ARCHIVÉ -  Transcription

 

 

 

 

 

 

              TRANSCRIPT OF PROCEEDINGS BEFORE

             THE CANADIAN RADIO‑TELEVISION AND

               TELECOMMUNICATIONS COMMISSION

 

 

 

 

             TRANSCRIPTION DES AUDIENCES AVANT

                CONSEIL DE LA RADIODIFFUSION

           ET DES TÉLÉCOMMUNICATIONS CANADIENNES

 

 

                          SUBJECT:

 

 

 

  FORBEARANCE FROM REGULATION OF LOCAL EXCHANGE SERVICES /

    ABSTENTION DE LA RÉGLEMENTATION DES SERVICES LOCAUX

 

 

 

 

 

 

 

 

 

 

 

HELD AT:                              TENUE À:

 

Conference Centre                     Centre de conférences

Outaouais Room                        Salle Outaouais

Portage IV                            Portage IV

140 Promenade du Portage              140, promenade du Portage

Gatineau, Quebec                      Gatineau (Québec)

 

 

September 27, 2005                    Le 27 septembre 2005

 

 

 

 

 

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.

               Canadian Radio‑television and

               Telecommunications Commission

 

            Conseil de la radiodiffusion et des

               télécommunications canadiennes

 

 

                 Transcript / Transcription

 

 

                             

  FORBEARANCE FROM REGULATION OF LOCAL EXCHANGE SERVICES /

    ABSTENTION DE LA RÉGLEMENTATION DES SERVICES LOCAUX

                             

 

 

BEFORE / DEVANT:

 

Charles Dalfen                    Chairperson / Président

Richard French                    Commissioner / Conseillier

Michel Arpin                      Commissioner / Conseillier

Stuart Langford                   Commissioner / Conseillier

Joan Pennefather                  Commissioner / Conseillère

Andrée Noel                       Commissioner / Conseillère

Elizabeth Duncan                  Commissioner / Conseillère

Rita Cugini                       Commissioner / Conseillère

Barbara Cram                      Commissioner / Conseillère

Ronald Williams                   Commissioner / Conseillier

Helen del Val                     Commissioner / Conseillère

 

 

ALSO PRESENT / AUSSI PRÉSENTS:

 

Marielle Girard                   Consultation Secretary /

                                  Secrétaire de la

                                  consultation

 

James Wilson                      Legal Counsel /

Shelly Cruise                     Conseillers juridiques

 

Chris Seidl                       Project Manager /

                                  Gestionnaire des projets

 

 

HELD AT:                          TENUE À:

 

Conference Centre                 Centre de conférences

Outaouais Room                    Salle Outaouais

Portage IV                        Portage IV

140 Promenade du Portage          140, promenade du Portage

Gatineau, Quebec                  Gatineau (Québec)

 

September 27, 2005                Le 27 septembre 2005

           TABLE DES MATIÈRES / TABLE OF CONTENTS

 

 

                                                 PAGE / PARA

 

 

PRESENTATION BY / PRÉSENTATION PAR

 

Saskatchewan Telecommunications                   294 / 1624

 

Telus Communications Inc.                         347 / 1960

 

MTS Allstream Inc.                                482 / 2750

 

ARCH                                              561 / 3105

 

The Commissioner of Competition                   595 / 3249

 

 

                  Gatineau Quebec / Gatineau (Québec)

‑‑‑ Upon resuming on Tuesday, September 27, 2005

    at 0918 / L'audience reprend le lundi

    27 septembre 2005 à 0918

1620             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

1621             Madam Secretary...?

1622             THE SECRETARY:  Thank you, Mr. Chairman.  Good morning, everyone.

1623             We will now move on to Panel No. 3, saskatchewan Telecommunications.

PRESENTATION / PRÉSENTATION

1624             MR. MELDRUM:  Good morning.  My name is John Meldrum.  I am the Vice‑President, Corporate Counsel in Regulatory Affairs at SaskTel.  With me today is Bryce Schurr, who is Acting General Manager of Regulatory Affairs.  I will make our formal presentation and then both of us will be available to respond to any questions you may have.

1625             In our presentation today we intend to provide the Commission with a Saskatchewan perspective on the main issues up for debate.

1626             We thought that the description of this proceeding provided in the Public Notice was pretty clear:

                      "In this proceeding, the Commission will determine the framework, including the criteria, for forbearance from the regulation of residential and business local exchange services ..."

1627             As well as whether there should be a transitional regime that provides ILECs with more regulatory flexibility prior to forbearance.

1628             The scope of this proceeding has now been made very clear by the Commission's decision that the proposal to refrain from the regulation of discretionary services is outside the scope of this proceeding.  Nonetheless, a number of parties continue to present arguments and seek information regarding the current or future conditions of the local exchange markets.

1629             With all due respect, the current or future market positions of the incumbents or competitors are not relevant.  What is relevant is for the Commission to be aware of the future direction of the local services markets, with a view to setting the criteria for local forbearance to be applied in the future.  I will have more to say about that later.

1630             Many parties also speak to the issue of barriers to entry.  Again, in our view this has nothing to do with the issues to be addressed in this proceeding.  The Commission has determined that this proceeding is all about setting the criteria for forbearance after a competitor has entered, so how can any alleged barriers to entry be relevant if competitive entry has occurred already?

1631             In 1994, the Commission established the criteria it would employ when making a determination to forbear and it has utilized those criteria in its forbearance proceedings since then.

1632             The first step is to define the relevant market.

1633             SaskTel, along with Bell and Telebec, have proposed that the appropriate product‑based market segments are residential local services and business local services.  There is a clear differentiation in the marketplace today between the local services that are offered to businesses and to residences.

1634             In turn, we propose that business local services can be broken down into three clusters, namely business primary local services, Centrex services and digital trunk services.  Based on our experience, these services are provided to different segments of the business market based on the distinctive needs of each segment.

1635             The next step in defining the relevant market is to determine the appropriate geographic boundaries.  Several alternatives have been suggested by the parties to this proceeding.  In evaluating them, it is appropriate that we recall that competition will emerge and be sustained only where it will be economically viable.  That means it is very unlikely that widespread local competition will appear in high cost serving areas in Saskatchewan.

1636             In addition, it is important to remember that there are less than one million people spread widely and unevenly across some 650,000 square kilometres of the province.  In fact, some 41 percent of our residential customers reside in what the Commission has identified as high cost serving areas.

1637             Given those facts, it should be clear why we anticipate head‑to‑head facilities‑based competition for wireline local exchange services will appear first in Regina and Saskatoon, where one half of the population resides, and may materialize later in smaller cities such as Prince Albert and Moosejaw.  The remaining communities are simply too small and the population too widely dispersed to support any significant entry from traditional wireline service providers, at least in the near term.

1638             Let me now present some of the reasons why we think the geographic region other than the local exchange is not the relevant geographic market for the Commission to base a forbearance determination upon.

1639             It has been suggested a provincial territory is the smallest geographic area to be used in the local services forbearance test.  SaskTel suggests that this is far too extensive to be the relevant market, especially for Saskatchewan.

1640             As I noted above, head‑to‑head facilities‑based competition will most likely develop in Saskatoon and Regina and later in Prince Albert and Moosejaw, which are cities of about 40,000 people.  This represents only four of the 229 exchanges in the province.

1641             Using such a broad definition as the province as the relevant market when competitive entry is not likely to occur in most of the province would prove to be problematic.  Using a province‑wide criterion would inflate the competitive losses that SaskTel would face in order to gain forbearance.  The cablecos have suggested that a 30 percent market share loss should be required to trigger forbearance.  We of course do not agree.

1642             But let's suppose the Commission adopts a 30 percent market share loss as the trigger.  If competition occurs only in Regina and Saskatoon exchanges, using the entire province as the relevant geographic area would require SaskTel to lose over 70 percent of the residential market in Regina and Saskatoon in order to meet the 30  percent threshold.

1643             If competition were to occur only in Saskatoon ‑‑ which is not beyond the realm of possibility ‑‑ the threshold could never be met.  Even if SaskTel lost 100 percent of its local customers in Saskatoon, the provincial threshold of 30 percent could not be met.  If we add in Prince Albert and Moosejaw, a combined loss of 60 percent in those four markets would be required to gain forbearance.

1644             Obviously using the province as the relevant market would result in an effective threshold much higher than the target due to the limited degree of competitive entry that we expect in much of Saskatchewan.

1645             MTS Allstream has suggested the use of two geographic markets, non‑high cost and high cost serving areas.  This would likewise inflate the competitive losses that SaskTel would face in order to gain forbearance.  There are nine non‑high cost exchanges in the province, and we expect competitive entry in no more than four of these exchanges.

1646             If the Commission adopts a 30 percent market share threshold and uses MTS Allstream's relevant geographic market proposal, and competition occurs only in Regina and Saskatoon, SaskTel would have to lose over 40 percent of the residential market in these exchanges to meet the 30 percent threshold.  If we add in Prince Albert and Moosejaw again, the combined loss is 35 percent.

1647             The Commission asked SaskTel and others for data regarding the homes passed by facilities in census metropolitan areas, leading us to assume that the Commission may be considering their use in defining the relevant geographic markets for forbearance purposes.

1648             SaskTel was unable to provide a complete response to this question because our operational systems do not contain any information regarding the boundaries of Statistic Canada's geographic designations.

1649             We also explained in our final argument that CMAs cover communities and municipalities associated with multiple exchanges and that CMA boundaries do not match SaskTel's exchange boundaries.

1650             Selecting the CMA as the relevant geographic market as a criterion for determination of forbearance would impose a costly and unnecessary burden upon SaskTel, not only to identify when the threshold had been met, but also in the systems and procedures used to administer marketing programs, bill customers and meet regulatory reporting requirements after forbearance is granted.

1651             Some parties suggest that the local interconnection region is the relevant geographic market because it represents a community of interest.  Such a conclusion must be based on the assumption that the LIRs proposed by the Commission met their objective to broadly align the LIRs to boundaries reflecting a community of interest.

1652             Although that may have been the intention when the LIRs were first established, in SaskTel's case they were based on regional economic development authorities which are just not suitable to define where interconnection should occur, so we proposed alternative LIRs that are consistent with the design of SaskTel's host remote network and provide greater efficiencies in interconnection and coverage of the province.

1653             The LIRs proposed by SaskTel have not been objected to by any competitors following their presentation in the LIR proceeding.

1654             If I may direct your attention to the maps that are provided as an attachment to this paper ‑‑ and they are at the very end of our submission ‑‑ in particular the one providing a view of the province, you will see the boundaries of the proposed LIRs on that provincial map.  There are only eight for the entire province.

1655             If you then turn to the maps labelled Regina District and Saskatoon District which follow that map, it will be obvious that they constitute very large geographic areas.  In fact, Indian Head, home to one of the CRTC's Commissioners, is in the middle of the Regina LIR, which stretches from Kenaston to Moosomin, and is probably an area bigger than Prince Edward Island.

1656             In addition to the cities themselves, the Regina and Saskatoon LIRs encompass vast areas of rural Saskatchewan comprised of First Nations Reserves, farms, hamlets, towns and villages.

1657             Why is that important?  It is important because adopting the LIRs as a relevant geographic market would have the same effect described earlier of unreasonably inflating the forbearance market share criterion due to the anticipated lack of facilities‑based competition in rural areas of Saskatchewan.

1658             Recalling that competition for local exchange services is expected to concentrate in the major cities, SaskTel would have to lose a higher percentage of customers in Regina and Saskatoon in order to meet the overall criteria for market share loss.

1659             Continuing our example of adopting a 30 percent market share loss as a threshold for forbearance, SaskTel would have to lose 40 percent of the residential market in Regina in order to have an overall market share loss of 30 percent in the Regina LIR.

1660             In other words, using the LIR for Regina, skews the criteria by 33 percent for the Regina LIR, due to the large proportion of the Regina LIR that is rural.

1661             Generally the same results would occur in the Saskatoon LIR.

1662             For this reason alone, there is substantial doubt as to the selection of LIRs in Saskatchewan as the relevant geographic markets for forbearance.

1663             I would offer the observation that the geographic definitions of the relevant market are being proposed for one reason:  To inhibit the ability of the ILECs to respond to competition.

1664             The adoption of any of the above as a relevant geographic market for forbearance in Saskatchewan would result in the forbearance of local services in areas where no competitor would exist to discipline SaskTel's pricing.  Hypothetically rates charged to those customers could be raised in order to make up for revenues lost to competitors in the cities.

1665             Yes, it would be possible to address this through the introduction of price ceilings, but that would undermine the fundamental purpose of forbearance, allowing market forces rather than regulatory oversight to discipline the market.  It would be far more practical and appropriate to simply establish the right market geographic area to begin with.

1666             It is SaskTel's submission that the ILECs local exchange is the relevant geographic market for forbearance of business and residence local exchange services.  In 1997, the Commission identified the exchange as the basic unit for the administration and provision of telephone service by an ILEC and it normally encompasses a city, town or village and adjacent areas.  There is no reason to believe that assessment is any less correct than it was in 1997.

1667             SaskTel's exchanges generally are the closest approximation to the footprint of the cableco service area.  Although the exchange includes non‑urban areas where competition is not expected to emerge, they make up a much smaller percentage than would be produced if the province, CMA's, non‑high cost/high cost serving areas, LIRs or local calling areas were to be adopted as the relevant geographic market.  And, compared to the alternatives, the exchange constitutes the smallest geographic area in which a firm with market power could profitably impose a sustainable price increase.

1668             You heard earlier from Bell Canada that the predictions they and we made during the VoIP regulation proceeding are coming true in spades.  Bell and Telus are seeing their local exchange services being replaced by IP‑based services from the cablecos and other VoIP service providers.

1669             SaskTel identified 11 access independent VoIP service providers that are marketing their services within Saskatchewan.

1670             During the VoIP proceedings, SaskTel stated its belief that the major and most likely source of facilities‑based competition for local services would come from the cablecos.

1671             The cablecos will try to convince you they are not prepared for competition.  That is really difficult to believe.  SaskTel noted in its final argument that Shaw was presenting a story about its ability to compete in the local services market in response to a Commission interrogatory that contradicted what was presented to its investors.

1672             In Saskatchewan, Shaw is ready, willing and able to compete with SaskTel.  99.1 percent of the households in Saskatoon are passed by Shaw's own digital facilities for providing local exchange services.

1673             One wonders why companies like Shaw and the other large cablecos seek regulatory protection.  Why do they support the continued regulation of the incumbents?  The cablecos are not new companies, only recently emerging on the marketplace.  They are not operating in limited markets.  For instance, Rogers' acquisition of Call‑Net gives it nationwide coverage as both a wireless and wireline service provider.

1674             Shaw has extensive operations in the west and, through their affiliate Big Pipe, expansive telecommunications facilities.  Individually, Shaw and Rogers are several times larger than SaskTel and demonstrate that they are able to make the investments required to compete with SaskTel and the other ILECs.

1675             Bell Canada offers that the competitors want the ILEC regulated just in case, just in case some ILEC undertakes some anti‑competitive actions.

1676             Well, in our view just in case is not a good enough reason.  SaskTel submits that the Commission and the Competition Bureau both have sufficient authority to respond to any action by any service provider that would be regarded as anti‑competitive or threaten competitive entry or the maintenance of competition in the local exchange services market.

1677             Bell told you of a study by Decima Research that found that Canadians overwhelmingly support policies and regulations that treat incumbents and entrants the same.

1678             Back in June of this year, Decima conducted a similar survey of the residents of Saskatchewan.  It shouldn't surprise you that the June survey showed the same results.  Almost three‑quarters of the respondents were satisfied with the level of competition in Saskatchewan.  Nearly four out of five respondents believe that the same rules and regulations should apply to telephone companies, cablecos, cellular companies, broadcasters and internet service providers.

1679             In closing I would like to say a few words about the context in which you are making your decision.  There is a fundamental shift occurring with respect to plain ordinary telephone service.  In terms of markets based on generations, it is no longer the main means of communication for anyone other than seniors and near seniors.

1680             For my teenage children, the main means of communication is MSN, Microsoft's instant messaging.  For the young men that I play soccer with, the main means of communication is their personal cell phone.  For people my age it is e‑mails, now made even easier with consumer‑friendly devices such as a Blackberry.

1681             But the biggest shift of all is voice communication over the internet.  VoIP is here, it is ubiquitous and it is growing.  Following the purchase of Skype by eBay for $2.6 billion, plus an additional $1.5 billion if Skype hits certain performance targets, The Economist now says it is no longer a question of whether VoIP will wipe out traditional telephony, but a question of how quickly it will do so.

1682             For SaskTel the stakes are high.  Today we face competition against companies that are up to 20 times bigger than us.  This is a daunting task when the regulatory rules are designed to benefit those same competitors.

1683             But looking to where this is all headed, even our competitors are going to be dwarfed by our mutual competitors such as America Online and Microsoft.

1684             For Microsoft, SaskTel isn't even a rounding error.  Their profit last year was 130 times that of SaskTel and, of course, their marketing reach and domination are world renowned.

1685             The future telecommunications battles will be between the Canadian facilities‑based providers on the one hand, the LECs and, on the other hand, the likes of Vonage, Primus, Google, eBay, Skype, AOL and Microsoft.  To be successful, Canadian facilities‑based providers will have to be very efficient marketing machines with competitive offerings that can meet or beat the free or near free offerings of these transnational enterprises.

1686             We believe the Commission needs to ask itself whether the current form of regulation, with its regulatory constraints and market protection, is going to prepare either the CLECs or the ILECs for these future challenges.

1687             In making your decisions on the ground rules for local forbearance, don't just focus on the here and the now and the protectionist cries from the poor little cable companies.  Look to the future.  It is a future where none of our places are secure.

1688             Bryce and I would be pleased to answer any questions you may have.

1689             THE CHAIRPERSON:  Thank you.  I will call on the Commissioner from Indian Head.

1690             COMMISSIONER CRAM:  Thank you, Mr. Chair.

1691             For your information, Indian Head should have been the capital of Saskatchewan but the Lieutenant Governor owned land in Regina, just so you know that.

1692             Thank you.  Welcome, gentlemen.  I first wanted to ask a little personal question.

1693             It doesn't seem that Access Cable is going to be going into VoIP, is that ‑‑‑

1694             MR. MELDRUM:  Well, the most we know is what they have told the public.  They have made investments in upgrading their cable network, and as part of their discussion with the press they did talk about positioning themselves for future services, including telephony.

1695             But in terms of having announced anything concrete, we are not aware of anything at this point.  We do expect them to do something, but we are just not totally sure what it will be or when it will be.

1696             COMMISSIONER CRAM:  Eventually.

1697             I want to ask, Mr. Meldrum, when you, in your presentation today, broke down the business market I was comparing your version to the Aliant version.

1698             Aliant had basic, single line, multi‑line and small Centrex, 30 or less accesses, as one.  The second was mid‑size Centrex, 31 to 1,500 accesses.  The third was enterprise Centrex, greater than 1,500.  Then digital trunks.

1699             You have put all of the Centrex in one.

1700             Can you tell me why you would disagree with Aliant?  Is it the size of your market?

1701             MR. MELDRUM:  In our case it is really the feature‑rich aspect of the Centrex, which is much different than just a plain ordinary telephone service.

1702             Do you want to add to that at all, Bryce?

1703             MR. SCHURR:  Also conditions of the market.  They divide that market up in such small pieces and make forbearance determinations on such small segments you get into the administrative complexities that we were talking about, the dividing up a geographic market that telephone companies operate in the exchange.

1704             The differential between small and large Centrex, as John said, in terms of the feasibility and features didn't seem to be very different, but it is different from primary business service.

1705             COMMISSIONER CRAM:  I wanted to go to your maps.  Thank you so much, they are wonderful maps.

1706             If I looked at the LIR for Regina, which of course does include Indian Head, the smaller centres do have cable.  Are they mainly Persona Cable in the smaller centres around Regina?

1707             Do you know?

1708             MR. SCHURR:  Mainly, yes.

1709             COMMISSIONER CRAM:  Are you aware of any upgrades being made by Persona at all?

1710             MR. MELDRUM:  No, we are not.  There are a couple of small independents as well, but they would be very small.

1711             COMMISSIONER CRAM:  Yes.  All of them in analog.

1712             Is that your knowledge?

1713             MR. MELDRUM:  Yes.

1714             COMMISSIONER CRAM:  So if we chose anything larger than the exchange, or maybe a couple of exchanges, say if we chose the LIR in Regina, if Access were going to get into the business, the only other type of competition then would be resale and those independent ISPs I guess?

1715             MR. MELDRUM:  There would also be the potential for VoIP, Access independent VoIP.  If you include that in resale, yes.

1716             COMMISSIONER CRAM:  Yes, from the independent ISPs.

1717             MR. MELDRUM:  Yes, because SaskTel has extended high‑speed into probably every one of the towns that is shown on this map as well as smaller towns and is in the process of rolling out wireless high‑speed to ‑‑ I think it covers another 10 percent of the province from where we are at the moment, 10 percent of the population.  So again that would enable Access independent VoIP services to be provided.

1718             As well, image wireless is still in the high‑speed business.

1719             COMMISSIONER CRAM:  In Yorktown, yes.

1720             MR. MELDRUM:  A couple of areas, yes.

1721             COMMISSIONER CRAM:  I wanted to turn to your final argument at paragraph 11 on page 4.

1722             I will just give you time to read it.

‑‑‑ Pause

1723             COMMISSIONER CRAM:  Have you finished?

1724             MR. MELDRUM:  Yes.

1725             COMMISSIONER CRAM:  What I'm looking at is the word "meaningful" in the penultimate sentence:

                      "The result would be that large numbers of customers would have their local services forborne but yet have no meaningful competitive alternatives".  (As read)

1726             When I was reading through this ‑‑ and in fact through a lot of the arguments ‑‑ I got the feeling that you are really talking about cable VoIP competition.  So then that leads me to Telus's two‑facilities bright‑line test.

1727             What problems would you have with that particular proposal of theirs?  I won't go into the numerator and the denominator just yet, but the whole idea of the geographic area being the footprint of the competitor, facilities‑based competitor.

1728             MR. MELDRUM:  It does force you back to subdividing the exchange, but what you are subdividing is those areas that don't have the facilities‑based competition, but it does create some operational issues.  Other than that, it does get at the heart of where competition is expected and where ultimately the customer should be forborne.

1729             COMMISSIONER CRAM:  So you don't have that strenuous an objection to their proposal?

1730             MR. MELDRUM:  Not as strenuous, no.

1731             COMMISSIONER CRAM:  Mr. Grieve is looking on and nodding happily.

‑‑‑ Laughter / Rires

1732             MR. MELDRUM:  We are not completely happy with it, but it is workable, yes.

1733             COMMISSIONER CRAM:  From an operational point of view it would be workable, but it wouldn't be the best?

1734             MR. MELDRUM:  Right.

1735             COMMISSIONER CRAM:  Okay.

1736             MR. SCHURR:  I would understand that it would be workable, but it would be costly, costly to set up the systems.

1737             COMMISSIONER CRAM:  Initially.

1738             MR. SCHURR:  To divide customers into forborne and non‑forborne segments.  The footprint of the competitive supplier, it may alter, it may change, you could throw it out.  So you are into like who sets the criteria for future forbearance as that competitive footprint changes.

1739             COMMISSIONER CRAM:  So is it an issue of software?  Is that really what it is, software development?

1740             MR. SCHURR:  Frankly, Commissioner Cram, I don't think we have given it that much attention but, yes, it is systems and software.  My knowledge of the truculent billing systems of telephone companies always frightens me when we want to change them.

1741             COMMISSIONER CRAM:  Yes, that's true.  It seems people have learned that.

1742             I wanted to talk about the effectiveness of winbacks and promotions.  I guess maybe the best way to do that would have been:  In the 1990s what was your lowest point in terms of share of long distance revenue?

1743             Was it ever at 70 percent?

1744             MR. MELDRUM:  If you did it on the basis of revenues it was in the 70s.  If you did it on the basis of lines in the 1990s, it wouldn't have dropped below 90 percent.

1745             COMMISSIONER CRAM:  You used winbacks and promotions in order ‑‑ because you have moved that share back up, haven't you?

1746             MR. MELDRUM:  I don't know if it ever sort of dipped and came up.  It has just sort of slowly declined.

1747             COMMISSIONER CRAM:  So then winbacks were never effective in getting at ‑‑

1748             MR. MELDRUM:  Oh, they have always been effective, yes.  Customers like to hear from you and like to understand what the offers are that you have in the marketplace.

1749             If I think about when local competition first came into Saskatchewan a number of the things that were being said by competitors just weren't true.  I guess it was at the height of some of those companies that failed and some of the things that they were telling our customers were atrocious.

1750             I think even our own Minister at the time was telephoned and told that SaskTel had been sold and that they had taken over all of the long distance service and come over to us and all you have to do is give us this information and your long distance will be with us.

1751             So it was that kind of discussions that needed to take place with customers to understand some of the marketing stories they were hearing weren't true.

1752             COMMISSIONER CRAM:  What about the effectiveness of winbacks and promotions in terms of your market share?  Would the effectiveness of both winbacks and promotions, and maybe de‑averaging, be lesser the lower your market share went?

1753             What it really is, is this is the argument of Québecor saying that they, I think, wanted the market share to be at 80 percent before winbacks and promotions could be allowed, because by then ‑‑ I think the word was "diluted" ‑‑ that they had a big enough of a share that they could take a hit, they could take a loss?

1754             MR. MELDRUM:  I would think the first ones that leave would actually be the toughest to get back.  They are the ones who have been looking for choice perhaps the longest.  They are the ones who are most receptive to the offers from the competitors.  In the case of ourselves, often they are people who don't want anything to do with a Crown corporation.

1755             COMMISSIONER CRAM:  Yes.  Elsewhere I have heard from some people it is "anything but Telus", "anything but Bell".

1756             MR. MELDRUM:  Yes.  For various reasons, yes.

1757             COMMISSIONER CRAM:  So you would think, then, that it would be more effective if your share loss were in the 5 percent range than if it were in the 20 percent range?

1758             MR. SCHURR:  What would be more effective, I'm sorry?  The winback?

1759             COMMISSIONER CRAM:  Winbacks and promotions.

1760             MR. MELDRUM:  Would be more effective at 5 than 20?

1761             COMMISSIONER CRAM:  Yes.

1762             MR. MELDRUM:  No, I think I would have gone the other way.  I think I would have said they would be more effective at 20 than at 5.

1763             COMMISSIONER CRAM:  Because you have a larger pool to win back from?

1764             MR. SCHURR:  I forget whether Shaw is appearing, but if they are you might ask them the success of their early winbacks when we introduced Max in Saskatoon.  Our DIV broadcast service had a lot of immediate gains, as I recall, and I'm sure that Shaw didn't sit around just watching customers go.  They might have some real firsthand knowledge as to what small share winback effectiveness is.

1765             But I still don't understand ‑‑ I still come down to John's point that I think the first ones to leave are ready to leave when competition comes in and probably the hardest to win back.

1766             COMMISSIONER CRAM:  Okay.

1767             Now, I know you would be unhappy if we used a market share other than 5 percent, but if we used a smaller area, say an individual exchange, and said you could use promotions at 80 percent and then be deregulated at 70 percent, there would be the financial loss, but you would be able to sustain the competition and probably gain back some share?

1768             MR. MELDRUM:  How do you mean, after we were forborne at the 70?

1769             COMMISSIONER CRAM:  Yes.

1770             MR. MELDRUM:  Certainly at that point you would expect to be unfettered in the marketplace and hopefully your marketing plans would be successful.

1771             COMMISSIONER CRAM:  What if it was groups of exchanges, instead of using the smaller exchange, if we had groups of exchanges with not less than, say, 50,000 people in total?  You would still be able to sustain a fairly healthy competition if you were deregulated at 70 percent and given the ability to do promotions at 80?

1772             MR. MELDRUM:  Maybe it is just the way our province exists in terms of geography, but groups of exchanges wouldn't really work because the Regina exchange is only one exchange and anything outside of the Regina exchange, other than perhaps White City, which is served by Access but is part of the Regina exchange, I don't think there would be any competitive entry so it wouldn't make any sense for us to group exchanges.

1773             COMMISSIONER CRAM:  What is the population of Regina, 225?

1774             MR. MELDRUM:  Somewhere between 200 and 225, yes.

1775             COMMISSIONER CRAM:  Yes.

1776             MR. SCHURR:  The number of residence customers for Regina and Saskatoon business customers and Centrex customers are provided in the attachments that we have given you.

1777             COMMISSIONER CRAM:  Number of customers, is that by household?

1778             MR. SCHURR:  No, it is number of subscribers.  We don't do them by households.

1779             COMMISSIONER CRAM:  Okay.

1780             Which then brings me to:  Can you, in the fullness of time ‑‑ I know you have 229 exchanges ‑‑ let us know the number of A band exchanges and B band exchanges and the average number of people in each exchange in Saskatchewan?

1781             MR. MELDRUM:  We can certainly do that, just give you an overview and then we will provide it in writing.

1782             In terms of A exchange, that is Regina and Saskatoon, the central area.  I terms of the B exchange, that is the rest of Regina and Saskatoon.  The C exchange is the rest of the cities ‑‑ which our new president keeps reminding me are only big towns ‑‑ he is from Hamilton ‑‑ there is only six of them.  Then the rest, the 221 exchanges are all high‑cost, either bands E, F or G.

1783             Band E is small towns less than 1,500 total lines and that is the band that Indian Head is in.

1784             MR. SCHURR:  Commissioner Cram, just one question to make it clear?

1785             COMMISSIONER CRAM:  Yes?

1786             MR. SCHURR:  You said you wanted the number of people in those bands.

1787             COMMISSIONER CRAM:  Yes.

1788             MR. SCHURR:  Do you mean the number of subscribers?

1789             COMMISSIONER CRAM:  Yes.

1790             MR. SCHURR:  Okay.  Thank you.

1791             COMMISSIONER CRAM:  Much was spent yesterday on paragraph 101 of Bell's final argument.  That is the numerator and the denominator.

1792             Is that substantially your position?

1793             MR. MELDRUM:  Yes, that's right.

1794             COMMISSIONER CRAM:  Just to be clear, your wireless would be in the numerator?

1795             MR. MELDRUM:  Yes.

1796             COMMISSIONER CRAM:  Your VoIP would be out of the picture, right?  No, it would be in the denominator, but not ‑‑

1797             MR. SCHURR:  By our VoIP ‑‑

1798             COMMISSIONER CRAM:  If you had a VoIP service.

1799             MR. SCHURR:  Yes.  Our VoIP over our line ‑‑

1800             COMMISSIONER CRAM:  Yes.

1801             MR. SCHURR:  ‑‑ or our VoIP over a competitor's line ‑‑

1802             COMMISSIONER CRAM:  Both Access ‑‑

1803             MR. SCHURR:  ‑‑ or our VoIP over a DSL dry loop.

1804             COMMISSIONER CRAM:  Yes.

1805             MR. SCHURR:  Dry loop.

1806             COMMISSIONER CRAM:  All VoIP.

‑‑‑ Pause

1807             MR. SCHURR:  Can I take this under advisement?

1808             COMMISSIONER CRAM:  Sure.

1809             MR. SCHURR:  Thank you.

1810             COMMISSIONER CRAM:  Your count when you are using the percentages, you are using connections the same as Bell.

1811             So we are not distinguishing between first lines and second lines?

1812             MR. SCHURR:  That's right.

1813             MR. MELDRUM:  That's correct.

1814             COMMISSIONER CRAM:  I then wanted to move on to ‑‑ and I feel particularly qualified to talk about this ‑‑ brand loyalty and the consumer inertia issue.

1815             I think you would agree that SaskTel has quite a good brand in Saskatchewan, in fact probably I would venture to say a better brand than virtually any of the other ILECs in their territories.

1816             MR. MELDRUM:  I couldn't speak to other ILECs, but we do have a strong band in Saskatchewan, yes.

1817             COMMISSIONER CRAM:  Yes.  Every time I look at that monitoring report and see the 100 percent I realize that all over again.

1818             Do you think we should in some way compensate for that in, say, the market share or some other test for SaskTel because of that brand loyalty?

1819             MR. MELDRUM:  I don't think that would be consistent with the criterion in 94‑19.  I think that if you meet the criteria in 94‑19 that is what should be focused on.

1820             COMMISSIONER CRAM:  Okay.  Post‑forbearance would it be in your plans to offer a standalone basic local service?

1821             MR. MELDRUM:  For sure.

1822             COMMISSIONER CRAM:  Yes.  No politician in Saskatchewan?

1823             MR. MELDRUM:  No.  Unless you wanted short careers, yes.

‑‑‑ Laughter / Rires

1824             COMMISSIONER CRAM:  Yes.  Thank you.

1825             Thank you, Mr. Chair.

1826             THE CHAIRPERSON:  Commissioner Langford.

1827             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.  Just a couple of questions arising from responses to Commissioner Cram.

1828             Mr. Schurr, when Commissioner Cram was questioning you with regard to the feasibility of ILECs, yours in particular, utilizing the competitor's footprint rather than your own existing exchange patterns, if I can call it that, as the appropriate geographic market, you responded saying that it would be "costly".  I got that much down, quote/unquote.  Then I think you said you would have to kind of read ‑‑ I don't have that as a direct quote, but I think the sense of it, and you can correct me if I am wrong, obviously ‑‑ was that it would be costly.  You would have to redefine your customer bases and the way you dealt with customers because you would be forced into a new geographic pattern.

1829             Do I have the sense of that right?

1830             MR. SCHURR:  More or less.

1831             What I was trying to point out is that, as the Commission observed in 94‑19 ‑‑ sorry, in the local competition decision, the exchange is the fundamental unit in which the telephone companies operate.

1832             To take and divide up an exchange places conditions upon the operational systems and procedures of the telephone companies that they are not used to.  That complexity needs to be overcome.  It could be a one‑time or it could be an ongoing cost, the amount of which we have no idea.

1833             COMMISSIONER LANGFORD:  Would it be fair to say, then, that if we look at it from a competitor's point of view the same costly need to adjust would apply to them?  In a sense what we are talking about here is who has home field advantage, to use a sports analogy?  If it isn't fair to you to force you to use the competitor's footprint, it is equally unfair to them to force them to roll out their entry plans and their competitive strategies to fit your exchanges?

1834             MR. SCHURR:  I don't think that is what we are suggesting.  The footprint of a cable operation may extend beyond more than one exchange.

1835             If the bright‑line is 5 percent loss or 5 percent gain, in competitor's facilities based in that exchange and if 5 percent is reached it is forborne.  If only a portion of the exchange is covered by the competitor which doesn't equal 5 percent of the customer base, then that exchange is not subject to forbearance.

1836             We are not forcing the cable companies to operate within our exchanges.  The response I gave to Commissioner Cram was if you adopted the service provider's footprint as the relevant market, not only to determine when forbearance should be granted but to administer after forbearance, would place difficulties upon us, not the competition.

1837             In 97‑8 the Commission made a determination that the competitor didn't have to have local serving areas which were equivalent to the ILECs and that continues.  We are not suggesting that they be forced to operate only in exchange boundaries.

1838             COMMISSIONER LANGFORD:  But doesn't it force them from a pragmatic point of view?  I mean, fine, everybody, say, has downtown Regina because that is a logical place to go, as you say.  That is where the people are.  Why do you rob banks?  That is where the money is.  Why do you roll out in Regina?  That is where the people are.

1839             But once you start to get into the periphery it may force a cable company for example, or the type of CLEC that EastLink is should one arise in Regina or Saskatchewan or Saskatoon, it may force them to have to roll out network to match your exchanges in order to compete customer‑against‑customer or home‑against‑ home for each customer, whereas that is not the way they would normally do it.

1840             In other words, doesn't it once again give the incumbent the sort of advantage of setting all the rules, all the ground rules?  Doesn't it mean they have to come to you under this system and they have to play on your home field?

1841             MR. SCHURR:  No, I don't believe so.

1842             You said what if the competitor ‑‑ well you did say, I believe, that would force the competitor to move out and serve in another territory.  I suggest to you, sir, that is the option presented to the competitor, to expand his service where he wishes, not forced to.

1843             I am just saying that the bright‑line criteria is 5 percent within an exchange.  If he chooses to enter the exchange and only gains 1 percent of that exchange, I don't believe that would meet the criteria.

1844             COMMISSIONER LANGFORD:  But as soon as he gets to the 5 percent he is pretty well forced to keep rolling out because competition is in that exchange.  He can't ‑‑ I mean, it would take some incredible engineering to sort of roll your network around say the fringes of Regina into the outlying exchanges which you have shown on your map so that you are only touching 4.9 percent of the customer base.

1845             In a sense, once the competitor commits to competition in an area, pragmatically he either has to stay below 5 percent, as you indicate, or he has to go the whole way and therefore play on your field.  So it seems to me that they have the same costly disadvantage you would have if you had to re‑engineer the way you bill and the way you deal with customers based on someone else's footprint.

1846             MR. SCHURR:  I believe that would be based on your assumption that it is expensive to roll services out within an exchange.  The Commission's various decision, from local loop prices up to the CDN decision, the wire‑centre to wire‑centre intraexchange channel rates make it now very ‑‑ I won't say cheap, less costly, less of an investment once entering an exchange at the post to get access to all the other wire centres within that exchange.  The rollout then is very ‑‑ if you are using those kinds of facilities.

1847             With respect to a cable company, I would just pause to observe that Shaw is not interconnecting with any of the telcos networks where they are operating.  They are using an established LEC in those marketplaces who has the ability to roll out services into the exchange in the manner that I have just described it to you.

1848             MR. MELDRUM:  We believe that when Shaw starts in Saskatoon it will be the entire City of Saskatoon, contained within the City of Saskatoon and no cable operators in Saskatchewan have facilities that go across exchange area boundaries.  The exchange area boundaries, at least as in Saskatchewan, are very distinct.  I understand that is not necessarily the case in the rest of Canada, but in Saskatchewan they are very distinct.

1849             COMMISSIONER LANGFORD:  I will come back to that in one second.

1850             Mr. Schurr, you said it would be costly.  It wouldn't be all that costly to roll out what the cable companies require.

1851             You are complaining about the cost of readjusting your administrative procedures to fit a new footprint, and yet you seem reasonably unconcerned about the cost of actually having to roll out a network.  I'm not in your business and I can't possibly know down to the last dime what these costs are, although we have people with us who can do that sort of thing, mercifully, but it would seem to me that it must be more costly to adjust and to change an actual physical network than it would be to start working the computers and readjusting your approach to your customer base.

1852             Am I wrong on that?

1853             MR. SCHURR:  I have no idea what the costs of the competitors are.

1854             COMMISSIONER LANGFORD:  Yet you are willing to have these same competitors be forced to play on your field and to roll out because the costs, as you maintain, are not that high.

1855             MR. MELDRUM:  No.  I said they have come down.  They are considerably less.  They are far easier and far ‑‑ but yes, the threshold to get coverage within an exchange from all wire centres through the Commission's CDN decision has been reduced considerably.

1856             COMMISSIONER LANGFORD:  For your last point with regard to the uniqueness of Saskatchewan's exchange system, is it possible that we will just not be able to make a national test with regard to the appropriate geographic market and that in fact we will have to make a number of tests?

1857             MR. MELDRUM:  I would hope that would be something that the Commission would consider, because if you are going to end up with sort of a national number for the bright‑line test, well, then you have to do something in terms of getting back to what the appropriate geographic market is, because otherwise we have a higher hurdle if you choose something like the LIR.

1858             COMMISSIONER LANGFORD:  Your earlier statistics about the effect of kind of losing Saskatchewan in one fell decision does make one wonder.  We had here earlier Aliant with a very particular sort of situation that seems to exist nowhere else, at the present time anyway.

1859             Have you given that any thought, the notion of more than one test for the appropriate geographic market?

1860             MR. MELDRUM:  I don't know why for Saskatchewan it couldn't be the exchange.  It matches the geography.  To me, it works.  If it doesn't work in another jurisdiction, then I would think you would choose something else for other jurisdictions.

1861             I think the act itself requires you to look at the regions and regulate on the basis of issues that occur within the regions.

1862             COMMISSIONER LANGFORD:  Certainly something that came along about the same time as you folks into our life.

1863             MR. MELDRUM:  That's right.

1864             COMMISSIONER LANGFORD:  Thank you very much.

1865             Those are my questions, Mr. Chair.

1866             THE CHAIRPERSON:  Thank you.

1867             You have a question?  Go ahead.

1868             COMMISSIONER FRENCH:  Let me just pursue this question for a moment.

1869             In the 19th paragraph of your statement on the subject of orphaned customers within a forbearance area where this very expensive cable network has not yet been rolled out, you say:

                      "It would be possible to address this through the introduction of price ceilings, but that would undermine the fundamental purpose of forbearance allowing market forces rather than the regulatory oversight to discipline the market."  (As read)

1870             You have gone on to say that ‑‑ if I may paraphrase and you will correct me ‑‑ the problem of subdividing exchanges, where there are orphaned customers as I have defined them, involves billing mods which are expensive and also create instability in a very sensitive system.

1871             Is your argument then primarily a pragmatic one that you couldn't make the switch mods, or a philosophical one that you believe that once a defined forbearance unit has been forborne, that the forbearance must ipso facto apply to every single customer automatically?

1872             MR. SCHURR:  I believe it is the latter.

1873             COMMISSIONER FRENCH:  Yes, okay.  Fair enough.

1874             Why would you worry about price ceilings if you have no intention of raising prices for orphaned customers in this hypothetical situation where there are customers who don't have a choice but you need to be forborne to compete?

1875             I mean, you are not asking for forbearance to raise prices, so what is the issue?  Why is the philosophical issue important, I guess is what I am asking?

1876             MR. MELDRUM:  We thought that was something that the Commission would be worried about, that given pricing flexibility that we would jump in and increase prices.

1877             COMMISSIONER FRENCH:  But you have just told us you can't do that because it is very expensive to make the switch mods.

1878             MR. MELDRUM:  Right.  We wouldn't either as a Crown corporation.  Raising prices is not a very easy thing.

1879             COMMISSIONER FRENCH:  Fine.  Fair enough.

1880             I am not trying to harass you and put you in a corner here, I am just trying to understand very clearly what you have said.

1881             Your opposition to a price ceiling for orphaned customers ‑‑ and the State of Iowa we are informed by the Competition Bureau has done that ‑‑ is based on a philosophical premise that you recommend to us, to wit that when we forbear we forbear totally, and there is no residual form of upward protection ‑‑ excuse me, protection against an upward price movement.

1882             But is it a practical question or would you object to the Commission's use of that kind of protection for orphaned customers?

1883             MR. SCHURR:  There are two questions there.

1884             COMMISSIONER FRENCH:  Yes, fair enough.

1885             MR. SCHURR:  I would like to address the first one.

1886             The discussion I had with Commissioner Langford was the footprint as the example of the cable company spilling over to exchanges and not completely covering those, if you wish.  The use of that term may get me into trouble.

1887             My presumption in that situation would be people within the competitor's footprint would be forborne, people outside the competitor's footprint would not, they would still be subject to tariff.  Now we would have two systems operating, our billing systems would have to be adjusted to say that, "Oh, John Jones lives in there.  He is in the forborne area.  I can now charge him this rate or price differentials or whatever he is, but Mary Smith sitting outside of this footprint I now have to charge tariff to.  Well, that means that my billing systems have to be adjusted so that I can do more detailed divisions on them and dividing up exchanges into areas where tariff services would apply and where non‑tariff services would apply.  That was the administrative difficulty I had.

1888             The issue I think ‑‑

1889             COMMISSIONER FRENCH:  Sorry, could I just respond to that one?  I want to make sure I understand.

1890             MR. SCHURR:  Yes.

1891             COMMISSIONER FRENCH:  What you are saying is, you don't want to reprice the orphaned customers?

1892             MR. SCHURR:  In the scenario that I was speaking with Commissioner Langford about we would not be able to, because those "orphaned customers" would still be under tariff.

1893             COMMISSIONER FRENCH:  All right.

1894             MR. SCHURR:  But in the LIR situation ‑‑

1895             COMMISSIONER FRENCH:  In the ...?

1896             MR. SCHURR:  In the LIR, I'm sorry.

1897             COMMISSIONER FRENCH:  L‑I‑R?

1898             MR. SCHURR:  Yes.

1899             COMMISSIONER FRENCH:  Sorry.  Thank you.

1900             MR. SCHURR:  It is a term that is adopted just east of Swift Current.

‑‑‑ Laughter / Rires

1901             MR. SCHURR:  In the LIR situation it would be my assumption that if the bright‑line test is met the entire LIR is forborne.  And our point was ‑‑ we thought, as John said, it was a concern of the Commission ‑‑ there would be no market forces outside of the area, in Regina for instance where all the competition was, to protect customers and we didn't believe philosophically that the imposition of a price ceiling in areas where there was no competition was consistent with a forbearance decision.

1902             COMMISSIONER FRENCH:  Thanks.  I understood that it applied to LIR.

1903             I was trying to ask you what your thoughts were about if we adopted your exchange as the unit, how you would feel about a price ceiling for the orphaned customers within an exchange.  That is my only question.

1904             I know I should have phrased it perhaps better or not cited this item in your paragraph.

1905             Just to make sure I understood, you would not object to a residual price ceiling for orphaned customers within a forborne exchange, assuming we adopted the exchange as the unit?  You never raise prices, you are a Crown corporation and anyway you don't want to make the switch mods.

1906             MR. SCHURR:  Maybe it is my bizarre concept of the expanse and the ability to compete within an exchange, I don't understand what an "orphaned customer" would be within an exchange.

1907             I mean, one that isn't able to be reached by the competition?

1908             COMMISSIONER FRENCH:  One that the competition, for whatever reason, hasn't chosen to offer his services to.

1909             MR. SCHURR:  So now we are back down to the individual, or are we talking about wire centres?

1910             COMMISSIONER FRENCH:  We are talking about exchanges as you define them.

1911             MR. SCHURR:  Yes.

1912             COMMISSIONER FRENCH:  We are agreeing that cable companies don't have to roll out to cover exchanges.  They don't roll out relative to your structure.

1913             MR. SCHURR:  That is correct.

1914             COMMISSIONER FRENCH:  Your structure is the only administratively consistent structure that the Commission has to refer to and you are saying:  On those grounds, Commissioners, we respectfully suggest it is the appropriate item, the appropriate unit.

1915             Maybe I'm failing to make it clear, but I am just trying to get a grip on what your view would be as to how we deal with customers who are in an exchange which has been forborne but do not have an option.

1916             MR. MELDRUM:  Maybe I will just indicate that, at least in the case of Regina and Saskatoon, there would be options for those customers outside of the City of Regina and Saskatoon, because we will have high‑speed wireless internet and they are within the footprint of both SaskTel and Rogers Wireless coverage areas.

1917             So they are not totally orphaned, but there wouldn't be a cable company going out to them any time soon.

1918             COMMISSIONER FRENCH:  I guess you will understand the Commission can't make a national policy based on Saskatoon, so I probably asked the wrong people.

1919             MR. MELDRUM:  Yes.

1920             THE CHAIRPERSON:  Just to follow‑up on paragraph 19, I had a different question.

1921             You were basically addressing larger areas, geographic service areas, than the exchange, namely province and LIR, right, in that paragraph?

1922             MR. SCHURR:  Yes.

1923             THE CHAIRPERSON:  I guess the sentence that begins at the bottom of page 6:

                      "The documenting of any of the above as the relevant geographic market for forbearance in Saskatchewan would result in forbearance of local services in areas where no competitor would exist to discipline SaskTel's pricing.  Hypothetically, rates charged to those customers could be raised in order to make up for revenues lost to competitors in the cities."  (As read)

1924             When we read Shaw's evidence ‑‑ I am referring to paragraph 31 of the evidence which you can check ‑‑ their position in support of the LIR says that:

                      "Under this arrangement, local switch providers can offer a service throughout an LIR via a single POI and using only one switch."  (As read)

1925             There are two significant implications.

1926             First, the administrative region‑based LIR allows a company such as Shaw to provide service to any new customer within the LIR.

1927             Second, a customer can be served without the service provider incurring additional sunk costs.

1928             So why wouldn't an effort by you to raise prices to customers who are not yet served in that LIR be met with the offering of service by Shaw as suggested in that paragraph?  That would be the disciplining without the need for a price ceiling in that case.

1929             MR. SCHURR:  Can I correct one thing?

1930             Access to the LIR provides a single point of interconnection.  If the competition is going to run a facilities‑based model based upon that of a telephone company it is going to have to make its presence known in the exchange, in each of the exchanges, in each of the wire centres of that ‑‑ each of the exchanges of that LIR in order to pick up local loops.

1931             THE CHAIRPERSON:  Why would they necessarily use local loops?

1932             MR. SCHURR:  I said if they were ‑‑ I am not limiting it just to the cable companies.  I'm saying if they are a facilities‑based company operating in a manner of a telephone company ‑‑

1933             THE CHAIRPERSON:  I take that.

1934             MR. SCHURR:  ‑‑ they have to go to the exchange and pick up a local loop.

1935             THE CHAIRPERSON:  Right.

1936             MR. SCHURR:  If they are a cable company who may not require local loop, they are going to have to extend their service out to that exchange.  It does not give them access to the exchanges in the LIRs at no additional cost.  That is an error that Shaw is portraying.

1937             THE CHAIRPERSON:  They say "without incurring additional sunk costs".  We will ask them what that exactly means, but I appreciate that you extend they would have costs.  But again, it is a cost benefit and I guess it is a response that one could contemplate in that area.  I guess Shaw and a number of the cable companies are putting it forward as one of the reasons for adopting the LIR, that the point of interconnection allows them effectively to go forward and serve the LIR and meet competition, thereby addressing one of your points which is effectively the unequal competitive circumstances in regions outside the exchange.

1938             MR. SCHURR:  It gives them cost avoidance on establishing POI or point of interconnection in each one of the exchanges, granted.  I'm not sure that it removes a hurdle to getting out to all of the exchanges.

1939             THE CHAIRPERSON:  Right.  So we don't have the quantification on either side to really address that argument.

1940             MR. SCHURR:  Right.

1941             John wanted to address the heart of your question.

1942             THE CHAIRPERSON:  Go ahead.

1943             MR. MELDRUM:  I guess if you look at the Saskatoon LIR, Shaw doesn't serve any of those other areas at all.  They don't have any cable plant.  There is a fairly large area.  They only serve the City of Saskatoon on the Saskatoon LIR.  And for them to then provide service in Elrose or Kyle or any of those other places, they would have to either buy the facilities from Persona, or whoever the carrier might be there, or overbuild.

1944             So I think it is an absolute throwaway comment on the part of Shaw to say that that is one reason why it works.

1945             THE CHAIRPERSON:  We will address them on that.

1946             Have you had dealings with them in terms of them seeking members and other facilities from you in order to serve Saskatchewan at this point?

1947             MR. MELDRUM:  I think as Bryce indicated, they are using an established CLEC so they are dealing with another carrier.

1948             THE CHAIRPERSON:  In response ‑‑

1949             MR. SCHURR:  Specifically in the Province of Saskatchewan, it is my understanding that there have been discussions with our CSG Group.  I am not aware of any concrete arrangements that have been established yet as to how they are going to provide their service in the province.

1950             THE CHAIRPERSON:  Right.  In their interrogatory response, CRTC‑907, they make reference to "homes passed does not provide an indication of the lengthy delays frequently imposed by ILECs to complete work needed before local telephone service is available".

1951             They don't specify SaskTel in that.  I was wondering whether you had any response to that in respect of those.

1952             As you have said, you don't deal directly with them.  You deal indirectly with them, if I am taking your evidence.

1953             MR. MELDRUM:  Definitely we are not aware of any issues on our part that are holding up Shaw one iota.

1954             THE CHAIRPERSON:  Thank you very much.

1955             MR. MELDRUM:  Thank you.

1956             THE CHAIRPERSON:  Madam Secretary.

1957             THE SECRETARY:  Thank you, Mr. Chairman.

1958             I will now call on Telus Communications Inc.

‑‑‑ Pause

1959             THE SECRETARY:  You may introduce yourself and proceed with your 20‑minute presentation.  Thank you.

PRESENTATION /PRÉSENTATION

1960             MS YALE:  Good morning.

1961             Monsieur le président, mesdames et messieurs, les membres du Conseil, je m'appelle Janet Yale et je suis vice‑présidente à la direction, Affaires de l'entreprise, chez Telus Communications Inc.  C'est avec plaisir que Telus vous  présente aujourd'hui sa perspective en ce qui a trait à l'abstention de réglementation des services locaux résidentiels et affaires.

1962             With me this morning is a bit of a gang.  To my immediate left is Willie Grieve, Telus Vice‑President Telecom Policy and Regulatory Affairs.  To Willie's left is Dr. Robert Crandall, Senior Fellow in Economic Studies at the Brookings Institution, and Dr. Craig McTaggart, Telus Senior Regulatory Legal Counsel.

1963             On my right is Ted Woodhead, Director of Regulatory Matters at Telus.  To Ted's right is Dr. Dennis Weisman, Professor of Economics, Kansas State University, and Fred Di Blasio, our Vice‑President, Consumer Product Marketing.

1964             We appreciate in particular that Drs. Crandall and Weisman could be with us today to address any questions you may have about their statements, which form part of the record of this proceeding.

1965             I will begin our presentation with an overview of Telus' recommended approach.  Willie Grieve and Dr. Crandall will then address a number of key aspects of the Telus proposal.

1966             This is one of those regulatory proceedings that stands out as particularly important because the decision that will flow form it has the potential to shape the course of telecommunications for many years.

1967             Full facilities‑based competition has arrived in major urban centres across Canada just as the Commission forecast.  The challenge now is to adapt the regulatory framework so that, as an industry, we can fully realize the opportunities and benefits of competition.

1968             We have in Canada solid examples of past success in doing just that.  The CRTC's deregulation of long distance telephone services and cable services and its decision not to impose regulatory restrictions on the internet and wireless telephony can serve as guides for implementing forbearance in local telephony.

1969             Certains d'entre nous pourront se rappeler qu'il n'y a pas si longtemps, la réglementation nous forçait à louer un appareil téléphonique de la compagnie de téléphone ‑ et le choix de couleur était simple: c'était noir ou rien.  A mesure que la concurrence a évolué, le CRTC a éliminé ces restrictions et les consommateurs se sont vus offrir davantage de choix.

1970             My point is that regulation has continually adapted to the emergence of competitive markets in the past, and customers have been the winners.

1971             With durable facilities‑based competition now a fact of life in the provision of local service, it is once again time to adapt regulation to the competitive environment so that consumers can reap the benefits.

1972             That is why we have proposed a rigorous, objective and conservative forbearance test that will allow the Commission to be fully satisfied that customers in a geographic area have a choice among viable facilities‑based competitors.

1973             The two‑facilities bright‑line test proposed by Telus is modelled on tests previously approved by the Commission: for example, the two facilities bright‑line test for deregulating cable television rates and forbearance with respect to inter‑exchange private line services.

1974             The Telus test is a simple, effective means of determining whether competition is both sufficient to protect users' interests and durable.

1975             Here is how it works.  When we look at any geographic area as determined by the entrant's serving territory, we ask two questions:

1976             1.  Is there a full facilities‑based competitive local exchange carrier ‑‑ a CLEC ‑‑ offering residential services throughout its serving area?

1977             2.  Does that CLEC have at least 5 percent of the total residential network access lines or their equivalent in its serving area?

1978             If both criteria are met, an incumbent local exchange carrier ‑‑ or ILEC ‑‑ may apply to the Commission under an expedited process for forbearance within that facilities‑based CLEC's serving area.  The test would be the same for business services.

1979             Let me add as an aside that it is important to understand that our test does not replace the Decision 94‑19 test.  Conditions that justify forbearance may arise in other ways with combinations of loop resellers, access independent VoIP providers and the continuing evolution of mobile wireless.

1980             If our test isn't met, we or others would still be able to apply for forbearance under the Decision 94‑19 test if the conditions of that test would otherwise be met.

1981             Coming back to our test, we believe the Telus test fully responds to the need Commission has identified for ‑‑ and I quote ‑‑ "clear criteria that it can use to determine when it is appropriate to forbear from regulating local exchange services".

1982             Our bright‑line test is objective.  It is conservative.  It is administratively simple, and it can be applied quickly.

1983             It is conservative in that it does not ask how many customers we have lost but rather asks whether customers have chosen to subscribe to a particular full facilities‑based competitor, notwithstanding the presence in the market of other local service competitors.

1984             For example, there are consumers today who have chosen resellers of our local facilities, access‑independent VoIP providers or mobile wireless providers.  Only the presence of a full facilities‑based competitor offering a wireline or fixed access service would satisfy our forbearance test.

1985             The exclusion of non facilities‑based competitors and mobile competitors and mobile wireless from the forbearance test is not a minor matter.  The substitution of wireless for wireline service is increasing in British Columbia and Alberta every day.

1986             The internet has shattered the economics of entry into local telephony, enabling more than 30 foreign and domestic companies to provide telephone service in Canada.

1987             Our test only takes into account full facilities‑based competition and only in an area no wider than that in which we actually face that full facilities‑based competition.

1988             Our test requires evidence of actual facilities‑based competitive entry and actual customer migration to another facilities‑based carrier.

1989             Il s'agit‑là d'un aperçu détaillé proposé par Telus.  J'aimerais maintenant laisser la parole à Willie Grieve qui vous présentera en détail notre position à l'endroit des préoccupations soulevées au sujet du pouvoir de marché.

1990             Willie.

1991             MR. GRIEVE:  Thank you, Janet.

1992             I will spend a few moments on market power or, to be more precise, an incumbent local exchange carrier's lack of market power when competition comes from a full facilities‑based competitor.

1993             The Commission's task here is to consider two questions it is required by the Telecommunications Act to answer before forbearing.  Both are market power questions.

1994             First, is there or will there be competition sufficient to protect the interests of users?  In other words, can the ILEC profitably raise prices to consumers above competitive levels?

1995             Second, if you find that there is competition sufficient to prevent price increases, you must ask yourself whether forbearance would impair the establishment or continuance of a competitive market.  In other words, would the ILEC lower prices to exclude competitors from the market?

1996             Our bright‑line two‑facilities test was designed to address these questions by ensuring that once the test is met, so too are all of the elements of the market power test set out by the Commission in Decision 94‑19.

1997             Once again, we are not recommending that our test replace the 94‑19 test.  What we are saying is that the Commission can be assured that when our test is met, the 94‑19 test is met.

1998             The first question is about protecting consumers from higher prices, the Commission's traditional role; and the second is about protecting the competitive process.

1999             I will address the first question and Dr. Crandall will address the second.

2000             Before I answer the first question, though, let me say a word about the geographical area.  This proceeding is about determining when and where forbearance is warranted for local exchange services.

2001             Local services are, by definition, local.  Do the individual customers have a choice for their local exchange services where they live?  When our test is met, they certainly do.  If they don't like our service or prices, they can simply change providers.  This is local competition.

2002             Now let me address that first question:  When our test is satisfied, can the ILEC raise local prices without consequences?

2003             We asked Dr. Alfred Kahn, author of the leading text on the economics of regulation, to provide his views on the existence of an ILEC's market power when Telus' bright‑line test is satisfied.

2004             Dr. Kahn concluded that:

                      "... the demand of customers for innovative products and the ability of alternative suppliers to satisfy the demand at attractive prices means that there is no remaining market power."

2005             In its recent voice over IP decision, the Commission recognized that the entry of a facilities‑based carrier removes concerns about market power.

2006             Let me quote from that decision:

                      "The Commission considers that if forbearance were granted prematurely, the ILEC's ability and incentive to engage in the combination of targeted below‑cost pricing of local VoIP services, as well as bundling strategies, prior to the entry and roll‑out of other facilities‑based competitors, would have a material negative impact on the potential for sustainable competition in the provision of local VoIP services, and therefore on the protection of the interests of users."

2007             Telus' bright‑line test requires the entry and roll‑out of another facilities‑based competitor ‑‑ precisely the development that the Commission acknowledges will alleviate concerns about market power.

2008             The presence of another facilities‑based carrier means that substitutes are plentiful and entry barriers are low because there is another network already in place ready and already serving customers.

2009             In summary, when and where there is a full facilities‑based entry, an ILEC cannot raise its prices above competitive levels.

2010             Now I will ask Dr. Crandall to address why our test also satisfies the second question the Commission must consider:  whether the Commission can be assured that to forbear will not impair the establishment or continuance of a competitive market.

2011             DR. CRANDALL:  Mr. Chairman, Commissioners, at the heart of most of the recent Commission decisions involving the incumbent telephone companies is the Commission's implicit or explicit fear that the incumbents can exclude competitors.

2012             While this concern may derive from the pat seven years' experience with local entry through resale and unbundled loops, no evidence exists that these entrants' failures were due to exclusionary practices by incumbents.

2013             The Commission must examine very carefully any argument that suggests that the incumbents have the power to exclude Shaw, Rogers, Videotron, Vonage or Skype (now eBay) from offering telephone services.  These arguments fail for a number of reasons.

2014             First, the cable companies' costs for entering telephony are very low.  The entry costs of other VoIP providers are even lower.

2015             Second, I believe that any concern that incumbent telephone companies could exercise market power to exclude entrants in the current environment is misplaced.  In this environment, incumbent telephone companies could not successfully wage a predatory price war, because they are the high‑cost providers of telephone service.

2016             The Commission may perceive that incumbent telephone company revenue streams could make such a predatory strategy feasible.  Such a strategy, however, means that the profits an incumbent forgoes during the price war, which may be large and protracted, would have to be offset by a future price increase.

2017             If the entrants have low variable costs, as both the cable companies and voice over IP providers surely do, the required price cut may be quite substantial and the cost of the price war could be enormous.

2018             The future gains would require that the predator be able to raise prices substantially at some future date.  In addition, these high prices would have to be sustained for some time in order to recoup more than their losses from the predatory war.

2019             Even if some might contend that, given these facts, predation by incumbents is still feasible, it is inconceivable that such a strategy could be profitable.

2020             In fact, in the current environment I do not believe that there is any strategy available to the incumbents, including say de‑averaged pricing, that would enable them to exclude facilities‑based competitors.

2021             Janet.

2022             MS YALE:  Thank you.

2023             Plus tôt cette année, Telus a déposé une demande auprès du Conseil l'intimant de révoquer les règles relatives à la reconquête et à la non sollicitation des clients du service local dans les marchés où Shaw offre un service téléphonique concurrentiel.

2024             Nous avons demandé à ce que cette révocation entre en vigueur dès maintenant à Calgary, où Shaw a déjà percé le marché, et éventuellement dans les régions du territoire d'exploitation de Telus où Shaw offrira dans l'avenir le service téléphonique local.

2025             The Commission closed that application, noting that the issue would be dealt with in this proceeding.  I would like to briefly review our position.

2026             The restrictions that we believe should be removed are:

2027             One, the winback, no‑contact restrictions after a customer's service has been completely transferred to another local service provider.

2028             Two, general promotions and winback promotion restrictions, including the restriction on waiver of service charges.

2029             And, three, the prohibition on de‑averaging rates within a band.

2030             Why remove the marketing restrictions?

2031             To quote Dr. Weisman's statement:

                      "Winbacks and promotions are an integral part of the interminable, competitive struggle between market participants."

2032             So too, is de‑averaging rates in response to competition where it exists.  In other words, Telus should be able to reduce prices in Calgary and Edmonton in response to Shaw without having to reduce prices across the rest of Alberta.

2033             All the marketing restrictions we have today were developed for a different set of circumstances and in today's environment they are not in the public interest.  Full facilities‑based competitors who enter across a wide area ‑‑ usually an entire city ‑‑ do not need a grace period or protection from competition.

2034             In B.C. and Alberta, Shaw has ubiquitous networks in place with very large customer bases.  Shaw relies on Telus for little, if anything, for the purpose of providing local telephone service.  Anything that Shaw does require is subject to established and proven processes and is obtained through its business partner Bell.

2035             Shaw's local service will be available in all major B.C. and Alberta markets by the end of 2005.

2036             The most important reason for removing the marketing restrictions boils down to one word:  customers.  And we should all remind ourselves that regulation should be about customers.

2037             The marketing restrictions prevent Telus from making its best offers to potential customers.

2038             The regulatory barrier that prevents us form making our best offers to customers in turn reduces rivalry ‑‑ meaning that Telus' competitors do not need to make their best offers.

2039             I want to underline that the Commission's imputation test requirement would remain in place.  Our best offers would comply with that imputation test, which protects other suppliers, our competitors, from below‑cost pricing.

2040             Rather than the interminable competitive struggle, competition becomes a chaperoned dance.  That is hardly what Canadians expect and deserve from competition.  I think they would much rather see Shaw and Telus take each other on in a fair fight in the marketplace.

2041             Indeed, cable is one step ahead.  In our territory, for instance, Shaw now offers television, high‑speed internat access and local telephony over the same network with consolidated billing and integrated customer service.  Shaw and other cable companies have already been very successful in attracting customers to their local telephone service where they have entered.

2042             This is evidence of rivalrous behaviour on the part of the cable companies.  Of course, the Commission's marketing restrictions severely restrict the rivalrous behaviour in which the ILECs can engage.  This reduces the very rivalry that the Commission needs to see in order to forbear.

2043             Instead of protecting consumers from higher prices, these rules protect competitors from competition, which is hardly the outcome envisioned by Parliament.

2044             In conclusion, the marketing restrictions placed on Telus should be removed in order to allow the benefits of competition to flow to Canadians.

2045             The time has come to establish a clear forbearance framework and the time has passed for a transitional regime prior to forbearance.

2046             The cable companies have successfully launched facilities‑based local telephone services, providing ubiquitous wireline local access where they have entered.

2047             Facilities‑based competition is here.  It is time to adapt regulation to that fact of life.

2048             Nous sommes d'avis que le CRTC a devant lui aujourd'hui une occasion idéale de mettre en place un critère spécifique qui permettra de déclencher l'abstention de réglementation lorsqu'un concurrent doté de ses propres installations offre des services au sein d'un marché.

2049             Les consommateurs et les entreprises canadiennes bénéficieront tous des avantages de la concurrence dans le domaine des télécommunications.

2050             Thank you for this opportunity to present our position.  We look forward to any questions you may have.

2051             THE CHAIRPERSON:  Thank you.

2052             Commissioner del Val...?

2053             COMMISSIONER del VAL:  Thank you.

2054             I am going to address several topics in my line of questioning and I will let you know what those topics are, probably just five topics.

2055             I would like to explore, in order to understand better, the two‑facilities bright‑line test. In that category I would like to understand better the calculation and also the administration of the test.

2056             The second topic will be geographic market, your proposal and then the others' proposals.

2057             The third topic will be product and service market, your proposal and then the others.

2058             The fourth topic is what we have talked about a lot, the 5 percent.  Under the 5 percent I would like to address the sufficiency of the 5 percent, symmetry to cable, and also the whole issue of the legality of the predetermined threshold.

2059             The fifth topic will be other proposals for competition, competitive safeguards, consumer safeguards.

2060             My sixth topic will be my safety net, miscellaneous.

2061             I will also tell you that most of the references ‑‑ but don't hold me to this ‑‑ will be from the Telus final argument, Telus June 22 comments, the Call‑Net June 22 comments, Rogers final argument, Rogers interrogatory with CRTC, then the CCTA June 22nd comments and then the Telus CRTC interrogatories, if you want to pull those.

2062             My first question is to help me better understand the two facilities and 5 percent, the bright‑line test.  For this I would like to refer to the interrogatory CRTC‑901, please.

‑‑‑ Pause

2063             MS YALE:  I think we are ready.

2064             COMMISSIONER del VAL:  I think in your answer you gave quite a comprehensive discussion of that test, I would just like to understand better.

2065             I am looking at the "A" part to your answer, NAL equivalents being a viable commercial alternative to ILEC local exchange.

2066             If I were to take out NAL equivalents, what would I be deleting from your formula?  That is the question.  That is where I would like to get to.

2067             So if you want to discuss what is an NAL equivalent first, that would help.

2068             MS YALE:  The obvious category that would be eliminated would be Access independent voice over IP.

2069             COMMISSIONER del VAL:  Okay.  Then when you say "an NAL equivalent is any like connection using any technology", is wireless there?

2070             MS YALE:  No.  We have completely excluded wireless from the calculation, not because it may not be a substitute, but because we felt as part of being conservative in our test we didn't want to get into the wireless debate.

2071             COMMISSIONER del VAL:  Okay.  So then on page two of the interrogatory when you quote from your June 22nd comments, that quote, the purpose is really ‑‑, the last sentence is that this is a conservative test.  The first part, am I to take it this formula is also wireless ready?

2072             Should that be how I read it?

2073             MS YALE:  No.  What we were trying here to talk about is the fact that there may be customers who choose a variety of other alternatives.  For the purpose of this test we are looking at we are not including wireless in the calculation.  That is all it is meant to suggest because, as I say, we wanted to be conservative and keep it simple.

2074             MR. WOODHEAD:  Commissioner, in terms of it being wireless ready, if you were to find at some point in the future that there was massive amounts of wireless substitution, such substitution that I guess you don't see today, then, yes, you could put wireless into the equation, but, as Janet said, at this point in time, to be conservative, we have not included it.

2075             COMMISSIONER del VAL:  Okay.  I guess that is where your answer to Interrogatory 202 comes in in section E, where you say:

                      "Should the Commission determine that wireline service and mobile wireless service are in the same market Telus has proposed two‑facilities bright‑line test for variance would need to be restated.  That would be a second full facilities‑based local service provider in much, if not all, of an ILEC serving territory (a non‑ILEC wireless carrier) and the second part of the test would be if 5 percent of the customers in the full facilities‑based carrier's territory (the territory considered for forbearance) subscribed to a non‑ILEC mobile wireless or wireline service to confirm that these non‑ILEC services were viewed as substitutes for the ILEC's own wireline and mobile wireless service."  (As read)

2076             MR. WOODHEAD:  I'm sorry, could you just direct us within the interrogatories?

2077             COMMISSIONER del VAL:  I am jumping to Interrogatory 202, page 3, section E.

2078             MS YALE:  So what we are looking at is a single alternative full facilities‑based carrier and whether 5 percent of customers have gone to that carrier.  That could be over time.  If the Commission saw them pursuant to this answer as wireless as in the same market, it could be restated in terms of 5 percent of customers switching to that alternative full facilities‑based carrier within the serving territory, but we haven't done that.

2079             COMMISSIONER del VAL:  Okay.

2080             MS YALE:  Does that answer your question?

2081             COMMISSIONER del VAL:  Yes, I think so.

2082             In that case you would take, though ‑‑ an ILEC mobile wireless, that is going to be excluded from your count.  Right?  That is going to be ‑‑

2083             I'm sorry, I will get the example for you.

‑‑‑ Pause

2084             MS YALE:  It is highly speculative, because we didn't really focus on whether or not wireless is in the same market at this point in time.  So we are trying to be helpful with your hypothetical and I'm just not sure exactly what it is you are puzzled about.

2085             COMMISSIONER del VAL:  I wasn't certain about your position of whether wireless would be included in ‑‑ would be included in the service market at this point, and if it does become a substitute this formula would not change.

2086             MS YALE:  At this point it is not in.  That's the short answer.

2087             COMMISSIONER del VAL:  Okay.

2088             MS YALE:  If at some point enough people see wireless as a substitute for wireline we could get into a debate about how you would incorporate it in.  All we are saying here is, we just think that we are not at that place and we haven't incorporated it in the test.

2089             COMMISSIONER del VAL:  Okay.  The use of NALs, the lines, I am going back to Interrogatory 901 on page 3 and to the bottom of that page.

2090             On the sixth line of the final paragraph you talk about:

                      "... avoiding the under counting that might result from focusing on physical links to a switch."  (As read)

2091             Can you elaborate on that?  Can you explain that, please?

2092             MR. WOODHEAD:  Are you talking about sub 3 here?

2093             COMMISSIONER del VAL:  Yes.

2094             MR. WOODHEAD:

                      "... avoids the under counting that might result from focusing on physical links to a switch"?  (As read)

2095             Well, the classic example of that is you may have one physical link with a number attached to it that terminates at a PBX behind which there are a thousand telephone numbers.

2096             MS YALE:  But coming back to the point, it was about Access independent voice over IP where an individual may have several telephone numbers for a single line because they want to be local wherever they are.

‑‑‑ Pause

2097             COMMISSIONER del VAL:  All right.  Thank you.

2098             Then going on to using the competitor's footprint, I was looking at Appendix 4 to your June 22nd comments, which is the map of, I believe, Calgary.  There I believe that even on the map itself for business customers the areas are not always contiguous.  So how would you apply the competitors' footprint in a that scenario?

2099             MR. WOODHEAD:  The footprint we use is the footprint that the cable company in this case, what we face today, actually launches.  Did you say residential business?

2100             COMMISSIONER del VAL:  Just business.

2101             MR. WOODHEAD:  Just business.  Well, it doesn't really matter, because the area is where the cable company defines it.  For example, in the map you are looking at metropolitan Calgary is the largest one and then there is Leduc and some other outlying systems that are not contiguous, as you pointed out.

2102             If they launched in all of these areas at one time, that is their area and the cable company would be capable of serving residential and business customers within those areas, irrespective of whether they are contiguous or not.

2103             COMMISSIONER del VAL:  Okay.  So then when you are looking at that map, you would apply the test to each little area where is competition, say, in the business local?

2104             MR. WOODHEAD:  We would apply the test to where the cable company launched service.  So if it launched service in all of these areas at the same time, that defines their area.  If the cable company launched in the big area, in the middle of the diagram, that defines an area.  If they then subsequently launched in a non‑contiguous area, that would count as its own area.  Much, for example, as the way outside of the hypothetical you raised, which is a good one, certain of the cable companies have launched in discrete metropolitan areas.

2105             For example, in the case of Videotron they defined the south shore of Montreal as an area.  Subsequently, the West Island, subsequently, Laval, and so on and so forth.  So we are simply following their launch, their geographic area and their timing.  They define where they serve, they define the geographic area and that is what we use as our building block.

2106             COMMISSIONER del VAL:  So in the in between areas that they do not serve, do you count them into ‑‑

2107             MS YALE:  No.  Where they serve is where you look at whether or not they have met the threshold in terms of acquiring customers, where they have chosen to enter.  That's it.

2108             COMMISSIONER del VAL:  Okay.  So say in Vancouver, downtown Vancouver is a good example.  Let's just say, for example, then there is nothing in between until you go to metro town where all the towers are.  They serve that way.

2109             We would then have to apply the test to see whether there is competition in the metro town core and then the downtown area.  That would be where we would be aggregating and collecting the numbers.

2110             MS YALE:  Not aggregating, just ‑‑

2111             COMMISSIONER del VAL:  I'm sorry, yes.

2112             MS YALE:  ‑‑ area by area.  Because at the end of the day, as has been discussed many times here already, the problem is, if you go broader than that you end up with pockets of unserved customers.  So we felt that it was important to look at where there is an actual overlap of an incumbent and a full facilities‑based provider.  You know where they have entered.  You have a complete overlap.  What we were trying to do was to be able to identify those areas of complete overlap.

2113             COMMISSIONER del VAL:  The other parties have pointed to a lot of the administrative difficulties earlier this morning, the costliness of just data collection and monitoring.

2114             In Rogers Interrogatory 210, Rogers does list the challenges that it believes using the geographic footprint would pose.

2115             MS YALE:  Sorry, can you give us the exact reference, the page?

2116             COMMISSIONER del VAL:  Yes.  It is Rogers Interrogatory CRTC‑210.

‑‑‑ Pause

2117             MS YALE:  Okay.  We have that.

2118             COMMISSIONER del VAL:  Could you respond to the concerns raised by Rogers, and then do you have any solutions that you could propose or suggest?

2119             MS YALE:  I am going to give Ted here a chance to read it while I start off.  But before Ted gets into the detail I am going to ask Fred Di Blasio.

2120             This is an important issue, because we debated whether or not to look at our exchanges or where entry actually takes place, and at the end of the day we believe that it is important to focus on where there is a complete match in overlapping footprints, as I said.

2121             From an administrative perspective, as an ILEC, we believe that that is quite readily solvable in terms of any administration that you have to deal with.

2122             I am going to let Fred explain to you from a marketing perspective in the consumer marketplace how that would work.

2123             MR. Di BLASIO:  Thank you, Janet.

2124             We have a number of ways we can slice and dice the data with respect to the cable serving areas and the footprint and customers that are being served by cable companies that are also in our footprint.  So one of the tools that we use is geomatics, for instance, that assists us in actually locating those areas and making sure that we can do the overlap that Janet speaks of.

2125             MR. WOODHEAD:  Commissioner, I have read Rogers' answer to "A" and it would appear to say that irrespective of the fact that what we are saying is that the geographic area is defined by the cable serving area, they then overlay the telephone network exchange on that, and say, well, the cable area may cut across an exchange and there would be people or consumers, customers outside of the cable serving area.  Then they somehow seem to imply that that would force them to drive their network into those areas.

2126             Telus' position is not that.  Telus' position is that the cable serving area defines the relevant geographic area.  Whether the cable company wants to expand beyond its existing footprint ‑‑ which incidentally it does on a daily, weekly basis, whatever ‑‑ through organic growth to subdivisions and other areas of communities as they grow, but there is nothing implicit or explicit in our proposal that would force any competitor to put a network anywhere that it doesn't want to put it.

2127             So that is the answer to "A" and if you will give me just a second to review "B".

‑‑‑ Pause

2128             MR. WOODHEAD:  In "B" what they seem to be getting at is that this would be as they grow.  I think they are saying that as they grow out their network this would become administratively burdensome to collect data and report that data and adjust those serving area maps.

2129             then they point to our evidence where we ask for enhanced data collection and that is something that Telus has done consistently across a number of proceedings, including IXPL and some other ones, and they point out that in our evidence we have asked for a monthly updating by all carriers and competitors of data.

2130             I'm willing to sit here and concede that maybe monthly might be a bit aggressive, but the fact is that cable companies report their cable serving areas on the 6th floor of the Commission pursuant to their license and as they grow their networks there are maps that they file, there is a database up there that has all of that information in it, exactly where their networks go.  I guess what I am suggesting is, and what our evidence is suggesting, is the information is available, the Commission actually has it, and that forms the relevant geographic area because it encompasses all customers within their serving areas who are offered service by their network.

2131             That is a rather long‑winded answer, but I think I answered your question.

2132             COMMISSIONER del VAL:  Okay.

2133             I think Aliant pointed specifically to the example that, say, what if the footprint of the competitor covers half of an exchange, so half of it would be forborne and the other not forborne.

2134             How would the reporting be done on that one?

2135             MS YALE:  That is the whole point, is that what we want to do is avoid pockets of unserved customers so we focus on where they have entered, where there is an overlap.  As Ted has indicated, the Commission knows what that serving territory is and how many customers are served within that geographic area and the only question that flows from that is could we, as the telephone company, manage to split our exchanges based on whether there is and isn't forbearance.  As Fred has explained, we can sort by postal code and it is quite administratively straightforward to do.

2136             COMMISSIONER del VAL:  Okay.  Then what are your comments on SaskTel's comments today that it would be ‑‑ it is doable, but it is costly?

2137             Is it?

2138             MS YALE:  Well, as competition evolves it is more costly to do business, because we have to be able to respond to competition where it takes place and we are seeing competitive entry selectively by cable companies within their serving territory.

2139             So, I mean, those are the facts of operating in a more competitive environment.

2140             We were very concerned about a couple of things.  One was the problem of the pockets of customers who didn't have a facilities‑based competitive alternative and how do you deal with that.

2141             Second, the ability to game the test if you have a geographic area that is larger than where the entrant is serving.

2142             If you use, for example, an entire exchange and the cable company could enter the entire exchange but chooses not to, the larger the geographic area, the easier it is for them, through selective entry, irrespective of their capacity to enter, to delay the benefits of competition to those pockets in order to ensure that the threshold, wherever it is established, isn't met.

2143             So we thought, well, the best way to get around that problem is to say, okay, where you enter, where you the cable company enter is the relevant geographic market, and it avoid the potential to game the system in the way I have just described.

2144             THE CHAIRPERSON:  On that note we will break for 15 minutes.

2145             We will break for 15 minutes.  Nous reprendrons dans 15 minutes.

‑‑‑ Upon recessing at 1105 / Suspension à 1105

‑‑‑ Upon resuming at 1126 / Reprise à 1126

2146             THE CHAIRPERSON:  While we are waiting, for planning purposes it is likely that we will sit tonight until sometime between 6:30 and 7:00 depending on the pace of the presentation.  We won't start somebody off at that hour, but we will likely finish our proceedings between 6:30 and 7:00.

2147             We will continue the questioning with Commissioner del Val.

2148             COMMISSIONER del VAL:  Thank you.

2149             Still on the topic of the competitors' footprint, my next question was:  We do anticipate hopefully the expansion and the competition to be aggressive so you can anticipate that the competitor will be expanding its footprint.  Right?

2150             The question is:  One, how would you practically track the expansion of the footprint?  How would the reporting keep up with it?  That is the first part of the question.

2151             MR. WOODHEAD:  As I said, in our proposal we were talking about monthly reporting and, as I think I conceded, that might be a tad aggressive.  But you could pick some reasonable period of time where the cable ‑‑ in this example in terms of a cable company where it files, whatever the interval is, you can pick some reasonable interval, is it quarterly, is it two times a year, is it yearly and that would reflect the organic growth of the network that the cable carrier will expand its network to offer the full suite of its services, be it cable services, internet services and now telephony services.  So there will be some expansion.

2152             As to what the appropriate reporting period is, as I say, I concede it may not be monthly.  It may be quarterly or twice a year or yearly, but some reasonable period of time that you would be able to administratively track.

2153             THE CHAIRPERSON:  While Commissioner del Val is pausing, leaving aside the time dimension, in terms of the geography dimension you gave as an example before Videotron's expansion from the South Shore to, say, the West Island of Montreal, assuming we can define exactly what that means.

2154             In your proposal, assume they have met the 5 percent threshold on the South Shore and are now expanding to the West Island, does that become one area for your purposes?

2155             MR. WOODHEAD:  No, it would become two areas, because if you did it as it is the South Shore ‑‑ in the case of Videotron it is the South Shore they launch, they are in the market for two or three months and then they add the West Island, then if they had reached 5 percent in the South Shore you just have a rolling ‑‑ well, they don't reach it now because they just added a whole pile of new homes that they pass in the South Shore.

2156             So what we have sort of proposed is that you follow the cable company.  So if for example Shaw in our circumstance ‑‑

2157             THE CHAIRPERSON:  No, stick with the example if you could.

2158             MR. WOODHEAD:  Okay, sorry.

2159             So my answer to you is that they would become two discrete areas and once you reach 5 percent in one you have met it.

2160             THE CHAIRPERSON:  So if the cable company decided not to go to the entire West Island but to go to a six‑block area next, after the South Shore, would you then try to apply the 5 percent to the entire combined area of the South Shore in the new six blocks or are the six blocks now a new area for your calculation?

2161             MS YALE:  We can kind of get pretty far down the path of what‑ifs, but what we are trying to do is deal with separate areas.  So if they choose to enter a particular geographic area, the problem we were grappling with was the unserved pockets and the entry that we have observed has been selective.  Even though they could do more, they haven't chosen to do that.

2162             So how do you from a forbearance perspective, and how do we from a competitive response perspective, deal with that.  Right?

2163             The fact that entry is taking place selectively by cable companies is their choice about how to enter the market.  So we have said, "Okay, if it is the South Shore let's treat that as a discrete area.  The next discrete area they pick will be its own discrete area."  You can posit them doing it six blocks at a time I suppose, but I find that ‑‑

2164             THE CHAIRPERSON:  Well, just as a hypothetical.  So you are saying that every new addition to a boundary ‑‑

2165             MS YALE:  A non‑contiguous addition becomes its own discrete area.  I suppose what Ted was trying to deal with is the natural extension as within areas.  Right?  The maps get updated, there are sort of small increments at the margin.  That is different than a new pocket with a new area.

2166             THE CHAIRPERSON:  Okay.  The new area I think I understand.

2167             MS YALE:  Right.

2168             THE CHAIRPERSON:  But it is accretion I guess, because in the new area the 5 percent that might have been reached in the old area is now diluted by the fact that they are only at 0.5 of a percent in the new area, so that the combined total is now below 5 percent.  So you go back and forth over that with contiguity or you run the risk of that.

2169             This proposal has been challenged by a number of people as administratively difficult, so let us try and work through some of these basic administrative issues.

2170             MS YALE:  That's right.  But most of the administrative issues that have been posited have to do with the ability of the ILECs to administer on a sub‑exchange basis as opposed to the ability of the Commission to monitor the attainment of a 5 percent.

2171             From our perspective, I will put it simply, that is a price worth paying to be able to deal with sub‑exchanges to avoid the pockets of unserved customers and the gaming issue that I was referring to before.

2172             So it really responds to the issue of:  Do you have a facilities‑based entrant in a meaningful cable‑serving territory?  Typically, as we have seen with Shaw, they enter a serving territory at a time.

2173             THE CHAIRPERSON:  As you know, the devil is in the details.

2174             MS YALE:  Right.

2175             THE CHAIRPERSON:  If you are a cable industry, whatever the rules are, as you would expect competitors to do, they will try and adjust their business plans to their advantage.  So unless one has very clear and precise answers to a number of ‑‑

2176             MS YALE:  To those increments at the margin of a serving territory ‑‑

2177             THE CHAIRPERSON:  ‑‑ scenarios like that, I think you run the risk of vagueness and vagueness undermines your proposal.

2178             MS YALE:  Absolutely.

2179             I think Willie has an answer.

2180             MR. GRIEVE:  Mr. Chairman, we obviously are very sensitive to the fact that competitors might choose to try to game any system that is in place.

2181             So there are two kinds of questions here.  I am going to use an Alberta example because I saw the map.

2182             So look at the map of Red Deer.  Red Deer goes out and it stops.  It has new subdivisions and they stop and after that is the country.  Well, we know that Shaw eventually will update its maps for that area.  So we count.  If they enter in Red Deer, we count all of Red Deer where they enter because they typically enter wherever they have a headend or the facilities to enter.

2183             So then a new subdivision is built.  What happens when the new subdivision is built?

2184             Well, if they were at 5 percent and then the new subdivision is built and all of a sudden they are not at 5 percent any more, then you ask yourself the question, "Well, we just forbore, are we going to have to deforbear?" ‑‑ I call it "rebear" ‑‑ are we going to now rebear, right?

‑‑‑ Laughter / Rires

2185             MR. GRIEVE:  Our proposal for when you look at deforbearance is that you see, "Oh, now the territory has expanded they are below 5 percent."  You come back to us and you say, "Show cause why we shouldn't deforbear or reregulate in Red Deer" and we say, "Well, because they are new subdivisions.  We are rolling out, they are rolling out network, you have two facilities in place and we know throughout Red Deer that this service is a service that is accepted as a substitute by customers."

2186             THE CHAIRPERSON:  Okay.  I see administrative problems, particularly in Alberta.  The last few times I have been there, subdivisions are rolling out of most cities very rapidly.  Administratively, again, if we don't have clear answers to these we are kind of looking subdivision by subdivision at show causes as to why potentially.

2187             Unless you are way over the threshold.  It may raise the issue of is the threshold right?  Should there be a range?  Who knows?

2188             But I leave you to refine your proposal.

2189             MS YALE:  No, no.  It is a very good point.  I guess whatever threshold you pick you have that issue of if you are too close to the margin what happens if?

2190             So I don't think it is an issue of therefore do you wait until it is a little bit more above the threshold in fast‑growing communities, for example, so that you take into account the potential for those differences at the margin where there may be new subdivisions added.

2191             But at the end of the day we thought on balance it was more important to focus on where there was actual facilities‑based competition.  It is a balancing act in terms of which geographic territory do you pick.  Do you pick a larger area over which there is definitely going to be unserved pockets or do you start with where there is actual entry and grapple with the question of growth?

2192             THE CHAIRPERSON:  Thank you.

2193             Commissioner del Val.

2194             COMMISSIONER del VAL:  Thank you.

2195             On that note, let us talk about the other ILECs' proposal of using the exchange.

2196             What do you see there as the biggest challenge that hasn't been covered already and why is that not a good proposal, in your view?

2197             MS YALE:  The single biggest problem from our perspective is the unserved pockets and the fact that cable‑serving territories may cover part of an exchange and not others and what do you do with the unserved pockets when you look at making sure, from a public policy perspective, that there is competition.

2198             At the end of the day from a local service perspective for individual customers in their homes, it is small comfort to know that on the other side of the exchange there is competition but serving them there isn't.

2199             So from our perspective we felt that it was important to ensure that there were two full facilities‑based competitors for every customer for whom forbearance was granted.  At the end of the day, we thought that took precedence for us over anything else from a public policy perspective.

2200             As I said, from a gaming perspective there is no doubt that the larger the geographic area, whether you go to the exchange or the LIR, the easier it is to delay extending the benefits of competition by that facilities‑based entrant in order to make sure that you never get to the threshold or that you delay the attainment of the threshold wherever it is set.

2201             COMMISSIONER del VAL:  So would that view or that answer apply also to the proposals of using the LIR or the local calling area?

2202             MS YALE:  The LIR is ‑‑ the larger the geographic area the bigger the problem.

2203             COMMISSIONER del VAL:  Now I will move on to the product and services market.

2204             Call‑Net's view was that the relevant market would be the wireline including VoIP, and you agree with that?

2205             MS YALE:  Yes.

2206             COMMISSIONER del VAL:  Okay.  In the business product market Roger's proposal is to divide the business market into Centrex and digital trunk services.

2207             Do you agree with that?

2208             MR. WOODHEAD:  Under our proposal we have just said that the business market is a separate market.  In our view, if you are a full facilities‑based carrier within that defined area where you have full facilities, you can offer any number of these services, be it Centrex, primary business line, whatever that service group is.

2209             We don't differentiate.  We have not segmented it into these various segments.

2210             COMMISSIONER del VAL:  When Aliant proposed the four relevant product markets, they have the basic business services which include the single‑line businesses, multiline business and small Centrex, 30 or less,  The second group is the mid‑size Centrex, 31 to 1,500 accesses.  The third category is Enterprise Centrex, which are greater than 1,500 and digital trunks is the fourth group.

2211             Aliant's view is that the relevant market determination must be based on the market structure in the area under consideration and this may not be the same in all areas.

2212             So the first question is:  Do you agree with Aliant's proposed product groupings for determining relevant product market.

2213             The second question is:  Do you believe that the relevant market determination should vary by ILEC territory?

2214             MR. WOODHEAD:  I will start.

2215             The answer to the first question is that our proposal treats all business services the same.  We don't segment the service into those various groupings.

2216             I'm sorry, could you repeat the second question?

2217             COMMISSIONER del VAL:  Yes.

2218             The second question is:  Do you believe that the relevant market determination, particularly for business, should vary by ILEC territory?

2219             MR. WOODHEAD:  Our proposal is that if you have a full facilities‑based carrier in a particular serving area that it has chosen, it has the ability to offer all of those services within that area.

2220             COMMISSIONER del VAL:  So you don't see any need to further segment the business products, services?

2221             MR. WOODHEAD:  No.  Obviously in some of those ones that you have mentioned, in the higher Centrex ones, there is already competition in the enterprise.  Those are large enterprise accounts.  There is a lot of competitive activity in there in terms of companies like MTS Allstream and Rogers Telecom now in that segment, but our test focus is obviously on the full facilities‑based carrier within that defined serving area and we bunch them all together.

2222             COMMISSIONER del VAL:  Based on your answer wouldn't it therefore make more sense to segment it, say, for just what you said, the large Centrex.  There is already competition?

2223             MR. WOODHEAD:  Well, there is competition, but in our proposal obviously we still reserve the right to come in with a standard 94‑19 application to deal with that, even in the absence of a full facilities‑based competitor if those conditions present themselves in our serving territory.

2224             COMMISSIONER del VAL:  What do you think of the Bureau's comment that the division of the relevant residential market into first‑line market and then a second market being second‑lines mobile wireless and VoIP?

2225             MR. GRIEVE:  Well, we have looked at the first and second line issue quite a lot and I think Aliant's witnesses made reference to it yesterday.  If you had Telus and Shaw both offering service in a particular area and a household took one line from Telus and one line from Shaw, how do you know which is the first line and which is the second line?

2226             We have had requests from our marketing group in the past to look at whether there was a way to get special treatment of second lines and we just could not find any way at all of making a practical distinction between first and second lines.

2227             COMMISSIONER del VAL:  Now I am moving into the 5 percent category.

2228             I think you heard yesterday a lot of discussion on why 5 percent and 5 percent seems low, particularly in light of, say, Rogers pointed out compared to the international and general competition precedents it seems low.

2229             Then I think closer to home Call‑Net used the example of the Ontario Power mitigation framework and they are talking of reducing control of electricity supply to below 35 percent within 10 years.

2230             Do you have any more to add that is different from what was discussed yesterday and, in particular, would you have any examples of other jurisdictions using 5 percent as a threshold and finding that to be sustainable competition?

2231             MS YALE:  Let me start by clarifying I think a really important point in our proposal, because this is not a market share loss test and most of those other examples focus on the loss by the incumbent of market share and we don't do that.

2232             What we are focusing on is whether or not competition in the form of a facilities‑based competitor is viable in the sense that customers are willing to place their confidence in that provider as a serious alternative and a substitute for the services of the ILEC.  So the analogy to other market share loss tests we think is not the appropriate and relevant analogy.

2233             Where we borrow the idea, frankly, is the cable test, because there the Commission wanted to be sure that DTH entry was meaningful and that in the eyes of customers this was a meaningful alternative, viable from their perspective and so we borrowed from the Commission's own test looking at the acquisition and the willingness of customers to go to that competitor.

2234             Dr. Weisman, I believe, has some specific comments relative to your question.

2235             DR. WEISMAN:  I believe the 5 percent speaks to the fact that customers are switching and establishes that they are in fact substitutes.

2236             If you look at the law and economics literature with respect to regulation and market share what that literature tell us is that, to the extent regulation has been effective, the relationship between market share and market power is severed.

2237             Next, if you are going to use a market share measure, as the Bureau has suggested in their comments, you would want to do a market share measure based on capacity.  When Telus' test is satisfied, 100 percent of the market is addressable by at least two facilities‑based providers, and if you calculated the meaningful market share measure according to that metric, it would be no higher than 50 percent.  That is the appropriate measure if you are going to use a market share measure in this context, not 5 percent or 95 percent.

2238             COMMISSIONER del VAL:  Okay.  Thank you.

2239             Going back to Ms Yale's answer on the 5 percent, taking that from the cable industry, then of course you have the Rogers and the counter argument that when 5 percent was established in the deregulation of basic cable rates the company's market share at that time was around 75 to 80 percent.  Unlike the cable industry, there is almost universal adoption of local exchange service.  97 percent of households have wireline service.  There is also argument that the demand characteristics of the two markets are different.

2240             Can you comment on those, please?

2241             MS YALE:  Sure.  I have a number of comments.

2242             First of all, the reference on the cable side was that not every household had cable television service, not whether or not of those who chose to take cable service what percent of those took it from the cable company.  In the absence of competition, 100 percent of households that took cable television service took it from the cable company.  The fact was that not every household took it.  Not every household had cable.

2243             Similarly, for us today in B.C. and Alberta 10 percent of households don't take wireline service.  Don't take wireline service from us, 10 percent of households.  So whatever market share number you may want to use to reflect of those who do take wireline service what percent take it from us, the fact of the matter is it is the missing households in both cases that are evidence of the fact that not everybody sees wireline service in our case, and cable service in the cable industry's case, as something they need in their homes.

2244             So I think it is important to look at the issue from that perspective.

2245             I am going to turn it over to Dr. Crandall in a minute.

2246             But at the end of the day the 5 percent test was really, as I said, about looking at whether or not DTH would be seen by customers as a meaningful alternative, because there were concerns that this was a new technology, there were concerns about customer inertia, barriers to switching, it was an all‑digital service, people would have to put a box on every TV, where in those days analogue cable still didn't require you to have a box only if you took digital service, which is something people are getting used to.

2247             So there were all these concerns at the time as to whether or not people would actually switch.  So the 5 percent test was put there as evidence that people were comfortable with DTH as a meaningful alternative.

2248             In fact, in the case of telephone service we sort of borrowed from that notion to say this isn't about how much market share we have because we know there are other providers already in the market subscribing to services of CLECs, subscribing to access independent VoIP.  So it is not that we will have 95 percent and the cable company would have 5, it is that whatever other competitive factors may be going on in the market the facilities‑based competitor would be seen by customers as a meaningful alternative.

2249             I will turn it over to Dr. Crandall.

2250             DR. CRANDALL:  Just one brief comment, and that is to the extent that the cable television operators only had 70 percent of the households, or whatever the relevant number was at the time, and then a 5 percent test was applied to a new facilities‑based provider, namely a DTH service, the implicit suggestion I suspect coming from Rogers is that they had already lost 30 percent of the market.

2251             Those 30 percent of households were never in the market.  That they have not chosen to subscribe to cable as it went from 12 to 24 to 25 to 100 to 200 channels or whatever is available today suggests they are really in a different market.

2252             So for a DTH system to take 5 percent, if it all comes out of the cable company's hide, it is really a 7 percent test.

2253             COMMISSIONER del VAL:  Then what about the comment that the demand characteristics in the two markets are different?

2254             MS YALE:  Can you elaborate on what you mean by that?

2255             COMMISSIONER del VAL:  Call‑Net's submission on June 22nd said that:

                      "A market share target developed in one market, that is cable, is not necessarily suitable for forbearance in another market with different demand characteristics such as local residential service and local business service."  (As read)

2256             Do you have any further comment on just the demand characteristics being different?

2257             MS YALE:  I guess the real issue is whether or not customers are willing to take up an alternative.  At the end of the day what you are looking at is customers' willingness to switch.  Whatever the different attributes of the product or he service are in question, whatever factors may motivate their decisions, at the end of the day the question that the Commission has to address is:  Does market power continue to exist in the local telephone market or is competition sufficient to protect the interest of users?  And customers willing to switch to an alternative is evidence that whatever attributes they see in the product or service they think that there is a viable competitive alternative that is a substitute.

2258             COMMISSIONER del VAL:  Did you want to add something?

2259             DR. CRANDALL:  I just want to add one thing to that.

2260             To the extent that you are focused on demand differences I suspect that you ought to be concerned about the supposed consumer inertia.  How quickly will people shift from the incumbent to the entrant service?

2261             I think you will find that in telephony people switch more rapidly than they do in video.  I think you will find at least the experience in the United States would be that the two DTH providers have attracted subscribers more slowly than, say, Cox has attracted telephone subscribers in areas where they have deployed it, or the UK cable companies attracted telephone subscribers when they first deployed, or perhaps ‑‑ and I think there is only developing evidence here in Canada, households are switching to cable telephony today.

2262             COMMISSIONER del VAL:  So there are actually studies on this, that people are more prepared to switch their telephone service than cable service, than their television service?

2263             DR. CRANDALL:  There certainly is experience with the UK cable systems.  There have been reports in the financial reports of Cox ‑‑ which is now a private company, but back when it was a public company ‑‑ of how rapidly they were able to attract telephone subscribers, and the subscription levels of DIRECTV and the DISH network in the United States are matters of public evidence.  You can look it up.

2264             MS YALE:  I would like to turn it over to Fred Di Blasio to talk about it from a customer perspective, because at the end of the day one of the differentiators, if you will, is that this isn't like a cable television service from DTH providers where it was a single standalone service.  This is about adding to a bundle of services.  I think that affects the willingness of customers to switch.

2265             Perhaps I can let him expand on that.

2266             MR. Di BLASIO:  A couple of quick points.

2267             One of them is, I spent quite a bit of time in the UK market on the cable side of the equation and it was clear that initially the cable companies came in wanting to ‑‑ usurp the position and have a telephony sweetener.  It quickly became apparent to us that in fact we were going to have to try and fight on the telephone side and hopefully get some cable customers, multichannel video customers to speak of.

2268             So that I think is an interesting and relevant point to what has taken place here.

2269             In addition, I was at AT&T Broadband when we decided to deploy TDM across the United States in those markets where we had franchises and it was very clear to us that it was much easier to actually go after those customers when you bundled them with all of the services that we were able to offer, the sticky application being the video bundle.  So you offer video and then you layer on the high‑speed and then it was a quick sell for the telephony.

2270             So I think the experience I have had, certainly in the UK and in the U.S., is relevant and speaks to what we are talking about today.

2271             COMMISSIONER del VAL:  Thank you.

2272             I will move onto the last aspect of my questions regarding the 5 percent.  This is actually more generally about a predetermined criterion under the Telecom Act.

2273             I think Rogers, in their final argument, said that:

                      "The use of a predetermined level of market share alone to decide whether to forbear is not appropriate as it would fail to consider the important factors that should be considered in order to make the factual determination mandated by Parliament."  (As read)

2274             I think Call‑Net, in their June 22nd comments, were even stronger and said that:

                      "To the effect that predetermined criteria violate the mandate granted under section 34 of the Act and has the effect of unlawfully fettering the Commission's discretion..."  (As read)

2275             Did you want the references to these quotes?  I just wanted your response to that.

2276             MR. GRIEVE:  I am familiar with the arguments.

2277             COMMISSIONER del VAL:  Okay, great.

2278             MR. GRIEVE:  First of all, there are two things going on here.

2279             One is that the Commission can't set a rule because they are not abiding by Parliament's instruction.  Well, when you set a rule, just as when we set our test, what we did was we looked at the 94‑19 test in the context of sections 34(2) and 34(3) to make sure that when our test is met all of those requirements are met.  So you can certainly have that.

2280             That addresses the first question.

2281             The second question is whether you are actually fettering your discretion by picking a number.  I think there are mountains of court cases ‑‑ and I promised Janet I wouldn't go too far back in history, but there are mountains of court cases that say that a regulatory agency is perfectly entitled to set a rule, as long as it is always open to parties in suitable circumstances to raise new factors, new facts that hadn't come to their attention before and challenge the rule or the application of it in a specific case.

2282             So there is no fettering of discretion problem here, unless somebody came in and wanted to present new evidence that you hadn't considered before and new circumstances and you refused to hear it.  I don't think you could refuse to hear it.

2283             COMMISSIONER del VAL:  Thank you.

2284             I am going back a bit now.  Would your proposal of the 5 percent threshold change if the geographic market were the exchange?

2285             MS YALE:  No, it would actually be a tougher test because of course there are pockets of unserved customers so you would actually have to lose more market share in areas where the cable company had entered in order to meet the 5 percent threshold.

2286             COMMISSIONER del VAL:  Thank you.

2287             In the next set of questions I am just trying to assess the various proposals regarding criteria for competition and I would like your views on those.

2288             What are your views as to whether as part of a forbearance test the Commission should examine the entrants and incumbents cost structures, including whether the entrant has similar or lower variable costs than the incumbent?

2289             DR. CRANDALL:  In the opening statement I mentioned that the new forms of telephony, namely voice over internet, that is the Access independent as you are calling it here in Canada, and even the more Access dependent types of voice over internet have lower costs.

2290             The new player on the block gets to choose the technology and there has been technological progress since my colleagues here at Telus have deployed their network and these definitely have lower costs.  I was suggesting that is a reason not to be concerned about any attempt by Telus ‑‑ there are other reasons, but this is one reason not to be concerned that Telus would engage in predation.  You don't engage in predation against someone who has costs lower than your own in any circumstances and there are other reasons not to do it too.

2291             But I think that the lessons of regulation of telecom over the last 15 or 20 years is that you don't want to get into these attempts to measure costs.  It is going to be very difficult, particularly given that you are talking about an evolving network.  At what rate do you assume it fills up, and so forth.

2292             I think it is an undertaking that would delay you, complicate the matter and not satisfy you in the end.

2293             COMMISSIONER del VAL:  Thank you.

‑‑‑ Pause

2294             COMMISSIONER del VAL:  The company is Bell.  In their Interrogatory 305 they provided a study that indicated that in certain countries they are replacing the regulation of retail rates with regulation of rates at the wholesale level.

2295             Do you think a switch from retail to wholesale regulation of local services would be appropriate for forbearance from regulation of local services here?

2296             MS YALE:  Well, there are rules around the unbundling of our networks and rules that require us to make our facilities available at a wholesale level to our competitors that choose to enter on that basis, and those would continue in place, notwithstanding forbearance.  In other words, no economic regulation at the retail level.

2297             COMMISSIONER del VAL:  Thank you.

2298             Do you have any comments on the CCTA's proposed two‑part test for determining forbearance, the quantitative test of the market not being served by the ILEC, that a minimum of 30 percent not being served; and then the second part, that the facilities‑based competitive alternatives exist in the relevant geographic market on a pervasive and sustained basis?

2299             MS YALE:  Well, obviously their geographic area that they propose within which they measure that market share lost is much larger than our proposed area and suffers from all of the defects that we have already discussed.

2300             Again, a 30 percent test we believe is much too high.  For reasons that I think we have addressed, the evidence of sustainable competition I think is there by virtue of the fact that the cable companies are established players in the market with an infrastructure in place to serve customers for their broadcast distribution undertakings and their high‑speed internet.  So I don't think these are fragile competitors that are at any risk of leaving the market.

2301             COMMISSIONER del VAL:  Then what do you think of the Bureau's structured rule of reason approach requiring information on the costs of each of the parties and the possibilities for capacity expansions and the measurements of demand?

2302             Is this type of information likely to be available for both the entrants and the incumbent?

2303             MR. WOODHEAD:  I will take a crack at that one.

2304             For all of the reasons that Dr. Crandall discussed with you, a sort of merry journey down a costing exercise would be a long and tremendously complicated one which, I agree with him, at the end would leave you less than satisfied.

2305             There is little, little debate in my mind ‑‑ you don't have to believe me, you can listen to Mr. Shaw or Mr. Rogers.

2306             With respect to Mr. Shaw, in his quarterly reports he states that the capital cost for the first 100,000 subscribers are in the range of $50 to $55 million and only $35 million for the next 100,000 subscribers.

2307             For Mr. Rogers' part, he indicates with a somewhat more robust system where they are going full in as a CLEC that they are going to spend something in the order of $200 million, and their annual report in 2004 indicated that their capital expenditures at that point with $106 million.

2308             Rather than going through a costing exercise to see which provider has equivalent or lower variable costs, I suggest to you, assuming that they are not being disingenuous, that that is a low cost alternative in terms of expanding.

2309             So that is my answer to that part.

2310             Assuming now that we are talking about the ability to expand capacity to meet demand, cable networks, and particularly the major cable providers ‑‑ and as you well know because you sit as both broadcasting commissioners and telecom commissioners, that over the last 10 to 15 years a multitude of issues have come before you in terms of digital migration, HD, upgrading systems to provide a whole new host of services including VOD and a whole raft of just new programming undertakings that you have licensed and finding room on the cable system to do that.

2311             All of these major systems have upgraded their capacity in order to provide digital cable, get those channels that you have licensed on there, including the Cat 1 and Cat 2's, where they have chosen to distribute Cat 2's.

2312             Rogers launched in North America the first high‑speed internet service.  All of these services take capacity.  They have now all launched telephony services on varying geographic areas, but these are upgraded broadband networks that have the ability to serve customers and the demand that they face.  In fact, the only gating issue that I am aware of ‑‑ and I have followed this reasonably closely over the last eight or nine months ‑‑ is with Videotron who said not that our network doesn't have capacity to do it, our service is priced so attractively in our serving area that we just don't have the CSR capability, the call centre capability to answer it.

2313             So I would suggest to you, I guess that is a long way of saying I don't believe there is any constraint on their capacity for them to meet demand.

2314             Having said all of that, there was another one, there was another factor.  Let's pass it over to Dr. Crandall.

2315             DR. CRANDALL:  We are talking here about telephony and about entry into the incumbents market for largely voice services, and things have changed in that market, as we talked about in the VoIP proceeding and in this proceeding again today.

2316             But another major thing has changed in this market, and that is every incumbent, not just in Canada but elsewhere in the world, is looking to roll out video services.  The people we are talking about is the potential and actual now.  Now actual entrants into telephony in Canada are the cable companies who are earning substantial rents ‑‑ and I have this in the appendix to Telus's June filing ‑‑ on their video offerings.

2317             To the extent that they don't win the customer for telephony from Telus and the other incumbents, they risk losing their video services.  This is a completely different marketplace and they have to be aggressive going after that line that connects the customer to the incumbent telephone companies for fear if they don't they will start losing a substantial share of their video customers to terrestrial‑based broadcast systems.

2318             COMMISSIONER del VAL:  Thank you.

2319             The next line of questioning is around competitive safeguards really, giving the competition an opportunity to let it take hold.

2320             If the Commission determines that it needs to retain marketing safeguards such as competitive safeguards on winbacks, promotions, in a forborne market, should these be identical across all markets or should there be instances where in a forborne market that some are, for lack of a better term, more forborne than others?

2321             MS YALE:  Our proposal is that upon entry by a cable company the marketing restrictions should be eliminated so that there is actual rivalry among all players in the marketplace in terms of the ability to do promotions, winbacks and price responses.  With forbearance presumably all of that would disappear.

2322             So this is really, from our perspective, a preforbearance question in terms of the ability of competitors to take customers from the ILECs, and we just watched them walk out the door.  It is particularly troublesome for us, as Dr. Crandall just mentioned, as we are ready to launch our television service over our infrastructure.

2323             So for the first time we are about to see triple play competition between the cable companies and the telephone companies with very asymmetric rules, because the bundle the cable companies can offer is completely unregulated and unrestricted and the bundle we can offer comes with substantial restrictions.  So right now every customer that Shaw takes, every customer they take for local telephone service, we can't contact for one year for any service, including our BDU service in which we are a new entrant and they are the incumbent.

2324             So it is that asymmetry that we are arguing should be lifted immediately on their entry into the marketplace.  That would apply across all ILEC territory.

2325             COMMISSIONER del VAL:  Thank you.

2326             In your final argument, on page 20, paragraph 25 ‑‑

‑‑‑ Pause

2327             COMMISSIONER del VAL:  Page 20, paragraph 57.  I'm sorry, page 20, paragraph 57.

2328             MS YALE:  We have it.

2329             COMMISSIONER del VAL:  Am I correct in interpreting that you are saying that winback rules are predicated on loop resellers?

2330             MS YALE:  That they were put in place in the world of competition from the original CLEC entry model where the entrant leased our local loop and offered service over our infrastructure.

2331             COMMISSIONER del VAL:  I know the decision that you are referring to, but I just wanted a fuller discussion.

2332             My understanding is that winback rules are predicated on giving the competitors an opportunity to gain a foothold in the market and it really doesn't matter whether this competitor is a loop reseller or facilities‑based.

2333             What is your response to that?

2334             MS YALE:  From our perspective there is a significant difference with cable entry, because of the fact that if you think back to that model of entry, let alone the infrastructure issues that I have described, they were standalone entrants with essentially one product, a not well‑known brand, no established customer base, and instead what we are looking at in B.C. and Alberta is competition from Shaw, which has over 2.2 million customers, an established brand, relationships with every single one of those customers for cable television service, and in many cases high‑speed internet, and monthly bills that go to all those homes.

2335             So the notion that these providers need protection from competition is one that, from our perspective, just doesn't apply.  It just doesn't apply.

2336             COMMISSIONER del VAL:  In your final argument on page 22, paragraph 62, the last sentence you say that:

                      "Cable LECs have not experienced customer inertia at all and instead have rapidly acquired local exchange service customers as demonstrated in the previous section."  (As read)

2337             So besides the Aliant territory what other basis do you have for this statement?

2338             MS YALE:  Shaw has entered in Calgary and Edmonton.  Perhaps I can let Fred talk to you about what that experience has been for us in the marketplace.

2339             MR. Di BLASIO:  In our ILEC territory we have seen a distinct and significant increase in the number of NALs losses we have seen since the entry of Shaw in the marketplace.

2340             Under the rules I'm not allowed to see who goes where, but I can tell you that if you look at the trend rate and then you look at Shaw's entry in the market you can see a substantial increase in terms of the number of NAL's losses we are experiencing.

2341             I would also draw your attention to perhaps some other territories, when we hear Videotron suggesting that they are going to blast you the 120,000 subscriber mark in fairly short order, in fact more aggressively, more quickly than they had originally anticipated.

2342             In addition, if we look to Jim Shaw's comments at quarterly results with Bay Street, he too suggests that the timeline for him to drive the number of subscribers on his telephony service is far superior than what he had originally anticipated.

2343             I think all that points to the fact that there is indeed competition, it is aggressive and we are losing subscribers.

2344             MS YALE:  Does that respond to your issue?  I mean, what we are trying to address is the fact that there isn't inertia.  People are willing to switch, they are taking up the service and they are responding positively to the arrival of the cable companies in the markets in which they have chosen to enter.

2345             COMMISSIONER del VAL:  Thank you.

2346             I was just wondering whether you have any sort of numbers to back up this "there is no inertia" position?

2347             MS YALE:  Well, I mean, we are not saying there is no inertia.  The issue is:  Are customers willing to switch?  If you look at their actual behaviour, at the end of the day there is a simple question:  Do they take up the services of a competitor or don't they?  Every cable company has indicated that the take‑up rate has exceeded ‑‑ has exceeded their expectations.

2348             So there may be some customers for whom inertia is an issue and they are the ones who haven't yet switched ‑‑ thankfully for us, not everybody is leaving ‑‑ but at the end of the day the issue for you is:  Is there meaningful competition in the market such that competition rather than economic regulation is going to protect the interests of users.

2349             So not everybody has to switch.  It is just a question of whether there is a meaningful number of customers who are willing to switch to the services of a competitor.  The answer is clearly yes, given the entry that has taken place and the response to that entry that has occurred.

2350             COMMISSIONER del VAL:  I guess that leads to the next question, which yesterday I also asked Aliant.  I'm just taking a snapshot of the country today.  I'm not saying in the future, particularly with the introduction of VoIP and your position regarding VoIP.  I acknowledge that.

2351             But if we take a snapshot of the country today, why, in your view, are other parts of the country so behind Aliant's territory in the competition?

2352             MS YALE:  Let me just start by saying one thing.  We are not saying that the forbearance test is met today.

2353             COMMISSIONER del VAL:  No, I recognize that.

2354             MS YALE:  Our position is that it is time to set the test today so that we don't have this debate and delay forbearance when the time is right.

2355             COMMISSIONER del VAL:  Yes, I agree.

2356             MS YALE:  So I just want to be clear.  We are not saying that we are there, we are re saying the time is right to establish a test.

2357             As far as entry is concerned, EastLink made a decision to go in using circuit switch technology rather than wait for the evolution of IP.  So that decision to enter early was based on the fact that they decided to enter on a non‑IP basis rather than wait.

2358             Interestingly, in addition to that they also made a decision ‑‑ because of the way the cable company back office works they decided not to get into some of the billing issues that some of the later entrants have faced in terms of being able to offer local service with different calling features.  So you could take calling features one at a time, two at a time in packages, or deal with the rating of long distance calls, for example.

2359             EastLink said we are going to keep it simple.  So it was everybody got local service, all the features, for a single price, which meant that they could kind of leapfrog ahead of some of the other entrants in terms of needing to adapt their billing systems to accommodate some of the things that traditional telephone companies do, and they sent out their long distance traffic to a re‑biller to figure out how to bill for it.

2360             So they resolved some of the back office issues that allowed them to enter more quickly.  That was their business decision that they felt was appropriate for their marketplace.  You would have to ask Rogers and Shaw or Videotron or Cogeco why they chose not to enter that way.

2361             They have clearly made a decision to enter on an IP‑basis, and what the real issue now is, as they choose to enter is the competitive market emerging in the way the Commission hoped.

2362             COMMISSIONER del VAL:  Thank you, that is helpful.

2363             In your final argument again, on page 22, paragraph 62, the second to the last sentence, you are saying "they" referring to the cable LECs:

                      "... do not require a period to demonstrate the quality of their services".  (As read)

2364             I'm just wondering what led to that conclusion.  Is the suggestion that customers will scrutinize the quality of their service less?

2365             MS YALE:  No, more.  I think the issue was they wouldn't take a risk on introducing something unless they were sure it would be successful and of high quality because they have a brand to protect given their presence as incumbents in the cable distribution market.  In the case of Shaw, they have more than half of the market for high‑speed internet in B.C. and Alberta.

2366             So when you have a reputation and a brand already in the marketplace, adding the third element of the triple play you are going to make sure that you don't dilute the quality of your brand in the way you do that.

2367             COMMISSIONER del VAL:  Okay.  Thank you.

2368             I believe it is in the same final argument on page 21, paragraph 80, I think it says ‑‑ sorry, this is in Rogers final argument.  I will just read it to you:

                      "Rogers has limited access facilities into business locations, making extension of the network to business locations very expensive."  (As read)

2369             Do you agree?

2370             MS YALE:  That may be true for them.  The issue is entry, where they choose to enter.  It is true that cable companies have historically not approached the business market, and certainly in B.C. and Alberta the competition we face in the business market is primarily from companies like Bell, MTS Allstream and Call‑Net, now Rogers.

2371             But at the end of the day every provider faced with declining revenues in their incumbent business, in our case wireline; in the cable companies cable television with the emergence of competition, has to look at a growth strategy.  Every business thinks about what is the most appropriate growth strategy, whether it is adding products and services to their existing customer set or branching into new lines of business like cable companies getting into the business market.  Each company is going to develop the growth strategy that they think is a winning bet for them.

2372             COMMISSIONER del VAL:  Thank you.

2373             In Rogers' final argument on page 18, paragraph 71, they are talking about the price differential between VoIP service and basic circuit switch local exchange service and that that price differential means that customers who do not readily subscribe to high‑speed internet access are less likely to switch to VoIP service.

2374             Do you agree?

2375             MS YALE:  Sorry.  What you are saying is that if you don't already have high‑speed internet you are not as likely to take up Access independent voice over IP?

2376             COMMISSIONER del VAL:  Yes.

2377             MS YALE:  Well, it is kind of true.  We have always said that Access independent voice over IP appeals to those who already are on a high‑speed internet connection.  It is an add‑on, if you will, as an application to those already making the investment or spending the money, if you will, on a high‑speed connection, absolutely.

2378             COMMISSIONER del VAL:  Okay.

2379             Do you agree, then, with their apparent conclusion that accordingly VoIP providers will not be in a position to discipline the exercise of market power by the ILECs?

2380             MS YALE:  That conclusion I disagree with completely and I will let Dr. Crandall start on that.

2381             DR. CRANDALL:  In order to defeat a price increase by an incumbent or anyone else in the marketplace, not everybody has to switch, and with 50‑60 percent of the market able to obtain VoIP services ‑‑ I don't know exactly what the number is now in Canada ‑‑ certainly only a small share of those would have to switch in order to discipline a price increase.

2382             COMMISSIONER del VAL:  Thank you.

2383             Turning to the issue of consumer safeguards I believe it was Professor Townley who suggests that in low density areas possibly overlooked by competitors an incumbent may not be able to raise prices.

2384             Do you agree?

2385             MS YALE:  Can you say that one more time?  It is really hard to get that out of context.

2386             COMMISSIONER del VAL:  Okay, that in low density areas possibly overlooked by competitors an incumbent may not be able to raise prices.

2387             MS YALE:  I'm not sure what that means.  Our ability to raise prices right now is constrained by regulations, so I have no idea what that is about.

2388             Unless you are talking about ‑‑ I imagine that hypothesis there is the pockets?

2389             COMMISSIONER del VAL:  Yes.

2390             MS YALE:  So if you adopt a larger geographic area where there are unserved pockets, the issue is would we increase prices where we are forborne in unserved pockets.

2391             I take it that is the hypothetical?

2392             COMMISSIONER del VAL:  Yes.

2393             MS YALE:  The question that was posed earlier today in that regard ‑‑ it is one of the reasons we think that is the wrong geographic area.

2394             But assuming for the moment that was the test that was adopted from a geographic perspective, we would have no problem giving an undertaking not to increase prices in the unserved pockets.

2395             COMMISSIONER del VAL:  All right.  Thank you.

2396             In the forborne environment do you foresee selling basic local exchange service on a standalone basis?

2397             MR. Di BLASIO:  Absolutely.

2398             COMMISSIONER del VAL:  Great.

2399             If the Commission were to maintain section 24 conditions of service and 27(2) of the Telecommunications Act to ensure access for disabled and imposes these or other conditions on all service providers, would competition be impeded in any way?

2400             MS YALE:  No, and our view is that the social obligation should be imposed on a nondiscriminatory basis to all providers.  That in fact ensures that competition is equally available to all customers.

2401             COMMISSIONER del VAL:  If it were not imposed on all providers equally, what would be your view?

2402             MS YALE:  Are you saying it would be imposed only on the ILECs in that scenario?

2403             COMMISSIONER del VAL:  Yes.

2404             MS YALE:  I think we would be of the position, similar to what was addressed by Aliant, that it seems from a customer perspective, not extending the benefits of competition, two customers who have particular needs doesn't seem appropriate to us.  Obviously, if there are differential costs associated with having those obligations relative to our competitors that would put us in an unfair competitive situation.

2405             COMMISSIONER del VAL:  Thank you.

2406             This is just a pure clarification.

2407             What is your position on re‑regulation?

2408             MR. GRIEVE:  Re‑bearing?  Our position ‑‑

2409             As Janet just said, we should be so lucky as to be in the position to have to think about it.

‑‑‑ Laughter / Rires

2410             MR. GRIEVE:  We have said in this proceeding and in other proceedings including IXPL that if you have a threshold of the bright‑line test and you pass the bright‑line test you get forborne and then you fall back below the bright‑line test, then before the Commission re‑regulates we should have a proceeding where we would have to show cause why the Commission shouldn't re‑regulate.  You can see then a number of different factors, especially with our bright‑line test which is sort of specifically focused on a cable company.

2411             COMMISSIONER del VAL:  So you think still the 5 percent would be the trigger?

2412             MS YALE:  As the Chairman posed earlier, the question is what happens if you fall below the 5 percent, if through territory expansion or whatever.  I suppose the Commission would have to look at it case‑by‑case and consider whether or not there was a market power issue that would suggest there was a need for regulation.

2413             I mean, at the end of the day the issue is does the incumbent have the ability to exercise market power in the market in question?  This is a test as an alternative to Decision 94‑19 to assess that.

2414             At the end of the day it is the existence of market power that is really the fundamental question that has to be addressed and this is just a means to that end.

2415             COMMISSIONER del VAL:  This is not a trick question.  I am just trying to understand.

2416             So for forbearance the 5 percent would be more automatic than, say, re‑regulation?

2417             MS YALE:  Yes.

2418             COMMISSIONER del VAL:  Okay, good.  Thanks.

2419             Questions for the experts.

2420             A lot of what I am reading we are talking about really it is very focused on the competition that the cable companies will provide in terms of wireline local exchange service.

2421             Is the best that we can hope for in a wireline, in terms of competition in the wireline local exchange market, is a duopoly?  Is that the best that you think we will do?

2422             MR. CRANDALL:  At first it is obviously going to be those people who are selling other similar services like high‑speed data and video and have a network rolled out.  Things are changing so quickly that I wouldn't think that you have to despair in that fashion.

2423             It is possible that the electric utilities would be in this game too.  My own view is ‑‑ but I am not an engineer nor a crystal ball gazer ‑‑ is that it is more likely to be wireless‑based in the future.

2424             But if you have two full facility‑based carriers going at it over these services, I don't think you need to worry about that awful word "duopoly".  You have it now in broadband and it works very well.  No one is engaging in predation.  There is no concern that they are colluding or anything of that sort.  We have it in other markets and it works perfectly well.

2425             The reason it didn't work in cellular, at least in the United States, is that they were guaranteed protection by the regulator from entry.

2426             COMMISSIONER del VAL:  But I would have to worry more about coordinated efforts in a duopoly than, say, where there are more competitors.  Right?

2427             MS YALE:  We are not positing a duopoly.

2428             COMMISSIONER del VAL:  No.

2429             MS YALE:  There are already more than two providers in the market.  What we are positing for this simplified test is a full facilities‑based competitor.

2430             There isn't a duopoly today and so I am having a hard time imagining a scenario where there are, for any given customer given the existence of 20 or 30, however you count, Access independent voice over IP providers, three are lots of choice in the marketplace today.

2431             What we were focused on is actually making sure that that alternative ‑‑ that that alternative wasn't a provider that depended in any way on our infrastructure in order to compete.

2432             COMMISSIONER del VAL:  Thank you.

2433             I believe this is for Dr. Weisman.

2434             You were talking about the forbearance principles and then that premature forbearance is better than delayed forbearance.

2435             Can you explain why?

2436             DR. WEISMAN:  Yes.

2437             First of all, what my statement says is that forbearance should occur at the appropriate time based on an objective assessment of market conditions, but it is likely that the errors involved in ‑‑ or the risks involved in forbearing too late are greater than the risks involved in forbearing too early.

2438             The Commission itself recognizes this principle in essence in 94‑19 when it recognizes that residual levels of market power are not sufficient for regulation to continue.  There are very high costs associated with regulation in the form of pegging prices or quality levels at non‑market levels, diversion of managerial attention; the cost of the regulatory process itself.  The higher are those costs, the more a cost‑benefit test would justify earlier rather than later forbearance.

2439             But again I will come back to my main message, which is it should occur at the appropriate time based on an objective assessment of market conditions.

2440             COMMISSIONER del VAL:  So then in your view, in terms of the interplay between the principles of balance between ‑‑ I think it was principle No. 2 and then No. 8 was premature versus delayed, and the 5 percent ‑‑ so you think at 5 percent we are at the best equilibrium?

2441             DR. WISEMAN:  Well, I wouldn't call it an equilibrium.  Again, the 5 percent is simply a marketplace acknowledgement that customers are switching and we have established that these products are substitutes.

2442             Again, to the extent that market share measurement in this environment has any significance the appropriate way to measure that is on the basis of capacity.  Under those conditions, as both the Competition Bureau has recognized, and recently to go down south across the border the FCC has recognized in its Cingular merger proceedings that capacity is the right way to look at that question.

2443             Again, the literature is very clear on this point that in a regulated environment to the extent that regulation is effective there is no relationship between market share and market power, but if you are going to measure it capacity is the appropriate metric.

2444             COMMISSIONER del VAL:  Good.  Those are my questions.  Thank you for your time.

2445             THE CHAIRPERSON:  Thank you.

2446             Commissioner Cugini.

2447             COMMISSIONER CUGINI:  Good afternoon.

2448             Ms Yale, in your opening comments today you cited the example of how forbearance of terminal equipment has provided consumers with choice.  ARCH, however, points to exactly the same example to demonstrate how deregulation of terminal equipment has left persons with disabilities with almost no choice.

2449             I take note of your response to Commissioner del Val's questions regarding this issue, but I'm wondering if you have any suggestions or recommendations on what mechanisms or safeguards we can put in place to ensure that persons with disabilities enjoy as much choice as all other consumers in a forborne market?

2450             MS YALE:  I think my response would be that all of the social obligations that the Commission feels are important should be applied to all competitors in the marketplace to ensure that customers, notwithstanding their abilities, are able to fully benefit from choice.  We are completely supportive and distinguish between social regulation on the one hand and economic regulation on the other.

2451             COMMISSIONER CUGINI:  I noted in your response, in fact, to ARCH's interrogs that your list was quite extensive.  They may argue that it is not exhaustive, but it is extensive nonetheless.

2452             Would you see those measures being adopted by all local exchange services or carriers?

2453             MS YALE:  I don't have the list in front of me, but whatever the obligations are we think they should be applied equally to all competitors and we are completely supportive of that.

2454             COMMISSIONER CUGINI:  Thank you.

2455             THE CHAIRPERSON:  Thank you.

2456             Commissioner Williams.

2457             COMMISSIONER WILLIAMS:  Good morning, Ms Yale and panellists.

2458             Recognizing the lack of crystal ball gazers on your panel, and I guess on this Panel, if we use the CCTA‑proposed criteria for implementing forbearance can you give us your opinion and describe the effect that this decision would have on your business in the short to medium to long term?

2459             Specifically, how quickly do you anticipate being in a position to apply for forbearance if the CCTA criteria was implemented by the CRTC and what competitive responses would Telus exercise before and then after forbearance has taken place?

2460             MS YALE:  It is kind of hard to predict what our competitors are going to do in terms of the rollout of their service.

2461             There is no doubt that their ability to enter is unconstrained wherever the cable operator has serving territory.  The issue is whether they choose to enter.  There is no obligation for them to enter, they have to decide to enter as part of their growth strategy, as part of their bundling strategy and so on.

2462             I'm going to turn it over to Fred to talk about what he sees as their efforts to date.  The main caveat that I would suggest to you is that if you have a very large geographic area with a very high percentage threshold it is going to take a very long time until we get there.  The cable industry has it in its power, through selective rollout, to ensure that they get close but don't quite attain the threshold that would allow us freedom from economic regulation.

2463             In terms of timing, maybe I can turn it over to Fred to give you a sense of that.

2464             MR. Di BLASIO:  I believe, given the course and speed of what we are seeing the marketplace today, you know, their prediction is that it is roughly a five‑year time horizon for them to hit their 30 percent benchmark.  That would have, you know, a significantly ‑‑ would put us into significant difficulty with respect to the current rules in terms of the way they are approaching the market, which is really a bundled approach, trying to own the home and the rules, as they currently stand, preventing us from going back and maintaining or actually winning back the relationship with our customers on forborne services, such as internet and eventually TV.

2465             COMMISSIONER WILLIAMS:  So during this five‑year timeframe what types of competitive responses would Telus be exercising to try and maintain their I guess hold on all or part of the home that we are talking about?

2466             MS YALE:  Well, let me just come at that ‑‑ our growth strategy with respect to the consumer market is clearly to add television service to our bundle.

2467             One of the frustrations that we face is as an entrant in that market the customers that are most likely to try to new technology and to switch may be the ones that are going to Shaw right now and, because of the winback restriction, we have a no contact rule for one year.  So we launch TV service, the very customers that are most interested in switching are the very ones that we can't contact.  So that is a huge impediment to us from a marketing perspective.

2468             If you look at the range of tools that we could have in our toolkit, it is going after customers that are most interested in trying new things.  As I have said, the winback rule prevents that; offering promotions as part of our launch strategy.  The promotion rules kind of prevent that; and being able to respond in pricing terms where there is competitive entry. We can't do that because the rules require us to reduce prices across entire bands in order to respond to selective entry by the cable companies.

2469             So the concern we have is that the cable entry strategy, by being selective in their entry, by targeting the customers that are most willing to switch, given the rules we face give us very little to respond with.  That is the reason why we have suggested that those marketing restrictions, particularly the winback rule and the ability to respond selectively in terms of prices, be relaxed.

2470             As we have said, in a pre‑forbearance environment there is a difference between responding in terms of lower price in a true competitive fashion and responding in what might be considered too low a price, anti‑competitive fashion.  That is why we have suggested that in a pre‑forbearance environment the imputation test, the price floor test, would ensure that our price responses would not in fact be anti‑competitive, but would in fact allow customers to really benefit from competition by seeing the best offers, best offers from both providers.

2471             COMMISSIONER WILLIAMS:  On the top of page 16 in this morning's oral presentation you talked a bit about de‑averaging rates in response to competition where it exists.  To quote:

                      "In other words, Telus should be able to reduce prices in Calgary and Edmonton in response to Shaw without having to reduce prices across the rest of Alberta."  (As read)

2472             Why should the smaller centres in Telus territory effectively subsidize Telus' competitive response in the larger centres?

2473             MS YALE:  Well, they wouldn't be subsidizing.  Prices wouldn't go up.  Prices wouldn't go up.  The issue is, when do prices come down?

2474             We understand that the Commission would like us to reduce prices across all of band A and band B, which means basically not just Alberta, actually it is most of B.C. and Alberta.

2475             COMMISSIONER WILLIAMS:  No.  I'm just using your example.

2476             MS YALE:  The problem with that is that is just not the way competitive markets work.  There is an assumption behind that question that charging different prices is somehow inappropriate.  That is the way competitive markets work.  That is the way other markets work, whether it is wireless, high‑speed internet, cable, prices aren't the same in every community.  That is because competition and the competitive circumstances are different.

2477             The real issue is:  Is the price reduction anti‑competitive.  We completely agree that we should meet the price floor test to make sure that the price reductions that we choose to offer are not anti‑competitive in a pre‑forborne environment.

2478             COMMISSIONER WILLIAMS:  Would not the economy of scale enjoyed in the larger communities provide that sort of buffer that you are seeking by being able to de‑average prices?

2479             MS YALE:  I don't think I understood the question.

2480             COMMISSIONER WILLIAMS:  A larger centre providing more revenue, more opportunity to reap revenue off a network, like a basic economy of scale  opportunity that the larger centres provide over the smaller centres.

2481             MS YALE:  So that we should extend the lower prices to those smaller centres?  Is that what you are saying?

2482             COMMISSIONER WILLIAMS:  No, that the economy of scale gives you enough of an opportunity that you don't need to lower the prices in competitive centres.

2483             MS YALE:  That has to do with our costs.  The fact of the matter is, whatever our costs are, if the competitor is offering lower prices the customer is going to leave, right, and we can't match their offer.  The problem right now is we can't match the offers because we are not allowed to lower our prices unless we do it across all bands.

2484             The other point, from a competition law perspective the irony is that if you actually lower prices in communities before the arrival of the entrant you actually discourage entry in those communities.  So it is a bit of a public policy trade‑off, because what you want ‑‑ it is the high prices that encourage entry.

2485             COMMISSIONER WILLIAMS:   Correct.

2486             MS YALE:  So if you lower prices before the entrant comes in you actually increase the barrier to customers switching before the arrival of the entrant, as opposed to letting the entrant come in with the lower price and then only responding with lower prices after the entrant has arrived.

2487             So we are not actually trying to lower prices before entry, what we are trying to do is to respond to entry where it takes place.

2488             COMMISSIONER WILLIAMS:  Okay, thank you very much, Ms Yale.

2489             THE CHAIRPERSON:  On that point, I think you have summarized well the concern about the accretion point, because in that new accretion area that the ILEC has already served but the cable company enters, if you are forborne on the basis of it being merely an accretion to the larger area you could do that, i.e., lower prices before the entrant has really entered.

2490             MS YALE:  No, their extension of their serving territory would be the trigger point, because until they expanded the territory to include that subdivision we wouldn't be forborne in that area.

2491             THE CHAIRPERSON:  Is it the announcement that ‑‑

2492             MS YALE:  No, it is offer.

2493             THE CHAIRPERSON:  Well, it is offer and then at what point do you measure the actual service take‑up in that accreted area?

2494             MS YALE:  I'm having a hard time following, I'm sorry.

2495             THE CHAIRPERSON:  I guess it is part of the ‑‑

2496             MS YALE:  Because of course we have to do it by postal code, right.  That is the way we would do it.

2497             THE CHAIRPERSON:  Right.

2498             MS YALE:  So if a portion of an exchange is served by a cable company, in the example you are positing, and within that portion we are forborne because the cable company is already serving, right, and then in another portion ‑‑

2499             THE CHAIRPERSON:  Maybe it is our definition of "serving".

2500             I was looking back at your written argument at paragraph 8 where you refer to "its serving area" and then you have defined a number of terms but you don't define that one.  I guess in the example again of the accreted area, let's call it, what does "its serving area" really mean?  You say "offer", but offer can mean before any take‑up.

2501             So an announcement by a cable company that it is now going into a new area that you already serve, is it at that point that you are forborne from that area, in which case the very problem you just discussed with Commissioner Williams, as you said, is a real possibility?

2502             Unless you hive it off and say, "Well, now we are going to start the count again for that accreted area" and then it becomes a little clearer," but then you get into the prospect of immense numbers of boundary disputes, it seems to me, and so the administrative issues comes up again.

2503             I don't want to rehash the problem again, but ‑‑

2504             MS YALE:  No, I understand.

2505             THE CHAIRPERSON:  ‑‑ I advise you to kind of ‑‑

2506             I don't think in your argument you responded to the points that Commissioner del Val raised and discussed with Mr. Woodhead, the response to the Rogers 210 interrogatory and the administrative and related points dealing with your proposal.  I think it would be helpful at some point if you tried to deal with them very precisely and answer some of these so that we could take what is a pragmatic proposal and work with it in better way.

2507             MS YALE:  If it would be helpful, I think rather than do it on the fly we would like to do an undertaking and give you a detailed response as to how that would be done in a simple way that didn't make the entire thing collapse from complexity.

2508             THE CHAIRPERSON:  Given that you show a lot of, as my colleague would say, sang froid, I am leaving it to the ‑‑ you are basically saying to the competitor "You dictate the terms and we will kind of live by them."  What that really entails in practice and how we can avoid endless numbers of "We are serving the area", "We are not serving the area", what the boundaries actually are.

2509             MS YALE:  Right.

2510             THE CHAIRPERSON:  Because one thing we know this is going to evolve and roll out and is not going to be statically opposite, it is going to be rolling and dynamic.  In that context we need to have some clarity, which is I guess why the 94‑19 test discusses defining a geographic service market.

2511             MS YALE:  Okay.  Right.

2512             THE CHAIRPERSON:  So you are trying to just sort of short circuit.  I'm not saying it in a negative way, perhaps in a helpful and pragmatic way, but you still need to come to grips with all of these problems.

2513             MS YALE:  Which obviously is more of an issue in a high growth area than in a stable community.  So we will put our minds to it.

2514             THE CHAIRPERSON:  Even in a stable community, I mean it depends on where the cable industry and a couple of other competitors choose to enter next and how you apply your test for forbearance so we know whether forbearance agrees or it doesn't.

2515             MS YALE:  We will respond to that by way of an undertaking.

2516             THE CHAIRPERSON:  Thank you.

2517             COMMISSIONER FRENCH:  On the same subject, if I may, because I don't want to ask you this question at the end because we are running out of time, an undertaking to deal with the question of how the cableco games the system as you hypothetically evoke.

2518             I want to know how the cableco deals with his own existing structure of his network, his service territory configuration, your exchange boundaries, his price and service bundling and all the marketing expenses he is going to have to game the system so that they don't get too many takers in any one piece of geography that belongs to you.

2519             I know you are not going to answer me know.  It is just I would like to hear it, because I don't believe it at the moment.

2520             THE CHAIRPERSON:  Commissioner Cram.

2521             COMMISSIONER CRAM:  Thank you, Mr. Chair.

2522             I must say that when you were talking about the chaperoned dance I sort of felt like Aunt Mildred at the prom.  I'm wondering if Aunt Mildred in the form of a price cap is anticipated by you to stay around.

2523             I'm looking at our interrogatory to you No. 503.  Maybe you can just take a look.

2524             MS YALE:  It's on its way.

‑‑‑ Pause

2525             MS YALE:  Which part are you focusing on?

2526             COMMISSIONER CRAM:  It is the second paragraph in A and B.

2527             It looked to me like you were actually anticipating that even in a forborne market ‑‑ because the question was in the situations occurring in a forborne market ‑‑ that you are anticipating the price cap will remain?

2528             MR. GRIEVE:  I think we were getting at the pockets issue here.  So if you had a situation where if you did go to something like an exchange and you had pockets, we would anticipate that the price cap mechanism would stay in place to regulate the rates and the pockets.

2529             COMMISSIONER CRAM:  So the unserved?

2530             MR. GRIEVE:  Unserved by the facilities‑based competitor until there was sufficient competition there by other means that we felt we could have the 94‑19 test apply.

2531             COMMISSIONER CRAM:  Okay, until you do 94‑19?

2532             MR. GRIEVE:  Right.

2533             COMMISSIONER CRAM:  Now I am really lost.  This is in a forborne thing already.  It is in a forborne market, you are talking about the orphans, the price cap would exist for them ‑‑ help me here ‑‑ but then you would go to a real forbearance under 94‑19 and then there wouldn't be a price cap?

2534             MR. GRIEVE:  It depends whose test it is.

2535             MS YALE:  Our test doesn't have pockets.  In our test either there is competition or there isn't.  Right?  So the way price caps would work is, where there is forbearance that comes out of price caps, and where there isn't forbearance price caps still govern as the provisions and the terms and conditions of service to those consumers.

2536             So we don't have a pockets problem.

2537             COMMISSIONER CRAM:  Yes.  No deep pockets, no nothing pockets and no Aunt Mildred.

2538             UNIDENTIFIED SPEAKER:  Complete deferral.

‑‑‑ Laughter / Rires

2539             COMMISSIONER CRAM:  When you are talking about footprint ‑‑ and I need maybe a little help from you here ‑‑ is BellWest a full facilities competitor?

2540             MR. GRIEVE:  That is a really good question.

2541             MS YALE:  He has been waiting.

2542             COMMISSIONER CRAM:  Oh, you have been waiting for this one?

2543             MR. GRIEVE:  No, no.

2544             BellWest is building and has built interexchange facilities, interexchange and some intraexchange facilities, in Alberta mainly and in B.C.  It has built facilities into a number of large buildings in Alberta and British Columbia.  The rural area in Alberta is SuperNet, that is actually owned ‑‑ well, it is IRU'd to the provincial government on a long‑term IRU, but it is basically controlled by the provincial government.  It is not controlled by Bell, it is not their network.

2545             So the area in between, I guess from the Medicine Hat/Lethbridge area up to Grand Prairie, that area there, there is an alternate network for interexchange and a lot of intraexchange.

2546             The difficulty with a competitor like Bell is that we would probably be using the 94‑19 test in the case of Bell, because in certain situations they use their own access facilities, plus their own network, but their own sort of last mile or local loop kinds of facilities into buildings, and in other cases they lease those facilities from us.

2547             At some point there will come a critical mass where Bell is using mostly its own facilities and only using ours as a temporary measure the way the Commission envisioned in 97‑08, the local competition case, as a temporary measure to get the customer and then build the facilities later to serve those, in which case our investment or our network gets stranded unless we can find another use for it.

2548             So is Bell a full facilities‑based carrier?  I wouldn't say they are there yet, but in time I think they probably will be, especially in Alberta and the Lower Mainland in B.C.

2549             COMMISSIONER CRAM:  So then that gets me to definition.  "Full facilities" means 100 percent?

2550             MR. GRIEVE:  Yes.  The way we have defined it is someone who uses their own network to take the service from the customer's premises to their local switch equivalent and could lease from someone other than the ILEC for other things as Shaw does with BellWest.  They lease facilities from Bell to do the interconnection with Telus, for example.  In other words, Shaw doesn't directly interconnect with us, they go through BellWest.

2551             So the trick is that all of those facilities are independent of us other than the interconnection for the purpose of exchanging calls.

2552             MS YALE:  But to be clear, the test is primarily an alternative to Decision 94‑19 for the consumer market.

2553             COMMISSIONER CRAM:  Oh, okay.  So you weren't really talking about ‑‑

2554             MS YALE:  We were focused on that.  So if and when it does become relevant for the business market, so be it.  We didn't mean this as a substitute for Decision 94‑19, you know, replace it, but as an alternative where it made sense, so that there would be a simple clear test where it made sense to use it.

2555             From our perspective that is primarily the consumer market.

2556             COMMISSIONER CRAM:  If you could do it by undertaking in case Aunt Mildred doesn't like the footprint, could you let me know the number of exchanges in your territory; how many A band you have, B band, the average number of subs per exchange, and can you give me a map of your LIRs?

2557             MS YALE:  Yes, we will do that.

2558             COMMISSIONER CRAM:  Thanks.

2559             I have one more question.  Sorry?  Yes, Mr. Grieve.

2560             MR. GRIEVE:  We can give you a map of the LIRs with the cable serving areas also on the same map ‑‑

2561             COMMISSIONER CRAM:  Overlap, yes.

2562             MR. GRIEVE:  ‑‑ to show you how big the pockets would be in Alberta.  This is not Atlantic Canada and it's not Ontario, Southern Ontario.  This is the Prairies.  It is quite different.

2563             COMMISSIONER CRAM:  It is big country, I know.  Yes.

2564             My last one is, everybody has been relying it appears a lot on what we did in cable a long time ago, before any of us were on the Commission, and yet at the same time, on the other hand, you want us to get rid of the winback, no contact restrictions, which we have kept in cable.  Three months.

2565             MS YALE:  Not for single family.

2566             COMMISSIONER CRAM:  Single family we have gotten rid of, okay.

2567             MS YALE:  Right.  It is a very, very limited ‑‑

2568             COMMISSIONER CRAM:  The MDUs.

2569             MS YALE:  It is just MDU's.

2570             COMMISSIONER CRAM:  Thank you.

2571             Thank you, Mr. Chair.

2572             THE CHAIRPERSON:  Thank you.

2573             On the question of the NALs and NALs equivalent, I assume that you have excluded mobile wireless, but you would not exclude fixed wireless?

2574             MR. GRIEVE:  Correct.

2575             THE CHAIRPERSON:  Thank you.

2576             Commissioner Duncan.

2577             COMMISSIONER DUNCAN:  Thank you.  I have a number of questions.  Hopefully it won't take very long though.

2578             Just on the assumption that wireless were to be, if not today at some point, taken into consideration in calculating your market share loss, would you think it appropriate to include or exclude the wireless‑only subscriber or the wireless subscribers that are lost to Telus themselves?

2579             MS YALE:  They should be excluded.

2580             COMMISSIONER DUNCAN:  From the calculation of market share loss.  In other words, it wouldn't be added to the loss to the cablecos for example.

2581             MS YALE:  Sorry, yes.  All wireless only would be considered lost.  We don't agree with the market share loss approach, but if you went that way it wouldn't matter to whom they went.

2582             COMMISSIONER DUNCAN:  I'm just having a little bit of problem on why we would leave the Telus‑only ones in there, the ones that went to Telus.

2583             MS YALE:  Because what you are looking at is our market power in the wireline market.  So the fact that someone has chosen among competitive wireless providers to use Telus doesn't tell you anything about our market power in the wireline local exchange.  What we are looking at is whether you need economic regulation for wireline primary exchange service.  So it is really about that and that only.

2584             COMMISSIONER DUNCAN:  All right.  Thank you.  That is the answer we got yesterday from Aliant.  That is it.

2585             On the second lines, I think Aliant said yesterday that that was a very small portion of their business, 2 percent I believe they said.

2586             Is that similar in your situation?

2587             MR. Di BLASIO:  The second line market we guesstimate roughly 5.7 percent or so.

2588             COMMISSIONER DUNCAN:  Thank you.

2589             If I understood you earlier, Ms Yale, you said you would give an undertaking on behalf of the company not to increase prices in that portion of a forborne market that was not served by a facilities‑based competitor.

2590             I just wanted to clarify if that commitment applied only if the geographic market was defined as the exchange or if it applied as well if it was defined as a local calling area or an LIR?

2591             MS YALE:  It would apply where there were pockets.  In any of those definitions there would be pockets, so yes, subject to whatever price cap rules would allow prices to move generally.  I don't want to ‑‑

2592             COMMISSIONER DUNCAN:  Yes.  But you wouldn't increase them, at any rate, unless there were rules that allowed you to do that.  Thank you.

2593             The re‑regulation, I will just speak about the re‑regulation.  Just specifically, because I understand your process that you have suggested and I think it is reasonable that we would have some type of discussion if there was to be a re‑regulation scenario, but what would trigger the re‑regulation?  Would it be when your market share loss fell to 4.75 percent or 3 percent?

2594             What do you see being a trigger point?

2595             MS YALE:  Well, it could be on complaint.  I mean, if there was a bright‑line test that determined deregulation, then falling below that threshold could create a circumstance where you might want to ask us to show cause why there shouldn't be re‑regulation, but there could be other circumstances, because at the end of the day the question is:  Is there market power?

2596             If for any reason the Commission was concerned that there was market power being exercised by an incumbent, the Commission would have the ability to ask that incumbent to show cause why there shouldn't be regulation.

2597             COMMISSIONER DUNCAN:  I gather that the subsequent hearing or whatever, public notice, whatever process that we would have, would determine if there was market power, but just as a trigger point, just as a number, just like you are suggesting the 5 percent for the deregulation.

2598             Do you have a number in mind that would prompt us to look?

2599             MS YALE:  No.

2600             COMMISSIONER DUNCAN:  Thank you.

2601             That's good.  As far as selecting the LIR as CCTA has suggested ‑‑ I suppose I know the answer to this question even as it is ‑‑ would you feel more comfortable if the winback rules and the promotion rules were adjusted and would it affect your ability to compete in an LIR, for example, if those rules were removed even though the market wasn't forborne?

2602             MS YALE:  Getting rid of the marketing restrictions improves our ability to compete irrespective of the market.  If there is no competitor, obviously it doesn't really apply.  So the larger geographic market really is a problem for us because of the pockets of customers who may not have a facilities‑based competitive alternative, in which case there is no one to winback from in the same way.

2603             So I guess at the end of the day, from our perspective, dealing with those marketing restrictions is about ensuring that consumers have the full benefits of competition as competition emerges.

2604             I'm not sure if that is an answer to your question, but I am not sure the geographic market affects that.  What it really affects is whether or not, from a Commission perspective, you have parts of exchanges that are not overlapped by the facilities of a cable company, whether it is an exchange or an LIR.

2605             COMMISSIONER DUNCAN:  I think if I'm understanding correctly then, if the LIR was determined to be the geographic market it would be less of a problem, obviously for you, if the winback and promotion rules were eliminated or minimized.

2606             MS YALE:  I think the problem is the same.  I think what I'm trying to say is the problem is the same, because it is our ability to respond to cable companies that is at issue, and where they offer service to customers we want the ability to respond to them.  Our ability to respond is impacted by those marketing restrictions in terms of our ability to offer benefits of competition to customers.

2607             What really changes with the size of the geography is the ability to attain the percentage required for deregulation, because we have to lose more customers than the threshold in the pockets where competition exists to offset the fact that there may be no competition in the pockets of the exchange or the LIR where there is no competitive alternative.

2608             COMMISSIONER DUNCAN:  I take your point.

2609             That's it, Mr. Chairman.  Thank you.

2610             THE CHAIRPERSON:  Thank you.

2611             Commissioner Langford.

2612             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.  I will try to be brief because we have all had a long morning.  I'm afraid I have a couple of questions and I'm not going to see you folks again.

2613             The first one is to you, Dr. Crandall.  This will be a bit of a potpourri because I am just trying to pick up some points.

2614             I think you said, Dr. Crandall, in response to somebody's question sometime today, in talking about switching in the market, you said something like if 50 percent of users are able to switch, then only a small percentage would have to switch to discipline the market.

2615             Is that more or less what you said?

2616             DR. CRANDALL:  Well, less in all of them.  I don't know what a small percentage would be.  It depends on the price cost margin, but there is a calculation you could make on that.  Not all of them would have to switch.

2617             COMMISSIONER LANGFORD:  No, I think you said small percentage.

2618             DR. CRANDALL:  Okay.  I don't know.  Without knowing what the price cost margin is, I'm not sure.

2619             COMMISSIONER LANGFORD:  Would five do it, under your scenario?

2620             DR. CRANDALL:  As I say, we could give you a set of calculations under alternative costs, price costs margins, if you like.  It is something that has to be calculated.

2621             COMMISSIONER LANGFORD:  Let's go to the other side of it.  If we don't know the small number, the big number you used was 50 percent.  How far down could we go on that number?

2622             DR. CRANDALL:  As I say, I don't know.  It depends on the price cost margin.  I did say 50.  We were talking about 50 percent have access to broadband.

2623             COMMISSIONER LANGFORD:  Right.

2624             DR. CRANDALL:  I was told by my colleague here that it is now 60 percent in Canada, so we are working with 60 percent rather than 50 percent.

2625             COMMISSIONER LANGFORD:  Are you familiar with the test partially upon which I think Ms Yale said she was either relying on or inspired by, which was the cable test which roughly says if cable is available to 30 percent of the market ‑‑ sorry, if the alternative to cable is available to 30 percent of the market and 5 percent of the market has actually switched, we will forbear.

2626             DR. CRANDALL:  Yes, I am aware of that.

2627             COMMISSIONER LANGFORD:  Can you see something like that applying to the markets you are most familiar with, the Telus markets?

2628             DR. CRANDALL:  Well, the 30 percent, the two facilities‑based bright‑line test is much stronger than that.  It is 100 percent being available.

2629             COMMISSIONER LANGFORD:  I'm asking you if you could see this test applying in your markets.

2630             DR. CRANDALL:  Well, in the Telus markets, yes.

2631             What I'm saying is, it strikes me that it is very similar except that what Telus is proposing is 100 percent with at least 5 percent taking it up, yes.

2632             COMMISSIONER LANGFORD:  The problem we have is that when we applied that test and forbore from most of the cable companies, all of the prices went up ‑‑ it wasn't our best test I suppose we ever came up with ‑‑ and continued to go up a little bit and nothing has come down.

2633             So if you take kind of an example in the area around here across the river, you have ExpressVu or StarChoice available, and Rogers or Videotron, and ExpressVu's prices have gone up and Rogers prices have gone up after forbearance, they have all gone up.  No prices have gone down.

2634             So I'm just wondering why you are so confident that a small percentage would be enough to discipline the market.  It just hasn't worked for cable.

2635             DR. CRANDALL:  I'm not sure it hasn't worked and I'm not sure the alternative isn't worse.

2636             In the United States we have the same situation, except that we have tried on occasion to regulate the price of cable.  What has happened is that the price of cable has gone up, but not as rapidly as the number of channels have gone up.  What has happened is the quality of the service has improved.

2637             I think you have to be very careful about that.  I'm not saying that even today cable is perfectly competitive and there are no economic rents being earned.  In fact, in my appendix to the Telus June statement filing I conclude there are some rents being earned.  But it is far worse to try to regulate.

2638             The effects of trying to regulate on a per‑channel basis or for a given quality of service something as diverse in terms of the offerings of entertainment programming as cable offers is a terrible mistake.

2639             That is exactly Professor Weisman's point, that there are costs to regulation.  There are costs to reducing the development of new services and innovation.  The fact that you may not get a perfectly competitive outcome immediately is not sufficient reason to delay forbearance.

2640             COMMISSIONER LANGFORD:  Well, that sounds really great as part of a Ph.D. thesis or a paper given to a learned counsel, but the problem is we have to sell our product to Joe Lunchbucket, and Joe Lunchbucket, the average consumer, has seen prices go up where we have forborne, and they have seen prices go up where this magic rate of 5 percent has been hit, and they are seeing the ILECs in here now and the ILECs are saying, "Okay, we have some different market tests, but 5 percent is our magic number."

2641             You can't help but think that they would like us to look at the public interest, not in terms of theories that maybe could be worse if we hadn't applied them, but in terms of reality.  I find that what you are telling me is cold comfort for these people.

2642             MS YALE:  Maybe I can jump in and first of all talk about the fact that in high‑speed internet ‑‑ well, internet market, where the Commission chose not to have economic regulation, we started with dial‑up, then we moved to high‑speed.  We now have different grades of service with different price points depending on the needs and interests of consumers.  They are different quality at different prices, both for high‑speed, high‑speed light and dial‑up.  That is a vigorously competitive marketplace, notwithstanding the fact that there are two primary broadband providers.

2643             The other thing I would say to you is that I don't think the real concern here is that we would raise prices.  I think the real concern is that we would lower them.  Most of the discussion in fact is about whether or not we would lower prices and whether we can lower prices selectively to respond to competitive entry.

2644             Our real desire, frankly, is to have freedom to drop prices and to get out from the situation that is created by price caps on the deferral account where prices are kept artificially high, which is what is in fact creating a nice umbrella under which our competitors can enter the market.

2645             Increasing prices is not the issue, it is the ability of an ILEC to respond to competitive entry where it is taking place and where right now we can't respond in terms of lower prices, and where we are not forborne we can't raise prices.

2646             COMMISSIONER LANGFORD:  Let me speak to your first point about broadband.

2647             I would argue, or it certainly could be argued, that the broadband example, the internet forbearance is completely different from this, as was the sort of wireless example, because what you had was a whole bunch of new entrants all on the starting line at the same time, all starting more or less equal.  Okay, you folks had a ubiquitous network that you could do things with and so did cable that they could add to and pump up and do things with, but you were all starting more or less at the same place.

2648             That is not the same scenario here.  You are asking us, in a sense, to throw the whole competitive market wide open at only 5 percent when the entrants are starting from very staggered starting blocks.  You may feel that some of your lunch is being nibbled at at this point and is in danger of being gobbled at, but at this point the starting points are very, very different.  You folks have a huge percentage of the market today.

2649             You said earlier, Ms Yale, "We are not saying that the forbearance test is made today."  So I assume you have more than 95 percent today, if that is correct.  Nobody else has anything like that.  So how can you draw an analogy between forbearing here at 5 percent and forbearance in internet, or even wireless if you like, when the fact situation was so different?

2650             MS YALE:  I was just commenting on the issue of whether or not we would be able to raise prices in a competitive market.  It is the entrants right now that are setting the price point, because they are coming in at lower prices.  We can't raise prices because our entrants are stealing customers from us and we have no tools in our toolkit to respond.  So they are taking customers with great offers.  We don't want to increase prices, we want to lower them.

2651             So you are absolutely right that the circumstance is different in the sense that our price point sets the bar under which they have to compete and they are competing quite successfully and the issue for us is to be able to respond to that.

2652             COMMISSIONER LANGFORD:  I had this discussion yesterday with Aliant, I simply don't buy that prices are the only tool you have in your toolbox.  You can bundle forborne products and offer those.  You are getting into television, you can offer that.  You could settle your labour disputes and maybe, you know, reduce your overheads.  There are a number of ways that you can become more productive and then you can offer attractive packages.

2653             I mean, let's look at a basic question:  How much of your revenues are actually at stake here in this hearing?  What percentage of the Telus revenues are we discussing here in these hearings?

2654             MS YALE:  I think I'm going to turn it over to Fred to talk to you about our ability to offer competitive bundles relative to the cable companies.

2655             COMMISSIONER LANGFORD:  I'm not so sure I would call them bundles as much as groups of products.  I think with a little bit of creativity you could get around ‑‑

2656             I mean, Aliant yesterday, ILECs are keen to point at the stumbling blocks, but I would like you to look at some of the stepping stones you have here too.  You have got some ways to sell some attractive products.

2657             I would be interested to know what percentage of all your revenue we are actually dealing with and how hamstrung you really are.

2658             MR. Di BLASIO:  Whether we like it or not the consumers today view bundling ‑‑ and I know you would rather say groups of packages, if you will, or groups of services, but today bundling is effectively a proxy for discount in the consumer's mind.

2659             Let me give you a real tangible example.  I put a call into Shaw last week to talk a little bit about their cable pricing and I asked for basic service.  That is not on their website but the price point was $24.95.  I called them again and asked them about their DSL light pricing and it was $24.95.

2660             However, the CSR quickly told me if I wanted to bundle that, that price point would go down to $40 and, by the way, there is this spectacular deal right now, you won't have to pay for that installation charge that we normally charge you, which is anywhere from ‑‑ I don't recall.  I forget the exact number, but anywhere from $35 to $55.

2661             So to suggest that pricing is going to go north on us I think doesn't reflect ‑‑

2662             COMMISSIONER LANGFORD:  Is north up?

2663             MR. Di BLASIO:  North would be up.

2664             It doesn't reflect ‑‑ sorry, it is my marketing flair coming through here.  I apologize.

2665             But bottom line, I think to suggest that pricing will go up in a competitive environment is certainly vastly different from the competitive experience that I deal with everyday marketing our services to customers.

2666             Now, if we take that on and go beyond to your suggestion of how we could make it attractive to subscribers to keep our services or add services, well, if I were to lose a customer to Shaw, for instance on the telephony side, there are services which are currently forborne, internet and soon to be video off the Telus platform, that I can't go after the customer and offer them up to the customer given the current winback rules.  So I am actually completely hamstrung to tackle those customers that have changed from us as a local provider to Shaw.

2667             COMMISSIONER LANGFORD:  Oh, okay.  You are the marketer and if you feel hamstrung may God have mercy on you.

2668             But I would suggest that perhaps you are doing this wrong.  I mean maybe you are waiting to lose the customer and then realizing that you have a bit of a problem trying to win them back.  But why aren't you trying to keep the customer?

2669             Let me give you a scenario.  If you sell a customer broadband television product which you are bringing on, long distance and cellular, I find it hard to believe that customer would leave with their standalone local.  So why aren't you using the tools in your toolbox now rather than coming to us and saying the sky is falling?

2670             MS YALE:  I don't think we are saying the sky is falling.  I think what we are saying is that the entry of the cable companies is a significant change, because for the first time the Commission is faced with two facilities‑based providers into every home, into the residential consumer's home, offering a triple play, and that triple play, when provided by the cable companies, is offered under substantially different rules than that same triple play when offered by the telephone companies because they don't have bundling rules; we do.

2671             They don't have any part of their service offering regulated; we do.  They don't have, for single family homes, winback restrictions; we do.  They can promote any piece of that product they want on any terms they want and we can't.

2672             So most customers want to take one‑stop shopping; many do.  The fact that they may choose to keep one piece of the bundle out, well, as we know, you don't get the same discount when you take services a chunk at a time as when you take them all together.

2673             So do we have some alternatives?  Yes, but it is hard to justify those asymmetries relative to the cable company.  It is no longer the case ‑‑ if it was just a single play for local telephone service, which was the case of entry in the past, that is a very different scenario than a cable company that is already sending a bill to every one of those homes offering cable television for over 50 percent of those customers high‑speed internet and now they say, "Have I got a deal for you, just add local to the bundle", and they sever the relationship completely with us.  They sever the relationship with us and we have no contact with that customer for a year.

2674             It is a very different model of entry than the case of entry in the past.

2675             COMMISSIONER LANGFORD:  You have heard me on it.  I think we disagree.  I think there are differences, there is no doubt when you are operating in a reactive mode, but I think you could put together some awfully wonderful packages.

2676             Just a couple more questions.

2677             You did say, Ms Yale, we are not saying the forbearance test is made today, but if we use your test is it in fact made today?  If we accepted your proposition right now, ruled off the bench and asked you to come back within a month for your first set of forbearance applications, how many would you be ready for?

2678             MS YALE:  I don't know.  You would have to ask Shaw what their rate of acquisition is.  As you know, we don't know who our customers go to.  We know when we lose customers.

2679             COMMISSIONER LANGFORD:  Let's assume everything you have lost has gone to Shaw.

2680             MS YALE:  I'm not sure we can make that assumption.  There is Access independent voice providers, there are other CLECs.  We have CSG safeguards that prevent us from knowing who our customers go to.  That is the reason in fact why we suggested that the Commission is the only one who can get the data.  We can certify how many we have lost.  We have no idea and should have no idea who they have gone to.

2681             COMMISSIONER LANGFORD:  What is your gross figure in cities like Calgary and Edmonton?

2682             Have you lost 5 percent in any of those cities?

2683             MR. WOODHEAD:  No, is the answer to that.

2684             COMMISSIONER LANGFORD:  Right across the board.

2685             MR. WOODHEAD:  Pardon me?

2686             COMMISSIONER LANGFORD:  Right across the board to everybody.  You haven't lost 5 percent?

2687             MR. WOODHEAD:  No.

2688             MS YALE:  Sorry.

2689             We just can't answer that.  I mean, that information isn't disclosed publicly by city.

2690             COMMISSIONER LANGFORD:  I see.  Could you disclose it ‑‑

2691             MS YALE:  It is competitively‑sensitive information for us.

2692             COMMISSIONER LANGFORD:  Could you disclose it to us confidentially?

2693             MS YALE:  We can take an undertaking but, as I say, one of the reasons we proposed the way we did to the Commission is that the Commission is the only one who should know by serving territory who has what subscribers.

2694             COMMISSIONER LANGFORD:  It's just that you said, "We are not in any position to forbear today".  Earlier, though, you had mentioned that you could be talking of 10 percent losses in certain cable areas.

2695             So it is kind of a mystery for me to know.  You obviously have a sense of where you are losing.  I am not asking you to give away confidential information if you can't do it here in this room, but it is difficult for me to try to understand how desperate the situation is.  I know that pain isn't the test, but it does give us a sense of what we are looking at.

2696             Though you have offered in a sense an attractive geographic and very creative geographic market test, you have offered a very, very low threshold test.  I take Dr. Crandall's sense that it might work in theory, but I also take the realities of the cable world where it hasn't worked.  There may be reasons, as Dr. Crandall says, but we do have basic and basic hasn't changed in a long time and the price is going up.

2697             So I'm left here somewhat at sea as to what you are asking us to walk into.

2698             MS YALE:  What we are asking for today is the ability to respond competitively through the removal of the marketing restrictions, and that is not an issue of pain, that's an issue of making sure that customers have the opportunity to see the best offers from all players in the markets subject to anticompetitive safeguards like the imputation tests that make sure that what we are doing is not inappropriate and that over time ‑‑ over time ‑‑ that the Commission is really looking to satisfy the test in Decision 94‑19, which is whether or not there exists market power or whether or not there is competition sufficient to protect the interests of users, such that economic regulation ‑‑ regulation of our prices, not our social obligations ‑‑ is no longer required.

2699             So by the time a cable company will have met the 5 percent acquisition test ‑‑ it is not a market share loss test ‑‑ the actual loss of customers will be much greater because of course we have already lost customers to traditional CLECs as well as Access independent voice over IP providers as well as wireless customers, people who have chosen not to have a line in their home.

2700             The real issue is market power, and if there is no market power then you don't need economic regulation.

2701             COMMISSIONER LANGFORD:  So you say.

2702             Let me ask you one last specific question, if I may?

2703             The Chairman and Commissioner del Val probed the kind of notion of your area, your competitive area that you are describing, expanding.  I think you are going to get back to us on some of those problems.

2704             I want to go to it as you initially find it before there is any expansion, assuming a kind of stases, if you will.  I am trying to figure out how small it could be.  I have some difficulty trying to imagine where it all might end.  Never mind how big it could be and what growth might mean, I see the problems there and the uncertainties and I think you do as well, but how small could it be?

2705             Could it be just one building?

2706             MS YALE:  I think you should ask that question to the cable companies in terms of their entry strategy.

2707             COMMISSIONER LANGFORD:  No, I'm asking it to you.

2708             MS YALE:  Because what we are saying is the beauty of our test is it is not about where we offer service, it is about where the entrants choose to go, because then you have confidence as a commission that from a public policy perspective there is a meaningful facilities‑based alternative in the market and you don't have to worry about the unserved pieces of that territory when you define it too large.

2709             COMMISSIONER LANGFORD:  I take your point on the unserved part and it is a creative way to deal with that, but let us leave aside the cable companies.

2710             Let's say we have a traditional CLEC that has wired one high‑rise office tower in Edmonton ‑‑ that's all they have done right now, and have taken in that area obviously 5 percent of the tenants ‑‑ could you come in with a forbearance application for that office tower?

2711             MR. WOODHEAD:  Sorry, Commissioner, could you restart your example?

2712             COMMISSIONER LANGFORD:  Sure.

2713             MR. WOODHEAD:  Are you saying, for example, like a cable company?

2714             COMMISSIONER LANGFORD:  No, no, it's not a cable company.

2715             MR. WOODHEAD:  It was just some hypothetical new provider?

2716             COMMISSIONER LANGFORD:  I mean, we had people like 360 that were rolling out fibre in different places and trying to attract big contracts and whatnot.  You know, I could give you three examples.

2717             We could have a CLEC that has decided to wire a downtown office tower, or we could have a CLEC non‑cable that has decided to wire maybe with fibre, maybe with copper, who knows, maybe a bit of both, a university or a hospital or a government building.  So they get in there.  We have a government building that has three departments in it ‑‑ bloody unlikely in this day and age of government growth but let's assume we have a very big building with three sort of medium‑sized departments in it ‑‑ and they wire the building and they scoop one of the departments.  So they have got approximately a third of the building.

2718             Could you make a forbearance application for that building?

2719             MS YALE:  I suppose you can conceive of examples like that where theoretically our forbearance test would apply.

2720             As Willie already indicated, the Commission always has a discretion and if for whatever reason the Commission doesn't think it is appropriate in those circumstances to grant forbearance ‑‑ this is primarily business applications you are positing and we ‑‑

2721             COMMISSIONER LANGFORD:  University, it could be residences.

2722             MR. WOODHEAD:  The point is ‑‑

2723             COMMISSIONER LANGFORD:  It could be a high‑rise apartment.

2724             MR. WOODHEAD:  ‑‑ Commissioner, in the hypothetical, yes, you could it that way, as a short answer.

2725             What you are facing, however, the facts, as we have been reminded, are what you are interested in, what is before you; what is real.  That is not how cable networks are deployed.  That is not how our networks are deployed.  There could come along some full facilities‑based competitor who would do precisely what you are saying, but that isn't what you are facing today.

2726             COMMISSIONER LANGFORD:  But you know, these ‑‑

2727             THE CHAIRPERSON:  Excuse me, Commissioner Langford, just one second.

2728             Are you okay?  I'm trying to finish the questioning so that you can be liberated.

‑‑‑ Laughter / Rires

2729             THE CHAIRPERSON:  If you need a lunch break you let me know.  Are you okay to carry on?  I don't expect it will be that much longer.

2730             MS YALE:  I think there are a couple of panel members that would appreciate a bio break.

‑‑‑ Laughter / Rires

2731             COMMISSIONER LANGFORD:  Well, you know what, I could drop the questions.  I have lit the candle of the sort of concerns I have.  I'm not sure whether you want to come back to it.

2732             MS YALE:  We will do an undertaking with respect to that issue and see if we can be helpful on that question.

2733             COMMISSIONER LANGFORD:  Maybe you could give me an undertaking with regard to sort of the percentage of revenues at stake here that we spoke about but I didn't get an answer for and the notion of where you could forbear now, these sorts of areas, and the sort of loss of customers at this point we talked about.

2734             I would be happy with that, Mr. Chairman, and we could all go and have a bio break.

2735             MS YALE:  That's fine.

2736             THE CHAIRPERSON:  Are you all right with that?

2737             MS YALE:  I don't know if there are other questions.

2738             THE CHAIRPERSON:  Commissioner Noël promised me she had a quick question and since she is ‑‑

2739             COMMISSIONER NOËL:  My questions are always quick.

2740             Am I right in assuming that your bright‑line two‑prong test applies to the consumer market rather than to the business market?

2741             MS YALE:  Primarily, yes.

2742             COMMISSIONER NOËL:  Thank you.

2743             THE CHAIRPERSON:  Those are our questions.  Thank you very much.

2744             MS YALE:  Thank you.

2745             THE CHAIRPERSON:  We will resume at 2:45.  Nous reprendrons à 1445.

‑‑‑ Upon recessing at 1340 / Suspension à 1340

‑‑‑ Upon resuming at 1450 / Reprise à 1450

2746             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

2747             We will call the next item please, madame la secrétaire.

2748             LA SECRÉTAIRE:  Merci, monsieur le président.

2749             We are ready to proceed with the MTS Allstream Inc. panel.

PRESENTATION / PRÉSENTATION

2750             MR. PEIRCE:  Thank you and good afternoon, Commissioners.  Thank you for the chance to be in front of you.  To new Commissioners it is probably time to ask how you like it so far as you move through your first endeavour of this sort.

‑‑‑ Laughter / Rires

2751             MR. PEIRCE:  With me today are Ron McKenzie, who is Executive Vice‑President, Marketing and Business Development for our national division for the business outside of Manitoba; Teresa Griffin‑Muir, who is our Vice‑President of Regulatory Affairs with MTS Allstream; and me, Chris Peirce, who is responsible for Regulatory and Government Affairs for MTS Allstream.

2752             A few of these early on slides some Commissioners will have seen before, but at the risk of repetition just to underline who we are.

2753             We are the third largest national competitor provider of local LD data and, more recently, TV services to residential and business customers in Manitoba and business solutions to large and medium‑sized business customers throughout Canada and into the U.S.

2754             We are, and acknowledge that we are, dominant in Manitoba.  We are second to Bell Canada and Aliant in central and eastern Canada, and second to Telus in western Canada in terms of our market, which is a mid and large‑sized business market.  We are, to put a bottom line to it, inherently national in character.

2755             Turning to slide 3.  In that respect, I think we are coming to a significantly different perspective than you have heard so far.  The incumbents you have heard from so far have pretty much exclusively addressed themselves to you about protecting their market in the face cable entry and what they are able to do in the face of cable entry.

2756             That is not the perspective that we are coming to you from.  We are coming to you from the perspective of one who has a far larger proportion of its revenues than any other incumbent from outside of its region.  We survive and prosper by growing our business nationally.  We are, by our very nature, committed to national competition.

2757             For Commissioner Cram, we did point out last time using this slide that we have shown the proportion of revenues that come from in and outside of regions in terms of those columns.  Those columns do not reflect our relative size.  We are a tenth the size of Bell and less than half the size of Telus.  But a far greater proportion, 60 percent or more, come from outside of our territory.

2758             So we present a view to you that balances the interests of an incumbent in Manitoba, a competitor nationally, a new entrant if you will nationally, the oldest new entrant stemming back to our first days, and a new entrant in Manitoba in terms of presenting a TV alternative to the cablecos which we have now been doing for nearly a couple of years.

2759             Turning to page 4.  In terms of the issues in front of you, we would suggest to you that what underlines your consideration should be reality versus theory.  We don't really need to look too much at economic theorists and their view of competition, because we have a lot of experience in the Canadian market, we have a lot of experience with markets that are not forborne and with markets that are forborne.

2760             If I think back to my days as a litigator, if the facts were pretty clear you didn't need expert evidence.  If you are having problems with the facts you might find yourself an expert to interpret those facts the way you want the decision maker to see them.  We are comfortable with the facts in terms of what they say about the development of competition in Canada.

2761             The criteria you employ needs to balance a scope of a relevant geographic market against the degree of competition.  Broadly speaking, of course, we would say that the smaller the area you are considering forbearing upon the greater must be the competition present to justify that forbearance, because the incumbents in our experience bring their whole economic power to bear across their region in combating competition where it arises.

2762             That is why we would say that in terms of analysis of the incumbents overall market power in terms of market share the relevant geographic market is the ILEC non‑high cost serving area and the relevant product market is the total of the residential and business local voice market.

2763             To the extent that you step back from those propositions, the necessity to bump your threshold in terms of what competition would justify forbearance would follow.

2764             We also would say that demonstrably in the market, both in those markets where forbearance has happened and where not, where possible, that pre‑emptive activity has characterized the response of the incumbents.  They have done so to the full extent of their ability to do so, most recently in terms of Bell Canada and its $5.00 long distance bundle or package and what it is doing with its digital voice service in Ontario today where it meets competition.

2765             Turning to slide 5.  Further to that criteria being based in reality and not in theory, the appropriate parameters we believe are well set forth in Decision 94‑19.  We do not believe in a bright‑line test in terms of the utility for you now to set a market share level that will trigger automatically forbearance.

2766             In that regard I obviously disagree with those that have been in front of you thus far.  We think that the analysis in 94‑19 has been employed by you in reaching numerous other forbearance determinations.  You have done that with more facility than most other regulators in the world.

2767             You have managed to forbear from a significant part of the market and you need to look at the facts, actual market conditions and dominant firm behaviour, not simply constructs and paradigms that you hear from theorists.  Because if forbearance is granted on too narrow a market definition, the development of competition will clearly be arrested.

2768             As we will say later in our piece, it is clear that where you have forborne competition is pretty much stalled.  There has been no greater competitive activity in markets that have been forborne from you from the date of that forbearance.

2769             Slide 6.  The facts in terms of then speaking clearly, at the end of 2004 collectively from the numbers you take in yourself, the incumbents controlled 94 percent of the local voice market, virtually unchanged from 2003.  Of course, not too long ago you were hearing from incumbents:  You can't look at those numbers that the CRTC puts out, they are old, they are dated, but those old and dated numbers don't change year after year after year.

2770             The share of the residential market dropped by 1 percent to 97 percent, and the business market, which some would put the proposition forth is intensely competitive, has remained stagnant, at 88 percent for the last four years, and that large and mid‑sized business market is as concentrated as any in the country.

2771             With that, just in terms of our real world experience on the ground in terms of dealing with significant market power of the incumbents, I will pass it over to Ron McKenzie.

2772             MR. McKENZIE:  Thank you, Chris.

2773             If you will turn to slide 7.  In many ways the market share on its own stands to represent the power and control position that incumbents have within the business marketplace in particular.  So the perspective that I want to bring to the Commission is very much a day in the life of competing with an incumbent in the business marketplace.

2774             While the market share, as I have said, is concentrated and has remained stagnant for the last four years, what has truly happened is you have to understand how the technology and services are now being delivered in the marketplace and the dynamics of those services and the impact they have in terms of how you compete against an incumbent.

2775             In particular I want to focus on two key areas.

2776             One is the incumbent's ability to control the supply and demand of services within a given area.

2777             The second area is the ability to control the technological evolution.

2778             Let me talk about supply and demand for a minute.  If you look in the past at how services were built ‑‑ and I think the Commission is well aware of this ‑‑ you typically had standalone services.

2779             So you could look at voice in isolation.  Voice is a standalone service delivered on a dedicated network.  You could look at data networks, delivered once again over a standalone infrastructure.

2780             That is not the reality of the way next generation services are being built and delivered to the marketplace.  What is physically happening now is voice is migrating as an application onto that data network.  So that is an inherent dependency of the underlying delivery of that service that voice becomes an application, not a standalone item that you can look at in isolation, so that when you marry voice onto that network what happens is you drive the demand for bandwidth performance up.

2781             Today, if I look at although we have invested $5 billion in network across the country and continue to build and build and build, I am still, for that last mile, that access into the building, I am reliant on the incumbent to get there.

2782             So as you add more and more services, whether they are voice services combined on a data service network, what happens is the speed of that access continues to go up.  Now, we are talking about in the IP world, Ethernet everywhere or higher speeds, whether it be switched Ethernet or gigabit Ethernet, the reality is these are well above CDNA rates.

2783             So my costs continue to go up and up as you converge more and more services onto that platform.  This is not an area of lower costs, this is an area of costs actually increasing as you move to the higher‑speed services.

2784             So today the reality is, for every dollar in revenue that I collect from a customer, $0.25 goes to the incumbent.  That's the reality today.  And that cost continues to go up.

2785             Once again, controlling the access and the ability to build those services into the network gives the incumbent a unique capability to control the supply and demand of those services in the marketplace, because once you are above CDNA rates the incumbent is fee to set the price effectively for wholesale offerings that I have to purchase for that last mile.

2786             The second area that I wanted to focus on is when you actually look at the types of voice services that are being delivered to the business marketplace ‑‑ and in particular this is controlling the evolution of technology ‑‑ one of the predominant services for voice, local voice, is Centrex services.

2787             For those of you who aren't familiar this is where the technology and an appreciation for how the technology is delivered.  Centrex is basically what I would refer to as a network resident service.  It resides in the core of the network.  In order for that customer to migrate from that network resident Centrex service to, say, an IP voice service, we are reliant on the incumbent to support that migration because they control what is called the flashpoint or the cutover point from all those independent lines over onto a VoIP service.  Without full support and cooperation there is no way to migrate a customer with thousands of lines, and migrating that customer overnight is not technically feasible.

2788             So what happens is, every Centrex customer is effectively a stranglehold for the incumbent and they can control at that position the migration path to their IP networks.  Once again, if they were fully forborne they can control the supply and demand by bundling of services and control of the speeds and access into the building, and with the migration of technologies they can control the evolution of that technology to IP‑based services, which I would argue gives it unique capability, not to mention they are starting from a position of 94 percent market share on average across Canada.

2789             So if you turn to slide 8 you will see after eight years of competition and fighting and, once again, offering very unique services, we have delivered the first national NPLS network in the year 2000.  We were the first in Canada to offer those services.  So even after delivering unique functionality, after eight years the incumbents still control an average 94 percent.

2790             MR. PEIRCE:  Turning to slide 9, there clearly is a rational economic incentive for the incumbents to use pre‑emptive market tactics to hold onto their market power.  It allows the ILECs to not only control, as Ron was saying, retail pricing, but also competitive pricing, our ability to provide an alternative solution to customers in the marketplace.

2791             It would be irrational for the incumbent not to engage in targeted pricing, winback violations, or any other tactics they were allowed to utilize, to win back customers, once taken in a residential market, a cable provider or in the business market someone like us, because clearly cable is not present to any extent that is significant in the business market.

2792             The economic consequence of this strategy is positive.  The ILEC retains dominance.  I can tell you those kind of conversations will go on in Manitoba if that activity was permitted by the Commission.  You see the customer leaving.  You are going to react to that customer leaving by contacting them.  That is why we would say Aliant, Bell and others are urging a very narrow geographic and product definition for you.

2793             Turning to page 10, just talking back for a brief second about Bell's ability to raise prices, a factor we were looking at earlier.

2794             If you think about their $5.00 bundles, they were introduced, as stated to be introduced, in response to Primus and Rogers.  In less than a year they attracted more than 400,000 new customers.  That is as compared to 80,000 that VoIP has managed to attract across the country in the last year.

2795             What have they done now?  They have taken that bundle away because it has served its purpose apparently.  Taking that bundle away is effectively a price increase in the market which they have been able to obtain.  It also, of course, explains the conduct that you yourself have ruled on several times in the past few years of Nexxia or the tariff and winback violations of Aliant and Bell to this point.

2796             I will just turn over to Teresa now with respect to our comment on the transitional regime which we say would serve better than a flash guide.

2797             MS GRIFFIN‑MUIR:  Okay.  So in order to kind of temper the ILEC's rational response to the market, what we are proposing is to introduce gradual pricing flexibility and that can be done in a number of ways.  It can be done by reducing the time of the winback period.  It can be done by taking out of the caps some of the bundles.  There are a number of ways to address the market.

2798             By doing this, not only will we be able to accommodate what the legislation wants us to accomplish, which is to ensure that we don't arrest the development of competition, particularly now that cable is actually entering the residential market probably nationwide.  It also allows the Commission and everybody in the market to assess what the impact is of being able to address the market with a little more flexibility as the incumbent without full forbearance.

2799             So it doesn't kind of force fit the forbearance test into a model that says, okay, once I get to 5 or 10 or 15 that's it.  It gives the time to assess how the market does actually respond and how pre‑emptive or not certain behaviour of the incumbent might be in terms of competition.

2800             If you just turn to the next page, in looking at what has transpired in the competitive market, contrary to what has been put before you this morning in terms of premature forbearance is a better thing than a little too late, I guess we would say the reverse.

2801             The incumbent has a lot of market power and, as a consequence. if we just look down through history, it has actually been kind of a bright‑line mark where competition either stopped ‑‑ so if I had lost 80 percent roughly speaking in the data market as an incumbent, that is pretty well where I have stayed since 1996.

2802             In IXPL or long‑haul private line, that situation is actually reversing.  So we went from roughly 60 percent market share for the incumbent steadily growing up to 79 percent in 2003.  We are roughly in the same spot with LD.

2803             So if the bright‑line test is 5 percent we can feel pretty satisfied that that is pretty well it, plus or minus 5 percent.

2804             MR. PEIRCE:  In closing, we would say that granting any forbearance at the current market share levels would, at a minimum, freeze out the possibility of further competitive inroads and that transition measures will prevent the irreparable damage that premature forbearance might cause while without constraining unduly incumbents in response to a market entry that does occur.

2805             To slide 14, we do believe that moving to forbearance, making sure that barriers to entry have been removed, is essential.  Those barriers to entry still exist and are significant.  A robust competitive regime has to exist.  It has to exist for both underlying access to existing and next generation facilities and services.  Those access issues remain unresolved.

2806             Competitor quality of service standards must be consistently met.  In the last few months that has been our most significant issue.  Today we are experiencing an 86 percent failure rate from Bell, and Telus has failed to provision at all since their strike.  So we are forced to be telling a customer in 86 percent of the occasions that we can't fill their order as they requested it because the guy that we have to get the service from won't meet his quality of service standards.

2807             So the last slide, timing is everything.  Local forbearance framework needs to balance the market realities with the theoretical considerations that underpin your deliberations.  The limited extent of local competition to date and, really, the agonizingly slow rate at which competition has developed in the local market, our evidence that ILECs still have that market power and barriers to entry exist.

2808             Bear in mind that the limited local competition in Aliant has taken eight years to develop and has only developed, according even to the incumbent, in a limited number of exchanges over the three to four provinces that they serve.

2809             The damage caused by a framework that results in premature forbearance will be impossible to rectify after the fact.

2810             Thank you.  We welcome your questions.

2811             THE CHAIRPERSON:  Thank you very much.

2812             Commissioner Langford.

2813             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.

2814             Thank you, lady and gentleman, I guess, for that.  It is very clear, as were your original submission and your final argument and your answers to the interrogatories.  In a sense I suppose if we accept it we could just go home.  Maybe that would be a good thing for some people as well.  I know Commissioner Cram has had to hire a dog‑walking service while she has been here because she can't get the poor mutt out for its daily run, so she would be happy.  But we can't do that.

2815             As I read your stuff and as I listened to you today I thought how can I best use my time?  Your submissions are so clear that I actually don't have any questions on them precisely, maybe a little bit on the sort of extras, meeting Q of S and that sort of thing at the end, but the submissions are clear as clear can be.

2816             With your permission, what I thought I would do is pick your brains a little bit because you are kind of the ILEC that is out of step in a way, and see if I can get some background information and some thoughts from you on the positions of the other ILECs, not necessarily their overall positions but on particular positions, if that is amenable to you. I suppose if it isn't then you can signal the Chair and he will get the cane.

2817             Where I would like to start is with the appropriate geographic market.  Again, your submission is very clear on what it should be and you were clear this afternoon as well saying that, you know, the bigger it is perhaps the lower the bright‑line test or whatever it can be, the smaller it is the higher it should be.

2818             So let's start with the smallest one we have heard, although I have some questions about Telus.  It might be very, very small but we will see.

2819             Let us start with the local exchange. I thought I would just ask you if you, from your position as an ILEC, could give me some background into the creation of local exchanges, why they are or what they are or why they were set up that way.  Is there some economic reason for setting up the exchanges the way they are set up?  In the old days did this mean you could make more money?

2820             Maybe you don't want to bear your soul on this but it would be very, very helpful, I think, for us to have an understanding of why the exchanges look the way they do.

2821             Is that a fair question?

2822             MS GRIFFIN‑MUIR:  I'm not sure I'm totally equipped to answer that fair question.

2823             A lot of it is driven by technology and I guess historically in the local exchange it really covered, along with the local calling area, just how many other telephones you could reach in a certain area.

2824             COMMISSIONER LANGFORD:  So would it have been to the benefit of the monopolies then to keep the local exchange areas small so that you had to spend more money on long distance?

2825             MS GRIFFIN‑MUIR:  Well, you know what, the rates actually worked on kind of that value proposition anyway where you had rate groups and where the more telephones you could reach the higher flat rate you paid.  I don't know if there was a consideration in terms of balance between pricing of long distance and pricing of local, it was just a very different proposition.

2826             I think technology, though, also had something to do with how far out you expanded.  I think Ron can probably talk to that better than ‑‑

2827             MR. McKENZIE:  Yes, I can talk a little bit, Commissioner Langford.

2828             A lot of it was the transition, the technology capabilities itself.  When you were in the analog days you had distance limitations because of it being analog.  Without getting into the engineering principles of distance and what you can do analog versus digital, when you migrated the infrastructure to a digital world it enabled higher concentration so you could support more, call them customers, on a single switch.  So it allowed many of the incumbents to actually consolidate, which would help reduce the operating costs by consolidation of the switching points.  It is still separate from the calling areas but that is the switching technology.  So it allowed for a higher concentration on a single switch.

2829             So there are some economies of scale that was gained in the migration to digital.

2830             The same thing happens when you migrate into the data world as well, that you can get higher concentration, higher performance and, once again, depending on how you architect the network, you can actually start to introduce unique services within those areas as well.  That is where some of the decided advantages can be gained through that control of the technology.

2831             COMMISSIONER LANGFORD:  Yet we have had such varying views on this.  We have had Aliant and SaskTel, for example, who have made very, very strong cases for why the local exchange is the only way to go, and we have had Telus, who you must have heard some of this morning, indicating, no, they are willing to break away from that.

2832             An analogy I made yesterday with one of the participants was a kind of local playing field advantage in sports or something like that.

2833             When you go into another ILEC's territory as a competitor, do you sometimes wish you didn't have to play by the local exchange barriers or is that really any disadvantage at all?

2834             MR. PEIRCE:  I think just before answering that question, or having Ron answer that question, just in terms of the preamble, Commissioner, I think probably we would say that all those incumbents are doing is presenting you with the smallest area they can describe for you according to metrics that they use that would enable you to forbear, which again goes to the basic logic, which is they want to rationally preserve their dominant position and be able to respond as quickly as possible.

2835             So you have local exchange or you have got Telus.  We figured out a way to go smaller than local exchange.  There is nothing more, I don't think, intellectual afoot than that.

2836             But no, I don't think we would say that the local exchange in itself affects our ‑‑ we have had issues obviously around the local network and around local interconnection and that sort of thing that you have dealt with in early proceedings.  So how the network was constructed historically by incumbents that were building out piece by piece by piece has posed difficulty for us in a competitive environment having to try and figure out how to utilize that network and build.  I don't think the local exchange in and of itself bears in that light.

2837             COMMISSIONER LANGFORD:  Did you have something you wanted to add to that?

2838             MR. McKENZIE:  No.  I think the argument that you are probably hearing from the incumbents is one of where in a voice over IP world the non‑facilities‑based players have in some ways the freedom to effectively offer service and terminate into one location.  So I think what you may be hearing ‑‑ and certainly this is better answered by the incumbent that is trying to defend the position ‑‑ but I'm sure the position they are trying to do is give me as much freedom as possible, if I have to move around or I want to be able to bypass certain areas to compete with these other providers in a VoIP world.

2839             That may be where the motivation is coming from, but it is not a limitation from a competitive point of view today.

2840             MR. PEIRCE:  And it is not a limitation that would bear on the incumbent's market power because there is no accounting or division of revenue or costs or anything like that.  It is just a way they can justify getting back in.

2841             I can imagine conversations around a larger incumbent table just as I can imagine conversations around an MTS incumbent table about if that is what is afoot then how you craft as neatly as you can those guys you don't want coming in and then you are going to respond to those guys and you are going to respond in a targeted way to chase them off if you possibly can.

2842             COMMISSIONER LANGFORD:  Of course, cable puts them off that stride a little bit in a sense that they are bringing their own rollout patterns in.

2843             I don't know if you heard the representatives from SaskTel who did make a rather interesting case, at least in their particular territory, that it is configured in such a way that if ‑‑ this would be their submission and I hope I am getting it right ‑‑ that they could, in fact with the wrong test, lose an entire city like Saskatoon because it is one exchange kind of thing.

2844             If you don't go exchange by exchange and you have a high enough entry barrier of not 5 percent but 20 or 30 percent or something, they could end up losing an entire city like Saskatoon, a major part of their population base, about a quarter of a million people out of a million, and still not qualify for forbearance.

2845             Do you have some sympathy for that type of a position or predicament?

2846             MR. PEIRCE:  Teresa will add in here.

2847             I think probably there would be no better candidate than the Province of Saskatchewan that, I think, Mr. Goodale describes as the toughest to spell and the easiest to draw, as one where you could adopt the measure of non‑high‑cost serving areas.  It is so small in any event that if you utilize a non‑high‑cost serving area that it would probably be the easiest layover of any province.

2848             COMMISSIONER LANGFORD:  I don't do layovers, sorry.

2849             Could you help me with that one?

2850             MR. PEIRCE:  As you think about provinces where you were rolling out that type of approach ‑‑ I apologize for the cloudy communication, but just if you were putting out an approach of a non‑ high‑cost serving area as your measure for a decision on whether to forbear or not, Saskatchewan given its relatively limited geography and, as you say, population that is pretty well centred might be a candidate for ‑‑ the easiest candidate for a non‑high‑cost serving area approach as your market test.

2851             COMMISSIONER LANGFORD:  You are probably making perfect sense but, unfortunately, I'm not quite getting it, for which I apologize.

2852             MR. PEIRCE:  Saskatchewan is small.

2853             COMMISSIONER LANGFORD:  I know that.

‑‑‑ Laughter / Rires

2854             COMMISSIONER LANGFORD:  What I'm trying to get at, though, is the problem that SaskTel put on that if we use too big an area, if we define the appropriate geographic market in too large a way, anything bigger than an exchange, because they are in a strange position where their two main pockets of population are in fact two exchanges.  So they could lose, in a sense, half the game and still not qualify for forbearance.

2855             I wonder, being in the second easiest ‑‑ probably the third easiest province to draw, but maybe the second hardest to spell, you would have some sympathy for that and perhaps some notion about how we could work out a solution that would help them.

2856             MR. PEIRCE:  Maybe I will let Teresa try to communicate a little better.

2857             MS GRIFFIN‑MUIR:  I think actually what we were trying to suggest is that you are balancing, depending on where you strike if you want to go in a bright‑line test ‑‑ which I am assuming Saskatchewan is suggesting to you ‑‑ so where you strike that balance is really a balance between how much market power I have as a result of having the entire market versus how much I am going to lose in a particular part of the market.

2858             Because Saskatchewan, actually you are correct, is not dissimilar to Manitoba where in the south of the province is the highest concentration and a very small number, actually in our case two as well, cities or cities in the surrounding area.

2859             But generally speaking, it balances between high cost and non‑high cost, which I think is what Chris was saying.  Sure, maybe the threshold where you think there is sufficient competition overall where I cannot exercise market power in Manitoba any longer, or at least I have to think about it because really it is an economic decision.

2860             If you look at Aliant, they had 32 exchanges.  They never ever came to lower a price though overall.  Why?  Because overall you look at it and you think economically it makes more sense for me to stay where I am and lose market share than to reduce my price, which means I have market power.

2861             The same test could apply in Saskatchewan and in Manitoba where you are just balancing ‑‑ what I guess we are hesitant to do is say, okay, if it is this small a size, the percent, I would say it would have to be much greater than 5 percent and much greater than a percent you would put overall.

2862             So you would balance in really how you look at the whole province, because what Saskatchewan is really saying to you is, "If you take my whole territory and you set it at too high a threshold I will have lots more, obviously, out of Saskatoon."  They are absolutely right, but I would expect that you would have to lose more in some areas to lose market power generally speaking.

2863             COMMISSIONER LANGFORD:  So you are saying they have the option even under the present unforborne rules of lowering prices, putting together more attractive products and maintaining more of that market share than they are doing?

2864             MS GRIFFIN‑MUIR:  Well, yes.

2865             COMMISSIONER LANGFORD:  Saskatchewan has it all, but in Aliant's case.

2866             MS GRIFFIN‑MUIR:  No, I would say that for us, for everybody that is the case.

2867             I think we would also say, though, that that is where when you are looking between black and white, "Okay, today I regulate; tomorrow I stop, there are a whole bunch of things that you can put in place that are measurable in terms of market response that reduce regulation without completely eliminating regulations.

2868             COMMISSIONER LANGFORD:  Right.  Your submissions are clear on that and we will get to some of them.  I don't mean to overlook them, but if you don't mind I am going to continue to pick your brain a little bit about some of the other problems people have faced because you are in some of their territories competing and I think you are kind of uniquely positioned.  Plus, when you go home you are an ILEC so it is kind of an interesting animal we have here in front of us.

2869             Saskatchewan also thought it might be practical to have something other than a national test, to have a series of tests across the country for forbearance rather than one, so that in their case perhaps given the way their demographics are set out or their geographic spread is set out perhaps the exchange would make sense for them, but for other provinces perhaps it would not.

2870             How do you react to the notion of having different tests?

2871             MR. PEIRCE:  I think we agree with those words "a different test in different regions", but we would say that that test relates to what the evidence of competition is and the ability of competitors to be swayed or the fact of competitors being swayed by market power and that that leads you upfront to recognizing ‑‑ you know, implicit in that is a recognition that setting a bright‑line market share test as a general proposition for local voice deregulation is really not going to get you there, that it offers false promise in that way and what SaskTel is putting in front of you is probably an excellent argument on that side.

2872             COMMISSIONER LANGFORD:  I may have pushed them into it slightly, but anyway we shall see.

2873             Let's move up to the next biggest possible geographic market that some have suggested, I'm thinking for example the Coalition on Business and others, and that's the local calling area.  So we move up a little bigger and we talk about things like community of interest and then they would suggest that, "Look, these are the people I normally call.  This is what I'm comfortable with.  It is bigger than one exchange most of the time", perhaps not for Regina and Saskatoon, I'm not sure, but in many areas it is bigger than one exchange"

2874             Why doesn't that make sense to you?  Why do you want to go bigger than that?

2875             MR. PEIRCE:  Ron could talk about what it is like in the business market.  That is, frankly, not how customers generally surface in the business market.

2876             COMMISSIONER LANGFORD:  Okay.

2877             MR. McKENZIE:  Yes.  The way I would describe is it is not so much the calling area because of their desire to call within.

2878             If you take Enterprise customers and you start with what I will call the mid‑market ‑‑ and you can take the CRTC definition of mid‑market and above ‑‑ and typically on average if you follow the D&B databases they average a minimum of three locations.  So a typical mid‑market Enterprise customer will have three, some will have larger depending upon how they are geographically dispersed.

2879             In many cases, those are businesses that are not within one calling area for the most part.  They may have divisions.  They may have one in the west, one in central, one in the east.

2880             So in those scenarios you are typically not all served by just the incumbent to that business in one area.  What happens is ‑‑ and that is certainly why you see the incumbents, Telus, moving to the east and Bell West moving to the west, to certainly try and provide for those business customers, similar to us where we are the number two competitor in every market.

2881             What we find when we talk to the customer is it is not so much the local calling they are looking for these particular exchange areas, it is the, "What is the service you are going to provide me and show me how you are going to provide something that is unique or differentiated" or "How are you going to reduce my operating costs?"

2882             I would argue that it is more a case of how we reduce their operating costs rather than a physical location of geography that is the test, therefore, it is more that ability to leverage those services.  This is where, I think, under an open market of forbearance and local, the incumbents will have an unbelievable decided advantage because what they will be able to do is bundle in local services along with other services that they offer and control both the migration and the supply.

2883             So I think it is more an area of the services that you offer, because that is what customers are looking for rather than a physical geography discussion.  That is why I wouldn't want to be pulled into a belief that geography is going to protect or give me a method to decide when to forbear and when not to forbear.

2884             COMMISSIONER LANGFORD:  And on the residential side?

2885             MR. McKENZIE:  Residential, most people, one house.  They might have a cottage or something of that nature.

2886             The other thing I think came up early, though, residential for the most part ‑‑ and comments have been made by others ‑‑ is typically where the cable plant is located.  It is one of the things that is unique about the business marketplace.

2887             For the most part cable is a residential offer.  I think we started to make some foray into the strip malls in some of the outlying areas that are near their network within residential communities, but within the core downtown areas and things of that nature the incumbents are really the only choice to get access to that building.

2888             So the business market I would certainly put forth is decidedly different than residential.  Residentially, you are going to have geographic limitations depending on where the plants are located and there may be a desire for a certain segment of the market that may have family in other parts of Canada that they want to have effectively the equivalent of local calling, but I would argue that where the LD prices are falling, especially with Bell offering a $5.00 bundle, that is half a cent a minute, and at half a cent a minute who cares where the exchanges are?  It is darn near free at that point.  They gave it away.

2889             MR. PEIRCE:  Yes, I think we would say ‑‑

2890             COMMISSIONER LANGFORD:  I think we have gone off the rails a little here, though, haven't we.  Is it possible we have gone off the rails a little?  It is interesting information.

2891             MR. PEIRCE:  As between the local exchange and the local calling area.

2892             COMMISSIONER LANGFORD:  Yes, if I could bring you back to that.  I don't want to gainsay what you have said.  It is interesting information, but if we could come back to that?

2893             MR. PEIRCE:  I don't think we would say there is a lot to differentiate between local exchange and local calling area except for its size.  You would not see impairment of market power at one of those levels versus the other, except for one is a little bigger area.

2894             I don't think there is anything as a competitor we would say, if we were in either the residential or business we are in, or watching Shaw enter, that there is a magic one between the two.  It is just we get to respond earlier in Manitoba if we are MTS with one versus the other.

2895             COMMISSIONER LANGFORD:  We heard from some parties that one of the problems with local calling areas as a scheme, some say it is too small, as you have said, and other say, maybe it is not a bad size but there are overlap problems in the exchanges and that they don't necessarily make a lot of sense in that way.

2896             Are there ways to fix that or is the local calling area just simply a dream that can't ‑‑ you know, kind of an easy solution that, like a lot of easy solutions, won't work?

2897             Cybersurf, for example, has said that the problem of overlapping can be solved by making the LCAs more symmetrical.  We will get a chance to talk to them about what precisely that means, but do you see a way of improving the local calling area and making it a better, more appropriate geographic market for competition?

2898             MS GRIFFIN‑MUIR:  No, actually, I don't.

2899             I think it is a question of if you were to decide the local calling area is the area you are going to look at, a lot of the other issues are somewhat extraneous, like there is overlapping or not overlapping.  It is really the degree of competition that you are talking about and how much power the incumbent provider has or doesn't have as a result of somebody entering their market, taking customers from them on what is more or less a sustainable basis, so that you can see that there is kind of a continuation, which, even for us in Manitoba, obviously you don't want that.

2900             So it really is a question of balancing the two because obviously in the smaller area you will lose more the bigger the area gets.  But then you are also thinking about who has the opportunity to have a competition over a broader area where no one can behave pre‑emptively, that if it happens too soon over a larger or smaller area, that I can target customers.

2901             It is less likely that somebody else can expand, even a cable company, out to another area because everything is predicated on a business case that I will obtain a certain amount of market share as the entrant.  So I can sustain any kind of investment I make.  Even if it is not physical I will incur a lot of costs to bill, to actually augment my plant in a certain way that I can offer voice service or to purchase plant from somebody.

2902             So when you are looking at it very narrowly, particularly if you are looking at it narrowly with a very low threshold, it will be pre‑empted.  There is no two ways about it.

2903             If you look at it more broadly, you lessen the likelihood, but I don't think it is a question of really saying, "I have to redefine should it be an LIR, should it be a local calling area, should it be an exchange?"  It is really a question of saying where really ‑‑ and truly, it is an economic question, I mean in a financial sense ‑‑ when will it be that I don't have the sufficient wherewithal that I really have to think about targeting customers because it will cost me something now and I'm not sure that I can sustain that.  Maybe it is worth losing the customer as opposed to incurring the cost of retaining the customer.

2904             So that how you decide over the area, not so much like does this fit perfectly one way or another.  Our submission was, it is a broader area.

2905             MR. PEIRCE:  And you get past a lot of the difficulties of the conundrum you are putting forward of how you properly define the area.  If you are using a broader area, holding out the necessity and the necessity for providers, the benefit for users of competition over a broader area because you need entry in the broader area before forbearing completely, you are balancing that with a loosening of constraints on the incumbent provider for some of those things that an incumbent would complain about now along the way.  Perhaps you take some of the sting out of not being forborne from an incumbent perspective and some of the risk out of what the last point of forbearance means for the new entrant.

2906             COMMISSIONER LANGFORD:  I think if you were being cross‑examined by, perhaps Mr. Grieve or Mr. Bibic or one of the other ILECs, they might say to you that what you are saying has more of a ring of truth to it for the world of telephony the way it was before VoIP and the cable rollout than it does now.

2907             Without meaning to be critical ‑‑ and I did read your submissions, I didn't find as many references to VoIP as I thought I might.

2908             I wonder how you react to some of the things that the other ILECs have said about how having a near ubiquitous network of their own and the power to provide attractive bundles and, in fact, without forbearance the power to bundle in ways that that ILEC cannot, they would argue that this really is a new ballgame.

2909             Perhaps they may be being slightly alarmist in their predictions about how fast they will lose customer base, but it is arguable that they are being realistic in what they face from a technological point of view, that this is a new battle that they are fighting because never before ‑‑ they have always had the Allstreams of the world coming into town and maybe they could kind of skate them off the ice in different ways through access problems or whatever, but with the cable companies this is a new game for them.

2910             I wonder why you spoke so little about the whole new world of cable and telephony in your various submissions.

2911             MR. PEIRCE:  Well, we are happy with a VoIP decision, but in terms of cable, you know, we are a TV entrant in Manitoba against ‑‑ well, before Shaw's launch of voice in Manitoba.  I think we would be able to speak about gains that are attractive, also the challenges of that shift in technology in terms of offering a different service to the customer.

2912             Outside of Manitoba, that Ron will talk about, we are the telecom interface for a number of smaller cable providers and we absolutely don't gainsay the challenge for a cable provider to actually make that step into a voice offering world.

2913             In terms of IP, with the way that flow will go from platform to platform for a customer, our experience in the business market is that the incumbent advantage remains there to the point that Ron was speaking about earlier in terms of now data and voice are merged and now with the decisions that have been made about things like next generation access to this point it makes it doubly difficult for a competitor because the incumbent has that customer trapped and they will migrate them over at their pace and in a way that a competitor can't.

2914             Take as a most recent example the federal government Centrex contract:  177,000 lines, the largest local user in the country, perhaps the continent.  They are ready to sole source that contract to Bell Canada.

2915             On this one Willie would be on my side, a thing that we took to the CITT where because of the constraint they have they are able to take that business and in their time migrate it over to their new platform in a way that they won't let any other competitor access.  So you will find yourself five or six years down the road and, yes, things will have merged onto an IP platform and you will have exactly the same dominance that you have today.

2916             COMMISSIONER LANGFORD:  What about on the residential side though?  There must be a cable in almost every home in Winnipeg or at least passing it, that you pass.

2917             Do you have the same reaction on the residential side?

2918             MS GRIFFIN‑MUIR:  I think when you talk a whole new world, just to back up a little bit, I think you have to think about it hasn't actually happened.

2919             You haven't seen, other than EastLink, any ‑‑

2920             COMMISSIONER LANGFORD:  Which is an old world in a way.

2921             MS GRIFFIN‑MUIR:  Apparently, yes.

2922             You haven't really seen what that outcome will be.  What Chris was suggesting, our experience in the TV market, sure there have been gains and sure we are happy.  I mean we would like more.  It is a struggle against the incumbent.  I think the flip is true.  That's residential.  I mean the cablecos are residential.

2923             The same with VoIP.  I would have to say we didn't talk a lot about VoIP because we consider it the same.  It is local service, local voice service.  Clearly, wherever the competition comes from for local voice service, that's just part of the mix and, yes, if companies like Videotron and Cogeco and Rogers and Shaw are very successful, that will start to demonstrate itself in fact as opposed to I am on the threshold of something.

2924             I think what we are suggesting is you have to balance what actually happens versus ‑‑ just because it is a different technology doesn't mean all of a sudden all the rules of gaining a customer are thrown out the window or all the challenges associated with taking something from somebody who has everything, and that is the case.  Frankly, you don't want to lose everything.  That is a natural tendency you have.

2925             So it is a bit of a conundrum to get a competitive ILEC.

2926             COMMISSIONER LANGFORD:  Essentially, this proceeding is premature, is what you are saying.

2927             MS GRIFFIN‑MUIR:  To a certain extent.

2928             MR. PEIRCE:  In terms of establishing a bright‑line test now that will govern, yes, absolutely.  We would say that is not a question you should be feeling yourselves compelled to answer.

2929             You know, if you take a judge's classic response, you don't answer questions you don't have to answer until you have a real situation in front of you that actually presents the facts and gives you the appropriate chance to balance the puts and takes to a decision.  You really don't have that yet in terms of ‑‑ you have perhaps the promise of it in a way that you haven't had before, but you don't have it in front of you yet.

2930             COMMISSIONER LANGFORD:  It is a little tough for us to practice judicial economy though when we ask the questions.  But anyway, I take your point.

2931             MS GRIFFIN‑MUIR:  I think too a transitional regime does speak to that, because if you were to say in this decision, yes, there is a certain relaxation of existing regulation ‑‑ I know we all run to Winback and I would have to say that in Manitoba we run to Winback too because it is a very effective tool, so you have to balance putting in place what I would say and what was demonstrated actually through Call‑Net's submissions that Winback does make a difference in what happens to you, especially in the residential market.

2932             So you don't necessarily have to start with the number one thing everybody wants and then go to de‑averaging because frankly you are right on the threshold.  You are almost stepping over to be forborne.

2933             Between here and there there are a number of things that can be made available to the ILEC which do offer more pricing flexibility without being preemptive, without squashing competition before it starts, because unfortunately you have to lose market share if you are holding all the market share.  It is a question of obviously you don't want that.

2934             COMMISSIONER LANGFORD:  I would like you to review for us some of those things that we could do just to make sure we have them on this record as well and talk about them, and that will be my last major area.

2935             Before we do, there is a question I have put to a couple of the ILECs at least and I'm, to be frank, less than satisfied with some of the answers I have gotten so I will put it to you.

2936             I am sceptical of the statements that I have heard in here over the last day and a half about how tightly the hands of the ILECs are tied and how little they can do to proactively market their own products to sort of cut off at the pass anybody trying to steal their clients, steel their subscribers.  As you are an ILEC when you have one of your hats on, how hamstrung are you by the promotions, Winback and the need to make tariff applications for some of your products?

2937             It seems to me intuitively that though no doubt those are handicaps, I mean that is precisely what they are designed to be and that is what they are, but I'm trying to figure out just how much weight each jockey is carrying in this race ‑‑ and if that isn't a mix of metaphors I don't know what is ‑‑ but perhaps you could give me some help on that before we get to Ms Muir's sort of transitional kind of a notion.

2938             MR. PEIRCE:  In a business market obviously we would say that the incumbent is extremely well positioned to keep and to take back customers that either are considering leaving or have left.  That is because ‑‑ I think one of the points that Ron was trying to make is local voice is really a sweet spot in terms of hanging on to or persuading a customer to hang on to that incumbent for a variety of their communications solutions and the local voice lock is so tough to break for any competitor and hence the market share numbers that look like anything in a number of smaller provinces across the country.

2939             In terms of the residential market, you know, I think in Manitoba MTS would experience all the exasperation upfront about the things they would like to do and can't do and look across the fence at cable and say:  How come they can do that and we can't?  That was clearly the reason for the TV entry.

2940             So what has that led to?  What has that competitive threat led to?  It has led to innovation.  That is what drives an incumbent to innovate and offer new services is the threat or the reality of competition.

2941             In terms of are our incumbents in Canada well positioned to craft solutions that work for customers in that world, absolutely.

2942             So they have responded well.  They have responded exceedingly well to competition since competition has been introduced in Canada through all the technological change up until now.  The cable companies have been there through most of that time but only now are talking again about some entry and I think I would be confident, certainly I think Manitoba and MTS is confident, of being able to meet that competitive threat and respond.

2943             And will take all the flexibility the regulator gives it to respond.  But there absolutely are ways, whether it is new service offerings or pricing of forborne services or bundling that which you can bundle, that I don't think amount to shackles for the incumbents today.

2944             COMMISSIONER LANGFORD:  Thank you very much.

2945             Ms Muir, do you want to take us through sort of some of your transitional ideas in narrative form?  They are very clear but I think they are different and they are worth getting on the record here.

2946             I think that will end my questions this afternoon.

2947             MS GRIFFIN‑MUIR:  Sure.

2948             Actually, there are a number of things the Commission could do in terms of:  first, offering more flexibility by removing bundles from under the cap; removing calling features from under the price cap which gives a little more pricing flexibility; reducing the period from a year to something less than a year to eventual elimination of winback; changing the duration of time a promotion can run for or removing the requirement for there to be an imputation test on a promotion.

2949             So there are a number.  They are actually at the beginning of our submission of June 22nd.  But all those things offer some sort of way to respond to the market creatively actually.  What Chris is saying is very true.  The more boxed in you are in terms of just being able to go out and grab that customer back, better still before they actually leave you, the more creative you become in what you actually offer the customer but also the more efficient you become.

2950             If you think of the long distance market, because you had to impute all the costs the competitor had to pay you, you tried very hard to bring those costs down very quickly because it was impeding your pricing flexibility.  So it has a positive dynamic.

2951             I think what you are trying to do when you are moving a market from a monopoly to competitive ‑‑ because we are not starting on the premise that we are in the middle of competition here, especially in the local voice market, you want to try to have regulation that forces the incumbent to behave as if the market were competitive, not just to right off the top, "Okay, I'm going to drop my prices, offer something that I know cannot be sustained by my competitor after they have lost 5 percent market share."  You will never have competition if you do that and you won't have innovation either.

2952             What you are trying to do is give flexibility for someone to be innovative as they lose market share without setting them free to actually stifle the innovation.

2953             COMMISSIONER LANGFORD:  Thank you very much.

2954             Those are my questions, Mr. Chair.

2955             THE CHAIRPERSON:  Thank you.

2956             Commissioner Cram.

2957             COMMISSIONER CRAM:  Thank you and welcome.

2958             We have all afternoon because I do have the dog walker.

2959             I wanted to go to page 6 of your competitive landscape, reality versus theory.  Actually, I didn't understand the last bullet.

2960             Does the last bullet mean that the share of the residential market dropped by 1 percent to 97 percent in the last four years?  I'm just wondering what for the last four years ‑‑ does that only refer to the business market share remaining stagnant?

2961             MS GRIFFIN‑MUIR:  Sorry.  Yes, the share keeps dropping down, yes, in res.  It has just not dropped down that far.

2962             That is a national number too, so obviously depending on which market, yes.

2963             COMMISSIONER CRAM:  Yes.

2964             Mr. Peirce, you were talking about that is why we got into video was to essentially react preemptively but innovatively.  Would you say ExpressVu was also that kind of a thing, the establishment of ExpressVu itself ‑‑ or Ms Griffin‑Muir, it doesn't matter, or Mr. McKenzie?

2965             MR. PEIRCE:  We think it would be adverting to a converged world anyhow.

2966             MR. McKENZIE:  Yes.  I think that certainly was probably part of the vision of being able to drive convergence into the home via multiple vehicles and that was probably at the heyday of trying to control the content and the distribution at the same time.  That's probably what led to ExpressVu as an extension of their standard offers.

2967             MR. PEIRCE:  You probably would think too, Commissioner Cram, that that also speaks to along the way there will be ideas or offers that work better than others.  You know, you think about the talk now about fixed wireless and the announcement of Bell and Rogers around that rollout across the country.  Again, that was a competitor idea.  That arose through Microcell and us.

2968             So back to the point that it is competitors or it is the threat of competition that spurs that kind of creative response that Teresa was alluding to.

2969             COMMISSIONER CRAM:  You were I think the lonely only in saying that there should be no divisions.  It should be both res and bus together without any separation into digital trunks, Centrex and any of the other divisions that Aliant or anybody else has made.

2970             I guess along both a philosophical reason for that but also a practical how that rolls out ‑‑ so I guess we would start with a philosophical reason.

2971             MS GRIFFIN‑MUIR:  It actually goes back to market power.  Let's say for example in downtown Toronto ‑‑ the numbers are recently released by city for the business market, I don't know them off by heart so I am going to say hypothetically 20 percent market share is gone, but in residence 0 percent is gone, so if you were to say my threshold ‑‑ and I am not recommending this ‑‑ is 20 percent, you could forebear in the business market on that basis.  However, that is not to say that in Toronto the incumbent does not have residual market power sufficient actually to be preemptive in the business market because they have the wherewithal from the residential base to be able to respond even though it is a different market.  Frankly, that is probably what we have experienced.

2972             If you think of Centrex in Aliant territory, even having EastLink there on the residential side, what Aliant did throughout probably a three to five year period, when Group and C1 came in, they lowered the small Centrex rates.  When they were gone they raised those rates.  But then Group was coming in after, as were we, after Enterprise customers ‑‑

2973             COMMISSIONER CRAM:  You mean Group Telecom?

2974             COMMISSIONER CRAM:  Yes.  Sorry.  Yes.

2975             All of a sudden in one category there is a huge drop in price for those enterprise customers.

2976             So you have a certain amount of flexibility to respond and giving them more flexibility, along with the market power that comes from having an entire residential base, I think they would be able to behave targeted preemptively.

2977             COMMISSIONER CRAM:  So it really has nothing to do with the substitutability and all the economist philosophical talk?

2978             MS GRIFFIN‑MUIR:  Well, no.  We would say, from a supply side ‑‑ obviously if you look at business from a demand side perspective, pricing is different.  Some of that is the result of history.  Some of it is for a business customer a willingness to pay more for something than a residential customer.  Until you get to a large business customer, really it is substitutable.

2979             Tomorrow if we wanted we could offer the same service to the customer and never make any kind of distinction, whether they are res or bus, as long as we had a footprint to provide that service.  So in that sense, even from an economic theory perspective, we would say there is a lot of similarity in the service offering with the exception of price.

2980             MR. McKENZIE:  I would just add one other piece.

2981             There are some examples that may help which are direct leverage of why they are interconnected.  If you, for example, take the way that LD, long distance, is settled throughout North America, if you could combine all your volume in minutes from your residential business and combine that with your business, when you settle that it gives you a decided advantage.  When you settle that with a North American player, for example, in the U.S., which gives you a lower price point from a costing point of view that you can then turn around and offer into the business marketplace, once again you can leverage from one side to the other, which is something that certainly the incumbents have as an advantage.

2982             MR. PEIRCE:  And you think about that difference, Commissioner, between ‑‑ or the lack of difference in real terms between the business end and residential market as you think about forbearance is that, you know, a company like Allstream would have, network in places where we could offer residential voice service, it is just ‑‑ you know, we would get killed.

2983             Economically, it just would not work.  That is of course why we had to get out of the long distance business in the beginning in the days of contribution.  So it speaks to the market power of the incumbents.

2984             COMMISSIONER CRAM:  Isn't that really an argument saying that the market share loss by the ILECs or market share gain by the competitors should be different between business and res?  You seem to be and of course you know business far better than I think res, but you talk about the ILEC being very well positioned in business.  Isn't that really an argument for saying that instead of saying they should have a 70 percent share, we would be saying in business they would have a 60 percent share?

2985             Is Mr. Bibic here?  A 30 percent share, Mr. Bibic.  I hope his heart is working well.

2986             Wouldn't that be an argument for saying that, that we would just have a differential market share?

2987             MR. PEIRCE:  We would accept the logic that you might decide that you were going to separate the business and the residential market.  What we are trying to underline for you is that in our experience the incumbent with market power is able to bring that power to bear over more than just, you know, in our case the local voice business in a given urban area.  That is not a measure of what we are competing against when we are trying to take business from the incumbent.

2988             Does that roll out across all the geographies of Canada and who is present where?  You know, probably not, which goes again to why we would say tough to set a bright‑line test that is going to work for you across the country at this point.

2989             COMMISSIONER CRAM:  How would that roll out if you had the two of them?  It would have to be an average of 5 percent in ‑‑ it wouldn't because you are not giving us a number.

2990             But whatever, if we picked a bright‑line, and I don't know why that term is used, but if we picked a number it would have to be the two of them together, which would mean that you would be leveraging the low competitor share in residence against a slightly higher share in business.

2991             MR. PEIRCE:  I think you are underlining the fact that you are being forced to guess, and you should be doing that, about something as important as forbearance, and you don't need to.  You have demonstrated time and again your willingness to forebear when an applicant comes before you with a market that they can demonstrate under the criteria you set in 94‑19 would support that kind of decision.  Market share is certainly an important criterion of that.

2992             The one thing you can say to my mind clear and forcefully is that the market share figures in local voice today don't support it, but as to whether in a given province you would, in that circumstance, mix and match differently ‑‑ you know, I suppose that goes back to Commissioner Langford and the Saskatchewan comments about what is the mix of business and residence in a different province.  Are there some provinces where there is not that sort of business hammerlock that lets you draw down a wide assortment of communications solutions through that local voice dominance?  Is it more residential where you can just look at your basic market share?

2993             I suppose those are considerations that would be valid.

2994             COMMISSIONER CRAM:  Now I will go back to my desperate need for maps.  Could you give me ‑‑ and this is the other side of your, and I'm not going to say schizophrenic, personality.

2995             For MTS area, could you give me maps showing the LIRs there?  Also, tell me how many exchanges there are in Manitoba, how many A band exchanges, how many B band exchanges and the average number of subscribers per band, just by an undertaking.

2996             MS GRIFFIN‑MUIR:  Just A and B though?

2997             COMMISSIONER CRAM:  Yes, just A and B.

2998             MS GRIFFIN‑MUIR:  Okay.

2999             MR. PEIRCE:  Not F?

3000             COMMISSIONER CRAM:  No.  I mean, mind you, there is competition in F in Nova Scotia.

3001             Thank you.  Thank you, Mr. Chair.

3002             THE CHAIRPERSON:  Commissioner Pennefather.

3003             COMMISSIONER PENNEFATHER:  Thank you, Mr. Chairman.

3004             I just wanted to go back to the transition suggestion that you were discussing with Commissioner Langford.  There is just a piece of it that I wasn't entirely clear on.

3005             I got the list of measures per se but I'm assuming that if it is a transition from here to there as described in ‑‑ I have your MTS response to CRTC Interrog 701, but you don't have to get it, and I am looking at your final arguments as well, I would assume that rather than being just a continuing regulation that a transition period would be, as you say, a test.  You say that part of the testing would be "regimes are scalable".  I am quoting from your written arguments.

3006             Can you give me a sense of what you mean by "scalable" and what precisely that would be?

3007             MS GRIFFIN‑MUIR:  I guess precisely, I don't have something precise in mind.  I think what it is is scalable in the sense of the degree of competition could relate to the degree of flexibility provided to a particular incumbent in a particular area.

3008             So I don't have a scale in mind, if that is your question.

3009             COMMISSIONER PENNEFATHER:  It was my question.

3010             I was also listening to your other response in terms of not having a number, as I assume you don't, for when we have reached the "there" in terms of forbearance.  I assume perhaps you didn't have numbers working back, so what does "scalable" mean?  What would you be assessing?

3011             MS GRIFFIN‑MUIR:  "Scalable" does actually advert to some sort of share loss, some sort of entry.  Actually, this is where I could say 5 percent.  You could start introducing certain flexibility depending on what geographic area.  Not forbearance but maybe flexibility to remove some bundles from the cap, to be able to respond with a little more flexibility that could gradually get to a higher share loss over time.

3012             I mean it is possible there because it is a little more easily retractable if there hasn't been full forbearance.

3013             MR. PEIRCE:  It goes to, you know, you think about the things that we measure in the business, you know, six data points being a trend, that if you ‑‑ regardless of where you search, there is probably no particular magic there once you establish the floor.  When you establish the floor, if you are, as Teresa suggests, providing some greater flexibility, you are also able to see, are we still able to see some continuing or growing competitive entry which will let you see a trend toward competition instead of this one data point of here is the share, now we are gone.

3014             COMMISSIONER PENNEFATHER:  Just one final point too.

3015             In the written arguments you mention the concept of opportunity to test and measure the sustainability of competition in the relevant market prior to making a final decision to forebear from regulation.

3016             This speaks perhaps to a certain time period over which you would assess sustainability per se.

3017             Do you have a comment on that?

3018             MS GRIFFIN‑MUIR:  Yes.  Certainly when we were discussing it we were thinking kind of ‑‑ there is an annual monitoring report where you are looking at data annually, so you should see a discernible difference if truly this is competition that is going to be sustained over a period of time.  So that is more or less how we were thinking about it.

3019             COMMISSIONER PENNEFATHER:  Annual.

3020             Thank you very much.  Thank you, Mr. Chairman.

3021             THE CHAIRPERSON:  Just to follow up on Commissioner Pennefather's question, I must say in reading your transition proposals in your submission, your argument and today, I am seeing the monster of a three‑dimensional grid of triggers, measures, geography, and presumably each one with an application ‑‑ I am trying to see if I am correct ‑‑ and, if so, talking about administrative workability and non‑micromanaging a transition between where we are now and full competition, how do you solve that?

3022             MS GRIFFIN‑MUIR:  I guess really the way we would have discussed it was more in terms of our own recommendation for the relevant market, which would be the territory.

3023             For example, if you decided there was sufficient competition in the territory, non‑high cost, then you could decide well the ILEC is entitled to more pricing flexibility, maybe we should reduce the winback timeframe, for example, or remove some of the services from under the cap that are features or bundles.

3024             I didn't see it like a grid though.  I don't see it that mathematically.  It is actually to me probably more beneficial to just let it go for the overall territory period, because as ‑‑

3025             THE CHAIRPERSON:  The overall territory being each operating territory ‑‑

3026             MS GRIFFIN‑MUIR:  That's right of the incumbent, sorry, yes, within ‑‑ where there is competition.  So if I take Manitoba as an example, and Manitoba is experiencing ‑‑ obviously targeted in a certain respect to wherever their competitor rolls out service, but you can see they are losing residential market share generally speaking, I think you can make an assessment and decide, yes, they should have more flexibility to respond to that broadly.  So they could introduce something, a new bundle or features that won't affect their price cap, that will allow them to respond.  We could actually target that, I'm not saying we won't offer it to everybody else, but target it, market it to certain customers we want to be able to have respond.

3027             That is more what we were thinking in terms of not some construct, like, with matrices, more practically speaking just how regulation works today, which is broad.

3028             THE CHAIRPERSON:  Right.  I understand your broad concept, but again the devil turns out to be in the details and it turns out to be a given request for a given relaxation of one of those measures that you spoke about in a given territory or part of it.

3029             From what you are saying, by leaving it loose you almost enhance uncertainty, it seems to me, and regulatory burden by increasing the number of times that you have to debate whether a given measure should be relaxed at a given trigger point in a given territory.  I don't see how you can avoid the process discussion for how you get from here to there and, if I am correct, then I am seeing a nightmare of many, many proceedings, a lack of certainty and a regulatory tangle.  So help me out.

3030             MR. PEIRCE:  I think you could if you could see your way through to something that was administratively more easy.  Certainly, you know, a number of your stakeholders would say that we are stuck with a fairly application‑centric world now for a variety of things, but if you were looking, as we say, at a broad overall measure before you would make that ultimate decision to forebear, which we think should be a decision you take pretty seriously, I'm sure you would but I mean the last decision, and you leave that to the broadest level, then you might be in a position, through the guise of the monitoring report perhaps or through whatever natural administrative process, to say that in a given year you find yourself prepared to permit or allow a certain type of promotion or a competitive activity in a given region for the next period of time.

3031             Whatever flexibility with the ability I suppose that if circumstances showed really remarkable change then your stakeholders would be permitted to bring an application before you for something more extreme and imminent.  If you set in process some sort of continuum there, then your parties will react to that and will use what flexibility they have available to craft their annual campaigns over whatever it is they are doing.  That is how planning happens within the corporation about what the targets are for the year and how it is you are going to meet them.

3032             We would say that you are not facing something so imminent and overpowering that that type of tempered response would not be the appropriate one.

3033             THE CHAIRPERSON:  It is not the tempered response that I am questioning.  I don't see how you avoid, if you are going to keep it down to some relatively simple and predictable set of outcomes, I don't see how you get away from a grid or keeping as few boxes on that grid as possible with the measures down one side and the targets or triggers across the others so that people can govern their businesses and say, well, okay, I see that if that happens that I will be able to ‑‑ you know, the winback will be reduced, or whatever.

3034             Unless you do that and you have a fair degree of automaticity, it seems to me you have endless proceedings.

3035             That is not what you are proposing or does it translate into that kind of grid?  You haven't given us that yet, I mean ‑‑

3036             MS GRIFFIN‑MUIR:  No.  We haven't given you a grid.  I don't think we would object though to what you are saying.  To the scalable, I mean, that's what we envision.  No, we didn't give you a precise proposal.  I would have to think about that actually.

3037             THE CHAIRPERSON:  Thank you.

3038             Commissioner Noël.

3039             COMMISSIONER NOËL:  Just one question.

3040             You suggest that the relevant geographic market should be the ILEC non‑high cost serving area which is considerably larger than one exchange or a number or cluster of exchanges or an LCA or an LIR.  Is your approach to the relevant geographic market tinted by the fact that 62 percent of your overall revenues are derived from out of region or out of territory activities, therefore the lost revenues in your incumbent market are likely to be less impacted by competition, or your bottom line or your total revenues will be less impacted by competition?

3041             MR. PEIRCE:  I would say to you that our whole position in front of you is absolutely tainted by the fact that we are a national competitor.  We would say in terms of the public policy objectives that is a good thing, that we are not ‑‑ obviously, in Manitoba, when we were looking at the business, we are about growing the TV business and we are about preserving the dominance of the connectivity business, whether it is wireless or wireline, in Manitoba.  So to that extent, yes.

3042             But does that translate to say that ‑‑ I mean we would say the barriers at the national level are significant enough that we would ‑‑ if you haven't seen the challenges as often as we have, the challenges of growing on the national ‑‑

3043             COMMISSIONER NOËL:  I have seen the challenges in a previous life.

3044             MR. PEIRCE:  Exactly.  Exactly.  Actually, a life a few removed.  That's right.  I mean the challenge of growing the revenue nationally is probably as great or greater than that challenge of warding off competition in Manitoba.

3045             COMMISSIONER NOËL:  That position also protects you in a way in the out‑of‑territory market because you have the mantle of a protected ‑‑ je cherche un mot en anglais.  Ça va venir.  If there is no forbearance in the out‑of‑market territory, then you are protected against the ILEC, the local ILEC.

3046             MR. PEIRCE:  To be clear, there has been a lot of use of that phrase "protecting competitors" by a lot of the parties before you.  What we would honestly say is that our regime, framework, around competition since competition was opened up in Canada has done a very good job of protecting the incumbents.  There are no incumbents that have failed.  Nearly every competitor has.  There has been a lot of investor money, billions of dollars of investor money, that has been lost in that effort.

3047             It does cause one to choke a bit to hear that notion about competitors requesting protection, and I know that is not what you mean by that, but just to that point of that phrase being used a lot by a lot of people in front of you.

3048             COMMISSIONER NOËL:  Thank you.

3049             THE CHAIRPERSON:  Commissioner del Val.

3050             COMMISSIONER del VAL:  Thank you.

3051             For this question I am going to need you to put your ILEC hat back on, if that's okay.

3052             You are probably in one of the best positions to answer this question because as an ILEC, in your territory, and you are also offering the cable service, you will be in the position of chasing down the cableco and trying to report on if the geographic market were decided to be the competitor's footprint.

3053             Say if the geographic market, we adopted that to be the competitor's footprint, then you as an ILEC, without repeating what we have heard already and what say Rogers has already said, can you give me some practical examples in your operations of the hurdles you would face in reporting and collecting the data and would you have any information just in terms of what would be your biggest cost items?

3054             This may not be something you have at hand, I guess.

3055             MS GRIFFIN‑MUIR:  Yes, I can't say it is something we have at hand.  I just want to make sure I understand what you are suggesting is if we were to adopt Telus' proposal.  Wherever Shaw would enter, for example, in Winnipeg, we would then have to know where Shaw essentially and then be able to ‑‑ well, put ourselves in a position to respond to Shaw after we lost a certain amount of market share.

3056             COMMISSIONER del VAL:  Yes.

3057             MS GRIFFIN‑MUIR:  I couldn't tell you what our biggest cost was.  Obviously none of our systems are structured that way.  I will say, though, I think it is kind of a backward way of looking at forbearance, that you are really looking at it from the perspective of asking the competitor, which we have objected to actually in TV.  That the competitor always identify where they are because you are quite vulnerable as a competitor holding up your hand saying, hey, I am over here in this exact five houses.

3058             We don't like to do that in TV, I can tell you that right now.  And I am pretty sure that no one is going to want to do it in the telephone business either, but nothing we have to date in terms of data collection would allow us to zero in on exactly where everybody is to that degree.

3059             I think the onus would be on whoever the entrant was, which seems a high burden to them, but I still think it is looking at it backwards, even talking about our own territory.  Because once they identified to us where they were, and we may have an idea ‑‑ once you start losing market share, you have a general idea where you are losing it.  Especially I don't accept the premise we have the customer first, so we have an idea where we lost the customer from.

3060             But we could target, then, those customers, if that is your question.  I think there would be a cost obviously in a billing, particularly, and probably some operations to change the pricing, which is not an easy thing to do.  But if you are telling me that this is the threshold and you are  going to tell me exactly where my competitors are, I think I would probably bear those costs because it puts me in a very good position to respond to that competition.

3061             MR. PEIRCE:  And there is a analog in the business market, just to add to that, because that is exactly what happens in the ‑‑ in the business market, and something we worry about as a business if we can get an offer out there that is sort of beneath the radar screen of some of the larger incumbents we come across or whether it is something that will rise to that level as something they will not be prepared to lose, and will exercise their power to not do so, you know, when we have to announce, if you will, that fact.

3062             COMMISSIONER del VAL:  So just on that, that is interesting, putting on your other hat in being competitor in Manitoba, what ‑‑ and you were saying that you wouldn't want to give that type of information on where you are going in the competitive footprint.  Now, what hurdles would you put up to ‑‑

3063             MS GRIFFIN‑MUIR:  To not give that information?

3064             COMMISSIONER del VAL:  Yes.

3065             MS GRIFFIN‑MUIR:  Well, I guess, frankly, we are supposed to give that information ‑‑

3066             COMMISSIONER del VAL:  I know you are.

3067             MS GRIFFIN‑MUIR:  ‑‑ in a broadcast light.  How would we not?

3068             COMMISSIONER del VAL:  Yes?

3069             MS GRIFFIN‑MUIR:  How do we not.  Okay, well, normally we try to use all our own facilities so that we do not have to identify where we are.  That's how we don't do it today.

3070             COMMISSIONER del VAL:  Okay.  So it would be very difficult for the ILEC to track where you are and then even more difficult for us, wouldn't it?

3071             MS GRIFFIN‑MUIR:  Yes, if we don't want you to know where we are, yes.  I think so.  I mean I think it is less difficult for you if you just ask us.  We kind of have to tell you.  We just wouldn't tell the ILEC.

3072             COMMISSIONER del VAL:  Well, good.  Thank you.

3073             THE CHAIRPERSON:  Thank you.  Commissioner Williams.

3074             COMMISSIONER WILLIAMS:  My questions are, Mr. McKenzie, in your role as VP marketing and business development, given that 60 percent of your revenue is from out of territory, have you experienced various forms of foot‑dragging or questionable barriers to service when trying to get your connection needs met with the local ILECs?

3075             MR. McKENZIE:  Yes, in fact ‑‑ and the severity of that is actually increasing.  If I take last month alone, with the local line provisioning to business customers that we rely on, Bell, in particular, 86 percent failure rate in the month of August.  Telus was worse than that because of their labour disruption.

3076             So this has been be an ongoing issue and we haven't seen satisfactory remedy towards that.  So, once again, the point I was making earlier, just goes to show, when you control that last mile, whether through ‑‑ we have talked about service and pricing, but what you can actually do to control the customer is very much a unique position that incumbents have in the marketplace.

3077             COMMISSIONER WILLIAMS:  Shaw, in their final argument, suggests that MTS Allstream simply refuses to report numbers for Shaw customers  that subscribe to MTS Allstream's high speed internet service and MTS TV.  Why was this the case and for what reason and, finally, I guess, what is happening now or since that allegation was raised?

3078             MR. PEIRCE:  I think we have arrived at a solution that works for Shaw and works for us to de‑link the services.  This was the first competitive entry in Manitoba, so MTS had not been asked to do this before, and we have arrived at a manual process that will let us do it in the meantime until a permanent solution is in place.  And my impression is that, you know, that we have resolved that issue between the parties, in far less time than many of the participant applications we have launched as an competitor, I might add.

3079             COMMISSIONER WILLIAMS:  Thank you very much.  That's my question.

3080             THE CHAIRPERSON:  Thank you.  Vice Chair French.

3081             COMMISSIONER FRENCH:  The campaign against economics and regulations is an interesting one, though I confess it is less a campaign against economics than against a certain version of economics and in favour of another version of economics.  And in that light, I would like to ask you your reaction to the director's Competition Bureau's submission that the Commission should analyze the relative incremental or variable costs of competitors and entrants on the one hand and ILECs on the other.  Does that strike you as a useful activity on our part?  Do you think that it is pertinent to the decision on forbearance?  It is page ‑‑ paragraph 64 of the director's final argument.

3082             MS GRIFFIN‑MUIR:  Okay.  Thanks.  I don't think, just at the outset, we would say it is a useful exercise.  I think, by and large, we would say the variable cost of the incumbent would be less, actually, than the variable cause of the entrant.  But just to Mr. Dalfen's point about the difficulty of getting a scale for transition, I think once we go to measure those costs, it would take us two years, at least, to embark on a process to look at them, than the validity of the data that is put forward.  It is questionable.  That all has to be tested.

3083             So practically speaking, even if theoretically one wishes to make an argument that ‑‑ and I think their argument was actually flipped, that the variable cost of the entrant was actually lower than the variable cost of the incumbent.  So the premise of the argument I disagree with, but also I think the practicality, even if it is theoretically appealing, it would be impossible to actually measure that.

3084             COMMISSIONER FRENCH:  To be fair to the Commission, the Commissioner doesn't make any hypothesis one way or the other.  The suggestion is simply that this is a relevant piece of analytical ‑‑ piece of analysis for the Commission's assessment of the sustainability of competition, and you don't share the view that that kind of information, A, could be readily available and, B, would be useful?

3085             MS GRIFFIN‑MUIR:  I share it only to the extent that I think you can operate on the supposition that the incumbent's variable cost would be actually less than the entrant's cost.

3086             COMMISSIONER FRENCH:  So on that basis, how can we expect to have a sustainable competition?

3087             MS GRIFFIN‑MUIR:  Well, I guess it is giving entrants the opportunity to get into the market and get a stronger foothold and build up a certain level of scale, because this is an industry that is really governed by the scale of your customer base and your network and the combination of those two.

3088             COMMISSIONER FRENCH:  So the regulator's responsibility is to maintain constraints on the incumbent until the entrant has achieved cost parity?

3089             MS GRIFFIN‑MUIR:  No, I wouldn't say that is the responsibility of the Commission.  I think there is probably degrees at which you could do that anyway, even in terms of having a robust wholesale market would address some of those concerns.

3090             So that it is a question of finding out, not cost parity in a precise sense, but overall, the opportunity either through a robust wholesale market or probably more likely the combination of a robust wholesale market and incumbents with their own facilities as well to reach that equilibrium.

3091             COMMISSIONER FRENCH:  I am under the instructions of the Chairman to finish this by 4:30, so I am going to ask one small question.  And my colleague, Commissioner Williams notes that it is 4:31.

3092             Telus has suggested that the Commission needs the benefit of more current and more accurate information in order to assess the state of competition.  It was going to be a monthly report by all of the players as their customer acquisition performance in the last month relative to a baseline.  I hope I am not misrepresenting the proposal.

3093             I think that we heard this morning it might be quarterly.  Let's suppose it is quarterly.  Would you provide that information or would you regard it as appropriate?

3094             MS GRIFFIN‑MUIR:  Can we provide that information?  We have, I am sure the staff will tell you, a lot of trouble providing the information annually.  So on a quarterly basis, depending on how you scale the information, I am not saying we couldn't provide it.  I really disagree with is it necessary to incur that kind of burden.  Because we would spend most of our time trying to provide information, and our experience thus far has been the world doesn't change that much in a quarter.

3095             So ‑‑ and then once we saw rapid growth or rapid change, believe me, we would all be beating down your door to do something.  So I don't know that it is really necessary for the degree of administrative burden.

3096             MR. PEIRCE:  I think we would say that the annual coming out of the ‑‑ you know, one of the petitions on contribution, the annual monitoring report has proved to be a very helpful source of information for both the Commission and the industry.  I think clearly a bit of that push you are feeling from some players is just a reaction to the fact that these matters are being reported upon and because some parties don't like the picture, they want to continually re‑draw the picture.  But that annual report is ‑‑ and the diligence in which it is prepared and obviously the speed with which it is released each year has been generally a force of good in the industry, we would say.

3097             COMMISSIONER FRENCH:  How does the periodicity of the report affect the degree of perceived competition one way or the other?  Either the facts are this or they are that.  The fact that they are quarterly or annual, what difference does that make?

3098             MR. PEIRCE:  Well, exactly.  But that is the argument of those that have not liked the facts in the report has been they are old.  Things are changing.  The world is on its head.  You need more recent, more currently, because this week is different than last week.  What we are saying is that is just not the case.

3099             THE CHAIRPERSON:  Thank you.  Those are our questions and we will resume at 4:50.

3100             Nous reprendrons dans 15 minutes à 16 h 50.

3101             THE CHAIRPERSON:  A change in the order.  ARCH and the Bureau have exchanged places and so ARCH will be the next party appearing.

‑‑‑ Upon recessing at 1635 / Suspension à 1635

‑‑‑ Upon resuming at 1701 / Reprise à 1701

3102             THE CHAIRPERSON:  Order, please.  À l'ordre s'il vous plaît.

3103             Madame la secrétaire.

3104             THE SECRETARY:  Thank you, Mr. Chairman.  We will now proceed with ARCH.  Please introduce yourself and you have twenty minutes.

PRESENTATION / PRÉSENTATION

3105             MS KERZNER:  Thank you, Mr. Chairman, Commissioners.  My name is Lana Kerzner and I am a staff lawyer at ARCH, a legal resource centre for persons with disabilities.  With me today is Phyllis Gordon, ARCH's executive director.

3106             Firstly, I want to thank you and the Competition Bureau for accommodating our time constraints today and for moving us ahead in the schedule and unfortunately right now we don't have a copy for you of our written submissions, but we will be providing them this week.

3107             ARCH welcomes the opportunity to participate at this consultation.  We are here to speak to the Commission and the telecommunications industry about the responsibility to provide accessibility for persons with disabilities in the Commission's deliberations and decision in this proceeding.  As ARCH has participated in other proceedings before the Commission, we know that you are aware of our organization and its activities.

3108             I will briefly describe our organization for the sake of the record and the parties to the proceeding who may be unfamiliar with us.  ARCH is an Ontario‑based charitable, not for profit legal clinic that is dedicated to advancing and defending the equality rights of persons with disabilities regardless of the nature of the disability.

3109             ARCH represents national and provincial disability organizations and individuals in test case litigation at all levels of tribunal and courts.  We proceed education about disability law, make submissions to government on matters of law reform, and offer a telephone summary legal advice and referral service.

3110             ARCH is governed by a volunteer board of directors, a majority of whom are persons with disabilities.  We have realized over the past number of years, from both the calls we receive from persons with disabilities and from our board members who have disabilities, how significant the telecommunications barriers in the everyday lives of persons with disabilities really are.

3111             The frustrations that are regularly expressed to us point to the importance of our participation in any CRTC proceeding which we feel may impact on the lives of persons with disabilities until such time as inclusive design and barrier free telecommunication services truly exist in Canada.

3112             It is easy to forget how pervasive barriers may be for persons with disabilities.  Recently, I was giving a talk to a group of people whose disability affects their ability to communicate verbally.  To communicate they may point to pictures and letters on what are called Blissboards or rely on assistance of other people.  My talk was about the legal steps they can take if they experience abuse.  I told them that it is important for them to get legal advice and I then gave them a phone number that they could call to access a lawyer.  I immediately heard a collective laugh from the entire group.  I was mystified until an individual who attended to assist in communication explained to me that none of the members of the group can use a telephone, because telephones in Canada are not generally useable by persons who cannot speak.  Imagine being in a an abusive situation and not being able to access help because you can't use the telephone.

3113             It is our ARCH's belief that Canadians with disabilities currently face an extensive array of barriers to their ability to use telecommunication services.  ARCH summarized some of these barriers subsequent to a consultation we conducted in relation to our participation in the application by Marie and Chris Stark to review and vary review of regulatory framework, telecom decision CRTC 94‑19.  You will be able to review a summary of that consultation at Appendix A to our June 22 comments in this proceeding. 

3114             In this proceeding the issue that the Commission will determine is the framework, including the criteria, for forbearance from regulation of residential and business local exchange services.  As you are aware, the Commission may forbear where a telecommunications service is or will be subject to competition sufficient to protect the interests of its users.  Further, the Commission may only forbear in a way that is consistent with the telecommunications policy objectives.  Subsection 7(h) requires that telecommunications respond to the economic and social requirements of its users.  The social requirements of persons with disabilities includes accessibility to all telecommunications services without discrimination.  It is ARCH's view that unregulated competition has not and will not sufficiently protect the interests of users with disabilities.

3115             Historically, competition has not been sufficient to protect their interests.  The experience with terminal equipment illustrates the adverse effect that forbearances had on persons with disabilities.  As you know, the Commission deregulated the terminal equipment market in 1994.  At the time, it did not undertake any regulatory measures to impose any conditions to address the unjust discrimination faced by persons with disabilities relating to their use of terminal equipment.

3116             It is now over a decade since the decision to forbear and the discrimination relating to terminal equipment continues unabated.  Many persons with various disabilities are not able to use telephones at all or may have limited use of them.  Some of the barriers which we describe in our Appendix A to our June 22 comments include: 

                      "Individuals with little capacity to control hand movements have insufficient motor control to use keypads, given the small numbers and lack of space between the numbers.  Persons with limited cognitive capacity have trouble navigating the complex menus and features of most current phone technology."

3117             Faced with the reality of inaccessible terminal equipment in 2001 individual advocates, Marie and Chris Stark, filed an application to review and vary the part of decision 94‑19 dealing with the sale, lease and maintenance of terminal equipment.  The Starks had the following to say in a letter written to the Commission in November of 2001:

                      "We ask the CRTC to regulate access to terminals for persons who are blind, because competition has failed and is likely to fail to do so in the future."

3118             ARCH became a party to the Stark proceeding and made submissions in September, 2003 which addressed the inaccessibility of terminal equipment for a broad range of Canadians with disabilities.  Unfortunately, notwithstanding the Stark proceeding, inaccessible terminal equipment continues and the problem remains unchanged.  Even though the Commission does have in place processes for the public to raise concerns subsequent to a decision to forbear the Stark proceeding illustrates that such a process is unlikely to address the barriers experienced by persons with disabilities, systemically and comprehensively.

3119             The lesson to be learned from the experience with terminal equipment and the Stark proceeding is clear, competition in a forborne market has not and will not sufficiently protect the interests of users with disabilities.  A new and systemic approach to the social requirements of consumers must be adopted. 

3120             Terminal equipment is not the only example, unfortunately.  Although cellular phones have been in the competitive market for years, documentation and anecdotal evidence continues to demonstrate that they remain markedly inaccessible to many persons with disabilities.  For example, the keypads of wireless phones make it hard to distinguish keys visually and tactically, creating barriers for persons with visual disabilities.  The audio quality of wireless phones is often poor, creating a barrier for persons with hearing or speech disabilities. 

3121             It has been ARCH's position that all Commission activities are subject to the Canadian Charter of Rights and Freedoms.  Specifically relevant in the context of telecommunications and persons with disabilities is the Charter's guarantee of equality rights under section 15.  The Commission and the telcos, including Bell, SaskTel and Telus, have recently expressed similar views that the Charter applies to the Commission's decisions.  These positions were clarified in the context of the leave to appeal application to the Federal Court of Appeal with respect to the winback rule aspect of the Commission's recent VoIP decision.

3122             In this proceeding ARCH is not challenging the proposition, but the Commission has the power to forbear in the abstract.  Rather, we submit that the exercise of forbearance must be conducted in a manner consistent with the Charter and, in particular, that respects the constitutional rights of persons with disabilities.  This means that the Commission cannot forbear until it is certain that forbearance will not result in discriminatory telecommunication services or, if it does forbear, this must be undertaken in a manner that ensures non‑discriminatory access to telecommunication services now and in the future. 

3123             The Commission must pay due regard to the Charter's fundamental right to equal treatment and the intended principles of accessibility and accommodation.  In light of the examples we have highlighted which shows that competition has not ensured full accessibility to terminal equipment and cell phones for persons with disabilities, ARCH submits that the impact of forbearance in the local exchange market will also perpetuate and aggravate telecommunication barriers for persons with disabilities in violation of the Charter's right to equality.

3124             Accordingly, prior to making a decision on forbearance, it is incumbent on the Commission to ensure that its exercise of its forbearance power is in accordance with the Charter.  While ARCH has asked the Commission to consider the Charter's equality right in this proceeding, this does not mean that the responsibility rests with ARCH to advance and answer all of the Charter questions.  In conducting this proceeding the Commission is in the best position to decide what shape and format its consideration of charter issues should take.  A process needs to be developed that investigates the Charter concerns and gathers the relevant evidence regarding how forbearance with affect accessibility of telecommunications for persons with disabilities.

3125             The Commission is on record about possible methods by which it can consider Charter issues.  In the winback appeal the Commission referred to the following options it could have utilized in the VoIP hearing:  establish a parallel process focused on the Charter; send additional interrogatories to the parties; extend the timelines to allow all parties an opportunity to gather evidence and make submissions relating to the Charter issues; or make an interim ruling and commence a new proceeding by way of public notice to consider the Charter issues. 

3126             ARCH recommends a bold approach that is appropriate in law and public policy.  The decision in this proceeding should be stayed pending a public notice that fully investigates the responsibility and mechanism to implement fully accessible telecommunication services in Canada.  ARCH submits that the Commission must inform itself fully about the accessibility needs of persons with disabilities in the context of residential and business local exchange services.  We thus suggest that as part of the public notice a national consultation of persons with disabilities must be undertaken.  ARCH submits that the Commission's goal in the public notice should be that at least sufficient evidence is placed on the record to answer the following equality‑related questions.  How are persons with disabilities treated differently?  How can the unequal treatment be remedied or eliminated?  By what mechanism should the cost of accessibility be addressed?

3127             ARCH wishes to make it very clear that in our view an examination of the implication of the Charter and accessibility is the responsibility of the Commission and should not be delegated to CISC.

3128             Much debate in this proceeding has been in the context of which, if any, powers the Commission should retain if it does decide to forbear.  ARCH's primary and simple message in this proceeding is that if the Commission chooses to forbear it must retain and use the powers necessary to ensure a fully accessible telecommunications environment for all Canadians, including Canadians with disabilities.  It is ARCH's position that the most effective means for doing so is by retaining powers under both subsection 27(2) and 24. 

3129             ARCH's position on the framework for forbearance rests on the Commission's legal obligation to ensure the provision of a fully accessible telecommunications environment.  While this emanates from the Charter the obligation also arises directly and specifically from the Telecommunications Act itself in subsection 27(2), which prohibits unjust discrimination and undue or unreasonable disadvantage in the provision of telecommunication services.  Forbearance from exercising its duties under subsection 27(2) would undermine the Commission's ability and indeed its legal obligation to address discrimination faced by persons with disabilities.

3130             A decision by the Commission to forbear from the exercise of its power under subsection 27(2) would be inconsistent with its legal obligation to ensure that telecommunication services are available to all Canadians with disabilities on a non‑discriminatory basis.  If the Commission does not adopt our position on retaining jurisdiction under subsection 27(2), the Commission must impose stringent conditions regarding accessibility now and in the future under section 24.  Both retaining jurisdiction under subsection 27(2) and imposing conditions under section 24 is optimal.

3131             If conditions are imposed it is not sufficient that the Commission merely retain its powers to impose conditions at sometime in the future.  ARCH submits that concrete and enforceable conditions must be imposed in a comprehensive manner at the time of forbearance and on an ongoing basis.  We submit that the following conditions be imposed on telecommunication service providers:  that all current local exchange services be delivered to all Canadians in a fully accessible manner and on a non‑discriminatory basis; that telecommunication services be implemented consistently with all current Commission decisions that have provided accessibility requirements for persons with disabilities; that providers be required to audit their services to identify barriers to persons with disabilities and to design and implement barrier removal strategies; that providers be required to report on a regular basis to the Commission regarding the accessibility of their services for persons with disabilities and specific details regarding their plans for barrier removal; that providers be required to meet all future regulatory conditions which the Commission may impose, as well as standards or regulations which the government may enact to ensure ongoing accessibility.  The Commission must expressly reserve its jurisdiction to make future conditions.

3132             In its interrogatories the Commission specifically asked parties to address the concern about affordability for consumers with limited financial resources.  As persons with disabilities are more likely to have limited financial resources than Canadians who do not have disabilities affordable service rates are crucial.  Services which have specific features that make them accessible to persons with disabilities must also be available at affordable rates.  Unaffordable rates in and of themselves can create economic barriers to access of telecommunication services for persons with disabilities.  In our view, it is imperative that the issue be fully considered by the Commission in regard to the Commission's obligations regarding the social and economic requirements of its users. 

3133             In conclusion, ARCH believes that there's a shared vision that persons with disabilities must be able to participate fully in Canadian life.  The challenge is to conduct this forbearance proceeding and arrive at a decision that makes this vision a reality.  We hope that our comments today, as well as the written materials we have placed on the record, will assist the Commission to establish a process and arrive at a determination which is consistent with the equality provision of the Canadian Charter of Rights and Freedoms, retain the necessary powers and develop and implement such specific and concrete conditions which are necessary to ensure that Canadians with disabilities have full access to telecommunications on a non‑discriminatory basis of local exchange services in accordance with the Telecommunications Act and ensure that the views of persons with disabilities are effectively elicited and given due consideration as the Commission deliberates on the current forbearance proceeding.  Thank you.

3134             THE CHAIRPERSON:  Thank you.  Commissioner Cugini.

3135             COMMISSIONER CUGINI:  Ms Kerzner, good afternoon.  Ms Gordon, over here.  Thank you for your presentation this afternoon.

3136             I do have to say that it was so on point that you answered a few of the questions that I had already prepared, so this may be even more brief than you had anticipated.  Of course, your written comments on are on the record and they too were very much on point and your position is quite clear.

3137             I would like you to take me back a little bit if you would and, from your experience, to what extent have service providers today identified barriers for persons with disabilities and designed and implemented solutions to remove them.  As I read through some of the responses of the participants to this proceeding it appears that a number of them do have services in place to address the needs of persons with disabilities.

3138             What more do we need?

3139             MS KERZNER:  A lot of the services that currently exist are in response to activities or decisions that the Commission has already made.  For example, with respect to alternate billings for persons who are blind, with respect to message relay service, with respect to payphones and TTYs, and so as a result ‑‑ there are two results.  One is that the accessibility features that exist are limited to a large extent to accommodating persons with only some types of disabilities, such as visual disabilities and hearing disabilities.  So what that means is, for example, someone who is unable to communicate verbally still experiences a barrier or someone who has a cognitive disability and can't navigate a keypad that would need a picture on their phone that they could press of a person, to dial that number.  That is not accommodated.

3140             So there are a host of Canadians with disabilities that have not been addressed altogether.

3141             And also it appears to us that to a large extent the Commission has had a lot of influence in directing service providers in the way of accessibility, so our concern is that the initiatives so far are limited too much to responding to the Commission's direction rather than being proactive in addressing the host of barriers that currently exist.

3142             COMMISSIONER CUGINI:  So is it your position that the absence of any Commission direction would have resulted in none of these services being available?

3143             MS KERZNER:  It is hard to know what would have existed, but it is our position that the Commission's direction has certainly progressed advances and accessibility, but that it is right now not sufficient.

3144             COMMISSIONER CUGINI:  And do service providers contact organization as like yours for consultation purposes to determine what are the needs of persons with disabilities?

3145             MS KERZNER:  To my knowledge ARCH has never received an enquiry from a service provider about the needs of persons with disabilities.

3146             On the flip side, the other interesting aspect is that persons with disabilities primarily do not know what services currently exist that make telecommunications accessible to them, so when we read the responses to interrogatories from the parties, if we had put those responses to our ‑‑ to persons with disabilities, they would for a large part be shocked that all of these services currently exist.

3147             MS GORDON:  Can I just add to that answer.  It is apparent from some of the submissions that we have received over our last two or three years of engagement at the CRTC that some of the companies have initiated some programs and they have consulted ‑‑ they would be unlikely to consult with a legal resource centre.  We are primarily lawyers.  We are not telecom people, really.

3148             They would be much more likely to go to consumers groups such as the Canadian Hearing Society or something, the CNIB, but there are many disabilities that do not have powerful and long historical lobbies or consumer groups and that is ‑‑ I mean, one of the key points, messages that we want to explain is that we are not only dealing with some disabilities.

3149             And the response has been piecemeal.  I mean, some companies do more than others.  There is certainly no systemic national approach at this point in time from what we have been told from reading interrogatories.

3150             MS KERZNER:  If I could add to that, in fact, from the work I do at ARCH, one of the groups that appears to experience the most substantial barriers are people who have communication disabilities and they are not a very ‑‑ they do not have a very strong voice in terms of presenting their views, so some of the views that the Commission that might be raised with the Commission are not necessarily representative of the most extensive barriers that exist.

3151             MS GORDON:  Could I just add, I mean, I think that a key point we are trying to make in this proposal that you seriously consider looking at a public notice to find out really what is the state with respect to the requirements of persons with disabilities across the country, is that we cannot represent everybody and we cannot provide you all that information.

3152             You have the resources and you also have the obligations under the Charter and the Telecommunications Act to ensure that the social requirements of users are met.

3153             So that is why we can answer some questions, but in the same way that the companies are responding bit by bit, our answers will also be bit by bit.

3154             In the Stark proceeding that Lana mentioned, the Commission contracted with a consultant to prepare a very large report on the requirements of persons who are blind or have visual disabilities.  That took months.

3155             It is a large topic and there are examples in other jurisdictions.  I mean, it is a very big topic we are talking about and we think, we submit to you, that it really would be appropriate for the Commission to take a holistic and comprehensive approach to understanding the question and hearing legal submissions from everybody, all the parties, about what the Charter obligations truly are.

3156             COMMISSIONER CUGINI:  You have made that position quite clearly today.

3157             And so I will ask you one last question on my behalf, anyway.

3158             There has been quite a bit of discussion, certainly in the written submissions, on the substitutability of cell phones and VoIP for wireline, in other words wireless and VoIP as substitutes for wireline.

3159             Is that the case with persons with disabilities and, if not, why not?

3160             MS KERZNER:  That is actually not the case because for persons with disabilities, depending on the disability and the nature of whether it is wireline or wireless or VoIP, different barriers may be experienced ‑‑ may exist, so that for people who do not have disabilities it may just be a matter of which they prefer to use; whereas, for persons with disabilities is quite likely is that terminal equipment might be accessible and yet a cell phone might not be accessible.

3161             Cell phones, for example, tend to be smaller where the keypads are smaller, so for someone who has a disability that affects their hands, a cell phone would not be a substitute for a terminal equipment, which you can find with larger numbers.

3162             That is just one of many examples.

3163             We actually addressed that ‑‑ the Commission asked an interrogatory with respect to substitutability of cell phones for terminal equipment and we tried to provide some examples in our response to that interrogatory.

3164             COMMISSIONER CUGINI:  Thank you very much.

3165             Mr. Chairman, those are all my questions.

3166             THE CHAIRPERSON:  Thank you.  Commissioner Cram?

3167             COMMISSIONER CRAM:  Thank you, Ms ‑‑ what did you say?

3168             COMMISSIONER FRENCH:  Go ahead.

‑‑‑ Laughter / Rires

3169             COMMISSIONER CRAM:  It is C‑R‑A‑M.  You are F‑R‑E‑N‑C‑H.

‑‑‑ Laughter / Rires

3170             COMMISSIONER CRAM:  Little identity crisis here.

‑‑‑ Laughter / Rires

3171             COMMISSIONER CRAM:  Ms Kerzner, I was intrigued by you saying that individuals with disabilities do not know what exists right now, what we have done, and I am thinking when you say we should do a PN and do the formal process that really it might be a lot better to do something like a consultation, where we would sort of give information, because I wrote beside this "that is our problem".  I mean, clearly, we do not know how to get the information to people with certain disabilities in a manner in which they would be able to access the information.

3172             And so I am wondering if it really should be more of a two‑way street.

3173             I hear you.  I mean, I am a lawyer, so I know what you mean by the legal arguments and everything else, but it would make sense that if ‑‑ it would be more efficacious for us to at least start off with "Here's where we are now.", and then find out whether we are at 25 percent or 50 percent or 90 percent.

3174             MS GORDON:  If I might pick that one up.

3175             COMMISSIONER CRAM:  Yes, go ahead.

3176             MS GORDON:  When we talk about a PN, we have a fantasy.

‑‑‑ Laughter / Rires

3177             COMMISSIONER FRENCH:  We don't.

3178             MS KERZNER:  We have a nightmare.

3179             MS GORDON:  You people come from different parts of the country.  You could do regional consultations.  We certainly see this bigger than the ordinary parties.  We do not see it as ARCH and the telecommunications companies and the competitors and the new entrants, whatever.  Right?

3180             I mean, we see this as a public consultation.  We are talking about a Charter examination of equality rights of consumers.  We are not talking about a public notice potential as in the VoIP appeal of corporate free speech issue.

3181             So we really do think that you would need to gather considerable evidence in the sense of ‑‑ I mean, you can do it in many different fashions.  We don't have a prescribed image.  We do not think cross‑examination is the way to go on this, but there can be experts, there can be consultations, we can give you lists of consumer groups you should be addressing.  You can certainly develop your own forum, your own way of doing it, and that is key, but what is also key is that the legal obligations of the Commission get addressed.

3182             And so if it is only a consultation, our concern is that forbearance goes along and you haven't heard the real story as to why you should retain jurisdiction under 27‑2 or impose conditions under 24, because it is outside of the legal context.

3183             So we really are making a recommendation that ‑‑ we have heard earlier today, that, you know, there is no great rush on forbearance.  Some other parties seem to think the same thing, that for economic reasons it is not timely.

3184             Well, it is not timely for economic reasons, it is certainly not timely for social requirements.

3185             We also think, although we do not represent other consumers per se, that if you were to undertake a public notice in a comprehensive way, dealing with disability and accessibility, you might consider if there are other kinds of consumer social requirements that could be heard at the same time and really do a full picture, you know, and I think it would be wonderful for the country, I think it would can wonderful for the industry.  It would go a long way in terms of people feeling they are being heard.

3186             You know, I am not here to convince the telcos that this is a good thing.  I am hoping to convince you that it is the thing you need to do.

3187             Thanks.

3188             COMMISSIONER CRAM:  Thank you.  Thank you, Mr. Chair.

3189             THE CHAIRPERSON:  Your turn now.

3190             COMMISSIONER FRENCH:  Thank you very much, Commissioner Cram.

3191             I would just like to understand ARCH's view of history.

3192             Is it your position that the forms of economic and social regulation that applied to terminals pre 1994 provided a set of services that have since degenerated?

3193             MS KERZNER:  No, that ‑‑ I think that we ‑‑ that is not what we are saying.  What we are merely ‑‑ I guess what we are saying is that there needs to be some regulation in order to ensure accessibility, but we are not saying that the regulation that existed prior to 1994 was sufficient ‑‑ was what was needed to ensure accessibility of terminal equipment.

3194             MS GORDON:  Could I comment on that one as well, if I may?

3195             I think that what our experience ‑‑ first of all, we are fairly new to this game.  We are about two and a half years into it now and what we have been hearing in our communications or meetings in other forum, in other proceedings, is that we cannot look at terminal equipment because that was dealt with in 1994.  You cannot look at cellular, because that was dealt with in whatever year.  Right?

3196             So it is because of the lack of a comprehensive approach to looking at accessibility and the market has been ‑‑ in fairness, I mean, to your proceedings over the years, different issues have come forward, different markets have been examined by the CRTC and decisions have been made, but the impact in those decisions which has led to deregulation has meant that ‑‑ we keep hearing ‑‑ you can't touch terminal equipment.

3197             Well, as we said in the VoIP hearing, accessibility right now is really possible with new technology; barriers can also be increased tremendously with the new IP technology.  I mean, it can flip either way.

3198             We really do need, I think, leadership from the Commission to take it on.

3199             COMMISSIONER FRENCH:  Yes.  And that is what I am trying to get a grip on.

3200             It is the kind of leadership and the relationship between that leadership or responsiveness and the economic core of the proceeding that I am trying to grope with here.

3201             You are aware, perhaps, that ‑‑ and I stand corrected, but I think I am right that the great majority of the submissions we received advocate or understand or tolerate or contemplate that section 24 would remain for social purposes and some people say yes, but circumscribe it specifically and others say, well, keep 24.

3202             And that does not respond adequately to your concern, or does it?

3203             Were the Commission to accept that majority recommendation, would we be achieving with respect to this proceeding and not with respect to the broader project which you are urging on us, some degree of security for you?

3204             Would it be responsive, recognizing that there is a substantial momentum and other economic questions which also hang on the outcome of the proceeding?

3205             MS KERZNER:  In that question I am assuming that you are saying that the Commission would forbear from 27.2, though, right?  That they would retain jurisdiction under section 24 but forbear ‑‑

3206             COMMISSIONER FRENCH:  The truth is that I can't remember what the majority people said about 27(2).  That is the truth.

3207             MS KERZNER:  Well, you see, but that is ‑‑ to us that is ‑‑

3208             COMMISSIONER FRENCH:  That is important.

3209             MS KERZNER:  That is important, because 27(2) is the section that deals with unjust ‑‑ which is your ‑‑ your power under the Telecommunications Act to address unjust discrimination and from ARCH's perspective it is important that you retain jurisdiction under 27(2) and 24, because those are different sections which give you different powers.

3210             But what I would like to say about section 24 in particular is that from ARCH's perspective it is not enough that you just retain jurisdiction under 24, you ‑‑ it is important that you actually impose conditions now and on an ongoing basis which require accessibility at all points in time and in our submission today and on the record we have made some concrete suggestions about the conditions that would be necessary, but in our opinion if it were just retaining jurisdiction under section 24 to impose conditions without any concrete conditions, that would not be going far enough.

3211             COMMISSIONER FRENCH:  No, the latter point is clear to me.

3212             MS KERZNER:  Okay.

3213             COMMISSIONER FRENCH:  And I would venture to say that when most of the participants in this hearing responded on 27(2) they were not thinking of your particular constituency.  We know that they were thinking of other considerations which are perhaps more centrally or more obvious to them as interveners and to us as economic regulators and I don't think that they would object to the retention of a 27(2) power which was circumscribed for the purposes that you have described.

3214             So that is a helpful thought.

3215             And so the argument ‑‑ or the project really is to discover the unmet needs of the community in question with respect to telecommunications and to formulate structured responses which would improve the lot of these individuals, which is, after all, the fundamental purpose of the exercise.

3216             Is that a fair summary?

3217             MS GORDON:  Might also add that I think there would be some interest in figuring out how those accommodations or accessibility improvements would be paid for.

3218             COMMISSIONER FRENCH:  Yes, I hear you.

3219             MS GORDON:  And I think everybody would be interested in that.  There is other models in the legislation now for rural and urban, so, you know ‑‑

3220             COMMISSIONER FRENCH:  It is very important that you mention that.

3221             MS GORDON:  Yes.

3222             COMMISSIONER FRENCH:  Because Commissioner Cram and I were discussing that and we were ‑‑ I was thinking, and I suspect she was too, that if the Commission has exercised itself to meet that sort of need and, by the way, a number of people would say that needs has been essentially met now, that the purpose for which those high‑cost area subsidies were created, that does not mean that the other, as it were, forgotten constituencies should be ignored.

3223             So I thank you for your point and I think it is well‑taken.

3224             MS GORDON:  Yes, and that is pretty key in terms of economic deregulation potential.

3225             COMMISSIONER FRENCH:  Yes, I mean, I do understand that.

3226             The fundamental argument from the ILECs who have been bearing the burden, if there is a burden, or have been taking the responsibility or have been responding to the directives of the Commission, their view is that is fine, we are more than prepared to live with that, but we do not think it is reasonable that our competitors should be absolved of all responsibility in that regard, which is not something that you would differ with either.

3227             MS GORDON:  No, agree with the ILECs in that point, certainly.

3228             COMMISSIONER FRENCH:  Well, for my part I had the opportunity to be responsible for some of the kinds of services we are talking about when I was in a previous job and I know it is important and I appreciate your presence and it has been clear and helpful.

3229             THE CHAIRPERSON:  Commissioner Pennefather.

3230             COMMISSIONER PENNEFATHER:  Thank you, Mr. Chairman.  Good afternoon ‑‑ good evening, I should say.

3231             I think the Vice‑chair covered a good part of what I was going to ask you and actually, Ms Gordon, you have touched on technology.  I remember having this conversation in terms of the devils and the details, as our Chairman has mentioned in several discussions earlier today.

3232             I think perhaps what I will ask is, Ms Kerzner, you mentioned that at the meeting you were at you were surprised, shocked and perhaps dismayed at the reaction and I wondered if you could tell us specifically what people didn't know about.

3233             My reason for asking the question is where we are at right now and if, in fact, the point about technology is really where I think it is, we are thinking of the advantages, largely, I think you mentioned the advantages.

3234             But what specifically were they surprised that they didn't know about?

3235             MS KERZNER:  The group that I was talking to are persons with disabilities who wouldn't generally have access to the most current technological advancements in telecommunications ‑‑

3236             COMMISSIONER PENNEFATHER:  As in computer, as in VoIP, as in...?

3237             MS KERZNER:  Exactly.  Statistically, a larger proportion of persons with disabilities than average Canadians have lower incomes, so that they are much less likely to have access to the kinds of modern telecommunications technologies that I believe you are envisioning.

3238             In fact, a number of people who contact our office don't have computers, which means that for them using the phone it is the plain old telephone terminal equipment with a receiver that you pick up and if you can't speak, then that technology doesn't work for you.

3239             They do not have any knowledge or appreciation of what else might be out there, nor would they have the economic resources to purchase that equipment.

3240             COMMISSIONER PENNEFATHER:  Okay.  I think that is helpful, because I had assumed in fact that what you were talking about was not computer from your preamble of who you were speaking to, but rather I was concerned as to, I guess, the component of this, which is information, consumer information, and whether that is available about even the good old phone and what those options are and what is available or not and, second, going on into the future, how new technology can be looked at.

3241             But I guess what I'm talking about is also moving now, dealing with things now.

3242             Some of the process that you have been talking about is important, but at the same time in other conversations in this week we will talk about the speed of change.

3243             So I think that specifics are really very important as we look at this.

3244             Thank you for your response.

3245             THE CHAIRPERSON:  Thank you very much, ladies.  Those are our questions.

3246             Madame la Secrétaire.

3247             LA SECRÉTAIRE : Merci, Monsieur le Président.

3248             Nous allons maintenant poursuivre avec Competition Bureau.

‑‑‑ Pause

PRESENTATION / PRÉSENTATION

3249             MS SCOTT:  Thank you.  Merci.

3250             Good evening, ladies and gentlemen.

3251             I would like to begin by thanking the Commission for this opportunity to share the Competition Bureau's views about the important issue of local forbearance.

3252             I am accompanied today by Richard Taylor, Deputy Commission of Competition, Civil Matters Branch, and Patrick Hughes, Senior Economist in the Economic Policy and Enforcement Group.

3253             At the outset I would like to clarify that I will only be speaking to issues involving the general framework in this proceeding.

3254             I would note that we are nearing two years since I have been in my current position as Commissioner of Competition, however out of an abundance of caution and in consultation with the office of the Ethics Commissioner I have recused myself from any participation in the specific Aliant application, because of my former involvement with B.C. Inc. and Aliant.

3255             Mr. Taylor, in his capacity as Deputy Commissioner, has had direct oversight of the specific application.  I would therefore appreciate it if you could hold any questions regarding the Aliant/EastLink situation to the end, permitting me to excuse myself and allowing my colleagues to assist the panel.

3256             Je suis très heureuse d'avoir l'occasion de présenter, aujourd'hui, au Conseil les questions soulevées dans l'avis public de télécom CRTC 2005‑2, Abstention de la réglementation des services locaux.

3257             Les questions soulevées dans cette argumentation, à savoir un cadre d'abstention de réglementation du service téléphonique local, sont essentielles au développement de services téléphoniques locaux concurrentiels au Canada.

3258             Une plus grande confiance accordée aux forces du marché et à la concurrence actuelle, au lieu de la réglementation, offre des avantages considérables aux Canadiennes et aux Canadiens en matière de compétitivité des prix, de choix plus vastes, du service novateur, ainsi que d'une qualité de service améliorée.

3259             Le cadre législatif régissant l'abstention de la réglementation est clair.  Le paragraphe 34(2) de la Loi sur les télécommunications requiert que le Conseil s'abstienne de réglementer un service s'il conclut, comme question de fait, que le cadre de la fourniture par les entreprises canadiennes des services ou catégories de services de télécommunication est suffisamment concurrentiel pour protéger les intérêts des usagers, ou le sera.

3260             The ability of market forces to substitute for regulation turns on the ability of the regulated firm to exercise market power absent regulation.

3261             As the Commission is aware, the term "market power" refers to the ability of a firm to profitably cause one or more facets of competition, such as price, output, quality, variety, service, advertising or innovation to significantly deviate from competitive levels for a non‑transitory period of time.

3262             The Bureau's approach to the assessment of market power is set out in the 2004 Merger Enforcement Guidelines or MEGs.  In merger analysis the Bureau's considers whether the merged entity will be able to sustain higher prices than would exist in the absence of the merger.

3263             In forbearance analysis the Commission must consider whether forbearance will permit the regulated company to sustain higher prices than would exist if regulation remains.

3264             As the goals of merger and forbearance analysis are very similar, the MEGs provide a robust economic framework for the analysis of forbearance.

3265             The MEGs approach to the assessment of market power has been widely endorsed.  The framework has been accepted by the competition Tribunal and the Canadian courts.

3266             It is also consistent with the framework that has been adopted in the U.S. and the EC to assess the ability of a firm to exercise market power.

3267             In the EC, this analysis is also employed to determine the requirement for ex ante regulation of telecommunication services.

3268             The Commission has also adopted the MEGs framework for the purposes of forbearance analysis.  In telecom decision CRTC 94‑19 the CRTC adopted the concept of market power as the standard by which to determine whether or not a market is or is likely to become competitive.

3269             The Commission also recognized that defining the relevant product and geographic market is a prerequisite to assessing whether market power exists.

3270             Significantly, in Decision 94‑19 the Commission also rejected an approach that concentrates solely on market shares, noting that the MEGs require assessment of a number of other things.  In particular, the Commission recognized the importance of evidence rivalrous behaviour, as well as the pace of innovation and technical change in the relevant market.

3271             Proper application of this framework requires a highly fact‑specific forward‑looking assessment of detailed evidence on substitutability of services, costs, both sunk and incremental, capacity and sales of existing and potential suppliers of the relevant products in each relevant geographic market, barriers to entry, and change and innovation.

3272             For the reasons expressed in the MEGs and endorsed by the Commission in 94‑19, a bright‑line forbearance test based on ILEC market share loss is not appropriate.

3273             Market share loss in and of itself is not sufficient to establish either that the ILEC has market power or that the ILEC no longer has market power.  There is quite simply no one‑to‑one relationship between market share loss and market power.

3274             However, the Bureau acknowledges that a full‑blown market power assessment is complex, time consuming and costly.  For this reason the Bureau has tried to identify a streamlined approach, something between a full‑blown market power assessment and a bright‑line market share test that could serve as the basis for streamlined analysis of ILEC requests for local service forbearance once the relevant product market has been identified.

3275             To this end the Bureau has identified a set of conditions that if satisfied should be sufficient to conclude that an ILEC does not possess market power in the provision of local exchange services.  Specifically, the Bureau has proposed that once the relevant product markets for ILEC local exchange services have been identified, the CRTC could streamline its forbearance analysis by focusing on the following six conditions:

3276             First, there exist at least two independent facilities‑based service providers, the ILEC and a facilities based entrant, capable of offering local service that has been determined to fall within the relevant product market for ILEC local service;

3277             two, the entrant is able to obtain and retain a local customer base;

3278             three, the entrant's variable costs of providing local service are similar to or lower than the ILEC's variable costs of providing local service;

3279             four, neither the ILEC for the entrant is capacity constrained;

3280             five, there is evidence of vigorous rivalry between the ILEC and the entrant in the provision of local service; and

3281             six, industry characteristics are such that the ILECs are unlikely to engage in anticompetitive behaviour.

3282             The relationship between these conditions and the full‑blown MEGs analysis will be fleshed out as I step through the application of the MEGs framework to the evidence in this proceeding.

3283             I would first like to note that Appendix 1 to my presentation contains a checklist of key questions the Bureau would typically ask as part of this approach and identifies interrogatory responses on the public record that will assist in coming to a conclusion.

3284             Our final argument also contains a list of confidential or unanswered interrogatories that can be helpful.

3285             Proper definition of the relevant product and geographic markets for ILEC local exchange services is critical to forbearance assessment, regardless of whether a full‑fledged market power analysis, a bright‑lines test or the streamline approach proposed by the Bureau is applied.

3286             The Bureau uses a step‑by‑step approach to defining relevant product markets.  The analysis begins with each ILEC local service and the market is progressively expanded to include other local services that are determined to be close substitutes for the ILEC local exchange service.

3287             The Bureau considers a number of factors that provide indirect evidence of substitutability.

3288             The views, strategies and behaviour of buyers often provide a reliable indication of whether buyers are likely to switch to another product in response to a significant price increase.

3289             The views of industry participants are also considered.  Various functional indicators, such as end use, physical and technical characteristics, price relationships and relative price levels as well as switching costs also help to determine whether products should be considered to be close substitutes.

3290             The Bureau posed interrogatories to interested parties in this proceeding seeking information on customer switching, customer take‑up and churn rates and marketing and pricing strategies in order to obtain the information necessary to assess substitutability of cable telephony, voice over IP and wireless services for ILEC local exchange services.

3291             Some responses to these questions were filed in confidence and some questions were not answered.

3292             There is insufficient information on the public record for the Bureau to make a determination of the relevant product market in this proceeding.

3293             The Bureau has sought to assist the CRTC in its analysis by identifying three pivotal factual issues that will need to be addressed to define relevant product markets for ILEC local exchange services.

3294             First, are consumers willing and able to substitute other technological forms of access for ILEC circuit switched local exchanges services?  Specifically, in determining the extent to which cable telephone, voice over IP and wireless services are considered or are likely to be considered by consumers to be close substitutes for ILEC local exchange services within one or two years, the Bureau encourages the CRTC to assess the evidence of customers in this proceeding.

3295             Second, do ILEC local services have attributes that competitor local services cannot match?  This requires a detailed assessment of customer perception of the quality of access and features associated with the different services.

3296             Third, are competitors successful in retaining local service customers and, if so, what mechanisms do they use to reduce customer churn?

3297             Actual switching by customers indicates that customers are willing to try the competing local service.  Customer retention by an entrant suggests that customers consider its services to be an effective substitute for ILEC local exchange service.

3298             Once again, Appendix 1 sends out questions that relate to these factual issues and identifies relevant interrogatory responses that are on the public record.

3299             With respect to the relevant geographic market for local exchange services, each location appears on its face to be a separate relevant geographic market.

3300             A customer will not purchase the service from another location if price is increased.

3301             For the purposes of assessing market power, however, the Bureau believes that the geographic market can be defined in terms of locations that have the same supply options.  In other words, the geographic market is defined by the overlapping footprint of the ILEC's network and one or more independent networks that are capable of offering local service that has been determined to fall within the same relevant product market as ILEC local exchange service.

3302             Parties have filed in confidence with the Commission in this proceeding network coverage maps.  If there is overlapping network coverage in a very large portion of an exchange, the exchange may be an appropriate relevant geographic market for forbearance purposes.

3303             Complete or 100 percent coverage may not be essential.

3304             If the Commission is concerned about the potential for the ILEC to increase prices for service to the limited number of locations that are served by ILEC facilities only, the Commission could consider retaining a simple price ceiling to protect these customers from price increases, much as it did in the case of DDD.

3305             As an additional safeguard, entrants may be able to supplement holes in their networks by leasing facilities from ILECs.  This may have the additional benefit of permitting the Commission to collect data on a more uniform basis using the local exchange.  Appendix 2 contains an illustration of how this concept might work in a traditional ILEC territory.

3306             The Bureau typically begins its assessment of competitive constraints on the exercise of market power by examining market shares and market concentration levels.

3307             Subject to the first conditions set out in paragraph 11, the mere existence of a competitor that can take ILEC customers rapidly without incurring significant costs is likely to impose competitive discipline on the ILEC regardless of the revenue or customer shares of the competitor.

3308             In these circumstances the capacity to effectively serve locations is a more appropriate measure of market share for the purposes of market power assessment than revenue.

3309             Market shares are only an indicator of potential market power if they are calculated using a proper definition of the relevant product and geographic markets and data for all existing and uncommitted entrants.

3310             An uncommitted entrant is a service provider that would not have to expend significant funds in order to enter the market.  Capacity market shares properly calculated capture uncommitted entrants.

3311             It is possible that other potential entrants ‑‑ and by that I mean suppliers that are not currently in the market and are not uncommitted entrants ‑‑ discipline market power.  However, because there appear to be significant sunk costs and time lags associated with the construction of new network facilities, other potential facilities‑based entrants are unlikely to provide an effective constraint on market power of the ILECs.

3312             For these reasons the streamlined approach to forbearance analysis proposed by the Bureau focuses on existing and uncommitted entrants.

3313             This is captured by Condition 1 in paragraph 11, which requires that customer have access to at least two independent facilities‑based service providers, one the ILEC and another the new entrant, capable of offering local services that have been determined to fall within the same relevant product market as ILEC local service.

3314             Condition 1 also tracks the relevant geographic market for forbearance, that is locations where the ILEC and new entrant networks overlap.

3315             Condition 2 of the streamlined framework proposed by the Bureau for assessing local forbearance serves as a check on the correctness of the product market definition.  The condition requires the CRTC to consider whether the new entrant is able to obtain and retain a local customer base.

3316             As a general rule, the mere existence of a single entrant is not sufficient to discipline market power of a incumbent, however competition between two independent facilities‑based service providers is likely to be effective when most of the costs of providing service are fixed and sunk.

3317             If this is correct, then even a duopoly market structure could provide effective competition.  An assessment of rivalry will confirm whether or not this is the case.

3318             The Bureau has proposed three conditions in its streamlined approach to forbearance that address the extent of rivalry in the relevant markets.

3319             Two of these conditions, the absence of capacity constraints and lower entrant variable costs, are necessary conditions for effective competitive rivalry between the ILEC and the entrant.  The final rivalry condition requires the Commission to assess evidence of actual and vigorous rivalry.

3320             The Bureau encourages the Commission to examine capacity and cost information to determine whether the necessary conditions for rivalry appear to be met, as well as evidence of actual rivalry, illustrated, for example, by pricing and marketing strategies, and evidence of customer perceptions of entrant advantages such as bundling to determine whether rivalry between the ILEC and a new entrant is or is likely to be vigorous.

3321             Again, a set of questions and interrogatories responses are set out in Appendix 1.

3322             The final condition in the streamlined approach to forbearance requires that industry characteristics be such that the ILEC is unlikely to engage in anti‑competitive behaviour.

3323             There are two types of anti‑competitive conduct that must be considered.  Anti‑competitive, or in the Bureau's terminology predatory pricing, and raising rivals' costs.

3324             The requirement of at least two independent facilities‑based service providers constrains the ability of the ILEC to raise rivals' costs.  In the event that the facilities‑based entrant requires few services from the ILEC to provide competitive local service, there is little, if any, scope for the ILEC to raise wholesale price in order to engage in price squeezing.

3325             The Bureau is also of the view that the presence of at least one other independent facilities‑based service provider will likely significantly limit the incentive or ability  of an ILEC to engage in an effective predatory pricing strategy.

3326             There are a number of reasons why it may be rather difficult for an ILEC to force an independent facilities‑based competitor to exit the market.

3327             First, predation may initially require an ILEC to sacrifice substantial profit.  If the capital costs of facilities‑based entry are primarily sunk and fixed costs, and thus incremental costs are relatively low, it will take a dramatic price reduction by the incumbent to induce exit.  Economic theory predicts that the entrant will only exit if rates fall below its incremental costs.

3328             Second, even if a particular rival is driven from the market, any sunk investments would not be lost to the market.  Thus, even after the ILEC makes this initial profit sacrifice, new rivals may enter, using the same assets and facilities left behind by the first service provider.  It would likely be difficult for an ILEC to justify its costly price reductions to its shareholders and financial markets when the prospect of re‑entry by new competitors would continue to limit the ILEC's market power, even after the initial rival is driven from the market.

3329             Third, when assessing the likelihood of predation by an ILEC, it is important to bear in mind that the Commission has already addressed many of the cross‑subsidy concerns in the past by replacing earnings regulation with price regulation.  The market cap regime will remain in place in non‑forborne markets, thus limiting the scope for ILECs to recoup the costs of dramatic price reductions in forborne markets by raising prices in non‑forborne markets.

3330             In the end, even though it is unlikely, predatory pricing can never be ruled out entirely in this or any other market.  As a transitional measure, it may be appropriate to maintain a temporary price ceiling in forborne markets.  Such a ceiling would further limit the scope for ILECs to recoup forgone profits.

3331             Although highly improbable, an ILEC may be able to drive out a particular rival from the market and deny future new entrants from acquiring the assets and facilities.  Even under this scenario, it would be very difficult for the ILEC to justify costly price reductions if it remains subject to a price ceiling for a period of time.

3332             Turning now to one other issue, the Bureau considers that the concepts of just and reasonable rates and no unjust discrimination continue to be relevant and appropriate in regulated telecom markets.  However, where forbearance is warranted, the Commission ought to forbear fully with respect to section 27 of the Telecommunications Act. This is the case, since it is not clear how competition sufficient to protect the interests of users with respect to rates under subsection 27(1) would be insufficient to protect users' interests with respect to section 27(2).

3333             Indeed, once regulated companies are no longer found to have market power, competition should determine prices and reliance on the general provisions of the Competition Act rather than sector specific regulation under the Telecommunications Act would be more appropriate to deal with allegations of anti‑competitive conduct.

3334             Where the Commission deems it appropriate to retain jurisdiction under subsection  27(2), for example to deal with network interconnection and access issues, it should do so expressly and make clear that it does not intend to apply such powers to regulate retail rates.

3335             Public Notice 2005 has raised a number of other issues related to local service  forbearance.  The Bureau has set out its position on these issues in its argument.

3336             We would be pleased to respond to any questions that the Commission has with respect to the Bureau's position on any of these issues raised in the proceeding.

3337             Finally, since I will not be addressing the Aliant application, I would again refer the Panel to the Bureau's final argument in this area, which was prepared under Mr. Taylor's direction.

3338             Thank you very much and I will be quite happy to answer your questions.

3339             THE CHAIRPERSON:  Thank you.

3340             Vice‑Chair French...?

3341             COMMISSIONER FRENCH:  Madam Commissioner, I am sure I speak for some other participants in this hearing to say how disappointed I am that the structured rule of reason has disappeared from the oral remarks.  I'm just hoping that the substance hasn't changed much.

3342             MS SCOTT:  We call it the "S‑R‑O‑R".

3343             COMMISSIONER FRENCH:  Pardon?

3344             MS SCOTT:  We call it the "S‑R‑O‑R", just so everyone has an acronym.

3345             COMMISSIONER FRENCH:  Right.  The S‑R‑O‑R is presented in the oral comments and the S‑R‑O‑R is in the final argument.

3346             Notwithstanding the fact it has four conditions in the final argument and six in the oral presentation, it is the same thing, is it not?

3347             MS SCOTT:  It is the same thing.  We were trying to find  easy ways to communicate what sort of questions you would ask because we weren't able to do the analysis ourselves, not having access to some of the confidential record and then having some questions unanswered.  But those are essentially the same tests that are meant to capture the same main elements.

3348             COMMISSIONER FRENCH:  Understood.

3349             The prime advocate of a bright‑line test is Telus, as you know, and you fairly categorically suggest that you are not in favour of bright‑line tests, but you are really not in favour of the second dimension of the Telus bright‑line test.  Because the first part of the Telus bright‑line test is two facilities‑based competitors on a common piece of geography and geographical a definition of the market, which is that common piece of geography.

3350             So far so good.

3351             MS SCOTT:  Close.  I don't think it is identical, but it is close.

3352             COMMISSIONER FRENCH:  Fair.  But I mean, you are not raising major issues of principle with that aspect of the bright‑line test as they interpret it.

3353             MS SCOTT:  No, although I am not sure that Telus is proposing that there be a product market definition carried out in advance.  That is very important for us as well that you would have to go through the steps of the product market definition.

3354             COMMISSIONER FRENCH:  Fair enough.  I think they are, but that is fair enough.  Your position is clear.

3355             Those two suppliers in the first instance clearly wouldn't meet any standard neoclassical tests for competition, but you are pretty clear that ‑‑ and you have had to contend elsewhere in other markets with these sort of situations.

3356             I just wonder how you could tell us, apart from costs that are sunk, what other features of workable duopoly ‑‑ or what other features characterize a workable duopoly from one about which you and we should worry?

3357             MS SCOTT:  Maybe I will just say a couple of things before I hand it over to Pat to provide you some additional details.

3358             Normally, as you are alluding to, we would be concerned about a market that had only two participants in it.  I think it is important to remember that in this proceeding what the Commission called for were comments on an expedited process or a bright‑lines tests, however you want to characterize that.

3359             What we tried to do in our submission was to be helpful to you in that regard.  Our preference would normally be to carry out a full‑blown merger‑type analysis.  That is what the European communities, for example, directed their service specific regulators to do, is to follow very much the type of full blown analysis that we would normally conduct.

3360             So it was really to try to be helpful and say, well, what would allay some of our concerns that we came up with this model.

3361             Again, as we have mentioned, there are a number of conditions that we thought would have to be met to address our concerns.  Two facilities‑based providers, costs being sunk and fixed with incremental, costs being low, evidence of rivalry and anti‑competitive behaviour unlikely.

3362             What might be helpful is to have Pat describe to you a bit his analysis in a relatively recent merger that would have raised similar issues.  It was a merger of four to three competitors, so not down to a duopoly, but to three competitors that, again, would raise concerns.

3363             It is actually a merger that took place in the telecommunications market.  I am referring to the Fido, Rogers transaction.  So in that transaction you would have a cable player, a telephone player, so the folks who are appearing before you.

3364             He could maybe walk you through some of the issues that were relevant to our analysis of why that merger could go forward and we were not of the view that there would be a concern about the competition.

3365             Pat.

3366             COMMISSIONER FRENCH:  We would like very much to hear that, but I have a couple of questions on your response.

3367             Is that fair, and then we will move on?

3368             MS SCOTT:  Sure, yes.

3369             COMMISSIONER FRENCH:  So you are not proposing ‑‑

3370             MS SCOTT:  Although I may punt them to him as well because he is the expert economist.

3371             COMMISSIONER FRENCH:  This is fair.

3372             You are not, I think, suggesting that standard rule of reason is somehow, or the proposals the Commission, your Bureau, is making to the Commission today is a compromise with which you feel uncomfortable?

3373             MS SCOTT:  No, not at all.  What we have looked at is the types of errors that you might be concerned about making.  Same type of errors we worry about making, that you deregulate when you shouldn't or you continue regulating when you shouldn't.

3374             So this model is developed with a bias towards reducing the error we thought you would be most preoccupied with, that is, deregulating prematurely, before you really should deregulate.  So that is what this model is all about.

3375             COMMISSIONER FRENCH:  Yes, I want to get that to question.

3376             So we are both on the same wavelength that the European analyses took place in situations where there was one nationwide monopoly supplier, former state‑owned supplier and a territory a good deal more compact than the one we have to deal with, and not the patchwork of different suppliers that we have in this country.

3377             So recognizing that, we can't simply do an analysis.  If we were to do an analysis like that, we would have to enter five or ten such analyses.  So you are still with us that the SRORs are your attempt to help us to get to where we need to go more quickly.

3378             MS SCOTT:  Hence why we made an attempt at trying to find something more expedited, appreciating that is what you had asked us to comment on or asked parties to comment on.

3379             COMMISSIONER FRENCH:  I would like to hear about the kind of analysis the Bureau is engaged in in the particular case you referred to.

3380             MS SCOTT:  Okay.  Pat.

3381             MR. HUGHES:  Thank you.

3382             There are really two key elements of our examination I think that could be informative to you.  The first was that, as we generally do, and I will skip the details of that ‑‑ everything we do is sort of couched in our merge enforcement guidelines.  That is sort of in the background and provides a lot of detail, which I won't go into great detail about.

3383             The first was to conclude whether we thought that there was currently vigorous competition in this equilibrium.  So we have got four firms and we want to find out whether this equilibrium that we are starting out with is vigorously competitive.

3384             Then, once we concluded that it was, our main concern ‑‑ we did look at unilateral effects as well, but it was the concern that in layman's terms the firms would ‑‑ as numbers get small, start to become less eager to compete in the knowledge that if they compete hard, somebody else is going to respond by competing hard, and it is going to continue on that ‑‑ towards a competitive equilibrium which is great for consumers, but not so good for the firms.  In antitrust lingo, this is coordinated behaviour.

3385             We looked at a number of documents, as we would typically do in any case, and we looked at three really main issues.  And the first was we found that the mobile wireless industry was in a period of rapid growth and still is, and it is likely to continue for a number of years.  And we concluded that in a rapidly growing market when there is new consumers, there is new margins to be made, it's more difficult for firms to strike a gentleman's or gentle person's agreement to not compete because you are losing this carrot, this gain, the gain as this market continues to grow.

3386             The second and somewhat related point was that we found that there was a high degree of technological change and innovation in industry, as reflected in a number of new product and service launches.

3387             We also think this was evidence showing that it is going to be harder for firms to either tacitly or otherwise seek to compete less hard because the equilibrium is changing.  The deal is kind off every week.  There is a new service out there, there is a new plan out there.  It is very difficult to come to what we as ‑‑ we look out for in terms of the coordinated behaviour as economists and as the Bureau looking at these cases.

3388             The third is that we found that there were numerous competitive price reactions in this industry and they were prompted by firms that would likely remain in this industry in the future.  So that this competitive dynamic that we found, we originally found, which I alluded to of the vigorous competition in this market initially, we concluded it wouldn't change.  That it would still be there.

3389             And these we found to be conditions in the industry that constrained the firms in the market from coordinating.  We take it as given that they are maximizing firms and they would like to if they could, and we are looking for market forces that prevent them from doing so.

3390             So at the end of the day, we concluded that these constraints would limit the ability to have coordinated conduct in this industry.  I hope that is helpful to this question.

3391             COMMISSIONER FRENCH:  Yes.  It is helpful and interesting, Mr. Hughes.  I don't know if you notice, but local service, as far as we could tell, is not a rapidly growing market.  Does that bother you?

3392             MR. HUGHES:  I think it depends first of all, and we are going to say this more than once, what you define the relevant market to be.  How broadly these new services or new providers are in the market.  The broader this is included, the broader the services may be around.  And furthermore, the added services in this market may be increasing more and more, and this will give the incentive to give these margins.

3393             This is an important question which I would suggest that to apply this thinking to local exchange services you would have to verify.  I intuitively can give you my personal views, but I am a pretty sceptical economist, and when people come up with these kind of claims, I normally say show me the evidence, show me the facts.  And I ‑‑ that is what you have to do before you can come to a conclusion on that, I think.

3394             MR. TAYLOR:  Can I just add, my old professor is in the back of the room and he may be shocked by my economics here, but if I have a small market share and the cost of adding a customer is $100 and I can get $300 a year in revenue, even in a duopoly market I may be encouraged to try and go for that extra market share.

3395             COMMISSIONER FRENCH:  It does depend, then, on whether or not or on how we define the services in question.

3396             MR. TAYLOR:  I think it does.  I think that is a key question really.

3397             COMMISSIONER FRENCH:  I guess we have naively been thinking about primary exchange voice service and, of course, that is only part of the bundles that the competing players will be offering.

3398             So let's talk about bundles.  I want to talk now about ‑‑ let's move to the third issue, which is conditions constraining coordination.  Let's begin with bundles.  Does it encourage you or discourage you that there will be these heterogeneous packages containing, but not limited to, local voice service.  Is that a factor which will tend to encourage or discourage you with respect to the competitiveness or the degree of rivalrous behaviour going to be shown in that market?

3399             MR. HUGHES:  Encourage, I think.  It tells me that every consumer that you get gives you have that flow of these ‑‑ could well give you that flow of these extra other services and makes it more difficult for me to stand back, if you can imagine myself and you being the competitors, and watch you get your share of the customers because you are getting not only the customer's voice services, but the whole bundle.

3400             COMMISSIONER FRENCH:  Mr. Hughes, do I as a regulator ‑‑ do you and I as regulators need to think about players who are in a part of the market or in the primary voice market, but can't offer the bundles, should they be a matter of preoccupation?  Should the third, fourth or fifth entrant that can't compete with those full scope of bundles should be a preoccupation of ours, or should we conclude that this is going to be a bundled market and the stand alone players will have to make their own way and if they can't it is no concern of the regulator?

3401             MR. HUGHES:  I am going to sort of answer that question.  Let me know if I am being responsive or not.

3402             As ‑‑ from a competition point of view, one of the things I am going to ask when I'm calculating who is in this market, what the real constraints are, is whether service providers can provide all those bundles.  If you tell me firm three, four, five and six cannot provide those bundles, I am much more sceptical that they are a real constraint on the ILEC.

3403             Your question, I think, went into whether as regulators this is something that should be remedied, and I presume what you mean ‑‑ if I'm correct, you are thinking about regulatory remedies to ‑‑ I don't know ‑‑

3404             COMMISSIONER FRENCH:  I guess what I'm asking myself is if I thought that I had four or five entrants on a permanent basis, the trigger point at which I might tolerate forbearance in terms of absolute market share loss, we are not there yet, but might be lower than if I was concerned about the health of the third, fourth and fifth entrant.

3405             MR. HUGHES:  Yes, I agree.

3406             COMMISSIONER FRENCH:  And possible collusion between two sets of bundle offerers.

3407             MR. HUGHES:  Yes.  I think you very well may be ‑‑ it is possible that if you are looking at the world of bundling, you are looking at what we are suggesting in terms of independent networks, you could be looking at a harder question than we dealt with in Microcell, which is is two vigorously competitive.  Is two going to allow coordinated conduct.  I can tell you about three, but two I have to look at the facts.

3408             COMMISSIONER FRENCH:  Well, as a former president of a duopoly wireless provider in a jurisdiction outside Canada, I can assure you your concerns are legitimate.

3409             MR. HUGHES:  I am not sure I have concerns, but I would certainly be sceptical.

3410             COMMISSIONER FRENCH:  Right.  Your scepticism is founded.  So this is not a slam dunk, by any stretch of the imagination, and the 50/50 capacity share market formula, which, after all, under ‑‑ without much broader fixed wireless infrastructure in this country is basically a twisted pair and a piece of co‑ax and two different suppliers using those platforms, you know, we are back to square one in some sense.

3411             MR. HUGHES:  I think two could well be competitive.  I think it is a mistake to assume that it is not.  I think there are indications here if the certain ‑‑ if we can't establish the structured, streamlined approach that we suggest, I think those are really good conditions to show that it is not a circumstance like the circumstance you are describing.  I think that is at the key.

3412             I think what we are trying to propose to you is look at those conditions, look at that streamlined approach and look at the experience in Microcell, and if you believe you can find on the facts that those conditions hold, I am reasonably comfortable in a duopoly.

3413             COMMISSIONER FRENCH:  Let me try to give you another reason to be comfortable.  What if, as is the case, there was a virtually complete lack of congruity between the serving territories of the ILEC and the serving territories of the cable‑based competitor?  Would that encourage you to think that price collusion might be more difficult?

3414             MR. HUGHES:  Again, it really comes down ‑‑ my first test is market definition.  And these incongruencies are not likely to be consistent with the geographic market definitions that we are dealing with.  So I have ‑‑ I think the hypothetical may not lack ‑‑

3415             COMMISSIONER FRENCH:  The congruences are going to turn out to be ‑‑

3416             MR. HUGHES:  If they are minor ‑‑

3417             COMMISSIONER FRENCH:  Let me start again.  I understand what you are saying and it is a real problem, and without going into a long ‑‑ the Chairman's already looked at his watch.

3418             THE CHAIRPERSON:  No, no, I am actually enjoying this.

‑‑‑ Laughter / Rires

3419             COMMISSIONER FRENCH:  He says to his great surprise.  We are looking at a patchwork of cable companies of different degrees of technological sophistication and different degrees of modernization in networks, facing off against the pattern of ILEC ‑‑ ILEC serving territories with which we are all, as Canadians, familiar, and I am asking myself if pricing decisions and marketing decisions are to be efficient, they can't ‑‑ on the part of the ILEC, they can't necessarily tailor themselves to the behaviour of the local company.  There is consolidation going on in the cable business and there are some big, big cable competitors, but the Commission is already facing questions which results from the fact that ‑‑ a given ILEC has three or four different ‑‑ some ILECs have three or four different cable competitors.  Does this provide for a ‑‑ some degree of constraint or control on collusion?

3420             MR. HUGHES:  Oh, I think so.  That is really what we found in Microcell in a slightly different way of expressing that.  Change in innovation that when you are ‑‑ it is less and less plausible as an economist that this ILEC and its competitor or competitors are engaging in what we call coordinated conduct, when the game is always changing.

3421             When there will be a new service offering, there will be a new feature, there will be ‑‑ a technology will change and all of a sudden costs will vary.  Cost variation is one of the best recipes against coordinated conduct.  You have a competitor whose costs are varying.  They are going to eventually say I don't need to coordinate with this guy, I can just out‑compete him.  I have a lot better costs.

3422             And cost uncertainty and cost variation with that kind of technological change in the patterns you suggest, I think is a strong reason to think that coordinated conduct is not likely.

3423             COMMISSIONER FRENCH:  Well, I guess we have to talk about costs because you have made a pretty big ‑‑ a pretty important proposal to us, which is that one of the things that should govern our decision about forbearance is an analysis of the costs ‑‑ the variable costs or incremental costs to the parties.

3424             I won't get into average and long run and incremental and all that.  I would just assume that we could solve that one, although it is an important question.  And simply ask you in the first instance, as a matter of feasibility, you have recognized in your final argument that Aliant says it doesn't collect customer acquisition costs.  I don't know if you heard MTS Allstream, who appeared before the break this afternoon, said it would take them two years to obtain variable costs suitable for the kind of report that you are looking for.

3425             The first question is, is it feasible?

3426             MS SCOTT:  Maybe I will just say a few words in introduction before I ask Richard to respond to that question.  Because we have given a bit of thought to this because I know how much time the Commission has spent in activities like Phase 2 and Phase 3 of the cost inquiry.

3427             But what is quite interesting is in the Bureau's work, looking at numerous examples of non‑regulated companies, we have been called upon to do precisely this type of analysis because these are standard tools that one uses under the Competition Act, and I will ask Richard to talk about how we go about assessing these sorts of things, the type of information we look at and what not, because indeed, on multiple occasions we have had to come to conclusions on what are the variable costs or sunk costs of companies that are coming to us.  Richard.

3428             MR. TAYLOR:  Well, with the use of experts and sometimes accountants, we routinely look at costs in terms of abuse of dominance cases and mergers in terms of barriers to entry assessment and obviously in predatory pricing cases.  Our experience has been that although there is some certain cost associated with providing that information, we can certainly ‑‑ it is not ‑‑ it is not an unreasonable cost or a cost that is that difficult.

3429             In fact, most of the time we ask for the types of information on their costs and we make assessment ourselves on whether or not the cost is variable or fixed.  So we will ask for a breakdown of their costs and determine, they will provide that information.

3430             I would add in terms of this particular market, I had noticed that EastLink has an estimate of their customer acquisition costs and I guess they are ‑‑ the components of that may primarily be some marketing costs or billing costs.  There would be a truck roll to set the equipment up; the price of a few other things.  That information should ‑‑ I would imagine they would track.

3431             I would add that if companies don't track their variable costs, I fail to see how they can set an effective price in a market.  So some of those are some of the comments that I would make.

3432             MS SCOTT:  I might just point out, Commissioner French, that one of the differences I see between how the CRTC goes about its work and how the Competition Bureau goes about its work is the Bureau asks for different types of documents and they will rely on different types of documents.  Many of those were the types of documents we were requesting and they will be asking businesses to be providing.

3433             For example, their own internal documents that they would have relied on, for example, in their own price setting type activities.  This would probably be more real to them in an unregulated circumstance than in a regulated circumstance because for the regulated companies they are often looking at Phase 2 type costs for regulatory filing purposes.  But I know this from my own experience in a company, they certainly keep lots of cost information because that is how you figure out how to make money.

3434             COMMISSIONER FRENCH:  Well, Madam Commissioner, I have signed an affidavit for the purposes of one of your predecessors with respect to a company with which you are not unfamiliar, and swearing that, indeed, the director of the time had all the relevant documents to the inter‑exchange toll market in Canada possessed by that particular company.  So I have some experience in what you speak.

3435             The question in my mind is are you advocating that we adopt that sort of approach in the Commission or are you suggesting that the pre‑existence of regulatory requirements for our regulatees ought to make it easier for them to obtain the costs in question?

3436             MS SCOTT:  We are saying that if you want to adopt the streamlined approach, that there is a way of doing it.  There is information that we believe would be available to you to carry out this analysis and you would ask them for the sorts of documents ‑‑ again, we have tried to provide you with a list of those interrogatories that are either on a public record or confidential and answered.  That is what we would be asking for to come to a conclusion in the context of a merger case or an abuse of dominance case where we require a conclusion on this issue about costs.

3437             And, quite frankly, this would be the type of information we would have to bring before the Competition Tribunal.  We would have brought that information, for example, in the Air Canada predatory pricing case.  We would have had to produce evidence and the Tribunal would have had to weigh it and come to some conclusion, and there certainly isn't a Phase 2 of the cost inquiry in Air Canada's possession, as far as I know.

3438             I am just saying we are recommending to you this is one possible way of going that we have experienced.  Whether you wish to adopt it or not is obviously up to you.

3439             COMMISSIONER FRENCH:  Well, let's talk about what we would find out then.  As a matter of regulatory economics and regulatory policy, what would we do if we found out that an entrant which was taking market share had higher variable costs than the incumbent?

3440             MS SCOTT:  Say that again.

3441             COMMISSIONER FRENCH:  What would we do if we were observing a market and we undertook the comparative analysis which you proposed to us, and we discovered that the entrant had higher variable costs than the incumbent?

3442             MS SCOTT:  And you would be in the process of conducting this streamlined review with a view to determining whether there should be forbearance?

3443             COMMISSIONER FRENCH:  Correct, because as postulated that the entrant is taking market share or taking customers and has approached or has achieved ‑‑

3444             MS SCOTT:  Right.  And you had observed that the new entrant had costs that were less than the ‑‑

3445             COMMISSIONER FRENCH:  No ‑‑

3446             MS SCOTT:  Or did you say the other way around?

3447             COMMISSIONER FRENCH:  That's correct.  The other way around.

3448             MS SCOTT:  Then we would say this isn't a situation where you are meeting this condition.

3449             COMMISSIONER FRENCH:  Why would I want to deprive customers of an entrant who, for whatever reason, chooses to remain in a market and draw customers simply because I happen to know, contrary to his corporate strategy, that he is somehow making a mistake in making this offer.  He is acting irrationally.

3450             MS SCOTT:  Well, because you are trying to reach a determination about whether you have appropriate circumstances for forbearance.  Whether you are no longer going to regulate in the market.  So you are looking at whether there are certain conditions that are present, that is all.

3451             COMMISSIONER FRENCH:  So there would be an incentive for the entrant to swell his costs for the purpose of this proceeding?

3452             MS SCOTT:  Well, one of the differences, again, is that the information the Bureau looks at is information that will pre‑date, for example, a merger application.  And so the incentives are different.  You are trying to get documents that are as close to the business reality as possible.  And you are right, there is opportunities for gaming, obviously, if you know the game that is being played.

3453             But one of the reasons we get a broad range of documents, and it is not just internal documents, it may be internal documents that would go to some of these issues, but there could be external documents as well.  We might be looking at experts as well, forensic accountants that we could hire.  There is a range of tools that we use in order to get at this.

3454             MR. HUGHES:  If I may add as well, these are necessary conditions.  So it would be ‑‑ in some ways it would be better, we would be more sure if the entrant had the lower cost rather than the higher cost in the ILEC.  But we are not against it if the entrant has higher costs and can still compete.  It is just not meeting our necessary conditions.

3455             COMMISSIONER FRENCH:  Okay.  I am not completely clear here.  Either it is or is not the case that I should not forbear as a result of discovering that the entrant has higher variable costs, or do I simply say, okay, that is one factor among many and I am going to balance it against a number of others.

3456             I am just ‑‑ I am not trying to put you in a box, but I am trying to understand what you are suggesting to us.

3457             MR. HUGHES:  The latter.  I think it is a balance ‑‑ it is one ‑‑

3458             COMMISSIONER FRENCH:  It is one of the factors.

3459             MR. HUGHES:  One of a number of factors.

3460             COMMISSIONER FRENCH:  It is a factor that would make us more cautious, but would not necessarily prevent us from forbearing.

3461             MS SCOTT:  In all the cases of all these factors, we are saying you look at all of these and then weigh them.  And depending on the result on one, you might think differently about whether the appropriate circumstances were present.

3462             Let me give you another example.  In our proposal, one of the things we suggest you look at would be the ability of the new entrant to retain customers.  So how do you go about that?  Because you don't want to have people just trying out the service, sort of flirting with the new VoIP stuff to try it out, but, in fact, they have no intention of staying.  They don't think it is really a similar service or whatever.  So how are you going to find out whether they are actually there to stay?  It is a substitutable product.

3463             And we have four measures that we would suggest you might look at.  You might do a market share analysis.  Now, this is not market share in the context of forbearance.  This is a market share assessment.  You have your product market, you are feeling comfortable with that.  You then look at all the people in that product market and you look at whether there has been a market share loss from the incumbent.  That might be one measure.

3464             You might look at churn.  Churn would be another thing.  Now, churn, of course, goes two ways.  If you have high churn, that might mean that the market is hugely competitive.  It might also mean that people don't like the service and they are moving away from it at a really rapid rate.  So you would have to look at the facts behind the churn numbers.

3465             You might do customer surveys.  You might ask people whether they thought that the service of was substitutable and they were interested in staying with them.  You might also look in foreign jurisdictions, because some jurisdictions are further ahead than Canada in terms of opening up the market and you might look at whether, when you have this competition between two facilities‑based providers, what has happened in their market.  Do people stay?  Do people actually find the services substitutable?

3466             Now, if I take those four, we would say, okay, you can look at all of those.  You might start with a market share figure and you would pick ‑‑ I think Telus' figure is 5 percent for this measurement, for this type of measurement, because they get at this as well.

3467             We say 5 percent is pretty low.  So if you were going to say 5 percent, we are okay if it is 5 percent, that shows customer retention, we would say no, we think you should pay a lot more attention to churn, customer surveys and experience in other jurisdictions.  If you picked a higher market share figure, then you might be able to reassure yourself quite a bit on that figure only that, in fact, the new entrant is able to obtain and retain a customer basis.

3468             So on all of these variables, and this is how we carry out our work, we are looking at a balance.  And you can say, well, no, they don't meet that criterion, but it doesn't mean that you can't look for reassurance along some of these other dimensions.

3469             COMMISSIONER FRENCH:  Yes.  So all of the things being equal, a higher market trigger will require less attention to churn or less attention to what we call churn in the business.

3470             MS SCOTT:  Probably.  You could probably satisfy yourself.  This is a question how comfortable you feel looking at the facts.

3471             COMMISSIONER FRENCH:  Now, you said earlier that it was your sense that we would, as a Commission, be more concerned about premature deregulation than delaying ‑‑ premature forbearance than delaying forbearance beyond the point at which it might have been justified in the past.

3472             On the other hand, it is been suggested to us by distinguished economists that the premature forbearance is economically or less welfare eroding or reducing than delayed forbearance because the costs of regulation are extremely high.  For example, they preclude a keen and rapid responsiveness and meeting of the market on the part of ILECs.  This is the discourse we have heard.

3473             So what is your reaction to that?  I am a little bit surprised, I confess, that from a competition law ex post perspective, there is an assumption, I mean unless it is premised on the psychology of the eleven people in front of you, for which I would forgive you, but there is an assumption that as a matter of policy we would favour or we would lean towards the one rather than the other.

3474             MS SCOTT:  Well, in terms of our test, we looked at both type 1 and type 2 error to satisfy ourselves that we ‑‑ that we were reducing the likelihood of both of those types of errors, because you don't want to make either a type 1 or a type 2 error.  So it wasn't like we said, oh, the hell with type 2 error, we don't care about that.  These guys are really focused on type 1.  That wasn't what we said at all.

3475             Maybe we guessed you wrong in terms of where your preoccupations would lie but I guess it was a sense that there is some concern that one might stop regulating and then it is very difficult to re‑regulate and, in fact, that is not something that we would propose.  We would suggest that when you are thinking of kind of the burden of evidence or whatever you should be more quick to deregulate than to re‑regulate, in part because of these costs of regulation that you have just alluded to.

3476             So it was simply that balancing again by us that we thought Type 1 error might be somewhat more present on your mind.  If that's not true it is not ‑‑ we are just less helpful than we might otherwise be and, certainly, the model we put forward addresses both Type 1 and Type 2 errors.

3477             But Pat also being a distinguished economist might want to add something to what I have just said.

3478             MR. HUGHES:  I think you have said it all on this point.

‑‑‑ Laughter / Rires

3479             MS SCOTT:  That's why I call him a distinguished economist.

‑‑‑ Laughter / Rires

3480             COMMISSIONER FRENCH:  Madam Commissioner, you have said that some jurisdictions are ahead of us and, of course, you haven't injured our amour propre but we would like to know what in your mind those jurisdictions are and why they are ahead of us in regard to the issues that are of interest to us but maybe we can learn something.

3481             MS SCOTT:  I don't mean ahead of the Commission in terms of policy development or mindset or whatever.  It is more in terms of the state of competition in the market.  If you look in the States there are some markets that have deregulation, they have actually engaged in deregulation.  Iowa, I think, has deregulated some of the local services and are in the process of looking at sort of the final local services.

3482             I know there are some markets in the States where you would have 30 percent of loss to new entrants.  I just think they are further along in terms of the market share loss that has occurred from ILECs and they have also ‑‑ I know there is a number of states that have passed legislation directed precisely at deregulating the local services area.

3483             COMMISSIONER FRENCH:  Yes, well, PUCs are a more convenient instrument for the purposes in question.

3484             MS SCOTT:  Pardon me?

3485             COMMISSIONER FRENCH:  Public utility commissions in some states based in the United States are a more convenient instrument for the purpose in question.  They have some of the responsibilities we have ‑‑

3486             MS SCOTT:  That's right, the local services.

3487             COMMISSIONER FRENCH:  That's just a fact.  Sorry?

3488             MS SCOTT:  The local services; that is what their jurisdiction is ‑‑

3489             COMMISSIONER FRENCH:  That's all they do.  They don't have a comprehensive set of responsibilities for the whole system.

3490             MS SCOTT:  But we are not talking ‑‑ I wasn't talking at all about their framework per se or their legislation but more that if you want to find out ‑‑ this is a market question.  This isn't a regulatory question.  My observation was a market observation:  If you want to know whether people see voice, cable telephony as a substitute for telco telephony you can go and look in markets in the States and see if people have shifted over.

3491             COMMISSIONER FRENCH:  Well, that's a very interesting observation.  Just as a matter of passing, a market that you are not going to address or talk about has also, we learned yesterday, reached the point of 30 percent competitive market share, so some comfort to you.

3492             But it is important, I think, that we ask this question then:  If there are such markets anywhere in a remotely‑related telecom market, should we take that lesson and not rehearse over and over and over again in different slices of geography the same analysis?

3493             MS SCOTT:  Well, our market share figure ‑‑ let me just say that again, is not a market share figure that goes to forbearance.  We are concerned about bright‑line market share forbearance tests.  We are not suggesting that at all, quite the contrary.

3494             Our market share is an assessment of whether consumers actually see a substitutable product assuming you have done your product market definition. I am assuming that you have done that.

3495             So we are not advocating that at all, that you adopt a bright‑line market share test.

3496             COMMISSIONER FRENCH:  No, I understand that.  I mean, you have made your point and you have made it well and you have not only made that point but you have very helpfully said, "And this is what you should do" so we appreciate that.  But it is the evocation of a market somewhere and the notion that it is ‑‑ I mean, I am not trying to put words in your mouth or be unfair.  It is "advanced" and the reason it is "advanced" is that entrants have had a greater market share and that the greater degree of deregulation in that case of local market has occurred.

3497             What I am saying is VoIP is probably VoIP.  It probably doesn't look much different in Iowa than it does in Saskatchewan or Toronto.  So what lessons do we learn from the fact that a product, let us call it VoIP local voice services, is successfully and sustainably operating in a market not greatly unlike the ones we operate here?  Does it reduce the requirement to undergo the process on a repeated basis, as I say, and I don't want to exaggerate it but you are asking us ‑‑ you are proposing to us a fairly sophisticated, granted not a full merger analysis, but a fairly sophisticated piece of analysis and we are going to have to do it ‑‑ if we do it we have to do it over a number of times over a number of geographies.

3498             What information or conclusion do you draw from the fact that this advanced market or markets exist in markets not greatly unlike our own?

3499             MS SCOTT:  Well, first, let me just go back.  Advanced market, maybe that's my misnomer that I used.  I was talking about markets where we see greater market share loss than we see in Canada.

3500             COMMISSIONER FRENCH:  Yes.

3501             MS SCOTT:  So if you want to call that advanced, okay, but that's what I was talking about.

3502             COMMISSIONER FRENCH:  No, it was you who called it advanced.

3503             MS SCOTT:  That's what I am saying, that's maybe a misnomer to call it advanced but what I was trying to capture was this notion there has been market share loss.

3504             Again, we talk about the customer attention as being relevant to the product substitutability.  So it does go to the definition of your product market.

3505             So when you do this sort of analysis and you are trying to figure out whether it is a substitutable product; you are doing your product market analysis, you might look in other jurisdictions. This might be the sort of data that we would take into account as you try to grapple with what a proper product market ‑‑ it is not everything that you should look at.

3506             Richard may have ‑‑ Richard has done many of these cases so he could probably help me out here.  But our recommendation is do the product market once and you could obviously look at things like that to help you arrive at some sort of conclusion.

3507             Again, because we didn't have access to some of the information we would feel relevant, we didn't pronounce upon whether VoIP would be in the product market.  You know, that's still an open question for you and we unfortunately can't provide that much guidance on it.

3508             Richard, do you have anything to add to that?

3509             MR. TAYLOR:  Just to answer the question.

3510             If you found that VoIP in Iowa was being picked up and customers were happy with it and the quality ‑‑ they were happy with the quality and they weren't substituting back in large numbers, I think you can assume that ‑‑ or there is some evidence or good evidence that that is in the same product market.

3511             If you transfer that to Canada and your question is do you have to do it in every market, no, I don't think so.  I think if you establish in Halifax that the quality is good and it is a substitute and consumers are responsive and receptive to taking it up, then I don't think so.  I think it reduces your administrative burden considerably because I think that that question can then be put aside unless there is some evidence to the contrary in other markets, unless there is something different.

3512             COMMISSIONER FRENCH:  Thanks, Mr. Taylor.

3513             Yes, I mean, I now understand the question that I was trying to ask and it is the following:

‑‑‑ Laughter / Rires

3514             MS SCOTT:  I am glad you understand it.  That will help us.

3515             COMMISSIONER FRENCH:  Well, yes, that's my humble attempt here, my purpose at this point, and that is after we have used the structured rule of reason a few times is it likely we could move to a bright‑line test?

3516             MR. HUGHES:  I think in a matter of degree I think product market definition may well be transferable.  I think the lessons you will learn from geographic market will likely be transferable.  Maps will be different in every ‑‑ you will have to look at maps, of course, but I don't think that's a terribly time consuming ‑‑ or other sorts of evidence.

3517             The other issues in our test; for example, the degree to which costs are sunk, the relative variable costs, the degree to which anticompetitive behaviour is likely, these are things that I think in a matter of degree once the first one comes the second one is easier, the third one is easier and the fourth one is easier again.  I don't know if I would call it a bright‑line test but, I mean, as an antitrust person, you know, if you have done three cases in the widget industry the fourth one is pretty easy.

3518             MR. TAYLOR:  I will just add to Pat's comment that I think you will always want to assess the degree of rivalry because that could differ between markets and who is there.

3519             COMMISSIONER FRENCH:  Could we talk again about the capacity market share issue?

3520             The question I have in my mind is about the longevity of the interest of the two players in the market.  It has been forcibly suggested to me, pointed out to me in the last ‑‑ that the last 15 years of the telecom business looks dramatically different in terms of its cyclicality.  It is not only that there is more competition.  It is not only that there are more players but it is also that there is much more exit and that the underlying economics have varied in their attractiveness repeatedly since '90, maybe two, three cycles.

3521             Also, that the reactions of regulators to the problems raised by this phenomenon have varied enormously.  I mean, the Europeans are going one way and the Japanese are going another and the Americans are going somewhere else.  I won't burden you with even a thumbnail description.  I just ask you to take it on trust if you don't know it to be the case, but my problem is to know how confident we can be of the sustained interest of the players.

3522             Once the hardware is out there we go to a capacity market share of 50‑50.  We do the other things that you recommend and we forbear.  Then, it is not just a matter of possible collusion.  It is a matter also of the possible disinterest, the possible draw from the market of players.

3523             Is there any comment that occurs to you?  Is there any concern that you see in other industries?  This is not going to be, you know, your father's phone company.  We know that.  So the question is if it is going to be a little rougher and a little more cyclical should we be more concerned not just about a static picture but about the underlying finances, for example, or the financial situation or the leverage of the players, for example?

3524             MS SCOTT:  Well, I will have Richard add his observations to mine, but I guess I would just say by way of introduction that the focus under the Competition Act is always with competition and not with competitors.  So that's why you try and get the framework right.  That's why you look at issues like sunk costs and variable costs and whatnot because if you do have exit from the market, which is very likely to happen, could happen, that the assets are left behind and another entrant can come in and probably pay less money for those assets.

3525             Actually, as we were talking about this before in preparation for this hearing, I was recalling a cross‑examination that I did in the 92‑12 hearing and asking the question of the new entrant in that case, "Well, where is the public interest here?  You are going to invest all this money and in the end you may just fail and why is there public interest in the CRTC authorizing long distance competition if it is just going to lead to a bunch of people wasting a whole bunch of money?"

3526             It was said better on transcript.

‑‑‑ Laughter / Rires

3527             COMMISSIONER FRENCH:  I was there.

3528             MS SCOTT:  And the answer was, "From the ashes will rise the phoenix and there will be another new entrant who will come in and purchase these assets and be able to compete in a more cost‑effective manner" because that's what this is about, really.  You have competition because it helps drive price down and you want to have efficient cost equations.  You want to have the least‑cost competitor.

3529             I was mindful as well of a presentation that I found very interesting a couple of years back at the 10‑year anniversary of the 92‑12 decision and Liz and Ian and Angus did a presentation on why are we not seeing local competition.  They had a number of conditions that they had put up that I thought were quite interesting and Liz observed, "Well, you know, look at competition in telecommunications.  It's clear why it has emerged in a number of these areas.  We have met all these conditions.  In local phone we don't have the low‑cost provider".  So she was saying, "You should be on the watch for that low‑cost provider" and her sense was that that competitor was not there several years ago.

3530             So that is part of our test.  We are looking at that low variable cost and we are saying, yes, we think that's relevant too.  Now, whether they are there or not you have a lot of information that will help you determine whether that is so or not.

3531             Richard, did you have anything?

3532             MR. TAYLOR:  No.

3533             MR. HUGHES:  I would like to add one comment.  I think that if it can be verified that the networks are indeed invested in and that capacity is there and both on a geographic basis in terms of the sunk cost and the variable cost, this is a really good fact for expecting this to last.  This is a really, really good fact.  If you can establish this you have really, I think, shown a good case for this not being a fleeting competition.  This is the real thing.

3534             COMMISSIONER FRENCH:  Okay.  Now, I just want to talk a bit about market share as a concern.

3535             Let me say right away it is clear from your intervention and those of others, but particularly in your case, that your view is that it is one among a number of features to which the Commission should be attending.

3536             When there has been a ‑‑ in jurisdictions, in European jurisdictions in particular, at incumbent market share levels of 90‑95 percent, there has been a move from retail to wholesale regulation and a move from ex‑ante to ex‑post regulation.  Should we regard those precedents as significant for the case before us?

3537             MS SCOTT:  Richard, you may have something because we have looked at this in another context.

3538             You say you would look at whether you could focus on wholesale versus retail regulations ‑‑

3539             COMMISSIONER FRENCH:  No, no, I am saying that at 95 percent dramatic changes in the regulatory framework have occurred in Europe and in some other countries as well.  I am still trying to create a record around this issue of 5, 10, 15.  At 5 and 10 these dramatic changes have occurred.  Would you regard those as valuable precedents indicating that the Commission could be more rather than less confident about forbearance at 5 and 10 trigger points?

3540             MS SCOTT:  Well, I guess I would pass this off to either Richard or Pat.  I think we would look at it probably in the context of an economic framework and what the variables are but I am not sure I would see that directly relevant to this activity.

3541             Pat or Richard, do you have anything to add to that?

3542             MR. TAYLOR:  The only point I would make is that I would like to know what methodology they are using for assessing that.  If it is similar to ours then I think that you can take some comfort out of that, but if they haven't done even a streamlined approach like we are recommending then I think it could be more dangerous.  We have already indicated that we don't like simple market share ‑‑ measures of market share and the merger provision market share and the abuse of dominant provision in our Guidelines specifically mentions that we do not base our decision on market share alone.  It is the degree of remaining rivalry that is important, the longevity as you pointed to in terms of financial, their effectiveness and their likely staying power.

3543             COMMISSIONER FRENCH:  Thank you.

3544             I want to talk a little bit about your examination in your final argument of the CCTA's argument.  I just want to recapitulate it to be quite certain.  It is paragraphs 76 to 83 in your final argument.  You examine the case that the CCTA makes and you conclude ‑‑ it's in a form of ‑‑ I am asking whether my summary does justice, not whether you do justice to the CCTA but whether I do justice to you in saying that if you think that:

                      "...neither in their submission nor in those of the other cable companies did the Bureau find an economically credible case for such controls as winback constraints or tariff filings to ensure local prices above cost." (As read)

3545             MS SCOTT:  That's your summary of our position?

3546             COMMISSIONER FRENCH:  Yes.

3547             MS SCOTT:  Can you repeat it again?

3548             COMMISSIONER FRENCH:  I will phrase it differently.

3549             Would you please summarize your view of the CCTA's argument with respect to the winback controls and ex‑ante tariff filings to ensure the local prices are above cost?

3550             MR. TAYLOR:  I think if I understand Professor Gillen and Professor Ross' report correctly, it is a notion of targeting where there is somewhat less than predatory pricing where you pick customers off.  The competitor can't sustain those losses because of various conditions and that, therefore, you need to guard against that by continuing on regulatory safeguards, competitive safeguards.

3551             COMMISSIONER FRENCH:  I am sorry.  I am going to come back to it, not because, Dr. Taylor, your response is not helpful, but I just want to be absolutely certain.

3552             It seems to me that you are making an important point about the CCTA and by reduction the cable industry's argument about the preservation of various sorts of controls.  You may have responded to this by I didn't hear it clearly enough.

3553             You are saying there is a logical link missing in the argument and it is not because a particular measure tends in a particular direction and that particular direction is viewed as ipso facto desirable that we ought to adopt that particular measure without a rigorous and logically, fully argued analysis and prescription.

3554             MR. HUGHES:  One of the issues in this part of our argument that I think we are commenting on ‑‑ I don't know if this is going to go to your question or not, because I am not sure I am right on.

3555             One of the questions we are suggesting that in regard to the CCTA arguments you should address is:  Are the arguments that are being made by Professors Ross and Gillen founded in the facts?  What kind of factual analysis did they do in order to draw these conclusions and determine whether they are relevant to this proceeding and to this industry?

3556             I have reviewed the report and I have been searching frantically for the paragraph and not been able to find it.  I believe it is number 3 where the analysts indicate what they rely on to do their analysis, and it is largely publicly available information.  It leads me to question whether ‑‑ I am not necessarily questioning the logic, I am not necessarily questioning the validity of thinking about these issues.  I just don't think that they have looked at enough of the facts.  Or I should put it more precisely:  I think you should investigate whether they have looked at the facts in more detail before taking these on their face.

3557             COMMISSIONER FRENCH:  Thank you.  That is a fair answer.

3558             And more generally ‑‑ and I think I am doing it justice but I just want to make absolutely sure ‑‑ it is the Bureau's view that the economic characteristics of the industry are such that recoupment of revenue losses associated with predation strategy will be extremely difficult if not impossible, such that that kind of a strategy on the part of the ILECs would not be rational and not be likely?

3559             MR. HUGHES:  In a word, yes.

3560             COMMISSIONER FRENCH:  Thank you.

3561             In paragraphs 84 to 87 of the final argument the Bureau addresses the question of the ability of the incumbent to raise the costs of an entrant by denying or rendering difficult or unfairly pricing access to its support structures.  But the Bureau doesn't address an issue with which we are wrestling regularly, and that is the access by entrants to things like municipal rights‑of‑way, energy utility support structures and multi‑unit dwellings.

3562             It is the cable industry's position generally ‑‑ and I don't think I am doing them an injustice ‑‑ that the Commission shouldn't contemplate forbearance until these issues have been resolved.  I won't burden you with the complexities of these issues, simply to say that they are complex, they are time consuming and they will remain complex and time consuming for pretty much as far as we can see into the future for purposes of a future forbearance analysis.

3563             Would it be in these situations where power clearly does not reside with the incumbent relevant, important, essential in the view of the Bureau that forbearance be delayed or not granted until the Commission has been able to resolve these issues?

3564             MR. HUGHES:  I would tend to deal logically with those issues in my handicapping of how likely I think a competitor is to constrain a price increase by the incumbent.  That is a factor I would consider in any particular geographic region and the more this is idiosyncratic that might go against my earlier comments that, you know, it becomes easier as we go along and I acknowledge that.

3565             Rather than saying that forbearance ought to be conditioned on these things, I would say that these are facts relevant to consider whether this particular ‑‑ in a kind of way, how much market influence do you handicap this competitor to have.  I hope that answers your question.

3566             COMMISSIONER FRENCH:  Yes, it is fair.  I think you are saying, yes, it is another part of the structured rule of reason.

3567             MR. HUGHES:  Yes, I guess that is what ‑‑

3568             COMMISSIONER FRENCH:  But you don't regard the final resolution as a bright‑line?

3569             MR. HUGHES:  Yes.

3570             COMMISSIONER FRENCH:  But it could very well be relevant.  It could raise costs or delay market entry?

3571             MR. HUGHES:  That is a more precise way of saying what I was trying to say.

3572             COMMISSIONER FRENCH:  Okay, great.  Thank you.

3573             Mr. Chairman, I have no more questions for the director.

3574             THE CHAIRPERSON:  Thank you.

3575             Commissioner Cram.

3576             COMMISSIONER CRAM:  Thank you.

3577             I am not an economist and I always wanted to get my engineer's ring when I graduated from the CRTC, because I always thought that David Colville knew what he was talking about.

3578             I wanted to look at your six‑prong test.  It appears to me ‑‑ there are two things I was looking at ‑‑ that it looks like the competitor has to be in the geographic area for some time.  I say that because you are looking at churn rates and you are looking at retaining customers.

3579             Retaining customers, to me, means you keep them for longer than a month and probably a year, two years.  And churn rates aren't meaningful to me really, unless I am talking about at least a year, if not two years.

3580             So are you talking about actual churn and retention rates when you are referring to that here?

3581             MS SCOTT:  I will pass it over to Richard, but I will just say a few words of introduction.

3582             We are not talking about a year or two.  I don't think those would be the appropriate timeframes over which to measure this.  Again, that aspect of obtaining and retaining customers would be measured in a number of ways and churn is one of them, market share loss, but also customers.

3583             All you want to find out here is do people see this as a substitute?  So it is not a question necessarily of having someone in place a long time.  You could have a new entrant there and immediately people flock to them and that would be one indication suggesting this is substitutable.

3584             Richard, do you have anything to add to that?

3585             MR. TAYLOR:  Only that I think it depends on what the normal rates are in the industry in comparison to the incumbents and the like, and I think that that information is information that we would like to have and we would assess and would urge you to look at those same pieces of information.

3586             COMMISSIONER CRAM:  So we would compare churn and retention rates by the new entrant competitor versus that of the incumbent?

3587             MS SCOTT:  No, you would be trying to look at whether the new entrant was for real.  And so the questions you ask in saying are they for real, you might say, well they have already obtained 20 percent market share, sounds good.

3588             And churn, again, is difficult because high churn can send two different messages.  So you would look and say okay, there is high churn.  That suggests competition to me.  So you might then look at customer surveys and what they are saying about it.  You would ask the customer did they churn because they didn't think it was a proper substitute or did they churn because they saw a better price somewhere else?

3589             And then again, as I suggested, you might look to foreign jurisdictions.  You are not looking at the churn of the ILECs particularly.  It is more is this a real substitute for the product as you have defined it?

3590             COMMISSIONER CRAM:  You were talking about variable costs and I guess until you were talking about it today it didn't get into my head that that includes customer acquisition costs.  The ILEC has no acquisition costs.  We have looked at numbers of $400 or $500 per sub in terms of an acquisition cost.

3591             So given that, I am having a hard time contemplating when those variables ‑‑ because if it is VoIP, I do think it is a low cost substitute, but I don't think that the variation would be $400 to $500 per sub.

3592             MS SCOTT:  Just again on that ‑‑ again, I will have Richard add some details to this.  But in our test if you had the competitor being an Access independent VoIP provider, they wouldn't meet this test because they would not have their own facilities.

3593             COMMISSIONER CRAM:  All right.

3594             MS SCOTT:  This would be two facilities‑based providers and so obviously your cost structure is quite different if you are facilities‑based as opposed to application oriented.

3595             Richard, do you have anything to add?

3596             MR. TAYLOR:  Just that they may have other cost advantages that will allow them to absorb those acquisition costs by looking at a number of costs and whether they have advantages with their new technology or their new offerings.

3597             COMMISSIONER CRAM:  And if the product is in fact the bundle, then we would have to look at it differently because there would be acquisition costs by the ILEC for video customers?

3598             MR. TAYLOR:  I think you can add to a bundle in terms of outside of the ‑‑ you can have two or three of the products and purchase the fourth.  The bundle I think may well be important, but whether or not it would affect the costs of acquisition I am not sure.

3599             COMMISSIONER CRAM:  Thank you very much.  Thank you, Mr. Chair.

3600             THE CHAIRPERSON:  Thank you.

3601             Commissioner Williams.

3602             COMMISSIONER WILLIAMS:  Good afternoon or good evening, early evening.

3603             MS SCOTT:  Definitely evening now.

3604             COMMISSIONER WILLIAMS:  Definitely early evening yet.

3605             While Vice‑Chair French has focused your discussion on I guess the entire forest of a full‑blown market assessment and in spite of your clear assertions on the value of market share, I would like to focus on that one tree of market share, if you will.

3606             What would be some of the characteristics of a company considered dominant in its marketplace?  And, given the lateness of the time, a very quick response would be appropriate.

3607             MS SCOTT:  Richard.

3608             MR. TAYLOR:  The characteristics of a dominant firm outside of market share would depend very much upon the remaining competition and the vigour of that competition, and I think that that would be one of the important assessments that we would look at.

3609             Again, rivalry is ‑‑ the vigour of a competitor I think depends upon their cost structure.  We have pointed that out ‑‑

3610             COMMISSIONER WILLIAMS:  So not the size of the man in the fight, but the size of the fight in the man?

3611             MR. TAYLOR:  Right, basically.  There is a number of other factors we would look at.  Is there evidence of vigorous price discounting?  That is important.  Is there evidence of aggressive marketing?  Has there been share loss to the dominant firm over time?

3612             And one of the most important aspects I think is barriers to entry.  We would look at that as a ‑‑ I think that is the most important thing we do other than simply look at share loss.

3613             COMMISSIONER WILLIAMS:  If we focus now on market share, what percentage of market share would normally be considered an indication of dominance say in your makes?

3614             MR. TAYLOR:  We have a safe harbour at 35 percent and I think that that is ‑‑ it is telling that we use such a low safe harbour.  I think it is very, very difficult to assess a market share when a company starts having market power and it varies very much on case to case.

3615             We have these low market thresholds in both the merger guidelines and the abuse of dominance guidelines out of an abundance of caution.

3616             If you look at the cases we have taken, both in mergers and in dominance, they have been quite high market shares.  That doesn't mean that you couldn't get dominance at a lower market share, but it is very, very difficult to say without analyzing all of the conditions that we have recommended or we do in our full‑blown analysis.

3617             One of the reasons we want to stay away from market share bright‑lines tests, we could be anywhere from 50 to 100 percent.

3618             MS SCOTT:  Yes, and I think there has been sort of a misunderstanding about these MEGs.  I read part of the record on this.  These are not calculations of dominance.  They are signals about when we are going to be look or not looking.

3619             COMMISSIONER WILLIAMS:  Yes, and maybe you should be concerned.  I recognize that.

3620             MS SCOTT:  Yes, so it is a safe harbour.  Below 35 percent, we can go home.  But above that, we will be looking and in the end we could be satisfied with a market share that, you know, isn't intuitively obvious as showing dominance.

3621             COMMISSIONER WILLIAMS:  How high does it have to be, a market share, before you wouldn't even bother investigating?

3622             MS SCOTT:  Thirty‑five percent.

3623             COMMISSIONER WILLIAMS:  Where you would say that is clearly a dominant ‑‑

3624             MS SCOTT:  Thirty‑five percent is our safe harbour.  So if you are less than 35 percent, we are not going to look.  And beyond that, there is no guarantee.

3625             COMMISSIONER WILLIAMS:  Okay.  Ms Scott, based upon your knowledge of your merger enforcement guidelines and your general knowledge of the industry in question ‑‑ and we are quite lucky in that you have experience in both ‑‑ what minimum market share percentage should we consider as a possible bright‑line?  Recognizing that bright‑line is just one tree in this full forest of things that we should be looking at, what minimum percentage would you suggest based on your experience?

3626             MS SCOTT:  I think it would be a mistake to establish a minimum percentage.

3627             COMMISSIONER WILLIAMS:  Okay.  So I guess my next question was if we did establish a minimum ‑‑

3628             MS SCOTT:  Then you would be making a mistake.

‑‑‑ Laughter / Rires

3629             COMMISSIONER WILLIAMS:  How long should this market share percentage be maintained in order to be satisfied that forbearance of this market was appropriate?

3630             MS SCOTT:  It is a good illustration of why you don't want to have a single figure.  I mean, you just imagine if you pick, you know, 31 and then there is the 32‑day and then there is the 30‑day, what the heck are you going to do with that?  I just think you would open the opportunity for gaming.

3631             For example, we talked about gaming earlier.  This would be gaming big time.  What would you do?  I am regulated today and not regulated tomorrow.  It is nice to have a figure, but I think it is impractical.

3632             COMMISSIONER WILLIAMS:  Yes, it is kind of like people gaming around driver's licences or other arbitrary numbers, then, I would imagine?

3633             MS SCOTT:  Or my kids tell me the drinking age.

3634             COMMISSIONER WILLIAMS:  Yes, that could be possible in that area.  But I guess a more regulated area, much like driver's licences or the ability to vote in an election or something like that, is probably more difficult to game if that is probably thought out before it is implemented.

3635             MS SCOTT:  The difficulty of market share is the on again, off again aspect.  You might be above, you might be below.  Whereas with a driver's licence, once you hit a certain age you have your driver's licence.

3636             COMMISSIONER WILLIAMS:  Yes, you just keep getting older.  I guess that is why my ‑‑

3637             MS SCOTT:  And then they take it away from you.

3638             COMMISSIONER WILLIAMS:  I guess that is why my question was how long a period should it be maintained before you are cast to the fates of competition?

3639             MR. TAYLOR:  I would just point out in our merger guidelines, substantially in 2.14, the material price increase is not likely to be eliminated by existing or new competitors within two years.  So I think that that goes to show at least that ‑‑

3640             COMMISSIONER WILLIAMS:  Two years would be appropriate.

3641             MR. TAYLOR:  ‑‑ you know, on a cost‑benefit analysis we are going to accept some price increases over a certain period.

3642             MS SCOTT:  It is an important point Richard is making, because it is one way in which the Competition Act differs from the Telecommunications Act, although, quite frankly, there is a nexus in your forbearance power because the provision says it is or is likely to become competitive.  And we definitely have a forward looking timeframe; it is a two‑year forward looking timeframe.

3643             So it is conceivable that one could have an agreement to a merger where there was actually a substantial lessening of competition for two years, a price increase over that two‑year.  But our assessment was that it would disappear over the course of those two years.

3644             COMMISSIONER WILLIAMS:  Okay, thank you very much.  Those are my questions, Mr. Chair.

3645             THE CHAIRPERSON:  I would like to pick up on one thought.

3646             You mentioned the safe harbour threshold.  I heard your answer to Commissioner Williams.

3647             Why would you not advise us to flip that on its head and provide a threshold above which don't even think of applying for forbearance and below which we will consider it, which would be the same model as you are doing, wouldn't it?

3648             MS SCOTT:  Well, because it is conceivable that you would have a situation where after doing the analysis, you would say there isn't dominance even though that company has 80 percent market share.

3649             It is unlikely, but it is conceivable and you wouldn't ‑‑

3650             THE CHAIRPERSON:  Well, isn't it conceivable that above 35 percent you would not declare a company dominant or you would not bring the case on?  I am just flipping it on the other hand and saying that above that X percent, don't even bother coming for your analysis.  Below that, we will look at it, but there are no guarantees ‑‑ just to paraphrase what you were saying.

3651             Why would you not advise us to adopt the same approach?

3652             MS SCOTT:  You are looking at a different set of issues, though.  You may have a situation where someone comes in ‑‑ if I have understood your question ‑‑ where they have a market share loss of less than 35 percent and yet they believe they have met the conditions for forbearance.  And I am not sure we will capture it if you say don't bother coming in until there is a market share loss.

3653             Have I misunderstood your question?

3654             THE CHAIRPERSON:  No.  Is it not possible for there to be a complaint before you ‑‑ and I ask this without knowledge ‑‑ where somebody has less than 35 percent market share and a competitor says this party is dominant?  Will you not look at it absolutely?

3655             MS SCOTT:  Richard, do you know of any case like that?  I don't.

3656             MR. TAYLOR:  Yes, we get lots of complaints like that and we investigate them to see if there is any possibility of market power.  Normally ‑‑ in fact, in every case I can recall we haven't found market power below 35 percent.  But that is not to say that it can be found at 45, 55 either.

3657             And I think that is the problem with flipping it, is that the type of error you are going to make is that it is better to do ‑‑ I think the type of error that you are going to make is you are going to prevent competition on the possibility that you are going to have high or these market shares and consumers are not going to benefit from competition because of this abundance of caution.

3658             We believe it is better to do the analysis and actually drill down and find the market share where we think there is a problem or analyze it on that specific basis.  In that fashion you can forbear with confidence and consumers can benefit from competitive prices.

3659             MR. HUGHES:  May I add one other comment?

3660             In terms of just the economics of this, quite apart from the policy of why we generally in any industry have scepticism about market share criteria, I think the biggest reason why you would be even more concerned about it here than in other industries is the rate of change and innovation.

3661             Any market share has got to be measured at some point in time and without looking at things other than market share and other information to understand the market, it is going to be very difficult for you, I think, to make an evaluation of what the market shares are going to look like in six months or a year.  I think that is valuable information for you in these cases.

3662             THE CHAIRPERSON:  Thank you.

3663             Commissioner Duncan.

3664             COMMISSIONER DUNCAN:  I have one question just trying to understand the variable costs, because it seems like it is a key factor to be considered.

3665             Is there a concern with assuring yourselves that they are accurate and comparable?  How do you go about verifying that?

3666             MR. TAYLOR:  Accuracy is important but comparable in the sense of I think that we have said that the variable costs of the new entrant are equal to or lesser than the ILEC.

3667             COMMISSIONER DUNCAN:  I'm sorry.  I meant that they are calculated on a comparable basis.

3668             MR. TAYLOR:  Yes.  I think by asking the question and looking at the assumptions on which the parties put the information together you would be able to tell if they made ‑‑ normally it is standard accounting practices that we would follow and so the accountant would be able to talk to the accountant from the company to ensure that they are being consistently put together.

3669             COMMISSIONER DUNCAN:  So you look to their outside accountants to verify that then?

3670             MR. TAYLOR:  You could.

3671             MR. HUGHES:  We verify everything.  We will get our experts.  We talk to the market.  We are a pretty sceptical bunch.

3672             COMMISSIONER DUNCAN:  Okay.  So am I.  That's good.

3673             In the calculation of these variable costs, is it historical that you are looking or forward as well?

3674             MR. TAYLOR:  Mostly historical.

3675             COMMISSIONER DUNCAN:  In the case of Rogers and Shaw where they are just, for example, getting into VoIP, Videotron, what would you recommend that we do in that instance because there wouldn't be much ‑‑

3676             MR. TAYLOR:  I think we would recommend that you look at the costs.

3677             One of the things that Sheridan has said that is so important is to look at strategic documents of the parties.  I am sure there was planning by these cablecos before they got in there.  I'm sure there was estimates.  I'm sure they were trying to slice and dice the possible numbers to see if they could make money, how long it would take them, and the like.  So that may inform you a little bit, and then other jurisdictions as well.

3678             So you could expand upon, if you will, the confidence you have in your limited time series.  I will recommend that you get that, but by looking in other jurisdictions that have a longer history and by also asking for strategic documents on the projections and estimations.

3679             COMMISSIONER DUNCAN:  Would you try to eliminate, for example, the costs?

3680             For example, in EastLink where it is historical, would you try to eliminate the portion of EastLink's costs that might be attributed to some portion of the bundle, you know, to marketing some, because the ILEC didn't have the television service, or you don't get into in that ‑‑

3681             MR. TAYLOR:  It depends upon whether you believe the bundle ‑‑ why it is so important to do the product market as a merger guideline, say, when products are sold in groupings and consumers buy for the most part in those groupings and the bundle becomes the product market.

3682             If the bundle is the product market, then you don't have to do that.  If the bundle isn't the product market, then you do.

3683             I just note from observation that bundling, that that decision is based again upon consumers.  It is so very important to know what consumers value and what they are doing in terms of if some consumers value the bundle, if others are still buying individual pieces from different suppliers.  You have to take that into consideration as well.

3684             In that case there may be two product markets again.  That is quite possible.  It is so very important to know what customers are actually doing.

3685             COMMISSIONER DUNCAN:  Thank you very much.

3686             THE CHAIRPERSON:  Thank you.

3687             Commissioner Langford.

3688             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.  I will try to be very brief.

3689             Just a couple of clarifications.

3690             You spoke about how it would be very, very relevant if you learned that the new entrants had higher costs of acquisition than the incumbents.  Did I get that right?

3691             MR. HUGHES:  I don't know if "very, very" might be overstating it.

3692             COMMISSIONER LANGFORD:  Okay.  Take away a couple of "very's".  We could go with relevant.

3693             It struck me that you thought that would be a relevant piece of information.

3694             MR. HUGHES:  Anything that speaks to the expected vigour of competition that a competitor is going to bring is relevant.

3695             COMMISSIONER LANGFORD:  Really all I want to know about that ‑‑ the extra piece I wanted to put on was what would you say to it if the market were a duopoly?  In other words, Madam Commissioner said earlier, well, VoIP isn't as relevant to our calculations here because it is not facilities‑based.  If we are looking really in the sense of facilities‑based at a duopoly in any given market, does that become more pertinent, that the new entrant is paying more for acquisition?

3696             MR. HUGHES:  I guess one of the comments I didn't have a chance to make earlier is that when I think about the acquisition costs, both I think the cablecos and the telcos have their own advantages in terms of acquiring customers.  They are both pretty strong players.

3697             There is no obvious reason why the way I would handicap players depends on the number of players in the market.  Probably the biggest issue that two rather than three raises is what we call coordinated conduct as opposed to the cost themselves.  Players' incentives are players' incentives, whether they are competing against one player as in a duopoly or two players in a triopoly.

3698             I am not sure if I completely understand your question, but I don't think that would be key to me.

3699             COMMISSIONER LANGFORD:  I'm just wondering perhaps whether you see it as some kind of road to ultimate self‑destruction if they are paying too much.  And if you do, since there would only be the one facilities‑based competitor to self‑destruct, that the market might then be in very serious trouble.

3700             MR. HUGHES:  Yes.  I guess that is exactly where I was differing with you.  I don't think these players are going to self‑destruct.  I think that this is almost getting into predation.  I don't think we think it is very likely if the tests of our streamlined approach are met.

3701             Furthermore, as the Commissioner has noted, these assets aren't lost to the market so I guess that is the part I was disagreeing with you on.

3702             MS SCOTT:  Can I just add one point because I'm not sure what we said ‑‑ something you said makes me think we weren't perhaps clear enough.

3703             We have our streamlined approach that has unusual ‑‑ this is not the normal analysis we would do.  We would do a full‑blown MEGs analysis.  So in this one we say, all right, if we have two facilities‑based independent service providers, that is a first condition.  We don't discount the VoIP providers, though.

3704             When I said looking at the costs of acquisition of those two independent providers that we think is a condition here, that an access independent VoIP provider wouldn't enter into our calculation, that is only true when you are assessing the independent facilities providers.

3705             If we were measuring market share, our customer retention figure, and if we believed that access independent VoIP was in that market ‑‑ and it could be.  Maybe wireless is there; that's one of your questions.  Maybe independent VoIP is there; there are others.  You know, people speculate about text messaging and all sorts of things.

3706             COMMISSIONER LANGFORD:  Could bring back citizen band radio.

3707             MS SCOTT:  Exactly.  So when we do the market share assessment, that part of it, we put all the services in that would be substitutable services in accordance with your product market.

3708             COMMISSIONER LANGFORD:  Thank you for that.

3709             One other clarification, if I could, on an earlier discussion, I think, Ms Scott, by your distinguished economist Mr. Hughes on what I think of as this phoenix syndrome.

3710             I think you said, Mr. Hughes ‑‑ and again you will correct me if I misstate it ‑‑ that you would be less concerned about a facilities‑based provider, assuming presumably a new entrant, who had to exit the market, if they left behind their facilities that could be then purchased by someone else.

3711             Would that be a fair assessment of what you said?

3712             MR. HUGHES:  That would be a fair assessment.

3713             Another point which I would take this opportunity to add, there is a role for the Competition Bureau in not allowing an ILEC to buy these assets.

3714             COMMISSIONER LANGFORD:  Okay.

3715             Now let's take the particular type of facilities‑based entrant that might make the decision to exit the market.  I want to see what you would think of that.  Let's assume it's a cable company and the market they exit is only telephony.  They just say the hell with it, we can't compete, forbearance is too much, we have high costs of acquisitions, whatever, we just don't need the aggravation.  So we are going to stick with internet providing and we are going to stick with television pictures and being a broadcast distribution undertaking but we are getting out of the telephone market.

3716             So they wouldn't be abandoning their network.  It wouldn't be for sale to anyone.  No one could come in and get it because they were going to keep it.  They were just going to get out of telephony.

3717             How would you respond to that sort of a scenario?

3718             MR. HUGHES:  In that scenario, the phoenix analogy or the observation of the sunk costs is not the thing that is giving you the comfort to forbear.  Where you should be looking in that scenario is again not at the sunk costs but it is the variable costs.

3719             The question is what the level of the costs are of the cableco.  Presumably it is exiting only because the rates have fallen below its variable cost.  That presumably has to be the assumption.

3720             COMMISSIONER LANGFORD:  I don't know.  I mean, it could be exiting for the very reason we spoke of earlier.  Maybe it had been banking on grabbing a bigger market share and economies of scale so it had too high acquisition costs.  I think all of us in this room could think of reasons why they would say we played this strategy wrong and we want out of this particular market segment.

3721             I am just wondering what your comfort levels would be now because you wouldn't have the phoenix syndrome possible because they wouldn't be giving up.  Perhaps they might be willing to lease some of their assets but they wouldn't be willing to give up and sell out to someone else who wanted to come in and get a bargain and be a facilities‑based provider.

3722             MR. HUGHES:  Right.  Perhaps I was a little bit distracted with a notion or two, unfortunately.

3723             COMMISSIONER LANGFORD:  Yes.

3724             MR. HUGHES:  What I am suggesting is that what would comfort me is really the variable cost comparison that is part of our test.  If I know that the entrant, be it a cableco, has lower costs than the incumbent, that alone gives me comfort that your scenario is not going to occur, not likely to occur.

3725             COMMISSIONER LANGFORD:  And if he has higher costs?

3726             MR. HUGHES:  If he has higher costs, then the farther we go down that road I'm losing on that checklist, that part of the checklist, and if you are not going to meet those conditions in that area you better meet another condition pretty well.

3727             COMMISSIONER LANGFORD:  Okay.

3728             Now I would like to just jump to one other area.  Being the last person here, you don't have a clean list of questions.  They are little kinds of bits and pieces.

3729             We have had considerable difficulty in the last two days ‑‑ leave aside the record for a moment.  But in the discussions with participants in the last two days, there has been a considerable variation on what is an appropriate geographic market.  I am not going to ask you to try and solve that problem for us, but we did have one or two participants who under questioning agreed that it may, though they did not suggest this in their original submissions, agreed that maybe the only way we could go would be to have various appropriate geographic market tests in various areas of the country.

3730             I could take you through the scenarios if you would like, but I wonder if just putting that to you in the abstract is enough to elicit a response, or do you need more information?

3731             MS SCOTT:  I might need more information.  In terms of our own geographic market and how we had proposed that you come at that, it could be different looking in different regions, because the way we went about defining it was a traditional antitrust approach where you are looking at areas where there are competing suppliers.  We said you would define your geographic market as the area where there is overlap between the two markets because in our test it so happens that we require two facilities‑based competitors.

3732             That would not always be the case.  Your geographic market might look different if you were doing the normal MEGs process.  But because we have as one of our conditions the two of them, then we said the geographic market would be their overlap.  It would overlap differently in different parts of the country obviously, although I would suspect, given the level of cable penetration in this country and the level of telephone penetration, that it would actually look quite similar.  You would have coverage over major urban areas largely.

3733             COMMISSIONER LANGFORD:  For example, SaskTel has told us that the way their exchanges are set up, to make it reasonably simple, all of Regina and all of Saskatoon each are one exchange only.  Their fear is that if we were to take something bigger as a geographic market and one exchange so that they had to lose a certain percent of market say over their whole territory, they could end up, by their evidence, losing all of Saskatoon, about a quarter of all their subscribers, and still not qualify for forbearance.

3734             MS SCOTT:  Right.  I understand that issue.

3735             Again, and I don't know what the cable footprint looks like in Regina but one would imagine it is probably covering the city and then that would overlap with the single exchange so that would be your geographic area.  I don't know if you fully caught our amoeba drawing that we appended to my comments.  It is Appendix 2, I think.  We tried to capture this.

3736             I actually don't have the coloured version in front of me.

3737             COMMISSIONER LANGFORD:  I confess I didn't get to Appendix 2.  Sorry.

3738             MS SCOTT:  My amoeba drawing, as I call it.

3739             Maybe I will just explain to you a little bit of how we thought about it because I need a colour version so I'm referring to the right colours.

3740             The idea here is that you have the cable network, which is the amoeba, and then you overlay your exchanges.  This doesn't represent any place in this country at all.  It is just to try and capture a couple of notions.

3741             What we would say is you could have your geographic area that would actually be the outside contour.  It would include those parts of the exchange where there is no cable service.  That is a worry for us of course because you wouldn't have a competitor.  So what we would propose is that you retain the competitor services type of tariff so that there would be an incentive for people to provide service on a non‑facilities basis, because our model is a facilities basis.  That would be a way of incenting people to provide service in those parts on a non‑facilities basis.

3742             We would also propose ‑‑ and I think I did mention this in my remarks ‑‑ that you retain a price ceiling.  If you retain a price ceiling, then to the extent there isn't competition in some of these green parts of the diagram, then it would not be possible for the ILEC, who is not facing competition, it would not be possible for them to increase their local phone rates.

3743             COMMISSIONER LANGFORD:  Do you think this would apply to them across the country, this approach?

3744             MS SCOTT:  I don't know.  We haven't seen the maps.  It seemed to us that just knowing a bit about how cable penetration is in this country and the nature as we understand it of the role of telephony, that it goes through the network, the entire network ‑‑ cable companies of course will choose to target certain areas when they roll out, that would be a logical thing to do.  They will market in certain areas, but their network of course extends generally throughout a large service area, the service area that the CRTC licenses.

3745             COMMISSIONER LANGFORD:  Perhaps SaskTel will look at your amoeba and let us know what they think in final comments.

3746             MS SCOTT:  Yes, and feel comfort.  It certainly won't have so many patchwork quilted boxes here.

3747             Again, we tried to capture the notion that even with the amoeba, you may have parts inside the cable network ‑‑ it might be rural areas, for example, that a cable company is not serving.  Again the protection would be maintaining competitor services tariffs and to allow access using essential facilities and introduce a price ceiling.

3748             COMMISSIONER LANGFORD:  Thank you.

3749             Those are my questions, Mr. Chair.

3750             THE CHAIRPERSON:  Thank you, Commissioner.

3751             Ms Scott, we have a very small number of questions on the Aliant file and in deference to your request, perhaps you would excuse yourself and we will proceed.

3752             MS SCOTT:  Thank you very much.

3753             THE CHAIRPERSON:  Thank you very much.

‑‑‑ Pause

3754             THE CHAIRPERSON:  Commissioner French.

3755             COMMISSIONER FRENCH:  In the Bureau's response to a CCTA interrogatory, the Bureau stated that the factual ‑‑ I don't know if you have it.  It is Bureau CCTA‑1.

3756             Let me read it to you.  It will maybe jog your memories.

3757             It is stated:

                      "The factual context of the Aliant forbearance application might differ in important respects from other regions in the country where the cable companies are rolling out local exchange services because of difference in technology."  (As read)

3758             We know that EastLink is claiming what I call a pioneer preference.  It is saying look at our costs; they are not necessarily the same as the costs of other entrants ‑‑ our sunk capital costs are not necessarily the same as the costs of other entrants and we should be allowed the opportunity to recover those costs.

3759             Is it the Bureau's view that this is pertinent to the Commission's decision on forbearance in this particular case?

3760             MR. TAYLOR:  Yes, I think it is.  Under our test you would have to look at different technologies that are of differing costs.

3761             THE CHAIRPERSON:  Thank you very much for bearing with us.  It has been a long day.  We will adjourn now and resume at 9:30 tomorrow morning.

3762             Nous reprendrons à 9 h 30 le matin.

‑‑‑ Whereupon the hearing adjourned at 1940, to resume

    on Wednesday, September 28, 2005 at 0930 /

    L'audience est ajournée à 1940, pour reprendre le

    mercredi 28 septembre 2005 à 0930

 

 

 

 

 

 

 

 

 

 

 

  

 

                      REPORTERS

 

 

 

 

 

____________________      ____________________

Richard Johansson            Fiona Potvin

 

 

 

 

____________________      ____________________

Jean Desaulniers          Marc Bolduc

 

 

 

 

____________________      ____________________

Shari Bakalar             Sandy Kelloway     

 

 

     

Date de modification :

????-??-??