 MR. DIXON: Yes.

7260 THE CHAIRPERSON: Now, I assume that you have a -- well, let me ask this: Are there sales people in Nexxia outside of your group who are --

7261 MR. DIXON: In the wholesale?

7262 THE CHAIRPERSON:  -- who are in --

7263 MR. DIXON: Maybe I will explain the relationship --

7264 THE CHAIRPERSON:  -- the retail sales business?

7265 MR. DIXON: Yes. Maybe I would explain just my position in Nexxia.

7266 I report to the President of Nexxia. We did that about a year and a half ago, but fundamentally I continue as a Bell operating unit. My results are separate from -- and visibly separate from Nexxia as a whole.

7267 I do sell some Nexxia products and those services are accommodated in the Nexxia framework. You would say: Why would we do this?

7268 We are a few people, in terms of scale about 5 to 10 per cent of the volume that I had, so it was a move in terms of efficiency to have the wholesale units -- because Nexxia was focused mostly out of territory, so we put those two units together a year and a half ago.

7269 In terms of the confidentiality side, all of my people that report to me are all, you know, Bell Canada from the front end to the back end. I just happen to report to the President of Nexxia. The confidentiality issues that were described in 92-12, you know there's annual review of that with every employee that reports to me and every new employee. All of my people are separate from and separate -- behind closed doors from the rest of the units in the company.

7270 THE CHAIRPERSON: The rest of the units in which company?

7271 MR. DIXON: In Bell Canada and Bell Nexxia.

7272 THE CHAIRPERSON: Oh.

7273 MR. DIXON: Yes.

7274 THE CHAIRPERSON: Your staff -- are there written guidelines in terms of their confidentiality responsibilities vis-à-vis their marketing people in Bell Canada?

7275 MR. DIXON: That's correct. They sign off on those on an annual basis.

7276 On a broad corporate basis we have a business code of ethics that are also in play that within the last five years, I don't know the exact time, five or 10 years, they were updated to better reflect the overall competitive situation, because, as I mentioned, there are people outside of my group who perform functions for the whole of Bell Canada and do framework and do connections so they understand the roles they have to play.

7277 There was the notion, at the start of competition, quite honestly, of people considering that a service order for a competitor has some less priority than the service order for a retail customer. All those things have been addressed.

7278 Quite honestly, I don't see that as an issue. In my experience in the past 10 years it is just kind of go through those types of things. People understand the game has changed.

7279 THE CHAIRPERSON: So the confidentiality, from the point of view of your staff, equally applies to Bell Canada and the retail marketing people in Nexxia.

7280 MR. DIXON: Yes. The confidentiality requirements or the prescriptions are very clear within my group in terms of -- particularly of focus on marketing information. I mean we deal with carriers and CLECs and at times get very close to them and understand what they are doing next. The intent for the most part is to not indicate -- perhaps Joanne or sales forces on the end that someone is making a left hand turn. Those things are absolutely guarded against.

7281 THE CHAIRPERSON: I'm not sure what somebody making a left hand turn would be. The real issue is: We know someone has a hot customer on the line.

7282 MR. DIXON: Answering -- I might know well ahead of everybody else, for example, that one of the characters in the room is going to co-locate somewhere else and enter a particular market. That would not be highlighted to Joanne & company.

7283 However, the carrier is usually advertising that at the same time anyway.

7284 THE CHAIRPERSON: No, but I think the purpose of the whole CSG thing was to keep customer-specific information separate from the salespeople and Bell so an end-around isn't done.

7285 I guess really the point of my questioning here was I hadn't appreciated this distinction before. In fact I'm still a little confused as to where you fit in the organization.

7286 MR. DIXON: I have moved around.

7287 THE CHAIRPERSON: I appreciated CSG was in Nexxia and I understood the CSG people would be required to maintain confidentiality vis-à-vis the Bell Canada people. What I wanted to know was do they have that same responsibility vis-à-vis the other Nexxia people.

7288 MR. DIXON: Yes. The Nexxia people that I brought over, the smaller part, a year and a half ago, I converted them all to Bell Canada people. So they are all Bell Canada and they all have the same confidentiality requirements.

7289 THE CHAIRPERSON: With respect to Bell Canada retail people and with respect to Nexxia retail people?

7290 MR. DIXON: Absolutely. It only makes business sense. As I indicated earlier when we were talking about the issues, my customers have a lot of discretionary business, okay. If there was suspicions about leakage or information -- and quite honestly there is not that much information that you need to worry about, but I think all of the major carriers at various senior level know me and my phone would be ringing off the hook, and it isn't.

7291 THE CHAIRPERSON: Why did the company make the shift? You said for all practical purposes you are still an operating division of Bell Canada. But you report to the President of Nexxia?

7292 MR. DIXON: The primary focus of Nexxia, as well as sort of new services on the advance side, was a national focus. So the notion of having two wholesale groups when most of the customers I was dealing with primarily in Ontario and Quebec had national arms, it did not make a whole lot of sense for me to have a sales -- actually the multiple salespeople I have with some of the major accounts and then have another salesperson and a service group in another department service that same entity, so we just brought them together. It's as simple as that.

7293 THE CHAIRPERSON: Okay. Those are all my questions.

7294 I think those are all the questions for this panel then.

7295 Thank you very much for your participation in the proceeding and for answering the questions.

7296 MS HIGHET: Thank you for the opportunity.

7297 THE CHAIRPERSON: Thank you very much.

7298 That will conclude our work for the day then.

7299 Mr. Secretary, I forgot you yesterday. I better not forget you today.

7300 MR. SPENCER: Thank you, Mr. Chairman.

7301 I have nine documents I would like to assign exhibit numbers to.

7302 The first document is entitled "2000 Monitoring Report" which will be BCOAPO et al Exhibit No. 1.

EXHIBIT NO. BCOAPO-1: "2000 Monitoring Report"

7303 MR. SPENCER: "Months Below Quality of Service Standards" will be CRTC Exhibit No. 15.

EXHIBIT NO. CRTC-15: "Months Below Quality of Service Standards"

7304 MR. SPENCER: "Bell Canada Quality of Service Indicators" will be CRTC Exhibit No. 16.

EXHIBIT NO. CRTC-16: "Bell Canada Quality of Service Indicators

7305 MR. SPENCER: We also have CRTC undertakings to The Companies, TELUS, AT&T Canada, CallNet, GT Group Telecom, and RCI to provide The Companies' best estimates of projected market shares in the market of residential and business exchange services.

7306 The undertaking requested from The Companies will be identified as CRTC Exhibit No. 17.

EXHIBIT NO. CRTC-17: Undertaking from The Companies to give best estimates of projected market shares in the market of residential and business exchange services

7307 MR. SPENCER: From TELUS, CRTC Exhibit 18.

EXHIBIT NO. CRTC-18: Undertaking from TELUS to provide best estimates of projected market shares in the market of residential and business exchange services

7308 MR. SPENCER: From AT&T Canada, CRTC Exhibit 19.

EXHIBIT NO. CRTC-19: Undertaking from AT&T Canada to provide best estimates of projected market shares in the market of residential and business exchange services

7309 MR. SPENCER: From CallNet, CRTC Exhibit 20.

EXHIBIT NO. CRTC-20: Undertaking from CallNet to provide best estimates of projected market shares in the market of residential and business exchange services

7310 MR. SPENCER: From GT Group Telecom, CRTC Exhibit No. 21.

EXHIBIT NO. CRTC-21: Undertaking from GT Group Telecom to provide best estimates of projected market shares in the market of residential and business exchange services

7311 MR. SPENCER: From RCI, CRTC Exhibit No. 22.

EXHIBIT NO. CRTC-22: Undertaking from RCI to provide best estimates of projected market shares in the market of residential and business exchange services

7312 MR. SPENCER: These undertakings are due by the end of the hearing.

7313 Thank you, Mr. Chairman.

7314 THE CHAIRPERSON: Thank you, Mr. Secretary.

7315 Mr. Henry, did you want to --

7316 MR. HENRY: I just, Mr. Chairman, wanted to speak to a scheduling matter. Was that what you were about to do?

7317 THE CHAIRPERSON: Yes.

7318 I note that we had changed the schedule around to accommodate Dr. Taylor. The original proposal was that the next panel to Panel 2 would be what is now being characterized as 3A, which will be the company-specific representatives.

7319 Looking at the time estimates that we have for the two, and given what I understand to be the schedules for the parties, I would suggest that we start with Dr. Taylor tomorrow.

7320 MR. HENRY: That would be fine with me if it's fine with everybody else in the room.

7321 THE CHAIRPERSON: Depending on what time we could finish with Dr. Taylor, and assuming the parties would agree, then the next -- well then Panel 3A would come up.

7322 I don't know whether ARC and MKO could agree, but I am trying to accommodate Mr. Williams' schedule. He could perhaps be first up to deal with the company-specific.

7323 I don't know, given the time, whether that would -- you know, depending on the amount of time it takes to question Dr. Taylor, whether Mr. Williams would be able to start or even finish his cross. We can sort of fall off that bridge when we get there I guess.

7324 In any event, my suggestion would be to start with Dr. Taylor tomorrow.

7325 MR. HENRY: That's fine, Mr. Chairman. That is what I was going to suggest.

7326 THE CHAIRPERSON: Anything else.

7327 MR. WILLIAMS: Mr. Chairman, it's Mr. Williams falling off the bridge already apparently.

7328 I certainly have no objection to Dr. Taylor. I think I have the last flight out to Winnipeg at 12:00 and I have obligations in Winnipeg, so I wouldn't be able -- in the event that Dr. Taylor finished on Friday afternoon, then my plan would be to fly back on Tuesday -- or for Tuesday.

7329 THE CHAIRPERSON: In any event, yes, okay.

7330 All right. So we will go ahead with Dr. Taylor, then, and start with -- assuming we finish at a reasonable time, we will start with Panel 3A and then we can finish with Panel 3A on Tuesday.

7331 Okay. Anybody else?

7332 All right. That concludes our work for today then.

7333 We will see you at nine o'clock tomorrow.

--- Whereupon the hearing adjourned at 1725, to resume

on Friday, October 5, 2001, at 0900 / L'audience est ajournée à 1725, pour reprendre le vendredi

5 octobre 2001 à 0900

Date de modification :

2001-10-04